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My insurance agent says their are no fees for the investment products he wants to sell me.  How can he make a living if the products he sells don't have fees?

Jan 04, 2012 by Toni from Kenansville, NC in  |  Flag
17 Answers  |  23 Followers
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18 votes
Ted S. Rich Level 12

The intuitive answer to this question is actually the correct one -- he probably cannot. One of the most important items any client needs to understand fully about any financial product or advice offering is this one -- how EXACTLY does the person offering it get compensated. Although some compensation methods have fuzzy boundaries, there are three primary ways an advisor or agent makes money. One is by fees paid directly from clients to the advisor, another is by fees and/or commissions paid to the advisor by the investment products a client puts money into, and the last one is by a salary and/or bonus paid to the advisor by their employer. It could also be some combination of the above, but regardless of the answer, you can be certain that they are recommending the product to you because they are getting paid to do so. It cannot be overstated how important it is for every client to understand this critical part of the client/advisor relationship. There are pros and cons to each form of compensation, but the advisor or agent should be able to explain these to you clearly and in detail before you put one dollar in the product they are recommending.

2 Comments   |  Flag   |  Jan 04, 2012 from Orlando, FL

Thanks Ted. I still don't think most of the investing public understands how their advisor gets paid. I believe that incentives in large part drive behavior and it is therefore very important for an investor to understand their advisor's compensation structure.

Flag |  Jan 05, 2012 near San Diego, CA

Toni, Ted is very accurate with his description of the types of compensation that advisors or agents receive. If he isnt up front with you regarding his compensation, I would have to question the viability of his recommendation that he has for you and the suitability of that product for you then. How an advisor is paid must be factored into whether or not an investment or insurance product is a good fit for your situation and your time horizon. The product should meet an identified need or problem that you and your advisor identified and decided to take action on.

Flag |  Jan 11, 2012 near Waterford, CT

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6 votes
George Cones, JD Level 20


Questions to ask, better in writing:

What are the internal expenses for the investments? What is his or her commission? When can I get out of the product?

This last question is very important. You may find that you can not get out of the product for some number of years (5, 7, 10, 12). There is often a contingent deferred sales charge if you get out prior to the date spelled out in the contract or fund prospectus.

The up-front commission could be 5%-over 10%. You are correct in assuming nothing is free, but rather the costs are hidden in the contract or prospectus.

Comment   |  Flag   |  May 25, 2012 from Wilmington, DE

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5 votes
Ryan Level 19

I once worked for free too, but got meals and housing in return. Of course, that was when I was 12 years old! In the financial services field, all workers get paid via salary, commission, bonuses, or some combination. These either come from the client directly (pay by the hour, retainer, per financial plan, or based on assets managed) or from commissions paid to the sales person from the money invested at specific companies (think insurance companies and mutual funds). I would strongly suggest interviewing a few other advisors, fee only fiduciaries if available in your area, to discuss the recommendations of your current insurance agent. Take your time and you'll make the best decision.

Comment   |  Flag   |  Jan 27, 2012 from Gettysburg, PA

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Anil Vazirani Level 8

It all depends on what investment is being referred to. Whether it's an annuity or life insurance or any other type of investment there are always fees and commissions generated, either directly or indirectly. The question here that needs to be asked of your advisor is; if he/she is an insurance agent, a broker, or a Series 65 licensed investment advisor with a fiduciary obligation. The next question that should be asked; is how he/she is compensated, commission or fees, or a combination of both. The next question would be; who pays those commissions and fees to the said advisor, is it the financial institution or the consumer? Regardless, commissions and fees will be paid either directly or indirectly. In my opinion, you should always work with a firm like mine that has a fiduciary obligation to the consumer.

Comment   |  Flag   |  May 17, 2013 from Scottsdale, AZ

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4 votes

Hi Toni,

Perhaps your insurance agent is confused about "fees" vs. "commissions". If the product that he is recommending offers investments such as mutual funds, then he have to provide you with a prospectus, which will outline all of the fees and expenses within the product. An insurance product that has investment "sub-accounts" is usually a variable annuity or variable life insurance. There are some fixed annuities that pays a commission to the insurance agent, while the fee (i.e. "expense ratio" or "mortality & expense" fee) is earned by the issuing insurance company. However, there are fixed annuities that pays both a commission and a fee to the insurance agent.

The fee in this regard is paid to the agent/advisor beginning as early as the 13 month from the anniversary date of when the annuity was purchased, or as late as 4 to 5 years (and every year thereafter) from the anniversary date...it just depends. The agent is usually given the choice of whether he/she wants to receive a larger upfront commission with a smaller residual fee ("trail commission"), or a smaller upfront commission and a larger residual fee.

If your agent is paid a commission for selling a fixed annuity, it usually isn't paid directly by you (as in deducted out of your initial investment), but it can be "recouped" by the insurance company in the form of a "surrender penalty", in which case it is deducted from your original investment. Therefore, you must exercise caution, especially when someone tells you that there are no fees in whatever he/she may be trying to convince you to purchase. You are doing the right thing by presenting your question/concern with the professional advisors on this site.

Best wishes to you!

Comment   |  Flag   |  Aug 29, 2013 from Bethesda, MD

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3 votes

You mentioned "Insurance Agent". And it sounds like he is recommending an insurance product or annuity These products pays the agent or broker and commission ( and maybe and "override") As of this writing this amount does not need to be disclosed according to the law.

Comment   |  Flag   |  May 25, 2012 from Port Washington, NY

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3 votes
Lee Munson Level 16

He is a lair or a fool - or is lying and thinks you are a fool. Just ask him if he is playing with words (fees versus commissions versus underwriting concession) then go find a world class advisor that doesn't play games. I would be insulted.

Comment   |  Flag   |  May 19, 2013 from Albuquerque, NM

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3 votes

Hi Toni, All good answers above. Remember, every dollar you place somewhere has a cost associated with it, nothing is free. You used the word "sell," everything is for sale, the real question is what is it you want to buy and for what reason are you making the commitment. Your personal commitment to your future is what you need to think about. Once you have that outlined, then plan with the appropriate financial products that will get you there, with an advisor who is on YOUR team to guide you toward your accomplishments.

Comment   |  Flag   |  May 20, 2013 from Grand Blanc Township, MI

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3 votes

One of the most important questions you can ask you advisor relates to how they are compensated. The advisor's compensation may come in the form of commissions (usually the case with insurance products), AUM fees, hourly fees, and a whole host of other arrangements. The client should find this out upfront in order to determine if the advisor is incentivized to recommend one product or plan over others. Transparency is key.

Comment   |  Flag   |  Aug 29, 2013 from Cranford, NJ

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2 votes

Wow, I wonder how the insurance company can: afford to be in business. Usually there are expenses associated with an insurance company.

Comment   |  Flag   |  May 31, 2012 from Plano, TX

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