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More Work To Be Done If Annuities Are To Grow: Cerulli

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Although annuities are the only financial products specifically designed to generate a guaranteed lifetime stream of retirement income, few retirees currently use annuities for this purpose, says Cerulli Associates.

In a new report on the annuity future, the Boston research firm does find some positives ahead, however.

For instance, Cerulli said growth prospects are “optimistic” for qualified variable annuities (which accept rollovers from 401(k), individual retirement account and other tax-qualified retirement plans).

“Asset managers, in particular, anticipate very strong growth” in these VAs, the report adds, noting such VAs won a rating of 6.2 on a 7-point scale. The report also says nonqualified fixed annuities have growth potential.

Even so, there are several obstacles that need to be overcome, even where qualified VAs are concerned, says Lisa Plotnick, associate director at Cerulli and lead writer of the report. These include:

Tax-deferral. Many advisors continue to position annuities for the tax-deferral properties, Plotnick says, which will impede their use in rollover scenarios.

To overcome this, the industry should focus on positioning VAs for their income properties, she says. The rise of living benefit features in VAs is helping this along, she points out, noting that 67% of advisors surveyed by Cerulli in 2007 cited these features as highly important, up from 62% in 2006.

In particular, the guaranteed minimum withdrawal benefit has helped advisors view the VA as a product to use for income purposes, Plotnick says.

“Even executives who don’t like the GMWB concept actually praised it, in our survey, for getting advisors and consumers to think about using annuities to generate guaranteed lifetime income,” she says.

“They see the GMWB as similar to systematic withdrawal plans, which are something with which people are already familiar,” she adds.

The presentation of annuities. Too often, annuities are still being presented in “product pitches” that position the annuity as a stand-alone purchase, says Plotnick. The Cerulli report advises avoiding such pitches “as much as possible, particularly when expanding the advisor pool.”

Instead, present the annuity along with other products, as part of a holistic solution for the customer, suggests Plotnick.

The report notes that 44% of wholesalers see their main value to advisors as providing “actionable sales ideas.” However, some VA marketers are now focusing more on “actionable strategies” and “consultative selling,” the report continues.

“That is the direction the business needs to go,” confirms Plotnick. “The advisors already know the products. What they want to know is how to use the products, and how to position them with other products that, when combined, will meet clients’ unique needs.

Role of advice and annuities. VA use is strongest in the investment planner and financial planner channels, according to Cerulli’s advisor survey. Further, the survey found that, in general, “the greater the emphasis on advice, the greater the number of products (and product types) utilized by advisors.”

That means, as advisory practices put more focus on advice, annuities will represent a smaller percentage of the advisors’ books of business, says Plotnick.

When developing products and strategies for long-term, holistic income planning, annuity insurers need to develop a greater understanding of such distributor mindsets, observes the Cerulli report. Having appropriate expectations about the role of annuities in such planning will help too, Plotnick indicates.

Expense disclosure. The level of insurance expense charges in VAs continues to be a source of “controversy and confusion,” the report points out.

In 2007, one-half of contracts imposed charges of at least 1.4% a year, before adding optional rider charges. Three-quarters of insurers and asset management executives polled by Cerulli indicate they expect these expenses to stay the same or increase in the next few years.

In view of that, “it is imperative that insurers do a better job of explaining these charges to advisors and investors, and the important risks they cover,” the report says.

Product types. Firms are beginning to explore alternative ways to distribute annuities, ways that build on insurance concepts, says the report.

Examples include combining investment products with insurance (such as mutual funds with guaranteed living benefits). Some of these hybrids can be positioned alongside income annuities and other products for meeting long-term needs, it adds.

“The more products there are, the less reliance there will be on one solution,” Plotnick sums up. “Also, the more education there will need to be on the various products and how they fit together.”


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