Suddenly, annuities seem to be everywhere. Sales of a variety linked to the decade-long bull market on Wall Street are booming. Companies can now offer the guaranteed-income insurance in retirement plans for employees. Insurers are designing fee-based contracts aimed at countering the industry’s reputation as an ATM for commission-greedy brokers. ”The missing piece of your retirement planning puzzle,”
Will independent financial advisors, the fastest growing segment of the $
It’s an open question. “Would an annuity help provide for more security, more peace of mind, a higher probability of success of your retirement dreams? Yes,” said Bryan Pinsky, the president of individual retirement at insurer AIG’s Life & Retirement unit. “Annuities are the only product that can provide lifetime guaranteed income.” But they have three existential challenges.
Parsing the mortality lottery
The first hurdle is the word “annuities.” Like the generic term “cars,” the moniker for insurance contracts that convert payments into a lifetime income stream or lump sum payout can mean wildly different things. Is it an expensive
Things don’t get much clearer for investors — or advisors — when the opaque gets concrete.
“Many, many insurance companies have tried to simplify their products, the story, the positioning and the advantages over the last decade,” said Donnie Ethier, the head of the wealth management practice at Cerulli Associates, a research and consulting firm in Boston. But, he added, annuities “are still very complex. A lot of advisors do not understand them, and they won’t position something to a client that they can’t understand.”
The second challenge concerns image. For decades, the industry has been synonymous with large commissions, both upfront and yearly, for aggressive brokers who push contracts on vulnerable retirees at
In addition to the annual commission, investors typically pay additional fees for administration; “mortality expenses”; investment expense fees and distribution fees. All of those can total as much as
The third challenge involves transparency. An investor or advisor will spend many hours wading through a tumbleweed of jargon detailing costs and terms. Nothing is standardized. As for investors, “people will read the first two or three pages and say, ‘oh, that looks fine’,” said Karen Altfest, the executive vice president of Altfest Personal Wealth Management, an advisory firm in New York. “They probably don’t have the patience” to go through the contracts and their restrictive terms.
Even cautionary notes from the
Haters gonna hate
Negative headlines are driven largely by deferred variable annuities, the workhorse of the industry. VAs, which are regulated by SEC, are invested in mutual funds and can include “riders,” or extra features, at extra costs, that lock in a minimum payment if markets fall and a guaranteed minimum benefit from any gains.They typically cost a boatload.“The Great Annuity Rip-Off,” declared a 2006 Kiplinger’s
Fifteen years later, some advisors still hate the industry. “We believe anything you can do with an annuity can be done better with other investment vehicles,”
Jeannette Bajalia, the president and founder of Woman’s Worth, a financial planning firm in Jacksonville, Florida, said that “variable annuities are the ones that give annuities a bad rap.” But the broad brush tarnishing of the industry is unwarranted, she added: “If you hate annuities, you also hate pension plans and Social Security.”
The North American Securities Administrators Association, a trade group for state securities regulators, has flagged deceptive pitches for at least two decades (
“There are a large number of investors out there who own annuities that should not, because of historical sales practices,” said Cerulli’s Ethier. Countered AIG’s Pinsky: “The bad headlines have been overblown or misguided.” The industry, he added, “has always been very clear that they’re not right for everybody.”
Sales of some annuities are growing
Cautions and prejudice aside, investors bought $68 billion worth of contracts of all stripes in the second quarter of this year, up 40% from a year ago and the best quarter since the Great Recession in 2008,
While sales are nowhere near what they were before the 2008 financial crisis destroyed many insurers — total annuity sales that year were $265 billion, compared to $219 billion in 2020, according to LIMRA — they’re steadily coming back up.
Driving the recent growth are registered index-linked annuities, or
While the figures represent only around 4% of all annuities sales, they point to something big: Three in four buyers are using cash in their bank or investment accounts, and not money in their 401(k)s or IRAs, to buy the contracts.
