Most people have heard the old story about the homeowner who hires an electrician to fix the electrical problem in his house.
The electrician sees a loose wire, re-connects it, and gives him a bill for $500. The homeowner, outraged at getting a $500 bill for 30 seconds of work, asks for an itemization of the bill. The itemization says $5 to connect the wire and $495 for knowing which wire to connect.
That story came to mind as I read the recent article by Stan the Annuity Man.
While I think the article has a number of good ideas (particularly about the value of the annuity income benefit and how the term annuities should be associated with income, not just asset accumulation), there was one premise that I take issue with.
Stan seemed outraged that a planner would charge an assets-under-management fee for an indexed annuity.
If I understand the objection, it was essentially that indexed annuities have a year-to-year “set it and forget it” aspect to them. In the comments section, he asked what the advisor does the other 364 days.
I think he makes a few errors with this kind of thinking.
First, just because the fee is how an advisor is paid, it does not mean the advisor only gives service/advice related to that product.
Second, just like with the electrician story, it is a mistake to view the transaction from the perspective of how much time or effort the advisor spends. In my opinion, value should be measured from the customer’s perspective.
Whether the advisor spends 30 seconds or 30 hours, the question is whether the service, advice, and results the customer gets is worth the cost?
Of course, competition always enters into it too. If Stan can offer the same or better value for less cost, then he wins the day. But again, it does not (or should not) make a difference as to how he gets paid or how much time he spends.
That brings me to this installment on my team’s annuity video series. In our last video, which also addressed pundits’ hostility toward commissions, we looked at comparisons of the different ways agents/advisors might get paid. We showed that the method of compensation did not necessarily imply that one method is inherently more costly than another.
(Related: Why Do the Pundits Hate Annuity Commissions?)
In our latest video (see above), we look at a different question: Do some methods of compensation provide perverse incentives for the agent/advisor that can cause them to give bad advice to their clients?
As a consultant, one of my product offerings is an online life insurance sales illustration application. I charge a monthly license fee for its use. My goal is to offer great software that is justified based on the value to the user.
Does or should the user care how much time I spend each month servicing his software? I certainly hope not!
The holy grail for consultants is to provide a valuable service that maximizes ongoing value (and therefore revenue you can earn) while being able to minimize time and resources spent. Is that not the case for most any business?
Chuck Ritzke, FSA, MAAA, is a consulting actuary and the founder of Problem Solving Enterprises.