New annuity products don't have 'icky feeling of commission'

Most advisors don’t recommend annuities to the majority of their clients who are in retirement – and only 40% expect that advice to be taken to heart most of the time.

That is according to a brief this week published by the Center for Retirement Research at Boston College, which commissioned Greenwald Research to survey 400 financial professionals in June.

Despite the lack of annuity recommendations, advisors sometimes have concerns about clients outliving their assets, according to the report. Seventeen percent of clients will run out of money if they live to 95, advisors said in the survey.

“The results suggest that financial professionals are concerned that many of their clients could deplete their savings too quickly,” authors Karolos Arapakis and Gal Wettstein wrote. “But the majority of them do not recommend annuities to their clients and, when they do, many clients do not take the advice. These findings point to both the promise and limitations of reliance on financial professionals to guide clients to greater use of annuities.”

It’s hardly new information that many advisors have historically shunned annuities, largely because of the commissions on the products being incompatible with fee-based practices. The insurance industry has been working to make inroads with those advisors, and many annuities are now available without commissions. A question for those who avoided annuities in the past is whether it is incumbent on them to consider them now.

“If you liked commissions, you loved annuities because they can pay handsome ones. If you worked on AUM fees, you didn’t like them because they represented lost revenue (recommending annuities to your clients was often referred to as “annuicide” – killing your practice by losing AUM to non-billable annuities),” said David Lau, CEO of DPL Financial Partners, in an email. “Annuities also served as an easy poster boy to sell against with their high commissions and corresponding high fees.”

Lau’s firm works with RIAs to get them more comfortable with annuities, with more no-load products being on the market than in the past.

“Basically, we’re creating new adopters of annuities,” he said.

A survey DPL published earlier this year found a strong correlation between how familiar advisors were with annuities and whether they recommended them.

“We find that advisors who don’t use annuities are blanketly opposed because they have too much invested in that opposition,” Lau said. “It is exceptionally rare we encounter objections to actual products. Objections are more conceptual or philosophical.”

Colin Day, financial advisor at Correct Capital Wealth Management, was once opposed because of the commissions and steak-dinner events that were associated with them.

“I stayed away from annuities for years, because I didn’t want that stink on me,” he said. “Dealing with clients who are in retirement has changed my personal view of annuities, especially because of the new products where you don’t have that icky feeling of the commission.”

He recommends annuities to about 10% of clients, generally folks who have about $750,000 to $3 million in assets, he said. Above $2 million, self-funding is usually sufficient to minimize the risk of outliving assets, he noted.

Over the past two years, he has switched to recommend only fee-based annuities and is migrating clients in commission products to newer ones, he said. The wider availability of fee-friendly fixed indexed, variable and structured annuities has helped make the switch easier, he said.

Another advisor, Donald Roy, founder of New England Wealth Advisors, recommends annuities to 30% to 35% of clients, usually those 57 and older.

Most often, Roy uses multi-year guarantee annuities, or MYGAs, and fixed indexed annuities, he said in an email. MYGAs are an alternative to certificates of deposit or bonds, and fixed indexed annuities have more upside potential, he noted. He recommends structured annuities “as a more risk-mitigated equity replacement for individuals who want to take some risk out of the equity portion of a portfolio.”

Even for retirees, the rates at which advisors recommend annuities is relatively low, according to the new Center for Retirement Research paper. Two-thirds of advisors surveyed said they recommend annuities for less than half of retired clients, while 12% said they do so for at least 75%.

Further, those recommendations may often fall flat. Only 2% of advisors said that all clients for whom they recommend annuities actually buy them, while 38% said at least half do. Meanwhile, 60% said clients opt for the annuities less than half of the time.

“This finding suggests that financial professionals seem to have the ability to influence only a modest portion of their clients,” the authors wrote.