What is a fee-based MYGA annuity? It’s a type of Multi-Year Guaranteed Annuity that charges a flat fee for advisory services rather than commissions.
It guarantees a fixed interest rate for a specific period, making it a predictable investment option.
This article covers their structure, benefits, potential drawbacks, and comparisons to other financial products.
Summary
- Fee-based MYGAs offer transparency in advisor compensation, aligning the interests of advisors and clients while providing a guaranteed income and preserving principal.
- Compared to commission-based MYGAs, fee-based options eliminate hidden costs, although they may have initial fees that impact overall yield. It’s worth consulting with an independent annuity expert that can compare all annuity options to see which is best.
- Investors should carefully consider market value adjustments and early withdrawal penalties associated with MYGAs, as they can significantly influence liquidity and overall investment returns.
Need help choosing the best annuity for your unique situation? Have questions about getting an annuity? If so, it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!)
Understanding Fee-Based Multi-Year Guaranteed Annuities (MYGAs)
A Multi-Year Guaranteed Annuity (MYGA) guarantees a fixed interest rate for the contract’s entire duration. This predictable return on investment makes MYGAs popular among those nearing retirement or those averse to market volatility.
Fee-based MYGA annuities are designed to offer transparency in advisor compensation, aligning the interests of both advisors and clients, providing a guaranteed income.
Typically, MYGAs offer a fixed interest rate lasting from three to ten years, providing stable growth. Interest earned is compounded annually, allowing for tax-deferred growth until withdrawal, making MYGAs attractive for those seeking to grow savings without immediate tax implications.
Fee-based MYGAs protect the principal, ensuring the initial investment remains intact. This, coupled with a guaranteed interest rate, makes MYGAs secure for conservative investors. Additionally, fee-based structures help avoid hidden costs with a straightforward pricing model.
MYGAs are often likened to certificates of deposit (CDs) due to their similar traits. However, MYGAs generally offer higher interest rates than savings accounts and CDs, due to longer commitment durations and the insurance company’s backing.
While CDs are FDIC insured, MYGAs depend on the financial stability of the issuing insurance company. They are also insured by the state guaranty association, adding security for the investor.
This comparison helps investors understand the unique benefits of MYGAs within the broader financial product landscape.
Fee-Based vs Commission-Based MYGAs
Fee-based MYGAs offer transparent advisor fees, ensuring clear and straightforward costs.
Commission-based MYGAs often involve undisclosed commissions, ranging from half a percent to three percent, potentially impacting overall yield. If you want to know what the commission is, just ask!
Investors preferring clarity might find fee-based MYGAs more appealing, as they eliminate uncertainty surrounding advisor compensation. Some offer slightly higher rates than commission based products, but after the advisory fees, the actual yield could be lower.
Switching from a commission-based to a fee-based MYGA annuity is feasible for those who prefer the fee structure. The bottom line is that some advisors charge separate fees for selling MYGA annuity contracts, while others receive commissions from insurance companies.
The Impact of Advisor Fees on MYGA Yields
Advisor fees in fee-based MYGAs can significantly impact overall yield. While the transparency of fee-based MYGAs is advantageous, these fees can lead to lower net returns compared to commission-based MYGAs.
Initial advisor fees might be substantial, depending on their rates, cutting into the overall yield.
Commission-free annuities often provide better returns by avoiding additional costs linked to commissions. However, the trade-off is in transparency and alignment of interests.
Fee-based MYGAs might offer slightly lower yields after deducting advisor fees, but they provide a clearer understanding of financial allocations.
Investors should carefully weigh these factors when deciding between fee-based and commission-based MYGA annuities.
It can be helpful to consult with an annuity expert who can compare different MYGA annuity options to see what is best for you.
Click here to schedule a call if you’d like me to do this for you.
Benefits & Drawbacks of Fee-Based MYGA Annuities
Choosing a fee-based MYGA annuity comes with benefits and drawbacks. One primary advantage is the lack of hidden commissions, leading to more straightforward pricing for investors.
This transparency ensures that the advisor’s compensation aligns with the client’s interests, fostering a relationship built on trust and mutual financial goals.
However, fee-based MYGAs may involve initial advisor fees that can impact overall yield. While these fees might lead to higher upfront costs, the long-term benefits of transparency and aligned interests often outweigh the drawbacks.
Weighing these factors and considering your financial strategy is crucial when choosing a fee-based MYGA.
Compared to commission-based options, fee-based MYGAs can lead to lower total expenses over time. The absence of commissions often results in better net returns, making fee-based MYGAs a wise choice for those seeking a secure and predictable investment.
However, each investor’s situation is unique, so evaluating your financial goals and needs before deciding is crucial.
Comparing MYGAs to Other Financial Products
Comparing MYGAs to other financial products involves considering the unique benefits and drawbacks of each option. MYGAs are often likened to certificates of deposit (CDs) due to similar characteristics.
However, MYGAs typically offer higher interest rates than CDs, thanks to longer commitment durations and the insurance companies’ backing. While CDs are FDIC insured, MYGAs rely on the financial stability of the issuing insurance company.
Compared to traditional fixed annuities, MYGAs often provide higher interest rates due to the absence of commissions. This makes them attractive for conservative investors seeking predictable returns without hidden costs.
Additionally, MYGAs typically offer longer terms of three to ten years compared to CDs, which often have shorter terms.
Compared to stock market investments, MYGAs provide a more stable and predictable alternative. While the stock market offers potential for higher returns, it comes with significant volatility and risk.
MYGAs, with their guaranteed interest rates, offer a safer option for those nearing retirement or preferring a conservative financial strategy.
They provide a secure and predictable investment option that complements other financial products, helping investors achieve their financial goals with confidence.
Whether you’re looking to purchase a MYGA or exploring other annuities, understanding the unique benefits of each product is essential for making informed financial decisions.
Market Value Adjustments and Early Withdrawal Penalties
Market value adjustments (MVAs) and early withdrawal penalties are critical considerations when investing in MYGAs. MVAs adjust the surrender value based on changes in interest rates, providing potential for higher returns but also passing market losses to the investor depending on conditions.
Including a market value adjustment can help the insurance company protect against losses while allowing for a higher guaranteed interest rate.
Fee-based MYGA annuities typically impose surrender charges for early withdrawals, significantly impacting overall value, especially if withdrawals are made before the penalty-free period. Penalty-free withdrawals may be allowed after a certain period, usually around five years.
However, exceeding this limit can result in substantial declines in overall value due to surrender charges.
Understanding the surrender charge period and how it varies by insurance provider is crucial. These charges usually decrease over time but can still impact liquidity and overall returns.
For investors who might need access to their funds before the end of the MYGA term, being aware of these penalties is essential.
Early withdrawals and market value adjustments significantly impact both liquidity and overall investment returns of MYGAs, including partial withdrawals.
By carefully considering these factors, investors can make informed decisions that align with their financial goals and ensure their investments provide the desired stability and predictability.
Conclusion
Fee-based MYGA annuities offer a transparent and secure investment option for those nearing retirement or seeking a predictable return.
By understanding the differences between fee-based and commission-based MYGAs, the impact of advisor fees on yields, and the importance of transparency in advisor compensation, investors can make informed decisions that align with their financial goals.
Need help with finding the best annuity?
Click here to schedule a call with me.
On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have
