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Another Reason Advisors Are Warming to Annuities

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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.

Seventy-eight percent of advisors surveyed reported that predictable income is more important to clients than asset growth, and at least three-quarters of respondents indicated that a low interest rate environment is a good environment to use annuities, up from 59% the previous year.

The survey found that more than 38% of respondents allocated some client assets to an annuity, up from 29% the prior year. Advisors are using annuities to fill an income gap created by low bond yields, mitigate sequence of returns risk, guarantee income for longevity purposes and fund essential expenses.

Almost one-third of advisors surveyed said they were funding essential expenses of clients with an income annuity, up from just 13% the year before, but a total return strategy remained the most popular strategy for that purpose — noted by 40% of respondents, down from 48% the year before. Bonds and dividend-yielding equities trailed both allocations for income purposes — 13% in 2021 and 11% in 2020.

DPL Financial Partners is a turnkey insurance management platform offering commission-free insurance products for registered investment advisory firms.

Pictured: DPL CEO David Lau