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When planning for retirement, many people consider annuities as a way to secure guaranteed income. But have you ever wondered how financial advisors get paid when they sell you an annuity? The answer isn’t always straightforward, and understanding advisor compensation is crucial before making any decisions about these complex financial products.
As someone who’s researched this topic extensively, I can tell you that financial advisors definitely make money when selling annuities—and sometimes quite a bit But the ways they earn this money vary significantly depending on their business model and the types of annuities they sell.
How Financial Advisors Earn Money From Annuity Sales
Financial advisors can earn money from selling annuities through several different compensation structures:
1. Commission-Based Compensation
This is the traditional model for annuity sales, Here’s how it works
- Advisors receive a percentage of the annuity’s value as a one-time payment directly from the insurance company
- Commission rates typically range from 1% to 10% of the annuity’s value
- For example, on a $100,000 annuity with a 6% commission rate, the advisor would earn $6,000
Non-fiduciary advisors who work for brokerage firms or insurance companies often get paid based on commissions. The upfront payment model in this model is very good for advisors, but it could lead to conflicts of interest.
2. Fee-Based Compensation
Fee-based compensation combines elements of commission-based models with ongoing fees for advisory services:
- Advisors charge an annual fee based on a percentage of the client’s assets under management
- The annual fee is calculated by multiplying the assets under management by the fee percentage
- For example, if an advisor manages a $500,000 portfolio with a 1% annual fee, they would earn $5,000 per year
This model can better align the advisor’s interests with the client’s, since their compensation grows if the client’s assets grow. However, it may result in higher long-term costs for clients.
3. Hybrid Models
A hybrid pay model combines parts of both commission-based and fee-based structures is used by some advisors:
- Advisors earn a smaller upfront commission plus an ongoing annual fee
- Total compensation = (Annuity Value × Commission %) + (Assets Under Management × Annual Fee %)
- For example, an advisor selling a $100,000 annuity with a 3% commission and managing $400,000 in other assets with a 0.5% annual fee would earn $5,000 in the first year
This approach attempts to balance immediate compensation with ongoing alignment of interests.
4. Flat Fee or Hourly Rate
Some advisors, especially those who work on a fee-only basis, charge a flat fee or an hourly rate for services related to annuities:
- Flat fee compensation = Predetermined fee amount (like $1,500 for annuity-related services)
- Hourly rate compensation = Hours worked × Hourly rate (for example, $250 per hour for 6 hours = $1,500)
This model provides clear, upfront pricing and may reduce conflicts of interest.
5. No-Load Annuities
Some insurance companies offer no-load annuities that don’t pay commissions to advisors:
- Advisors typically earn money through a fee-based model for managing the client’s overall portfolio
- Annual fee = Assets under management (including annuity value) × Fee percentage
- For a $100,000 no-load annuity within a $500,000 portfolio with a 1% annual fee, the advisor would earn $5,000 per year
This approach can reduce costs for clients while still providing advisors with compensation.
The Trend of Decreasing Commissions in the Annuity Industry
In recent years, the annuity industry has seen a shift toward lower commission rates, driven by:
- Regulatory pressure – Increased scrutiny from regulatory bodies has pushed for more transparent practices
- Competition from low-cost providers – Robo-advisors and low-cost investment options have forced traditional providers to remain competitive
- Consumer awareness – Investors are becoming more sensitive to fees and commissions
- Shift toward fee-based models – Many advisors are transitioning away from commission-based compensation
- Technology and automation – Streamlined processes have reduced operational costs
This trend has important implications for both advisors and consumers.
How Regulatory Changes Have Affected Advisor Compensation
Regulatory changes have significantly influenced how financial advisors are compensated for annuity sales:
- The Department of Labor Fiduciary Rule (though vacated in 2018) expanded the definition of “fiduciary” to include more financial professionals
- SEC’s Regulation Best Interest (implemented in 2020) requires broker-dealers to act in customers’ best interests
- The NAIC’s Revised Suitability in Annuity Transactions Model Regulation requires insurance producers to act in consumers’ best interests
These changes have led to:
- A shift toward fee-based models
- Reduced commission rates
- Increased disclosure requirements
- Greater focus on lower-cost products
- Enhanced documentation requirements
Why Understanding Advisor Compensation Matters
Knowing how your financial advisor gets paid for selling annuities is crucial for several reasons:
1. Identifying Potential Conflicts of Interest
When an advisor earns a high commission on a particular annuity product, they might be more inclined to recommend it even if it’s not the best fit for your needs. Understanding compensation models helps you recognize these potential conflicts.
2. Comparing True Costs Across Different Annuity Options
A commission-based annuity might seem less expensive upfront but could cost more over time compared to a fee-based option. Understanding advisor compensation helps you more accurately compare total costs.
3. Negotiating Fees and Services
Armed with knowledge about typical compensation structures, you’re in a better position to negotiate fees with your advisor or request additional services.
