These trends are discussed in detail in The Missed Opportunity: Guaranteed Income as an Asset Class, a white paper based on a survey of 248 independent financial advisors in addition to interviews with two academic thought leaders and 11 leading providers of guaranteed income products. The research was conducted by the Aite Group, an independent research firm, and commissioned by NFP Advisor Services Group. It discusses guaranteed income-rather than fixed or variable annuities-to leave room for the introduction of new products.
Your Clients Crave Guarantees
Survey research shows that many Americans would like income guarantees. Almost half-61.5 million-of households said, "I would put most of my assets in an investment providing guaranteed income even if it provides a low return," in a survey conducted for Strategic Business Insight's 2010-2011 MacroMonitor. More than two-thirds of those surveyed-45 million households-held enough wealth to be served by a financial advisor.
This included 5.1 million households in the pre-retired (age 50-64) and retired (age 65+) wealthy (top 5%) and affluent (next 15%) categories.
The pro-guarantee households hold a big chunk of investable assets-$10 trillion. Most of these assets are held by pre-retirees and retirees, the most likely candidates for products promising income guarantees (See Chart: "Households Attracted to a Guaranteed Income Investment").
The bottom line? You're likely to have some of these security-craving households among your clients, and they may be seeking a new financial advisor who can satisfy their craving.
Guaranteed income products aren't cheap, so you may wonder if clients will pay for them. The cost of the guarantee alone typically runs about 100 basis points (1.00%), without factoring in other expenses. Other fees may boost expenses to three percent or more, with surrender fees potentially adding an additional layer of expenses.
Advisors often cite fees as a reason to avoid the current generation of guaranteed income products. However, consumers "said they were willing to pay between 4% and 6% of assets to guarantee that they wouldn't run out of money in retirement," according to a 2007 survey by Alliance Bernstein. It seems likely that the market downturn of 2008-2009 increased this openness to paying fees to achieve peace of mind.
Despite individuals' enthusiasm for guaranteed income, advisors-especially independent registered investment advisors (RIAs)-aren't sold on these products (See Chart: "Guaranteed Income Solutions Still Face Resistance"). Roughly half (51%) of independent RIAs do not recommend income guarantees to pre-retirees facing longevity risk, according to the Aite Group survey. There are also some holdouts among advisors of independent broker/dealers and insurance broker/dealers.
The gap between individuals' interest in these investments and some advisors' reluctance to use them is striking. This made us wonder if there was objective academic research that advisors should consider as they balance fees and other concerns against the benefits of guaranteed income. We asked Aite Group to examine academic research on the impact of guaranteed income on a portfolio designed for distribution in retirement.
The Academic Case: Higher Returns with Less Risk
Evolving academic research makes a case for incorporating guaranteed income into the portfolios of individuals preparing for retirement. Essentially, it lets retirees live better for longer. This is critical as more Americans face the risk of outliving their assets due to longer lives and volatile markets.
Retirement income increased and income risk decreased when guaranteed income replaced the cash or fixed income allocations. This was the conclusion of "Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit," an Ibbotson study for Nationwide Insurance. "Rational Decumulation," a 2007 study by Professors David Babbel and Craig Merrill, found that taking advantage of insurers' economies of scale allowed individuals to gain financial security for retirement using 25 0% less money than would be required for a retirement portfolio not using income annuities. Babbel and Merrill also found that annuitizing a large percentage of wealth helped retirees to provide bequests for heirs, contrary to the conventional wisdom. Further research is necessary to assess the scope of the benefits from reduced payments in today's environment of lower interest rates and more risk-averse issuers of annuities.