The appeal and practicality of guaranteed income investments is rising. Your clients are willing to pay significant fees for the peace of mind. Academic research shows that guaranteed income offers the potential for higher returns with less volatility over the long run. Product providers are committed to meeting the needs expressed by you and your clients. These ongoing changes-and the opportunities they offer-demand your attention as you seek to help your clients live comfortably in retirement.

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,"[1] 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[1]. 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.

Similarly, the Ibbotson-Nationwide research (2007, expanded in 2010), found that total retirement income increased as income risk fell when guaranteed income replaced cash or fixed income allocations. This was true of different portfolios incorporating guaranteed income that the authors analyzed over a 30-year period. The authors stressed the benefit of adding guaranteed income to conservative, moderate conservative and conservative portfolios.

Using guaranteed income also allows you more flexibility in managing your retired clients' income. For example, with an income guarantee, you can keep a higher percentage of your clients' portfolios in stocks for a longer time. This permits your clients to potentially benefit from the historically higher long-term returns from stocks.

Based on this evidence, advisors should consider including guaranteed income as an asset class when constructing client portfolios. More than half of the advisors in our survey already view guaranteed income as an asset class.

Products Are Changing for the Better

Aite Group's research showed that product providers are aware of advisors' challenges in using guaranteed income products. These companies are committed to education and product development to overcome your challenges. This has already been reflected in the development of new products to accommodate advisors who don't accept commissions.

Senior executives identified some practical barriers to advisors' adoption of guaranteed income. For example:

-- Financial planning tools were created without guaranteed income in mind. Questionnaires, modeling, and proposal generation systems need to be redesigned.

-- Inadequate clearing systems require manual processing of guaranteed income products, in many cases.

-- Some managed account platforms don't incorporate guaranteed income products.

-- These are all challenges that can be addressed. In fact, solutions are in the works.

Getting Ahead of the Curve

To attract and retain clients, you must keep up with the dynamic, ever-changing investment environment. This includes offering innovative solutions that meet your clients' needs and choosing partners that think ahead of the curve.

Clients are intrigued by guaranteed income and they're willing to pay for it. Academic research says their interest is justified. The right guaranteed income products at the right price in the right portfolio can improve your ability to boost clients' retirement security.

Take the time to understand today's products and the new products on the horizon. The range of products and features may be broader than you realize. In addition, if you don't provide these products when they're right for your clients, someone else may offer them. This potentially poses a risk to the relationships you've built so carefully.

Your Next Steps

If you want to learn more about how guaranteed income might play a role in satisfying your clients' needs, get a free copy our white paper, "The Missed Opportunity: Guaranteed Income as an Asset Class" at

[1] "After the Crisis" survey, Alliance Bernstein and Insured Retirement Institute (IRI), November, 2011 p. 3


James L. Poer is president of NFP Advisor Services Group, which provides a unique integration of service and technology for successful advisors to use with their clients in whatever capacity they choose.



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