The inclusion of an annuity in an RIA client’s retirement income strategy has a positive impact on that client’s behavior—they’re more comfortable spending more during retirement, it’s easier to stay the course when the markets get choppy, and they have a higher risk tolerance in other financial areas, according to a new survey.
At the same time, the survey found the RIA firms themselves reported stronger relationships with their clients, more assets under management and a bump in referrals.
The survey, “Impact of Annuity Usage Survey 2023,” was conducted by DPL Financial Partners, a distributor of financial products to fee-based advisors, and polled nearly 400 predominantly independent RIAs who use the DPL platform for commission-free annuities.
“This is an audience that’s been traditionally antagonistic to annuities,” said David Lau, founder and CEO of DPL. “Annuities have represented a financial conflict of interest for RIAs pretty much forever, until the recent advent of commission-free products that allow them to use these products in their practice without it having a negative financial impact.”
When asked about their clients, 56% of the RIA respondents said their clients were more comfortable spending their retirement assets when they had the steady income stream coming from an annuity, 59% said they were more comfortable taking on risk in other financial areas, 70% said they were less stressed about the market, and 78% said they were better able to withstand market fluctuations without panicking. Overall, 89% said their clients were satisfied with the annuity purchase.
Including annuities as part of a firm’s offerings to its clients also had a positive impact on the firm, with 44% of the RIAs participating saying the annuities led to more assets under management, 43% reporting stronger relationships with clients and 16% reporting more referrals.
Collaborating with Lau on the survey was David Blanchett, managing director and head of retirement research at QMA, a division of Prudential Financial, and an adjunct professor of wealth management at The American College of Financial Services.
“If I think about who is not going to want to use annuities, or who do I want to get insights from, this is that group,” he said. “This is a very different audience than you would normally hear from when it comes to annuities.”
The respondents indicated that when they’re trying to solve for retirement income, they’re looking at upper age ranges for their clients—41% said they planned for longevity of 90 to 94 years, 45% said 95 to 100, and 5% planned for over 100 years.
“Longevity is becoming a trickier and trickier planning problem, and annuities can obviously play a great role in that,” Lau said.
As incorporating annuity use into a practice is as much a business issue as it is an investment issue, the survey’s findings on revenue were among the most illuminating, he said.
“In the past, RIAs would have been losing revenue by using annuities, but now over 60% say there’s been either a slight or significant increase in revenue,” Lau said, adding that advisors have finally figured out how to charge clients for these products.
He said that while DPL recommends that RIAs charge an equal fee for all types of investments, as that is the most “fiduciary” approach, not all advisors adopt that practice.
“Over the years we’ve seen a lot of advisors bifurcate their fees into equities and bonds because the yields on bonds were so low they felt like if they put 1% on top of the bond returns their clients would immediately be negative on bonds,” he said. “So you saw a lot of firms move to a different fee for fixed income than for equities.”
But, Lau said, RIAs are being paid for financial advice and the AUM is really just a proxy to calculate a retainer.
“You shouldn’t have financial incentive to allocate to one class of products over another,” he said. “So the most fiduciary thing to do is to have a single rate. So if that means you have to blend it to 75 basis points overall, rather than 100 for equities and 50 for bonds, I think one fee across all asset classes is the most fiduciary way to go.”
Not surprisingly, the survey found that the more familiar the RIA advisor is with annuities, the more likely they are to use them. When advisors considered themselves very familiar with how annuities work 28.3% of them used annuities with 10% to 25% of their clients, 24.5% of them used annuities with 25% to 50% of their clients, and 16.4% of them used annuities with more than half of their clients.
“If you know the difference between SPIAs and FIAs and MYGAs and all these fun words we use, you’re going to see opportunities to use them to help clients,” Blanchett said. “If you only know about SPIAs, that’s good, but you’re not going to use them as much.
“This is a different kind of Alpha,” he continued. “This is not ‘Did I outperform on a risk-adjusted basis some portfolio benchmark.’ This is ‘Am I doing the things I should be doing to help a client accomplish a goal.’ This is the definition of how you move beyond just an efficient portfolio to how you actually help a client better outcomes.”