4. Aligning Advisor Incentives With Your Goals
Different compensation models create different incentives for advisors. If you know about these models, you can pick an advisor whose pay structure fits with your long-term financial goals.
Tips for Evaluating an Advisor’s Compensation Transparency
When working with a financial advisor on annuities, ensure transparency in their compensation structure:
- Request a clear, written breakdown of all fees and commissions before making decisions
- Compare compensation structures across multiple advisors
- Ask about potential conflicts of interest
- Verify the advisor’s credentials and regulatory standing
- Consider working with fee-only advisors for potentially reduced conflicts of interest
- Ask about proprietary products the advisor sells
- Request examples of how their compensation might vary based on different recommendations
- Inquire about their policy on disclosing compensation changes
A truly transparent advisor will welcome these questions and provide clear, comprehensive answers.
Frequently Asked Questions About Advisors and Annuities
Are all financial advisors fiduciaries?
No, not all financial advisors are fiduciaries. Fiduciaries are legally obligated to act in their clients’ best interests. Registered Investment Advisors (RIAs) are typically fiduciaries, while some broker-dealers may operate under a less stringent “suitability” standard.
Can I buy an annuity without a financial advisor?
Yes, you can purchase annuities directly from insurance companies or through online platforms. However, given how complex these products are, many people choose to work with a financial advisor to ensure they select an appropriate annuity for their needs.
What questions should I ask a financial advisor about their compensation?
Consider asking:
- How are you compensated for this annuity recommendation?
- What percentage commission will you earn from this sale?
- Are there any ongoing fees I should know about?
- Do you offer fee-only or hourly rate options for annuity advice?
- How does your compensation align with my best interests?
Can an advisor’s compensation model influence their recommendations?
Yes, an advisor’s compensation model can potentially influence their recommendations. An advisor earning commissions might be incentivized to recommend products with higher commission rates. This is why it’s crucial to understand how your advisor is compensated and to work with a fiduciary when possible.
How can I determine if an annuity is right for my financial situation?
To determine if an annuity is appropriate for you:
- Assess your long-term financial goals
- Consider your risk tolerance and income needs
- Evaluate your current retirement savings and income sources
- Understand the fees, terms, and potential returns of the annuity
- Consult with a fiduciary financial advisor for personalized advice
- Compare multiple annuity options before making a decision
Types of Annuities and Their Fee Structures
Variable Annuities
Variable annuities offer “sub-accounts” similar to mutual funds that allow you to benefit from market gains. The income stream from a variable annuity can increase or decrease based on the performance of your investments.
Many financial experts, including Suze Orman, criticize variable annuities for their high management fees. These fees can significantly reduce your returns over time.
Fixed Annuities
Fixed annuities provide a guaranteed interest rate for a specific period, offering predictable income. They typically have lower fees than variable annuities but may not provide protection against inflation.
Equity Index Annuities
Equity index annuities offer returns based on a specific market index, with some downside protection. These products often have complex fee structures and participation rates that can limit your upside potential.
Final Thoughts
Financial advisors definitely make money on annuities, and how they’re compensated can significantly impact the advice they give you. Whether through commissions, fees, or a combination of both, it’s important to understand your advisor’s incentives before making any decisions.
I always recommend working with a fiduciary advisor who is legally obligated to put your interests first. And remember, the cheapest option isn’t always the best—what matters most is finding an annuity (if appropriate) and an advisor that align with your long-term financial goals.
Before purchasing any annuity, ask detailed questions about fees, commissions, and how the product fits into your overall retirement strategy. Your financial future is too important to leave to chance or hidden incentives.
Annuities can carry high fees
Historically, most annuities came with steep costs. Costs, commissions, and deaths (M
Variable annuities, in particular, are known for having a lot of fees that can add up to 3 percent or more a year. However, variable annuities have become much less popular over the last five years.
Meanwhile, many financial advisors today prioritize low-cost, transparent investment strategies. When a portfolio of index funds can be put together for a lot less money and still do well, it can be hard to recommend a product that is more expensive and less flexible.
“From my perspective, simpler, lower-cost solutions — such as adjusting withdrawal strategies and maintaining proper cash reserves — can often effectively address the same concerns of outliving income,” says Nate Baim, a certified financial planner and founding member of Pursuit Planning and Investments.
Annuities are complicated
Annuities can be difficult to understand, even for well-informed investors. There are many types to choose from — fixed, variable, indexed, immediate, deferred — and each comes with its own structure, rules and fees. Annuity contracts can be dozens of pages long, and comparing options isn’t easy.
Optional features, known as riders, add even more complexity, as do surrender charges and insurer credit risk.
That’s a lot, especially if you’re trying to explain all the details to a client in a one-hour meeting.
The 2023 Boston College study found that even among relatively wealthy clients (those with over $100,000 in financial assets), more than one-third weren’t familiar with lifetime income products, and another 40 percent were only somewhat familiar. That leaves financial advisors with the burden of educating clients from scratch.
“If you can’t explain what you’re buying back to me in plain language, you probably shouldn’t sign the dotted line,” says Toberman.