Decumulation is a trending topic in the pension and broader financial services industries. A Google search on decumulation (and variants) and retirement filtered on Canadian domains yields about 65,000 results! Notwithstanding the discourse, recent experiences of my 80-year-old mother with her retirement portfolio demonstrate that the financial services industry currently does a very poor job when it comes to decumulation.

The first problem is a structural one. In the financial services industry, the smaller your investment portfolio, the less access you have for full services and the more you pay for the services that are available to you. The standard of applying asset-based fees should be an equalizer, but it’s not—advisors prefer larger portfolios and are not interested in the concept that the large fees they earn on such portfolios might cross-subsidize services on smaller portfolios. This means as retirees age and their portfolios naturally decline as they draw their retirement income, they will inevitably become unattractive as clients to advisors, unless they are in a position to retain a large estate for their heirs.

My mother has a rather modest retirement portfolio, and there is no expectation of leaving a significant estate to her heirs. Earlier this year, her trusted full-service financial advisor of many years told her, with genuine regret, that she would have to seek investment services elsewhere. The reason? Her portfolio was too small. Her advisor’s firm required a new wrap management fee on top of the existing fee structure. Her trusted advisor rightly feared that, with the additional fees, she would not be able to manage my mother’s modest retirement portfolio to ensure that her she would not outlive her retirement assets.

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In the financial services marketplace, if your portfolio is too small for full services they offer mutual funds. The impact on my mother’s portfolio of retail mutual fund management expense ratios would be no different than the wrap fee required by her current advisor, plus there would be additional account fees that were being waived by her full-service advisor, as her portfolio was spread across a registered retirement income fund (RRIF), life income fund (LIF), tax-free savings account and non-registered accounts.

Astonishingly, none of the advisors we spoke with suggested a life annuity to my mother. I did, and her current advisor conceded that could be a good solution but confessed that she knew very little about annuities. Fortunately, I know a lot about them!

My mother and I spoke with a few advisors about annuities, and I conducted some online research of current literature on annuities. Noting that one-time annuity commissions generally have less value than ongoing commission streams, I have concluded that, in general, advisors’ self-interest in their commission streams overrides the best interests of their clients. In a number of articles I read, advisors seem to work themselves into pretzels to explain why annuities are not a wise financial decision for anyone.

Read: How to help plan members with decumulation

The next problem we encountered was gender discrimination. In 2012, the EU broadly outlawed gender discrimination in insurance contracts. In Canada, gender discrimination is prohibited when annuities are purchased from monies that originated from a registered pension plan (e.g., my mother’s LIF), but not from other sources such as her RRIF. This means the monthly annuity rate per dollar on my mother’s RRIF balance was quoted as less than for her LIF balance. Interestingly, the female insurance broker employed by the same firm as my mother’s trusted financial advisor didn’t share our concerns about this state of affairs, which I took as a reflection of a general lack of experience on her part in annuity transactions.

Fee disclosure is another problem. The aforementioned broker actually stated that the annuity purchase would be made at no cost to my mother as the insurer(s) paid the broker. The broker met her statutory obligation to advise that a commission was paid but refused to discuss the amount and would not countenance my suggestion that we negotiate the amount.

As I stated earlier, I know a lot about annuities. The lowest standard commission rates on retail annuity purchases start at 3% on the first $100,000 of premium, with a declining scale thereafter. Some insurers allow the broker to set a lower commission scale negotiated with a client, while others do not.

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In B.C. and Alberta, brokers are permitted to rebate all or part of a commission to clients (subject to limits that do not practically apply to annuity transactions). The commission comes right off the top of the single premium. Commission levels of thousands of dollars are far in excess of the modest paperwork requirement to effect an annuity purchase. In my view, annuity purchase commissions should be capped at $1,500 (possibly less), unless the transaction has unusual complexities.

Employers as retirement plan sponsors might play a role to mitigate some of these issues. However, even those willing to do so will encounter significant challenges until the financial services industry finds a way to care about aging retirees to offer appropriately suitable services at appropriate prices.

As for my mother, she was able to benefit from my expertise with a monthly annuity payment that was 6% higher and a few thousand dollars of rebated commissions from a more amenable insurance broker for her Christmas season shopping!

Greg Hurst is a Vancouver-based pension consultant with Greg Hurst & Associates Ltd.

These are the views of the author and not necessarily those of Benefits Canada.

Copyright © 2021 Transcontinental Media G.P. Originally published on

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Hi Greg,
I enjoyed your article. Being a CFP working in Saskatchewan the options that are made available to clients are not well explained in the least. Many advisors and institutions lead them exclusively to what they have access to versus what is best for the client. I personally work with an organization that is insurance heavy I would say many of my peers are ignorant to many of the available, and often advantageous, investment products that they do not have access to and instead of admitting their lack of knowledge downplay the products significance. This bias goes both ways where many investment heavy advisory firms do not have the proper insurance training to speak adequately of different income products that are suitable for many retirees especially with the different guarantees that can be built in.
I fully support all disclosure on commissions to clients as they have the right as a consumer to understand what they are paying for and why certain recommendations are being insisted on so strongly. However, I do not agree with the capped commission it will create an “advice” gap in the market that I no longer have an incentive to work with these individuals if there is limited revenue from them as a clients and I will need to move on to clients that can afford my services. Commission is not good nor bad in this case if it is properly disclosed and if the advisor is working in the best interest of the client, but of course how is that ensured?

Wednesday, February 04 at 12:37 pm | Reply

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