What You Need to Know
- New research finds advisors are unlikely to recommend annuities and clients often do not take their advice when they do.
- David Blanchett is skeptical that these clients are driven to ignore their advisors.
- A more likely story, he suggests, is that advisors are unenthusiatic about annuities, in large part because it's difficult for them to get paid on annuity assets.
A recent paper and summary brief published by two experts at the Center for Retirement Research at Boston College has sparked a debate about financial advisors being able to steer clients toward guaranteed income annuities in the retirement planning process.
The paper in question, by CRR research economists Karolos Arapakis and Gal Wettstein, cautiously draws the conclusion that advisors seem to have little power to bridge the annuity divide for their clients — at least at the current moment.
According to the duo, the results suggest that financial professionals are concerned that many clients could deplete their savings too quickly, but the majority of them do not recommend annuities and, when they do, many clients do not take the advice.
Arapakis and Wettstein say these findings point to both the promise and limitations of reliance on financial professionals to guide clients to greater use of annuities.
Commenting on these conclusions on LinkedIn, PGIM’s David Blanchett said he was “a little surprised” at the relatively low rate of annuity use, and he wonders whether there are other trends playing out in the data.
“I would have thought [theuptake of annuity recommendations] would have been significantly higher,” Blanchett wrote Monday, sparking several dozen commenters to offer their own thoughts.
“How many times when advisors recommend portfolios do the clients not follow the recommendation? I get that annuities can be complicated, but products/strategies that may provide lifetime income can do something a regular portfolio can’t, which is why I believe, we need more retirees with more lifetime income … not less,” he explained.
Expanding on his comments in a follow-up email to ThinkAdvisor, Blanchett said the research is interesting and informative, but it also leaves some unanswered questions, as Arapakis and Wettstein themselves warn.
Are Advisors Really Being Ignored?
Asked whether he would interpret the results to suggest that advisors are being ignored when they make annuity recommendations, Blanchett said he doubts it.
“I have mixed feelings that it’s really clients not following advisor recommendations versus advisors not actively positioning them with clients,” he explained. “I mean, do you think the clients aren’t taking the advisor portfolio recommendations? I highly doubt it.
“To me this suggests that while advisors in the survey might ‘recommend’ an annuity, they don’t necessarily really believe in the benefits. [If they did,] the take-up would be significantly higher,” Blanchett added.
Related: Ken Fisher Can’t Have It All
Another important consideration, he said, was raised in a comment by Kelby Meyers, who runs a retirement income planning firm called Nestimate: “Do clients need better longevity literacy?”
Blanchett wrote in reply that it still seems like a lot of advisors don’t “really understand annuities, and they don’t necessarily mesh well with AUM business models,” but he’s not so sure a lack of longevity literacy is itself to blame.
FAQs
They don't want their army of advisors pushing Immediate Annuities, Deferred Income Annuities, QLACs, and Qualified Longevity Annuity Contracts. Why? You can't charge a fee on those, and those are irrevocable lifetime income products, which means that money in the firm's eyes is gone.
Why do annuities have a bad reputation? ›
Insurance agents and financial advisors have been investing their clients' retirement money in annuities for decades. This practice has its detractors, with the criticism usually focusing on the high commissions paid to annuity salespeople and stiff fees charged to annuity owners year after year.
Why are financial advisors pushing annuities? ›
With an annuity—especially a fixed annuity—they know what their monthly income will be (and can budget accordingly). This saves them the task of managing their retirement portfolio, a plus for those who worry they aren't capable of managing their own portfolio.
Do financial professionals recommend annuities? ›
Nevertheless, the majority of financial professionals do not typically recommend annuity products to their clients. Among those who do, many report that their clients do not follow their recommendation.
What does Warren Buffett think about annuities? ›
So does Warren Buffett love annuities like the future ads you will see from your local broker or annuity Internet promoter. The answer is a resounding NO. Warren Buffett loves only one thing ... making money, and he's still pretty darn good at it.
Why does Ken Fisher dislike annuities? ›
Our founder, Ken Fisher, is fond of saying, “I hate annuities,” because he believes anything you can do with an annuity can be done better with other investment vehicles.” Annuities are a product structure, like an ETF or a mutual fund. Annuities do two things that ETFs and mutual funds can't do.
What is the biggest disadvantage of an annuity? ›
Disadvantages of annuities
- High expenses and commissions. Cost is one of the biggest drawbacks of annuities. ...
- Difficult to exit. While it may be possible to get out of an annuity contract, it comes at a cost. ...
- Possibility of an insurer defaulting. ...
- Highly complex.
And while inflation-linked annuities can be a great option to secure a fixed real-terms income through your lifetime, they remain unpopular because of their hefty cost. An investment portfolio with an allocation to equities will typically be better for inflation protection purposes.
Do millionaires use annuities? ›
But certain annuity characteristics still have particular appeal to wealthier investors. Here's a look at the pros and cons of annuities in general, along with reasons the rich often include annuities as part of their long-term wealth-building plans.
Should a 70 year old buy an annuity? ›
Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it's time for a guaranteed stream of income.
Annuities: Annuity commissions are generally built into the price of the contract. Commissions usually range anywhere from 1% to 10% of the entire contract amount, depending on the type of annuity. For example, fixed-indexed annuities generally earn advisors a 4% commission.
Are annuities safe if market crashes? ›
Yes, some annuities are safe in a recession. Some annuities are even securities. Fixed annuities provide guaranteed rates of return, which means that you know exactly how much you can earn at the end of the term.
What does Ramsey think about annuities? ›
Ramsey gave this in response: “You could also do annuities. There are fixed annuities and variable annuities. I would not do fixed annuities because they are a bad savings account with an insurance company.
What is better than an annuity? ›
In general, 401(k) plans — and the very similar 403(b) plans offered by nonprofit organizations — are a better way to grow your cash for retirement than an annuity. For starters, 401(k) contributions are deducted from your taxable income, while annuity purchases generally aren't.
What are the don'ts of annuities? ›
Don't: Consider a variable annuity.
These fees can end up being higher than any interest you earn, which means you could actually lose money. While variable annuities may be suitable for a younger investor, they aren't ideal for growing and preserving your nest egg in retirement.
Why are annuities not a good investment? ›
Why are annuities a poor investment choice? Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed.
Why don t more people buy annuities? ›
Researchers theorize that most Americans don't seriously consider commercial annuities for several reasons. Annuities are complex. Buying one isn't as easy as signing up for a 401(k) plan through an employer. "It's not an easy thing to do," Richardson said.
