Trail commissions are shaping up to be the compromise between large upfront commissions and asset-management fees that seem to be an awkward fit for annuities, according to two marketing organization executives.
Trails could provide the firmer direction that the industry has been seeking. The large upfront commissions are under attack from critics and regulators, while the advisory world claims that agents charging management fees for assets they don’t manage doesn’t work either.
“I think trails probably become the preferred option,” said Jason Jenkins, chief marketing officer with Simplicity Group Holdings, a financial marketing organization with nearly $4 billion in 2018 annuity sales. “If an advisor can (utilize trails), it’s a smart way to build a book of business.”
Not everybody in the business loves trail commissions. Ohio National rattled the industry with its September decision to cut off trail commission payments on specific variable annuity contracts. The insurer was sued several times and, to date, no other companies have cut off trail commissions.
The shocking Ohio National decision shows how much turmoil and uncertainty the industry faces, Jenkins said.
“What happens over the next 10 years will be the biggest change and impact in this industry — ever,” he said. “That’s because it’s a collision of regulation, fee compression, artificial intelligence, all of that, and you’re starting to see it in the last 12 months.”
As it unfolds, Jenkins said agents will have to prove their worth.
“The challenge that advisors have to face is, what is the value add that you’re bringing to substantiate how you’re being compensated?” he said. “So if that’s commissions, fee-based, whatever, that’s the conversation we need to be having.”
The three basic compensation models for annuity sales are:
Upfront commissions. Also known as “heaped commissions,” this is paid up front in a large lump sum. Common with fixed and indexed annuities.
Trail commissions. A commission structure where regular commissions are paid, based on the annuity’s account value and made payable to the producer after the annuity contract is issued. Trail commissions are usually offered in addition to some form of upfront commission. Common with variable annuity contracts.
Fee-based. The producer collects a fee similar to an advisory model. This model is in its infancy and sales are small.