• Selling assets to “top up” income
• Finding ways to manage sequence of returns risk while still finding yield
• Planning for an uncertain (and growing) life expectancy
So why do RIAs even try to replicate annuities when annuities are academically demonstrated to be a more efficient means of generating retirement paychecks? When the value of annuities is “beyond dispute,” according to Dr. Michael Finke of The American College?
Replicating an income stream is an incredibly difficult, time consuming, complex thing to do. It is no wonder that Michael Kitces recently described these income strategies in an article he wrote for an industry publication as “remarkably difficult to simply figure out where the actual cash comes from,” involving “a non-trivial amount of complexity,” and requiring clients to take risk in the market that “doesn’t always pay the level of income one desires.”
And on top of that…none of these strategies can prevent clients from running out of money, nor do they protect their income from sequence of returns risk that can significantly impact retirement income levels.
So why would an RIA even think about undertaking such an endeavor? I’ll answer in one word—commissions.
The commission-driven nature of the insurance business has made annuities untouchable for RIAs for decades. On top of that, commissions drive up the pricing, making it easy for RIAs to question their value. Not to mention the deceptive sales tactics that some annuity salespeople employ. They’re easy to sell against.
Also, to recommend an annuity to a client, an RIA has had to refer the client to an outside insurance professional—inviting a competitor into their client relationship, potentially losing significant assets (revenue) and putting their client into a product they deem expensive. It makes no sense. So instead, RIAs must try to replicate the income stream created by annuities to generate paychecks for their clients in retirement.
Not a great solution, but better than sending a client to a competitor and losing revenue.