Fee-based Annuities Explained: A Guide for Financial Professionals

An annuity is a tax-deferred investment designed to help clients grow and protect assets while also providing income that can last a lifetime through the addition of optional benefits. Several categories of annuities exist that vary in risk/return profiles to meet multiple client needs. All annuity types have a few things in common that set them apart from other financial products.
What makes annuities different?
  1. They can give a client a dependable stream of income they can’t outlive through either annuitization or optional benefits.
  2. For high-net-worth clients who have maximized 401k and IRA contributions, annuities allow for unlimited tax-deferred contributions.
  3. Income can be passed directly to a beneficiary. And just as the annuitant has the option to take lifetime income from their contract, some annuities allow that income to be “stretched” to the next generation’s lifetime.
Making annuities available to fee-based financial professionals
Most annuities sold today are commission-based products. While many fee-based financial professionals and RIAs know about annuities and the potential benefits for their clients, the process of bringing annuities into their practice has been challenging.
For one, taking their fee from an annuity would cause a host of problems, including adverse tax consequences for the client. It was a known and complicated obstacle that made annuities a non-starter for fee-based financial professionals. However, the IRS recently revisited this issue. They no longer deem withdrawals as a taxable event to the client, so the financial professional’s fee can now be treated as a pre-tax expense, putting annuities in line with IRAs. It’s important to note this isn’t a global change for all annuities. Each insurance carrier must submit each of its products to the IRS in order to obtain a Private Letter Ruling for this to apply.
This ruling by the IRS, along with the Tax Cuts and Jobs Act of 2017, which eliminated the tax deductibility of certain management fees for mutual funds, has made some fee-based financial professionals rethink what annuities can do for their clients. As insurance companies gain more experience working with fee-based and fee-only financial professionals, they’ve been able to manufacture new products that drive down the overall cost of annuities, adding greater liquidity while still offering options like lifetime income and legacy benefits. These newer, fee-friendly and lower-cost annuities allow fee-based financial professionals and RIAs to bring these assets under their own management, ultimately generating more AUM and more options for their clients
Key takeaways:
  1. Annuities offer unique benefits clients may not be able to find elsewhere.
  2. Thanks to changing regulatory guidelines and continued product innovation, financial professionals can charge the same fee for the annuity as they do on all other assets they manage without creating a negative impact on the client or the annuity contract.
  3. Insurance companies have begun manufacturing new products that drive down the overall costs causing some fee-based financial professionals to rethink how annuities fit into their practice.

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