Banks' appetite for quick profits is keeping them from using a commission structure for annuity sales that could yield benefits in the long run.
The arrangement, in which annuity sellers are paid a trail commission, is increasingly popular with nonbank brokerages.
Under the trail commission plan, annuity manufacturers each year pay brokerages about 0.25% of the total annuity assets they have accumulated. Under the more conventional arrangement, the brokerage is paid about 6% of the asset amount when a sale is made.
Banking companies are wary of trail commissions because they and their brokerages are under short-term earnings pressure and switching compensation systems would crimp their cash flow, those in the business say.
"With the need for banks to generate nontraditional bank fee income, net present value is very important today," said Joseph Alberti, president and chief executive of Firstar Insurance Services, a subsidiary of Firstar Corp., Milwaukee. "All banks are trying to take" as much up-front commission income as they possibly can, he said.
Trail commissions have been around for more than five years, but they have been growing in popularity. Once used only for mutual fund and variable annuity sales, they are increasingly being extended to fixed annuity sales.
The trail commission arrangement could benefit banks by supplying a steady, annual source of income, possibly for decades, whereas up-front commissions are a one-shot deal.
"If the sales rep is a long-term player, they are going to make a lot more money in the long run under this strategy," said Bradley Powell, president of the financial institutions group at Jackson National Life, Atlanta.
Brokers typically get one-third of either the up-front or the trail commission.
While Jackson National has had lots of success getting nonbank brokers- particularly financial planners-to accept trail commissions, no bank has taken the bait.
That's despite the fact that Jackson National offers a hybrid arrangement, with part of the commission paid up-front and part as a trailer.
Insurance companies have a vested interest in trail commissions because they give brokers an incentive to keep investors' money in the same annuity for several years.
Up-front commissions, by contrast, create an incentive to move the money to other investments after surrender penalties expire in five or seven years, said Kenneth Kehrer, a consultant in Princeton, N.J.
"The longer the money stays on the books, the more the insurers make," he said.
With fixed annuities, insurers invest the assets and pocket the difference between the returns and the amount they distribute to the investor and pay to the broker.
With variable annuities, insurers pay part of the ongoing management and expense fees to brokers and keep the rest.
Kenneth Schweiger, head of bank channel operations at the New England, Boston, said it is unlikely that banks with established annuity sales programs will shift to the trail commission structure soon.
"Once you've started a program without trail commissions, you've got those earnings, and the bank is always looking for an increase," Mr. Schweiger said. "It's real hard to back off some of your up-front compensation."
But when sales reach a plateau, banking companies will want continuing fees to produce a steady income stream, he said.
"Unless you have trail commissions, you won't have any way to increase that revenue stream," Mr. Schweiger said.
At least one banker conceded as much and said he sees trail commissions as a possible part of the future.
"If you have a stable book of business, at some point it makes more money for you," said Gary Sawyer, vice president of People's Securities, the brokerage subsidiary of People's Bank, Bridgeport, Conn. "I think over time we certainly will consider using trail commissions as a part of our long-term business development strategy."