That may mean they’re buying annuities from advisors, not commissioned brokers at Wall Street wirehouses (some of which also sell fee-based annuities), said Todd Giesing, LIMRA’s director of annuity research.
The role of advisors
The wealth management industry is shifting away from wirehouse brokers who earn commissions on house products they’re incentivized to sell toward independent advisors paid by fees for selling any product or investment. This dynamic makes an annuity without a commission more palatable to RIAs, because it syncs up with their fiduciary responsibility to avoid conflicts of interest and put the client first. But it also appeals to brokers who ditch Wall Street to join hybrid firms that are part fiduciary advisor, part brokerage.
Jim Cooper, the co-CEO of Financial Independence Group, a financial services and insurance marketing firm in Cornelius, North Carolina, said that “a lot of advisors are leaving wirehouses, so they’re familiar with annuities and receptive to using them.” Ethier said that “we are seeing sales growth in fee-based annuities” What is often missed, he added: “RIAs are fee-based, but they’re not adopting annuities — IBDs (independent broker-dealers, which include advisors) are.”
Who are annuities right for? The answer depends on whom you talk to.
They’re “most attractive to people who have money to lose,” with between $500,000 and $10 million in assets, said David Stone, the CEO and co-founder of RetireOne, a San Francisco-based annuities distributor focused on consumers “who would never consider a traditional annuity.” “That’s how you de-risk your portfolio.” Bajalia said her buyers are “middle class, with decent assets of $500,000.” Millionaires, she said, “don’t need one.”
On average, people who buy indexed annuities, which promise a minimum payout linked to a stock-market index while guaranteeing against losses but also limiting the upside, are nearly 64 years old, according to LIMRA data from 2019. Those who buy VAs are just over 60. Purchasers of fixed annuities are just over 66. All of that data is for commission-based products. Buyers of fee-based annuities average age 66.
Sold properly, annuities require lots of in-person, or at least virtual, explanation, one reason why sales dipped during the COVID pandemic. Industry experts attribute the current rebound to the re-opening of the economy, along with worries about tax increases and a resulting interest in tax-deferred investments. Also helping: historically low interest rates and lousy bond yields, which have prompted investors to seek out other havens.
Last but not least, one in two Americans worries about
Who needs an annuity
As investment managers, wealth advisors and private bankers jostle for a slice of the
What kind? Jason Fichtner, who heads the Retirement Income Institute at the Alliance for Lifetime Income, a nonprofit consumer education group in Washington, D.C., said it’s safe to say that “they’re not suitable for someone with $50,000 in retirement savings or terminal cancer.” Asked who should buy an annuity, Cerulli’s Ethier replied, “It’s so client specific; I don’t know how I could honestly, accurately answer that question.” One thing’s clear, he added: “The unfortunate truth of guaranteed income is that most clients who need this may not work with an advisor or think the products are too expensive.”
In what economic theory calls the “
No commissions
Fiduciary advisors are legally barred from selling commission-based products. Fee-based annuities, which have been around
Reid Abedeen, the managing partner at Safeguard Investment Advisory Group, an independent advisory firm in Corona, California, likes them because of tax rules allowing investors to
Cerulli’s Ethier said many independent advisors are reluctant to put clients in them amid “excessive all-in costs” relative to exchange-traded funds, where fees can be
Against that backdrop, insurers recently adopted a page from behavioral psychology. They’re increasingly casting annuities as “guaranteed income products” or “guaranteed income streams,” both more-pleasing monikers.
It’s a bit old wine (the “bad” word) in new bottles. “Framing the product as a ‘guaranteed stream of income for life,’ rather than calling it by its conventional ‘annuity’ title, increased people’s willingness” to buy annuities,
With no standard definition of what constitutes a socially responsible investment, the SEC is looking to police funds and protect investors.
