I recently read an article (Investment News, May 19, 2011: “Annuity fees a turnoff for clients and advisors”, by Lavonne Kuydendall) with some interest, having been involved with annuity products almost since their creation (at least in the modern era). While I agree with much of what was expressed by the author, I don’t believe the article fully addresses why for the most part, fee-based advisors haven’t fully embraced annuities for their clients.

Here are my top five reasons:

  1. Fee-based advisors are not being marketed to by annuity product providers: As I’ve heard from product managers and distributors, fee-based advisors are an “inefficient” channel that can’t be approached in a scalable way. This is a “chicken and egg” problem—an initial effort has to be made to begin creating sales, which then creates more focus which in turn creates the required scale over time.
  2. Variable Annuities represent a “separate platform” which advisors reject: A lot of advisors want to keep their business model simple, and limit the “platforms”, e.g., Schwab, Fidelity, etc, that they deploy. In doing so, advisor convenience may limit potential investor advantages. So it’s back to getting the product providers and/or platforms to make it easy for advisors to add annuities to their product mix.
  3. Advisors don’t “get” annuities: Not only do they not understand the admittedly complex operations of living benefit guarantees; they may not even understand the benefits and forms of payout annuities. Which brings us back to “marketing” the benefits, advantages, and yes, even some of the possible downsides – in other words, a balanced presentation that should be expected for any and all retirement investment products that can benefit the client.
  4. Annuities undermine the advisor’s value added: The built-in tax control advantages of non-qualified annuities tend to lessen the perceived benefit of the advisor’s tax management schemes. Also, with comparatively limited fund choices in Variable Annuities, the advisor cannot bring the full “power” of their asset allocation and fund/ETF selection. This may be the case; however, the advisor still has the responsibility and obligation to give the client the best “net” solution in all of its aspects.
  5. Variable Annuity fees are too high: In some cases, that may be true; however, it’s the responsibility of the VA provider to make the fee structure as competitive as possible. In looking at fees, it’s important to consider all of the relevant fees: (a) underlying fund fees, (b) annuity wrapper fees, and (c) fees for all forms of secondary guarantees. In my view, if (a) and (b) are priced institutionally for the fee-based advisor, then you’ve likely got a fair price.

The insurance company needs to design its products to be meaningful to both the seller (advisor) and the buyer (advisor’s clients) and to market them accordingly. It’s the responsibility of the advisor to be open to all reasonable investment concepts, including annuities, and to recommend to clients the products that best meet their needs.

Towards this end, we have developed in www.GoldenRetirement.com, a website that provides analysis of why and how a low-cost annuity works for non-qualified savings. Over time, we will also show when there are alternatives that are superior to annuities, or when annuities only work in combination with other investments. We hope with places like our website, we can help better frame the discussion to the benefit of all.

Jerry Golden
President
Golden Retirement, LLC
www.GoldenRetirement.com