With no end in sight to historically low interest rates, insurance providers are increasingly using technology to help advisors consider using annuities in client portfolios. But many advisors are instead continuing to pile clients into bonds, where net inflows remain high.
SS&C Advent and Envestnet both have
After the Federal Reserve’s Open Market Committee signaled in December it intends to keep interest rates low, now is the time for advisors to look at how annuities can fit into an accumulation portfolio to balance growth with downside protection, says RetireOne co-founder and CTO R. Scott Strait. The tool treats IndexMax ADV, a fixed annuity developed by RetireOne and issued by Midland National Life, as an asset class and reallocates a portion of the advisor’s fixed income portfolio to the product.
“Interest rates are so low today, it allows [advisors] to … capture upside and higher returns,” Straight says. “We have the tool that illustrates how the product fits into the portfolio.”
However, it’s unclear how much low interest rates are really driving advisors away from traditional fixed income products and towards annuities. Outside of a drop in March, 2020 net new flows into fixed income mutual funds and ETFs have been positive for three years, indicating strong demand for the products, says Brendan Powers, associate director of product development at research firm Cerulli Associates.
Usage of money market funds and taxable fixed income products remain more common than insurance products for downside risk protection, and the vast majority of advisors plan to either increase their allocations or keep them the same in 2021.
“Advisors still view fixed income as a ballast, if you will, for their portfolios,” Powers says. “It’s a straight-forward way to implement downside risk protection.”
On InspereX, a new fintech formed by the merger of digital bonds marketplace 280 CapMarkets and fixed income underwriter and distributor Incapital, advisors are showing a strong interest in municipal bonds, says president David Rudd.
“If you look at the fund flows, a lot of money is going into bonds,” Rudd adds. “When stocks are at all-time highs, people are taking money off the table and keeping balanced portfolios.”
And while Cerulli’s data shows 30% of advisors plan to increase allocations to insurance products — the highest rate of increase among any of the downside protection products the survey asked about — there has yet to be much adoption in the RIA market, Powers says.
One reason is that most advisors’ traditional financial planning tools don’t do a good job factoring in annuities, Strait says. RetireOne hopes to eventually integrate the Advisory Annuity Impact Calculator into the backend engines of major planning softwares like Envestnet MoneyGuide and eMoney.
When asked about steady inflows to traditional fixed income investments and low adoption of annuities among RIAs, RetireOne founder and CEO David Stone responded that the company is receiving increased interest from advisors in a variety of different accumulation protection products. Replacing bonds with fixed income annuities results in “uniformly better outcomes,” and the Advisor Impact Annuity Calculator demonstrates that, Stone said in an email.
“The upside potential is the most prominent in a bear bond market,” he added.
It remains to be seen how many advisors will be convinced.