A
David Lau, the founder and CEO of DPL Financial Partners, a firm in Louisville, Kentucky, that creates and sells commision-free contracts to independent advisors, said that annuities “are only controversial with people who have a financial conflict of interest.” “Today’s commission-free annuities eliminate all of those problems, leaving only historical biases and misconceptions as reasons for not utilizing annuities for clients.”
Not so fast, some industry experts say.
When annuities meet trusts and estate planning
A fiduciary-only advisor eliminates the financial conflict when selling a fee-based annuity. Fiduciaries charge the client a flat fee (not based on the size of the annuity) or simply their usual annual fee for assets under management that includes the annuity. But what about the fiduciary requirement that an advisor act in her client’s best interest to maximize an overall portfolio’s returns?
David Sterling, a lawyer and licensed insurance broker in Sarasota, Florida, and a former co-chair of the American Bar Association’s insurance and financial planning committee, said that because an annuity is a legal contract, not an investment per se, it can legally conflict with a client’s holistic estate plan.
“An annuity contract trumps the authority of an estate plan drawn up by an attorney, which can mean really bad things for the client,” he said. For example, most annuity contracts have provisions stating that if the owner has two children who are beneficiaries and one child dies before the owner dies, the other child gets the annuity’s distributions. The spouse or living child or the estate of the beneficiary who died gets nothing. “Annuities are being promoted for wealth transfer and legacy planning purposes,” Sterling said. “But they are not designed for that.”
He cited a client who paid $300,000 for a
But the terms of the trust entitled her to receive only to payments of income earned, not the trust’s principal. She thus received $300,000 to which she was not entitled under the terms of trust. Children from the deceased husband’s prior marriage objected and had to hire an estate lawyer to sort it out and get some of the money back
Sterling said he also worries about “the large population of elderly people out there owning these bloody contracts” who have dementia. “It’s very hard for insurers to quickly accept a power of attorney for the contract,” he said. One ailing client, he added, had a contract that said only the insurer’s CEO could grant permission for a family member to oversee her annuity.
Independent advisors as the entry point
Twice as many investors who work with a broker or independent advisor, or 56%, own an annuity compared with the 28% who don’t use an advisor,
Aimee DeCamillo, the chief commercial officer of Jackson National Life Insurance in Lansing, Michigan, said that “the most opportunity is in the independent RIA channel.” Which means fiduciary advisors should be prepared for a barrage of marketing. “Annuities do require time for an advisor to take out of their busy schedule, so they may not be the place a new advisor starts,” AIG’s Pinsky said. “Fee-based planners have a pretty structured system for how they manage clients assets, but as an industry, we haven’t done enough to meet the RIA in the space where they play.”
New financial planning software can game out annuity costs and tradeoffs in an investor’s overall retirement portfolio. But the technology still doesn’t do everything, according to FIG’s Cooper, who said most advisors still have to log in to an insurer’s website to see the real-time value of an annuity and make a trade.
“The industry is trying to bring both into a single pane of glass, to see both the asset management side and the insurance side,” he said.
Jackson’s DeCamillo said that “the vast majority” of the RIA market has access to annuities, through financial planning software like Envestnet’s MoneyGuide Pro. But “adoption is another thing,” she said. “We’re continuing to proselytize. Our sales people are calling on advisors.”
Annuities in 401(k)s
Meanwhile, a small number of companies, including giant asset manager BlackRock and Advance Auto Parts, have put annuities as a default option
“Think of what target date funds have done for DC (defined contribution) plans,” like 401(k)s, said Andrea Hasler, an assistant research professor of financial literacy at The George Washington University School of Business. But the expansion means a heavy lift for more working Americans — and for their advisors. “Somebody would have to work out for them, or they would have to work out for themselves, if it makes financial sense,” said Altfest. Annuities, she added, “are very complex.”
Editor's note: This story has been updated to clarify statements attributed to Todd Giesing. The story has been changed to refer to some advisors selling fee-based annuities as commissioned.
