The Time Is Ripe For Income Annuities To Take Off
By Thomas F. Streiff
The subject of using annuities for income continues to generate substantial interest in our industry. The problem so far has been that most of the interest has been at an intellectual level and not at an implementation level. This means that we all talk about it, agree its a good idea, develop programs and products, but few people are actually buying. Weve been operating in this zone for a few years.
I think its all about to change. The buyers are ready. The brokers are just about ready, and the product providers are finally providing real solutions. Heres my take on each of these constituencies.
The Buyers: After three years of a bear market, most retirees or near-retirees are looking for safety, stability and predictability. I see nostalgia for the predictable payouts of defined-benefit pension plans. Our parents generation enthusiastically accepted these fixed annuitization income strategies. Of course, they never called them fixed annuitization (they still dont). They called them pension distributions, lifetime income or guaranteed payouts.
Its clear that retirements of the future wont have much (or any) of these payouts. Therefore, theyll need to be structured for the retirees. Annuities are the only way to achieve lifetime-guaranteed payments results outside of the plan. This could become obvious to many retirees. What wont necessarily be obvious to most retirees is the how and the how much. Brokers will need to educate their clients.
The Brokers: This is probably the missing link in the annuitization retirement income chain. Again, most brokers intellectually accept that some part of a retirees distribution should come from annuitization, but executing such a strategy is almost unheard of. Why?
There are numerous issues. Probably the biggest of which is education. Some brokers are not as well equipped as they should be to have meaningful discussions with their clients on this issue. As an industry, we are in the process of developing better tools for the broker to use in determining whether a client can better pursue their retirement goals with annuitization and if so, how so.
When you look at the many asset allocation and stochastic modeling tools available for accumulation, you have to wonder why so little has been developed for distribution. With the focus on retirement distributions and the evolving nature of retirement plans, this is changing quickly.
Additionally, you dont have to look very hard to see that the economic incentives for brokers to implement annuity programs also have been anemic. Annuity income products have traditionally paid less commission than accumulation products (sometimes they pay nothing at all), and due to their structure, they have resulted in the asset management fees being lost to the broker forever.
Brokers perform valuable services and provide important advice for retirees involving distributions. The compensation structure of the product needs to reflect this, which leads us to the provider.
The Providers: Historically the annuity income products have been fixed or variable, with variable allowing for some level of sub-account choice flexibility. Often the sub-account choice flexibility was somewhat overstated as many of the products were “once and done,” which is to say that you made your sub-account choice at the start of the income process and were locked in for life. Additionally, as mentioned above, products were limited in flexibility and designed around irrevocable elections.
With the compensation for the advisor being inferior, the products were pretty much relegated to the scrap heap of the financial products. When you evaluated all of these drawbacks, you couldnt help but reach a conclusion of sales success that has been reflected in actual results–abysmal.
When you put it all together, its clear that we now stand at the precipice of opportunity. The buyers are ready. The demographics and psychographics are lined up perfectly. Its now up to the brokers and providers to fill this demand with products that provide buyers with solutions. The successful products will have the attributes listed in the chart.
I have no doubt that the future is bright for these products and programs. For those who do it right, the future is now. If you can offer the right program and position this properly for your clients, theyll have a better retirement, and so will you.
Thomas Streiff, CFP, CLU, ChFC, CFS, is director of investment solutions at UBS PaineWebber, responsible for the separate accounts, mutual funds, insurance and annuity product areas. He can be reached via e-mail at [email protected].
Reproduced from National Underwriter Edition, April 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.