The benefits of including annuities as an RIA

An important aspect of going RIA is understanding exactly what the different business models and fee structures are, so you can be ready to best serve the interests of your clients, as well as fully maximizing your revenue streams.

One such fee structure relates to annuities. David Lau, founder and CEO of DPL Financial, says fee-based annuities offer benefits such as generating income and provide structural advantages, like risk pooling and tax deferral.

“You can't organically manufacture that as a financial advisor,” he says.

Lau points to some of the largest asset managers in the world, like Blackrock and State Street who have been putting annuities into their target-date funds, simply because “annuities are really good at generating income.”

“When these asset managers are acknowledging that fact and bringing annuities in for income and in their own products, that has to speak to the individual advisors and firms who think they can do it themselves, when the largest asset management companies in the world can't even do it by themselves,” Lau said.

The reason Lau thinks it’s valuable for an advisor to bring in annuities, particularly in retirement plans, is the efficiency of income that is generated by an annuity. At its core, he explains, $1 put into an annuity is going to generate more income than $1 put into a fixed income investment.

“That's been academically proven for decades,” Lau says. “Financial advisors just haven't adopted this, in large part, because they couldn't get paid on those products. What we enable through the use of annuities on a fee basis, is getting more wallet share from your clients.”

Consequently, advisors are increasing revenue in two ways for the firm, Lau explains. For starters, advisors are adding wallet share, because they’re able to offer and supply insurance where they couldn't before.

Because of that efficiency and income, Lau explains, advisors shouldn’t need to allocate as many dollars to generating income as the portfolio's aren't getting depleted as fast, and they can subsequently grow more.

“It's all part of the academics of why. You wind up with so many significant benefits to the firm and to the clients, it’s a no-brainer that you would include annuities," said Lau.

Scott Stolz, managing director at iCapital, says if advisors don’t create a protected retirement income paycheck through an annuity, they’ll have to invest the retirement portfolio relatively conservatively in order to generate the 4 percent "safe" withdrawal rate.

“If the portfolio is invested too aggressively, a significant drop in equities in the first few years of retirement, combined with the annual withdrawal, can put the retirement income plan at risk,” he wrote in an email. “However, if the majority of the retiree’s retirement income needs are covered by a combination of Social Security, a pension, and/or an annuity, then the advisor can allow the portfolio to recover from any early losses.”

Rather than investing the remaining assets in the standard 50/50 or 60/40 allocation, Stolz says, the portfolio can be structured as a 70/30 or even an 80/20 allocation.

“In the long run, this will allow the investible funds to grow more quickly,” added Stolz.

Whether advisors like to admit it or not, Lau says, clients love annuities.

“Who doesn't like a guaranteed income stream for life? Everybody wants that peace of mind. In their retirement, you have to get to a point where you're delivering guarantees, not probabilities.

"Probabilities are great during accumulation. People don't want probabilities that they're going to be okay in retirement. They want certainties and annuities can do that,” said Lau.