Annuities might be the Rodney Dangerfield of financial products. No respect! Yet even advisors who want to use them are often stymied by a mountain of frustrations.
Here are a few of the biggest problems—and some sage advice about how to overcome the worst hurdles.
One common complaint is how insurance companies represent and promote their annuity products.
“Sales materials for annuities often prominently feature historical returns, sometimes even repeating the 10 best and 10 worst years, to illustrate potential outcomes and capture attention,” says Todd Wolfe, senior insurance associate at Telemus Capital in Southfield, Mich. “While these marketing tactics are designed to attract buyers, they can constrain advisors [who] strive to provide accurate and unbiased advice.”
The trouble, he says, is that past performance does not guarantee future results. Using so-called back-tested numbers inevitably results in unrealistic expectations and client disappointments.
What’s more, this performance data is overly simplistic. Annuities are complex solutions. Variable annuities track a basket of stocks, while fixed annuities offer a set rate of return. In addition, most annuities offer an array of riders to guarantee, say, a death benefit or long-term-care coverage. “This makes them very flexible products that can meet numerous financial needs,” says Scott Stolz, a managing director at iCapital in St. Petersburg, Fla.
But how are clients supposed to weigh these different options?
“Insurance companies are reluctant to provide any guidance [on how to use these options] in their marketing literature,” says Stolz. It falls on the advisor to understand, compare and explain different products and options for their clients.
“Insurance companies take the position that it’s their job to offer product solutions, not advice,” he adds.
Lack Of Uniformity
This might not be so bad, though, if it were easier to do side-by-side assessments of products from different providers.
“If you’re working directly with the carrier, you’re only seeing their perspective,” says Michael Kazanjian, chief marketing officer at FIDx, a financial planning firm in Berwyn, Pa. “So it’s up to the advisor to go through and create the comparisons on their own. [It’s] difficult to create an apples-to-apples comparison.”
There are no standard, third-party benchmarks, he says. Even the language about types of products and benefits isn’t necessarily consistent.
“The industry does need better uniformity,” says David Lau, founder and CEO of DPL Financial Partners in Louisville, Ky.
But it isn’t necessarily “incumbent on the industry to provide comparison tools,” he contends. “Others can do that.” (His own firm, DPL, provides tools for advisors and consumers to select the best annuities for their needs.)
Advisors say there is software that can help. “A number of platforms have arisen to meet this need and provide annuity comparison tools that zero in on the unique benefits of various products that may fit particular client needs,” says Mike Reidy, a vice president at Security Benefit in New York City.
But others grumble that these software platforms only go so far. “Most advisors research annuity offerings across providers on their own,” says Suzanne Norman, a Boston-based education fellow for the Alliance for Lifetime Income.
Fitting With Financial Planning Software
There is, she says, often a mismatch between annuities and financial planning applications. “Popular programs like eMoney Advisor and MoneyGuidePro give advisors the ability to incorporate annuities, but there are extra input steps involved,” she explains. “An advisor’s understanding, insights and inputs are crucial.”
If an advisor is modeling future income, for example, she says it’s critical that they’re precise as possible with the many annuity income features and options available.
It can be incredibly difficult to include annuities—especially anything more complex than a basic fixed annuity—in most popular financial planning progams, says David Blanchett, the Lexington, Ky.-based head of retirement research at PGIM, the investment management group of Prudential. If, for instance, the annuity has any kind of market-linked component to the benefits it pays out, it should be reflected in a client’s retirement plan.
“But it’s just not possible with almost all the tools that exist today,” says Blanchett. “This has to change.”
Advisor Education And Licensing
It’s understandable if an advisor isn’t up to the task of comparing, servicing, presenting or otherwise including annuities in a client’s retirement plan.
There are legal hurdles, too.
To offer annuities, advisors are “required to have the proper licensing and training to effectively understand and explain them to clients,” says Robert Powell, vice president of wealth management sales at iPipeline, a financial services software provider in Exton, Pa. “There is no middle ground. You need to have a certain level of expertise to be an ‘annuity expert,’ or you can’t be involved in annuities at all.”
A single purchase request might produce more than 5,000 available annuity products, he says, each with its own characteristics.
“Advisors must thoroughly understand the nuances of each product they offer to clients, which requires ongoing training and education to stay current with the evolving landscape of annuity offerings,” he cautions.
The Problem With Commissions
Yet another concern involves how advisors are compensated.
Historically, all annuities were sold on commission. Fee-only advisors could not touch them. If their clients owned annuities that carried commissions, the annuities could not be handled by their advisors. In fact, advisors who took them on could find their status as “fee-only” in jeopardy.
A similar limitation exists for advisors who have recently converted to fee-only.
“If an advisor who began in the business [using commissions] with an insurance company, broker-dealer or wirehouse firm, and then, years later, decided to become a fee-only advisor, they may have an insurmountable hurdle” transitioning their book into their new fee-only model, says Jason Branning of Branning Wealth Management in Jackson, Miss.
The National Association of Personal Financial Advisors, he says, will allow newly designated fee-only advisors to collect up to $2,500 per year in trailing commissions from legacy products. But if the commissions are higher, he says, they must be forfeited, given to charity, or assigned to someone else. “If a career-changer has dropped all methods of collecting new commissions, they still need to meet the trailing commissions rules,” Branning says.
Another option is to help clients convert their old, commission-based annuities into new zero-commission models. Under Section 1035 of the Internal Revenue Service code, any nonqualified annuity—meaning one that was funded with after-tax dollars—can be traded for another nonqualified annuity without generating taxes.
“Many advisors I work with are shocked by how many of these contracts can be improved immediately through a tax-free exchange to a commission-free product,” says Ross McGoodwin, a regional vice president at DPL. “Modern” annuities, he says, “often deliver superior cost structure, lifetime payout rates, upside potential on fixed solutions, and liquidity. The benefits are numerous.”
These conversions, he notes, also give advisors a recurring fee on the new asset. “This is a true win-win that advisors need to be aware of,” he says.
Don’t Give Up
Despite the many obstacles, many advisors continue to like annuities.
“Most firms feature annuities as a normal part of their client retirement strategies,” says Mike Maghini, head of national accounts at Security Benefit. “They offer a way to help de-risk portfolios.”
Some go even farther. “In my mind, you cannot be acting in a client’s best interest if you are not knowledgeable about annuities and present them as options,” says DPL’s Lau.