Marketing Fee or Commission: It's Money Coming Out Of Investor's Pocket

Marketing Fee or Commission: 

It's Money Coming Out Of Investor's Pocket

                                           by: Brendan Magee

I was listening to an investment radio show the other day and the hosts wanted to make it very clear to the audience that they do not sell securities. They didn't and won't sell stocks, bonds or mutual funds. They were promoting "Crash Proof" vehicles as they call them. According to them the stock market was way to risky to have your money there. 

In promoting their vehicles, as they called them,they were saying that the companies they use to crash proof people's money didn't pay them a commission.Rather, they paid their firm a marketing fee. The benefit was that 100% of the client's money gets invested right away. All the more reason an investor should do business with them.

First, let's be clear. It shouldn't make any difference how a firm gets paid if what they are doing provides value to the public. Call it whatever you want. In this case, the vehicles are insurance products. They are annuities. Annuities come in a variety of products. There are fixed annuities, indexed annuities, and variable annuities. Indexed annuities are the big thing now as they promote that investors in these products have their money grow when the stock market goes up and they do not go down should the market go down. In essence they are crash proof. 

As far as the producer or agent is concerned they are golden because the commission on deposits into these accounts range any where between seven to twelve percent. So if the investor deposits $100,000 into one of these products their commission ranges any where between $7,000 to $12,000, not a bad pay day. If you look at the contract of these products the commission or marketing fee is referred to as deferred compensation and it drops over the a specific period of time.

So everyone wins under this scenario. The investor has their money in a safe investment, and the producer gets paid handsomely. But, what about the insurance company? Aren't they out on a limb? What if the investor decides they don't like the investment for some reason? What if circumstances dictate they need their money back? What if they discover a better investment? The insurance company just gave the producer $7,000. No problem they'll just ask for the commission/marketing fee back, and the producer will happily give back the $7,000, right? Wrong!

No way in #### is the producer giving back the $7,000! They have mortgage payments to make and college tuition to pay for. That money is spoken for. The insurance company has put themselves way out on a limb here, right? Wrong! They are not that stupid. You ask for your money back. The producer isn't going to give back their commission/ marketing fee. Where will the insurance company go to get their money back? Answer? You. 

Deferred compensation,as mentioned above, means that their is a penalty assessed against the money you deposited into your annuity. Let's say the commission/marketing fee was seven percent. The penalty, if you withdraw your money over designated period of time, starts out at seven percent. You get your $100,000 back in this case minus the $7,000 they paid the producer. Now the penalty goes down over a designated period of time,but you won't get your money back before the penalty is assessed  Plus, you are going to pay income tax on the money you take out of the contract if the money was after-tax. 

So yeah, your money gets deposited right away, but you are not being given a free lunch. Your money needs to stay in that vehicle/annuity for a specified period of time or you will pay a hefty penalty. The announcer didn't mention that on her show. She also didn't mention that the penalty is paid by you. 

Like just about everything else, it's what's not being said that is the most important thing an investor needs to hear. 

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments go to www.coachgee.com or call 610-446-4322.