Income Solutions

“As a product line, the annuity hasn’t had the breadth and depth it needs and annuities have struggled with the legacy of negativity in the press,” Ford says. “But you are seeing insurance companies stepping up to the plate and looking at alternatives. We’re right on the cusp of this.”

Retirement income distribution specialist Briggs Matsko, an advisor with Lincoln Financial Advisors in Sacramento, has long recognized that traditional asset allocation models don’t take longevity risk into account. Thirty percent of his clients are annuitized through a process-led approach that considers his clients’ “core” and “joy” expenses, among others.

“The products are just arrows in the quiver, solutions to problems we uncover in the process. There’s been so much negative press about annuities. The industry needs to do a better job of calling them what they are: private pensions, income streams you cannot outlive,” says Matsko, who has over $300 million in assets under management. “They are one of the products of choice when mitigating longevity risk. In fact, it’s the only choice — I’ll go that far.”

John Lynch, a Wachovia Securities advisor in Columbia, Md., works exclusively with lump-sum recipients. Three years ago, he began using variable annuities.

“With life expectancies going up, it’s becoming more of an issue. Also, interest rates are going down so bonds aren’t the vehicles to get that guaranteed income that they once were,” says Lynch, who has $500 million in assets under management. “I would have to say I have had to get more comfortable with annuities. My initial gut reaction is: We hate them, right? They’re too expensive. But I’ve come to realize that guaranteeing someone they will never run out of money is worth paying for. That’s where I had to come around. Annuitization is, I think, a big issue.”

Education Is Key

Part of the problem with annuities, and structured products as well, is that they are complex. They can be tough to understand — and hard to explain. In recognition of that, industry players across the spectrum are aggressively mounting educational and training initiatives to help advisors learn the language of longevity protection.

In March, Incapital, a distributor of fixed-income securities and structured products, launched a new website, www.structuredinvestments.com. The website, targeted at financial professionals and individual investors, is designed to demystify structured products, derivative-linked instruments that link fixed-income notes and CDs to the performance of equities or other assets.

“What we’re hearing is that advisors need a lot more market education, a lot more comfort on the pricing and a lot more comfort on the secondary market. Our mission is to raise the comfort level on those three categories this year,” notes Tom Ricketts, Incapital’s CEO. “What we’re trying to do is make available more choices for investors.”

Typically, structured products have been used as accumulation instruments but Milevsky and others believe they will “take the leap soon” as income vehicles. As he puts it: “I’m not going to dismiss derivatives. The whole notion of derivatives sounds mysterious but that doesn’t mean we rule it out. It’s just that a higher level of diligence is required.”

As for annuities, Milevsky observes: “What’s happening is people are realizing the best and most successful way to sell an annuity is not to mention it’s an annuity. At the very least, you should be looking at the specifics, before discarding it out of hand.”

Sun Life Financial is pulling out the stops when it comes to training advisors about the benefits of annuities in the context of a retirement income distribution conversation with clients. In a new initiative, the firm is working with broker-dealers to design a curriculum in a format advisors can better relate to.

“The advisor talks in terms of ‘alpha,’ ‘alpha engines,’ ‘alternative investments.’ We need to use those words, their vocabulary,” says Hart.

As an example, Hart points to industry research that queried annuity-averse financial advisors as to why they don’t use annuities.

“When we ask advisors to rate the issues they focus in on with their clients, they are exactly the issues variable annuities [address]. They talk about investing within a horizon challenged by inflation, the potential of running out of money, longevity, trying to build in protection against risk. These are exactly the issues we solve to, but we use words like ‘annuitant,’ ‘annuitization,’ ‘withdrawal benefits,’ ‘death benefits,’” Hart adds. “Advisors don’t understand annuities. There’s this disconnect because they’re accumulation specialists and they speak a unique language. If they understood them, we believe they would use them more.”

Last year, Wachovia Securities launched a program called Mastering the Business of Advice. Ford reports that the curriculum on retirement, with income planning embedded in it, is one of the “hottest” tracks.

“There are different stages of learning: unconsciously incompetent, consciously incompetent and consciously competent. We’ve squarely, as an industry, moved into the consciously incompetent space. And that’s very positive,” says Ford. “That means we can move on to the consciously competent stage where the advisor is now invested in his own development and education and product providers have reached a point where strategies and innovation have begun to emerge. I’m optimistic.”

For those advisors who fail to become pro-active, Ford has a cautionary note: “Fast-forward five or 10 years and advisors will have stories of clients who have run out of money. Someone will have spent too aggressively, drawn down faster than they should have, lived decades longer than anticipated. To date, you don’t have those stories. As they begin to emerge, advisors will be looking for insurance policies to help their clients. Just like insuring against fire and theft, insuring your income stream is going to become a mainstream strategy.”

—

Ellen Uzelac is a Chestertown, Md.-based freelance writer and contributing editor of Research.