In this video installment, we are addressing the pundits’ primary punching bag — one seemingly more evil than tyrannical dictators, terrorists, or 1950s movie creatures from out of the lagoon. That is, of course, annuity commissions.
Actually, we are told, it is not just annuity commissions that are evil, but all forms of insurance product commissions. And probably not just insurance product commissions, but any kind of commissioned sales agent from any industry.
(Related: Gap-Filler Distributor Pays More Commissions)
While we’re at it, it’s not just pundits who hate them, but, more importantly, politicians too. While the video today does not attempt to specifically address the travails of the U.S. Department of Labor fiduciary rulings, we suspect that commission hatred is a primary driver of that whole effort. Instead, we want to take a basic look at agent/advisor annuity compensation unencumbered by the effects of any current regulatory efforts.
So to start, we’ve put together a video to do a comparison of the typical costs of annuity commissions versus other ways agents/advisors get paid.
I want to emphasize, that the point of the video is not to endorse one method of compensation over another, but to merely show that commissions are not inherently evil or costly compared to any other.
I also think commissioned agents/advisors often make a major mistake in the way that they defend commissions. For example, the Affordable Care Act (ACA) put a major squeeze on agent compensation for health insurance. Agents defended their compensation by arguing that they provided a valuable service to customers in helping them to understand and choose amongst all their complex health insurance choices. Poorly trained, inexperienced, ACA “navigators” are a poor substitute. Of course, that is all true, but it does not go far enough to justify commissions.
It sometimes seems agents are embarrassed to admit the obvious -commissions are mostly intended to move product sales. (We’ll have more on whether commissions are a “perverse incentive” in our next video.) The important services agents provide to clients do not solely justify the level of compensation that many agents earn. This is the bludgeon used to beat up on commissions. But it makes no sense. Moving product is important.
There is this mistaken idea that commissions inherently increase the cost of coverage to the consumer. (It is essentially the same mistaken idea that suggests that profit margins increase costs to consumers.) Like any other type of company, insurance companies have fixed costs in bringing products to market. The more they sell, the more they can spread those fixed costs. If ultimately successful, that can lower the costs they must pass to consumers.
The arguments are also logically inconsistent in another way. It seems that most pundits agree that insurance companies are evil and greedy for profits. If commissions actually increase costs to the consumer, why wouldn’t the “evil” companies just eliminate the agent and commissions to increase their own profits? Do they really think that they love their agents more than they are “greedy” for profit? That makes no sense.
Bottom line is that agents should boldly admit that they are paid to increase sales. That is not an inherently bad thing for consumers.
That’s not to say that other methods of compensation may not work better in some situations. We work with distribution systems of all kinds -commissioned agents, direct marketing companies, and fee-based advisors. We’re always looking for new ways to structure compensation that might work better for everyone. Of course, agents can and do sometimes pervert the commission system to do bad things for the consumer.
But that can be true for any system of compensation for agents/advisors. The ultimate proof is in the performance of the agent/advisor. We’ll discuss this more in our next video on compensation.
Chuck Ritzke, FSA, MAAA, is a consulting actuary and the founder of Problem Solving Enterprises.