Advisors who feel that the complexity of annuities is too great for client conversations and they dislike selling clients on the concept of them can consider a few options. One might be to consider using client dinners and lunches for educational purposes. Another might be to anoint a particular person in their firm as the annuities expert and partner up with that advisor. This can be an excellent option for younger advisors building their skills to learn client relations and management.
Sales of annuities are breaking records, and yet, many advisors shy away from them. As we’ve said before, “[m]ost folks over the age of 40 have a certain opinion about annuities which may align closely with root canals and black holes. That’s probably because back in the mid-1980s, annuities were the bubble that burst and may have taken down a few college savings funds….”[1] Sales in 2022 topped $80.7 billion in the summer. That’s not too shabby for an asset class that causes confusion among many. As one financial analyst said: "[annuities] are still very complex. A lot of advisors do not understand them, and they won't position something to a client that they can't understand."[2]
But the boom in sales has moved some advisors towards considering them a new. “Sold by insurance companies, they provide a pension-like income to the purchaser during retirement. On the other hand, many consider annuities excessively complex and expensive, or complain that they're "sold" to clients rather than demanded by them — sometimes without the client's full understanding. The products' defenders counter that today there are plenty of cheaper, simpler annuities, and the hidden fees of yesteryear are an outdated stereotype.”[3]
While they are confusing, annuities can be an excellent option for many investors. “Annuities are investment products that can help extend the life of your savings and are typically used as part of a retirement plan. Annuities provide a fixed, stable income once you stop working. You are paid a monthly, quarterly, biannual or annual distribution for a specified period of time. The amount of your distribution is based on the growth of your annuity account.”[4]
Annuities have a few ways of being defined. The IRS defines annuities as “[A] series of payments under a contract made at regular intervals over a period of more than 1 full year. They can be either fixed (under which you receive a definite amount) or variable (not fixed). You can buy the contract alone or with the help of your employer.” Most discussions of annuities break them down into categories based on payment of compensation. First, there are immediate versus deferred annuities which differ based on timing, e.g., whether you receive the payments presently or obtain them later. In an immediate annuity, a client gives the broker a lump sum of money and receives payments over time. Longevity annuities are those where payment is deferred until a specific age, and then provides a specific, predictable amount. Next, annuities differ based on the payment calculation, whether that amount is fixed payment to payment or varies (or is blended as in an equity-indexed annuity). Lastly, annuities fall into individual versus group plans. Individual annuities are as they sound, a contract between an individual and an insurer. Group annuity plans fall into defined benefit plans.
Other types of annuities include immediate and equity indexed. Immediate annuities provide an immediate income stream after the initial one-time payment has been made. These immediate annuities can be set to a variety of time periods, usually between five to twenty or for the duration of a person’s life, such as a spouse. Equity-index annuities are similar to others in that premiums are paid either lump sum or periodically, however the interest earnings are tied to security performance, rather than a fixed amount. These annuities require computing the difference in the value of the index on the date the annuity was issued and when it matured. While the equity-index is an important part of the value of the annuity, the annuity is not invested in it: it’s a reference point.
If advisors feel that the complexity of annuities is too great for client conversations and they dislike selling clients on the concept of them, they can consider a few options. They may want to consider using client dinners and lunches for educational purposes. Other advisors may want to anoint a particular person in their firm as the annuities expert and partner up with that advisor. This can be an excellent option for younger advisors building their skills to learn client relations and management.
[1] https://www.bcgbenefits.com/blog/annuities
[3] https://www.financial-planning.com/list/ask-an-advisor-the-great-annuity-debate
[4] https://www.bcgsecurities.com/investments-annuities
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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