Is now the time to flip the script on annuities?
PHOENIX — What can advisors glean from the recent popularity spike of the perennially disparaged variable annuity?
Though their origins can be traced back to the Roman Empire, annuities have been historically underutilized by advisors.
But that could be changing, panelists told attendees at Pershing's annual Insite conference.
Annuities’ bad rap in the wealth management industry stems mainly from numerous compliance concerns and the extent of the processing they require, said Hans Schemmel, director of retirement, insurance-based and cash management solutions at Pershing.
"Beyond that, I think what's important to ask is can these products be the right products for your clients?" Schemmel continued. "What makes these attractive products for investors to use?"
Issuers are contributing to the uptick in annuity sales by reframing their appeal to clients, said Ted Repass, Northeast divisional vice president with Prudential Annuities. "What we've seen is the variable annuity industry has gotten better at telling a story. It's about saying [to advisors and clients] that we can do things as an industry that you might not accomplish elsewhere."
The crux that needs to be passed on to clients is that annuities are now one of if not the only products that can guarantee lifetime income after retirement, Repass said.
With the oncoming generational wealth transfer, many retiring clients will find themselves in crisis-mode when it comes to replacing their income. While previous generations could rely on pensions and Social Security, current clients are going to have a much more difficult time, Repass said. Advisors can start by underlining that annuities function "as an individual pension plan."
"We can guarantee an outcome through an insurance company that no other entity can,” he said. “It gives your clients assurance that you can't outlive your income if you've chosen to purchase this."
Another selling point for advisors’ pitching annuities to clients is to explain that they can confer additional freedom to make bolder asset allocation decisions. "Does that make you more or less conservative? All an annuity does ... is give you that comfort level that it will provide that assurance of lifetime income," he said.
If annuities' popularity is to continue increasing, changes will need to be made at the regulatory and legal levels, according to panelist Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute. As things now stand, the products' ties to insurance companies can raise red flags for clients.
"Telling that story about what the products do, how they work and how they benefit people, that's something we spend a lot of time on in Washington," Berkowitz said. "It's not easy communicating with clients … but it can be even more difficult with policymakers that are stuck in the past."
It could be the most significant update to advisor standards of conduct in years.
With brokerage firms lining up in support of the SEC proposal, fiduciary planners aim to keep their differences from the BD channel intact.
The rule requires greater public input, an industry trade group says.
Advisors may be less inclined to suggest annuities to clients given the state of flux surrounding SEC and DoL rules. While both the SEC's Regulation Best Interest and the now-overturned DoL fiduciary standard made strides to protect clients, they aren't perfect — or even in effect.
"As the policymakers in Washington have thought about this, they have very clearly said there's not a lot of daylight between these things," he added. "We know the majority of advisors do the right thing … how do we write rules to make everybody meet that standard? … How do we protect people from negative actors?"
Nonetheless, the fiduciary mindset is here to stay, Berkowitz said. "From the broker-dealer community, there's a feeling that they want to understand where business is being conducted and develop oversight over it."
Advisors considering keeping or adding annuities to their investment menu for clients may also take some comfort in the fact that both insurance companies and broker-dealers are working to streamline the annuity experience for both them and their clients.On the business side, for instance, some commission payments on annuities can take six to eight weeks to process, Schemmel said. On some platforms, "I've seen it as fast as one day for [advisors] to get your commission on it."
Clients also want to be able to check the status of all of their retirement investments on one platform, Schemmel added. "I think that's where asset consolidation is helping our clients. How do I show this fuller view and make it visible for the client but also easier to process the business? Ultimately the result is the client being able to see the business more holistically."
Repass said he can understand advisors' hesitance even from the insurance side. "We were operating under the vernacular of if we build it, you're gonna come. It's the ‘Field of Dreams’ methodology," he said. "But we built something that didn't live in your platform and was set outside of it. We're now saying we will live in a world where you want to be."