One important feature of RILAs (buffered annuities) to share with clients is that they don’t typically have any base product fees. Even when annual fees are moderate, a client may still have concerns that all of their money isn’t working on their behalf. If clients have previously invested in financial products that have annual fees or expenses, a product without annual fees might be a change for them – and one that could encourage interest in RILAs.

Variable annuities usually have fees or charges associated with their administration, mortality expenses, riders, and – because VAs invest directly in subaccounts – investment expense ratios. One of the significant differences with a RILA is that it tracks the performance of one or more indices rather than investing directly in an index, so investment expense fees do not apply.

“We know that clients work very hard for their money, which means they want their money to work equally hard for them,” says Meghan Doscher, Senior Vice President and Chief Marketing Officer at Brighthouse Financial. “Because a RILA generally has no annual or base fees, RILA contract owners can see that more of their money is invested in their future rather than covering expenses that other products may charge.”

Although many RILAs (buffered annuities) feature no base product fees, other costs may be associated with the purchase, so it’s important for financial professionals to be transparent with clients about those instances when fees or charges may occur. For example, a fee or charge may apply if the client withdraws more than the amount allowed by the contract before the end of the surrender period. In one survey, 21% of people said a better explanation of fees from their financial professional may have convinced them to purchase an annuity.³

Discussing fees with clients is important because it’s often one of the more challenging things for clients to understand. One way to demonstrate how fees can affect a client’s investment, especially when comparing multiple financial products, is to show the impact of fees over the long term.

Account value of a $100,000 investment after 30 years, assuming 6% annual growth.

“Typically, a RILA has no annual fees, so it can help with the cost of the overall portfolio,” advises Leslie Williamson, Head of Digital Distribution at Brighthouse Financial. “If a client needs additional features, then they can add those and only pay for what they need, like a living benefit rider.”

For clients familiar with the fee structure of other types of investments, the concept of a product like a RILA (buffered annuity) without base product fees may seem too good to be true. Financial professionals can consider explaining how insurance companies are able to offer a RILA without base product fees.

One way to help clarify this is to share that the annuity purchase payment isn’t invested in an index fund, so that eliminates the expense ratio usually associated with mutual funds or exchange-traded funds (ETFs). Instead, the annuity tracks the performance of an index and credits the investor with the change in the index, taking into account the selected crediting strategy and buffer.

With a portion of the premium, the insurance company purchases options to cover growth in the index and purchases other options to provide a level of downside protection if the market declines. It also invests a portion of the purchase payment in high-quality assets.

“More specifically, what insurance companies are doing is purchasing an at-the-money call, which provides for the upside potential; selling an out-of-the-money call, which provides for a cap; and then selling an out-of-the-money put, which is what offers the guaranteed downside level of protection,” Chris explains. “And the remainder of the dollars are typically invested in a basket of very high-quality, fixed-income securities.”

While a RILA (buffered annuity) doesn’t typically have any base product fees, financial professionals should consider discussing the potential costs of an annuity with clients. This conversation could be approached by discussing what features or functionality an investor may be exchanging to have the benefits of a RILA – the opportunity for market gains with a level of downside protection. Chris puts these costs into four categories:

• Liquidity cost: The investor may be entering a contract that has a surrender schedule, meaning they may not have access to their entire account value without a charge or fee.
• Opportunity cost: For RILAs that come with a Cap Rate (also known as a ceiling), an investor could be giving up the opportunity to earn more if their investments perform above the Cap Rate. For RILAs using the Step Rate crediting strategy, which credits a predetermined percentage of growth if index performance is flat or up at the end of the term, the investor’s rate of return may be less than the change in the index value.
• Dividend cost: RILAs don’t directly invest in an index, so there are no dividends like an investor may receive with mutual funds or other types of investments.
• Flexibility cost: There aren’t many ways a client can change their index option once the term has started, and they may only have a few indices to choose from in a RILA.

“I think it’s critical to be up front about the realities of this type of an investment,” Chris says. “That can help reduce skepticism.”

By having these discussions early in the planning process, financial professionals can help educate clients about what a RILA offers compared to other investments. Being transparent about benefits, fees, and costs can help build trust with clients who may have misconceptions about annuities.