Advisors might think of annuities as “the A word,” according to some industry specialists, but there’s no doubt the interest in these products, both for advisors and their clients, has grown in recent years.
The reasons? A combination of possibly years of low fixed income returns and the threat of dropping stock valuations are forcing advisors to search outside their comfort zone to find clients decent returns and guaranteed retirement income.
And new, simpler no-commission annuities can provide clients those guaranteed lifetime payouts without causing conflicts of interest for advisors.
Highlighting the retirement squeeze problem, David Lau, founder of DPL Financial, in a recent webinar showed if a client wanted to get a 7.5% return back in 2004, 50% of a portfolio had to be in equities. Today that is 96%.
He cited a survey in which 56% of those between 50 and 75 years of age wanted “guaranteed” income.
But, Morningstar’s Head of Retirement Research David Blanchett added, “if you change the question and put in ‘annuity,’ [interest] drops dramatically.”
Why this visceral reaction to annuities and why is this changing?
Historically, commissions on annuities made them costly. Lau, who calls those commissions the “root of all evil,” points out that a commissioned annuity, amortized with a 7-year duration, would cost investors 1.43% in fees today. A commission-free vehicle with a 5-year duration would cost 0.20%.
Further, in the “old” days, annuities typically were single premium immediate annuities, or SPIAs, and a client gave a lump sum to an insurance company for the annuity and immediately or at a certain time a regular income was paid back. The insurance company kept any remaining balance when the annuitant died. Today those accounts make up a small fraction of annuities available, about 4%, Lau told ThinkAdvisor.
But, Lau said, no matter how simple, annuities still can be complicated, some with “phone book”-sized prospectuses.
What Has Changed?
Blanchett, who is working with Michael Finke, professor of wealth management at The American College, to research this topic, told ThinkAdvisor that he isn’t necessarily pro-annuity, but rather, “pro-consideration,” and does believe “they should be a part of a retirement plan.
“The problem is a lot of people who sell them aren’t fiduciaries, and [their annuities] aren’t what’s best for their clients. A lot of products they sell aren’t very good.”
He points out “there’s a lot of difference in the investment space, where folks are fiduciaries, and in the insurance space where folks aren’t.”
Also, today’s annuity designs are simpler. The most popular annuities have no commissions and fall into the variable and fixed indexed categories, which Lau says “are the two biggest product categories for generating income.”