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.”
A fixed indexed annuity pays based on the value of an external index, such as the S&P 500, but doesn’t own those assets. A variable annuity owns the assets inside the account.
These typically are straightforward products that guarantee income based on a payout rate. They can, and often do, include an “income rider” (sometimes known as death rider) that the client pays extra for, say between 50 and 150 basis points, depending on the carrier, and this allows for funds in the account to go to beneficiaries upon the death of the account holder.
The trend toward fee-only advisory has helped the annuity movement as well. An advisor can be agnostic and select the right annuity for their client, and is paid their regular fee by the client. Those who are paid on assets under management can include the annuity among assets, Lau explains.
He also recommends advisors stick with the simplest annuities that include an income rider or even one that has downside protection. But avoid those that have step-ups and roll-ups “and all kind of other bells and whistles, like if the market does this or that. When you start doing those kinds of things you kind of lose me.”
He says they may sound good to the client, but can add cost and “get overly complicated. It’s hard to even figure out whether it’s a good value or not.”
Deliverability Is Better
Another advantage advisors have today is the ability to access platforms though their RIA planning software or through membership in a platform firm that allows them to compare costs and products to help solve for the client problem but purchase them as well.
Highlighting the increased interest in annuities, Lau, whose firm is such a platform, says “advisors have historically been skeptical [but] in two and a half years since we’ve launched, we’ve signed up over a thousand firms as members.”
In September, DPL Financial partnered with SS&C Technologies to create an SS&C Advent Insurance Marketplace so the 2,500 firms SS&C serves can access its solutions through their Black Diamond platform, he says.
The tide is changing for annuities, and the convergence of lower investment returns possibly over decades with revitalized and simpler products has sparked interest. During the webinar hosted by Lau, several advisors spoke to their experience with annuities.
“I hated annuities but in the mid-2000s I saw the living benefits,” said Dan Rohlfing of Lantz Financial, in Naperville, Illinois.
Jason Branning, of Branning Wealth Management, said that he “did see abuses on insurance annuity side, but just because something has been misused, it doesn’t mean it shouldn’t be used.”
He added that today’s annuities are stable, use riders and are third-party guaranteed. But two main reasons today on why to use them are COVID-19 and Black Swan events. “Clients were happy about statements in 2019,” he said. “Ninety days later they weren’t. Annuities can assure income stream.”
— Related on ThinkAdvisor: