What You Need to Know
- A DPL Financial Partners survey found advisors use annuities partly because they make little money on bonds.
- They're not charging their usual fee on fixed income assets because those assets are yielding less than 1%.
- Some advisors use dividend-yielding stocks instead of bonds, which increases portfolio risk.
Beyond the usual reasons given for the growing use of annuities among financial advisors including an aging population, expansion of non-commission products and low bond yields is a little-known development that DPL Financial Partners uncovered in a recent advisor survey: They are making little or no money on fixed income assets.
According to the survey, “well over a third of respondents said they either charge reduced fees on fixed income assets or no fees at all,” leading some to put more of their clients’ capital in riskier assets such as dividend-paying stocks and lower-rated bonds with higher yields.
“Asset allocations or product choices may be guided by factors other than the best interest of the client,” the survey states.
David Lau, chief executive officer of DPL, explained that some advisors have been excluding bonds from the total assets subject to their usual 1% fee on assets under management because many of those assets aren’t even yielding 1%, which at best would earn clients nothing on that allocation or at worst, actually cost them.
What’s most important for clients, according to Lau, is “predictable income, and bonds can no longer provide that.” That creates billing problems for advisors and income problems for clients.