Is It Time to Consider Annuities?
With the recent market volatility, higher interest rates, and June being Annuity Awareness Month, now seems like the perfect time to discuss annuities. In my experience, many RIAs and comprehensive financial advisors do not make annuities part of their everyday client conversations or recommendations. There seems to be a disconnect for advisors between what annuities are versus what they can do. This is unfortunate because, in the right circumstances, annuities can be used to help improve an asset allocation or, more importantly, improve a client's financial outcomes and their financial life plan.
In this article, I aim to shed some light on how they work, where they fit, and why now may be the time to start incorporating them into your client conversations.
I think it is important to note annuities can now be purchased as a "fee-only "option. "Fee-only" annuities have removed many of the prior objections advisors might have had about using them, allowing an advisor to charge a fee versus receive a commission.
Market Returns vs. Investor Returns
Recent stock market volatility has been dramatic and, with no sign of calm in sight, investor behavior is in the spotlight. Research shows that investor returns are typically much lower than market returns. For this reason, annuities can be a great client conversation to address behavior risk. When used as part of an overall portfolio, the fact that a fixed index annuity can participate in some of the market's upside with no downside risk can be very appealing during volatile times. One of the perceived downsides to these investments is that returns typically average in the 3%-6% range. However, perceptions may need to be re-evaluated as research shows investor returns usually fall into those ranges anyway.
Retirement Ready
Retiring today is more complex than in prior generations. The absence of company pensions coupled with increased longevity poses a real risk to people's lifestyle in retirement. Annuities offer a great client conversation to address lifestyle protection in retirement. Immediate annuities can provide clients with a "personal pension" that they may lack from their current employer. Or a Fixed Index Annuity with an income guarantee can create a similar lifetime income with "assets under management" and potential proceeds for beneficiaries. We encourage you to consider filling a portion of the income gap for clients with an annuity. A simple formula is to manage their essential needs in retirement with pensions, social security, and annuities. It is a logical choice that makes sense to many clients when analyzing their retirement. My firm has client-friendly tools and presentations that allow you to take this planning conversation to clients. Please feel free to reach out to me anytime.
The Conservative Alternative
With rising interest rates, MYGAs have emerged as an excellent option for conservative investors. A MYGA is a fixed annuity that offers a guaranteed fixed interest rate for a certain period, usually from two to ten years. A MYGA might be appropriate for someone closer to retirement who prefers tax deferral and a guaranteed return. MYGAs can be an excellent CD alternative for clients holding funds until age 59.5.
Your Opportunity
It seems like there is a large percentage of advisors that market themselves as "comprehensive." However, many of the ones we speak with don't integrate risk management conversations into their practice. Or, they lightly discuss it, but with no real intention of offering ideas and solutions. We think these advisors are missing a tremendous opportunity. The financial advice landscape has changed, and with that change, more clients want a comprehensive client experience (hence why so many advisors now market themselves this way). Yet the real opportunity lies with those advisors who deliver a comprehensive experience. Taking the time to understand and incorporate annuities and other risk management solutions can be a simple first step.
The BluePrint Insurance Services are administered by Lockton Affinity, LLC d/b/a Lockton Affinity Insurance Brokers LLC in California #0795478. Coverage is subject to actual policy terms and conditions. Policy benefits are the sole responsibility of the issuing insurance company.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.