I love to get questions on the fees investors pay. Especially from investors who just meet with advisors and then have to ask me or someone else what the fee or commission is on a product.
I just read an email from a user who inquired about the fees associated with a “Variable Annuity” Here is what their question asked.
Hello Financialjoe, could you please help answer a question? I recently inherited some money from my father which is currently at Washington Mutual Investments. My father’s financial advisor told me my father has $273,526.00 in a fixed annuity. After I met with him for about thirty minutes he recommended that I take my father’s fixed annuity in the form of cash because there is no fee to get the money upon the death of my father. He then recommended that I put the money into a variable annuity. He told me that it would not cost me anything other than a total of 1.75% a year which is what the insurance company charges. He said it is tax deferred and would be the best thing for me to save for retirement due to my age (46) Is this true?
Thank you XXXXXXX
Well, here is my answer even though we don’t give direct financial advice.
There are a lot of variables that must be considered when using a fixed or variable annuity such as income, age, time horizon, risk, goals, objectives, and tax bracket. Before you even consider a variable annuity you need to have a financial plan done. I’m not happy that a product recommendation was made after sitting with you for only 30 minutes. You can hardly get to know someone in that time and I have to believe 15 minutes of that time was at least used to discuss what your father owned. So in realty he gave you a recommendation after 15 minutes.
As for the fees, there are numerous fees that can be associated with an annuity; two at a minimum. The first is the management fee that he mentions. The other is the mutual funds within the variable annuity. Each mutual fund company will charge a management fee which is usually around 90 basis point or .90, so just under 1%. This alone would make your total expenses about 2.75%. This does not include any riders which are extra services you can add on to the contract. Each rider will have an additional fee. It’s hard for me to give you an exact number without looking at the offer.
Additional fees can be applied in you surrender the annuity before the contract period ends. These are often referred to as back end sales charges. They can be steep, like 7% of the original investment. So be very careful.
Do yourself a favor, go see about 3-4 financial advisors. Don’t tell them that you have seen other advisors. Just tell them that you have the fixed annuity you’ve inherited from your father. Ask them to create a financial plan for you and you’ll have a second meeting. If they don’t do financial plans then thank them for their time and leave! If they charge for a financial plan then thank them for their time and leave! There are too many firms that do financial plans for free and frankly the plans are software driven based on your answers to the questions they ask you from a questionnaire. Don’t be fooled if they tell you there’s a week to two week turnaround- it’s to make you think they’re putting a tone of work into it. Most of the time they can be done within a few hours, especially if their assistants doing them. Most important bring a pad and pen to write their comments and answers to any questions you have.
After you have met with them for the second time don’t commit to anything. Take all the plans and compare them. Don’t be surprised if they’re all different; I mean really different. Then take some time to reflect on each advisor-trust your gut- if you hesitate on any of them cross them off your list. Especially if anything they say is different from the first meaning- remember you wrote it down on paper and you have it with you on the second meeting…right!!!
After you narrow your choice then take the plans of those you’re still considering to your third meeting. Asked each to look all the plans and tell you why theirs is better. If they can’t give you a good answer without a bunch of fluff then you can move onto the next. If they slam the other plans in an unprofessional manner then cross them off your list.
The bottom line is this, take your time! Don’t be in a hurry or allow someone to pressure you.
Let me empower you in this way. If you invest your $273,526.00 into a variable annuity because you have decided it’s the best for you after conducting your due diligence as discussed above, it’s going to generate a minimum $9, 573 in a gross commission for the firm. The advisor is going to make at a minimum about $2,871.00 up to $8,615 depending on who they work for or if they’re independent. So even on the low end if they give you a total of 5hrs of meeting time they made $574 an hour. Plus they will get what’s called a “Trail” this is an ongoing commission paid to them annually for the life of the contract to provide you “great” service. The trail can be as much as 1% depending on how the advisor chooses his upfront commission payout.
So don’t be shy since you’re paying them so much.
Cheers,
Shawn Tierney
financialjoe