Advisers plan more annuity recommendations amid the pandemic

Data from InvestmentNews Research and an annuities webcast show that more advisers are interested in the products.

The past year provided some scares for people nearing retirement, and financial advisers are addressing concerns about future income in part with annuities, new data from InvestmentNews Research show.

It’s a product category that registered investment advisers shunned for years, but there are good reasons why they are increasingly receptive to annuities. The insurance products have become much more compatible with RIAs’ compensation models, and they can provide some financial security that their clients are seeking, panelists at the InvestmentNews Annuities in 2021 webcast said.

Nearly three-quarters of independent financial advisers are planning to recommend annuities to some clients this year, according to the recent InvestmentNews Research survey of 400 advisers. More than half of those who do use annuities in their practices 58% said they will likely change product recommendations in 2021, while most indicated they will suggest annuities more often than they did in the past, that report found.

“RIAs historically have used mostly investment-only variable annuities with the occasional single-premium immediate annuity mixed in, and that is because annuities until recently haven’t been built to fit into their business model,” David Lau, CEO of DPL Financial Partners, said during the annuities webcast last Tuesday.

His message to advisers is that annuities can provide retirement income more efficiently than bond ladders, freeing up a greater proportion of a client’s portfolio to be invested more aggressively for legacy or discretionary spending.

“One of the things that’s misunderstood about annuities is that in a low-interest-rate environment, it’s something you may not want to consider,” Lau said. “In today’s market with interest rates where they are, it is about 41% more expensive to fund retirement income using a bond portfolio than it is using an annuity.”

A $250,000 investment for a 60-year-old man planning to retire by 67 could lead to $500,000 more in retirement income through a certain annuity than it could invested in bonds with a 2% interest rate, he said. A goal of retirement income of $50,000 a year could be reached with a $600,000 annuity contract or with $1 million using a bond ladder, he said.

Nearly half of advisers surveyed by InvestmentNews Research said they will increase use of at least one kind of annuity this year. Twenty percent said they would recommend more VAs and fixed-indexed annuities, while 15% said they would recommend more registered index-linked annuities.


Last year, overall annuity sales fell, while numbers were strong for registered index-linked annuities and traditional fixed deferred annuities. Prospecting and even paperwork became more onerous than in the past, Todd Giesing, director of annuity research at Limra, said during the webcast.

“When you think about the unique solutions that annuities provide and the value propositions they provide, guaranteed lifetime income is at the top of the list,” Giesing sad. “And everything is saying that demand should be increasing as we move forward, with more and more Americans that are nearing or entering retirement and fewer of them having the backstop of a pension and guaranteed income sources than in the past.”

While sales of VAs are projected to rise, that will occur slowly, and it could take five years for rates on living benefits to reach the highly competitive levels seen in 2013 or 2014, he said.

“It will still be a pricing struggle as we move forward and as interest rates creep up in this environment,” Giesing said. “2021 we view as a transition year.”

Still, the drop in the market a year ago was a wake-up call for baby boomers nearing retirement, Scott Stolz, head of insurance solutions for Simon Markets, said during the event.

“They’ve been through, over the past 20 years, first the tech crash, then the financial crisis and then most recently last March, they saw the market drop by 30% in a very short amount of time,” Stolz said. “If they stayed the course, they recovered from all of that, but they’re now at a point where they’re basically saying, ‘I can’t go through that again.’”

That means more people are interested in annuities for principal protection, he noted.

For people who hold onto annuities and use them for income, rather than turning in their contracts early and cashing out, there can be big advantages, he said. Insurance companies use the assumption when setting prices and guaranteed income levels that most people do not use the products efficiently, he noted.

And today, clients who hold contracts issued years ago, when interest rates were higher and living benefits were more generous, are often in good positions, he said.

“I actually still own an annuity contract that I purchased in 1990. Needless to say, interest rates were much higher … [and] people weren’t living as long. I can actually get 40% more income from that annuity on a guaranteed basis than I can with any annuity I can buy today,” he said. “If you’ve got a client who has an old annuity, meaning 10 years old or older, I would definitely encourage you to take a look at how much income that can generate, even if you just annuitize the contract.”

Only about 0.5% of in-force annuity assets are actually annuitized, Giesing said.

“It’s still a lot of money. We’re talking about a $3 trillion industry,” he said.

Most of the objections that RIAs have had to annuities are misperceptions, Lau said. Often, advisers just have questions and concerns about how certain features work, how they can bill on products and how they get data feeds, he said.

One of the biggest misunderstandings, he said, is that contracts need to be annuitized for people to receive income.

“Most people generate income through riders, which leaves the account value available to the client and the adviser to withdraw until it’s been depleted by the income payouts, just like any other investment would be,” Lau said.

And now there is more technology that helps advisers evaluate products and make well-researched recommendations, Stolz said.

“What you’re starting to see is technology tools coming into play,” he said. “It’s going to be easier for all advisers, including RIAs, to determine where the annuity fits best in the portfolio.”

Annuities are the new fixed income

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