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Is 2015 the year of the annuity?

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Annuities have long been a polarizing topic. Some advisors say annuities are a core part of their business, while others almost never consider them. Clients who have annuities often buy more, while a vast majority of consumers still aren’t quite sure how they work.  But 2015 might just prove to be a promising year for annuities. The industry is ripening with innovative new solutions, and consumers, with “safe money” on the sidelines, are shouting more loudly for efficient guarantees. In other words, simple, accessible income solutions are beginning to emerge at a time they’re most desperately needed.

So wherever you fall on the love-or-hate annuities spectrum, when you talk to your clients this month about their financial resolutions, talk annuities. This part-history lesson, part-prescriptive look at where the industry has been and where it could be going is the first in a series on how to make annuities a smart, simple way to grow your business and give your clients the secure retirement income they crave.

Two years ago, the name of the game was supply and demand. Carriers were exiting the industry, especially the variable annuity with living benefits market, while consumers at the very tip of the retiring Baby Boomer iceberg started asking for income, leaving those who had solutions to offer very well positioned. But if we look back further into the history of the annuity industry we see a trend that’s potentially startling: the industry has grown long term, but the last 10 years have been flat (except for the much smaller income annuity sector).

Since 1985, the industry grew from about $29 billion in retail sales to $224 billion in 2013, with growth fueled by VA sales (Source: LIMRA, 2014).  A closer look at recent years reveals that the industry is due for a kick start; the 5 year compound annual growth rate is flat and when we consider annuities’ share of the overall retirement market, they’ve never exceeded more than 10 percent (Source: Investment Company Institute, 2013). Skeptics would conclude that this is an indication that the industry is flat-lining. At the same time, though, consumers are asking for solutions that annuities – especially new product types – are uniquely equipped to deliver.

The ingredients for the start of a new era for annuities are on the table. Long-term rates have bottomed out and to say that stock market valuations have recovered may be an understatement. Barron’s recently noted we are currently in the fourth longest bull market in history. And although we know that this is not a guarantee of future performance, since its March 2009 lows through the end of November 2014, the S&P was up 245 percent. Have you talked to your clients about what to do with those gains?

Most importantly, the fundamentals for a boom in the retirement income industry are still in place. Demographics – things like age and longevity – certainly favor a conversation about positioning assets to last a long time. There’s a huge opportunity in the IRA market, as rollovers are expected to grow to $453 billion annually by 2016, up from about $326 billion in 2012, according to LIMRA Secure Retirement Institute, 2014. Demand for guaranteed income is growing. Higher taxes leave clients looking for more efficient ways to grow their assets and receive income. Distributors have more widely accepted annuities onto their platforms – recognition of the fact that Americans need more options when it comes to their retirement savings. The piece about consumer demand is particularly interesting because it helps explain some of the new products on the market. When we talk about “safe money” we mean the over $2.5 trillion that consumers over age 55 hold in banking assets, money market assets, and directly-held bonds (80% of which is held by households with over $500,000 in investable assets). This tells us that retirement-age consumers, still cautious after the financial crisis, are looking for guarantees and liquidity, not just rate. This behavior manifests itself in consumer research, too.

In 2014, market research firm Greenwald & Associates, Inc. asked retirement-age consumers what they considered most important in a retirement income product and they responded with control of their money, safety of principal, and lifetime income payments. In another study conducted by the same firm, consumers said that outliving assets or running out of money topped their list of greatest retirement-related fears.

In response to the attitudes this research described, we’ve seen the emergence of income-focused products over the last two years in the form of variable annuities and fixed indexed annuities with optional income benefit riders at additional cost deferred income annuities, and single premium immediate annuities, all with guarantees backed by the issuers. But these products are not one-size-fits-all. That means helping clients find the solutions that work best for them has become both a science and an art.  Consumers need access to the right solutions.

In 2015, manufacturer innovation is set to continue and will help answer the call for both stability and income.  Hybrid-style products haven’t stopped at FIAs. Some fixed deferred annuities now offer Guaranteed Lifetime Withdrawal Benefits riders at an additional cost, giving consumers flexibility, security, and income all in one simple package. Products like these make the income market more accessible and appropriate than ever before.  The mantra for 2015 is simple, accessible income solutions.

If your clients haven’t asked you yet about annuities, they will. And if you haven’t considered the benefits of annuities as part of their retirement income plans, you certainly should. 2015’s annuities can help you deliver real value to your clients. Plus, there’s benefit to your practice. How?  By reducing income risk, clients have greater capacity to bear market risk – and be better positioned for growth – in the rest of their portfolio.  More on this in a future post.