Annuities are changing, and so are advisors' attitudes

It’s no secret that, despite many advisors' aversion to the products, there has been an uptick of sales of annuities over the past several years.

Sales in the US surged to $215.2 billion in the first half of 2024, marking a 19% increase over the previous year, according to LIMRA data. The increase represented a new record for the first six months of the year.

Part of the allure, surely, was higher interest rates, giving customers more bang for their buck in retirement. A new era of rate cuts now looks likely after the US Federal Reserve slashed its overnight rate by 0.5% in September. This will test people's appetite, particular for fixed annuities.

Jordan Sowhanger, wealth advisor at Girard, a Univest Wealth Division, says annuity companies have come down "a decent amount", about 1 percent, from the when rates were at their highest.

"If we would have had a conversation, even two months ago, with a client who might have been a good candidate for a fixed annuity, the rates that I would be talking to them about today, if they hadn't already locked into something, are definitely different even in just that time period," she says. 

As annuity sales continue to rise across the industry, annuities may keep soaring, however, especially when some advisors’ attitudes towards the asset class appear to have softened.

Terry Parham, CFO and co-founder at Innovative Wealth Building, likens them to a “handyman or handywoman.”

“You show up to the house, you figure out what their pain point is, and what job they need solved,” he says. “If you don't have that tool, you either got to go get it, or they have to get someone else.”

For advisors who “hate annuities and would never touch them,” Parham asserts they’re showing up to the job and missing a tool as a result. “You're not going to be able to properly serve that person who really wants it and requires it if you're not willing to have that in your toolkit.”

One of the main reasons annuities are frowned upon, Parham explains, is the industry's troubled past with "bad actors," which led to annuities acquiring an unfair reputation.

“They haven't been able to grow beyond that in some people's eyes,” he says. “Nowadays, I think the academics would agree to completely eliminate annuities from your toolkit puts you at a disadvantage as an advisor, and also puts your clients at a disadvantage because they may have some benefits to utilizing that product.”

Sandra Cho, founder and president at Pointwealth Capital Management, says while some people like Suze Orman used to believe annuities are “terrible things” and advisors should never invest in them, there are no bad investments "unless they're bogus."

“Annuities can come with a lot of bells and whistles that can be very appropriate for someone who needs some kind of guarantee,” says Cho, pointing to investment, income, death benefit or a growth guarantee, as an example.  

Many of the features that previously deterred advisors, such as high fees and lengthy surrender periods, have been addressed, notes Parham.

"Nowadays, there's lots of different lengths of time for the surrender period. Some annuities have a surrender period of zero. Some annuities have fees of zero," he explained. “A lot of the worries or angst don’t really exist anymore.”

Michael Robinson, a business development consultant at Synchronize, by Lockton Affinity, an affiliate of Lockton Companies, highlights that advisors are increasingly utilizing annuities for various purposes, such as income gap planning, longevity planning, and as a bond alternative.

The growing life expectancy of clients has also heightened the need for strategies that ensure long-term financial security, with annuities emerging as a valuable tool in this regard.

“My mom comes from a third world country. Her life expectancy was only 76. My mom's 84. This is where longevity planning, income gap planning can come into play,” says Robinson.

“People are asking about longevity,” he added, pointing to a Limra consensus. “It seems like they're asking for an annuity, but the question is, are advisors understanding what [clients] are asking for, and what is the best way to use an annuity to de-risk the portfolio?”

The key is to evaluate annuities within the context of an individual's overall financial plan, emphasizes Cho.

“Profiling your client is the first step. Make sure that this is going to be an appropriate investment for the person that you're sitting in front of and for the situation that they're in.”

Ultimately, she says that the product lineup of annuities is going to develop “even further,” noting that consumers want to be able to have a variety of different options that they can choose from.

She compares them to shopping at a supermarket where it’s not a matter of “just one kind of jams” but rather, having a variety of them.

“As long as there are people out there who want some kind of protection, I think there’s going to be a desire for annuities.”

Meanwhile, Sowhanger wants to see a greater understanding and acceptance of annuities among financial advisors, leading to more widespread utilization in client financial plans.

"A well-rounded financial advisor should, at the very minimum, understand all types of annuities that are able to be offered to clients."