The COVID-19 crisis could make 2020 the year when some advisers learn to like annuities and others are reminded why they considered them in the past, according a recent report from Cerulli Associates.
This year’s wild market volatility has investors, particularly those close to retirement, wondering if there is any way to guarantee their future income. Absent a pension plan, annuities can be an obvious answer.
“This is the type of environment that I truly believe reminds advisers of the value of annuities,” said Donnie Ethier, director of wealth management at Cerulli.
The problem, of course, is that low interest rates have led to products that offer lower overall benefits than they might have had in the past or that are more expensive.
In many cases, advisers have warmed to the insurance products over the past decade as product makers have adapted annuities for independent RIAs. A shift toward fee-based practices at broker-dealers has likely helped annuity sales, Ethier said. But advisers haven’t necessarily been recommending the products as much as the industry probably hoped, he said.
So far, 2020 has not been good for annuity sales, and the industry expects sales to remain low for the rest of the year. Some products, particularly structured annuities, are selling better than ever, although they represent a small proportion of overall sales. Nonetheless, insurers have been bringing new structured annuities to the market, anticipating more demand in the months and years ahead.
This year, advisers are reporting that clients have asked about whether their portfolios are protected from losses, which is prompting discussions about annuities, Ethier said. Describing products as an alternative to pensions or like a supplement to Social Security can be helpful, he said.
In a survey last year, advisers cited fees as the top reason why they did not recommend variable annuities to clients, according to Cerulli. Seventy-nine percent of advisers who do not use the products said the all-in fees for VAs are too high, while 37% said annuities in general are a less efficient means of providing retirement income than they could provide through portfolio construction.
Advisers who do use annuities said the top factor they considered when selecting an individual product was guaranteed retirement income – 97% said that was important, according to Cerulli. Other important factors were pricing (96%), principal protection (96%), an insurer’s financial strength (93%), tax deferral (93%), growth (93%) and portfolio diversification (90%), the survey found.
Because pricing and guarantees are challenging in the current environment, structured annuities, which provide some principal protection but allow for higher levels of appreciation than indexed annuities, have a selling point, according to Cerulli.
“A lot of [advisers] see this structured concept as being a possible best of both worlds,” Ethier said.
While clients are often interested in the features of annuities, they aren’t necessarily the ones broaching the subject with advisers.
“The old adage that these are sold, not bought, is still definitely true,” Ethier said. “It’s just really due to the complexities of the products.”
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