From the June 2009 issue of Investment Advisor • Subscribe!

Retirement Planning: Warming Up to Annuities

RIAs like immediate annuities for rollovers, but still steer clear of most annuities

While still taking a cautious approach to their use of annuities, registered investment advisors are steadily increasing their use of immediate annuities for rollover dollars, according to a recent study by Cerulli Associates.

"The current market environment has illuminated the role annuities can play in clients' portfolios as they seek protection while drawing income," says Lisa Plotnick, associate director at Cerulli and lead author of the Boston-based research firm's third annual Annuities and Insurance Update report. "RIAs are taking a second look as immediate annuities provide a relative low-cost means of enhancing clients' portfolios in need of guaranteed income."

The study found that 20% of RIAs would consider using immediate annuities for a portion of their clients' rollover assets. However, most RIAs are still reluctant to use deferred annuities (and other types of annuities) because they are inconsistent with the fee-based model, Cerulli says, because most annuities provide compensation through commissions. "The [annuity] product design is not quite there now to appeal to the RIAs," Plotnick says. Transitioning from the commission-based model is tough for insurance companies, Plotnick notes, because "it impacts the pricing of the product." RIAs prefer immediate annuities because they are generally low cost and don't include the "feature-rich benefits" offered by other types of annuities, she adds.

John Hsu, a Cerulli analyst and co-author of the report with Plotnick, says that RIAs are "more willing" to look at annuities because as the market has proved, "even a broad asset allocation had client portfolios down." Guaranteed products are more important for RIAs now "than 18 months ago."

Plotnick also notes that fixed annuity sales skyrocketed last year while variable annuity (VA) sales plummeted. According to NAVA, the Association for Insured Retirement Solutions, the combined net assets of U.S. variable annuities decreased 7.9% to $1.3 trillion at the end of the third quarter of 2008. Net assets decreased by 13.2% relative to the third quarter in 2007. Variable annuity total sales, also known as premium flows, for the third quarter was $37.8 billion, an 18.1% decrease from the third quarter of 2007, NAVA reports. Third quarter net sales, also known as net flows, of $4.9 billion, showed a decrease of 47.3% from third quarter 2007 net sales of $9.4 billion.


Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.
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