As a result, the relationship between advisors, clients and annuities will change, says Caplan.
“If you make products clearer, simpler and more transparent, they begin to become more commoditized and fungible,” Caplan says. “They migrate from products that are sold to products that are bought. Since they don’t have to be sold, that generally means that they can drop a lot of the commission structure, and everyone will be impacted along the way.”
Variable annuities will be limited in their utility, says D’Amico, because distributors will no longer be able to easily market them to low and middle-income investors who aren’t currently maxing out their retirement accounts.
“In the future, the only place where variable annuities will be able to be justified is for clients in the higher tax brackets or with very large portfolios,” D’Amico says. “Advisors are going to have to do a tax analysis specific to their client to determine if the cost of an annuity is worth the benefit it provides. If someone is strictly focused on selling a client, they’re not going to do that level of work.”
There may also still be a market for variable annuities among the extremely risk averse, says Girmann. “People still love guarantees. The fear of loss is much greater than the joy of a gain. We’re seeing investors who don’t ever want to lose money. They hate the idea of losing something. Those kinds of investors may be willing to take less of an upside by investing through a variable annuity product that protects on the downside. Especially in the younger generations, millennials don’t want to risk their nest eggs. They’re in cash or fixed income right now.”