In general, RIA firms and their advisors have a complicated relationship with annuities. At best, they keep them at arm’s length, while at worst they are openly hostile to them. 

A long-held assumption is that commissions are to blame: Fee-only advisors don’t charge them, so annuities are a complete non-starter. But while commissions are clearly one reason RIAs don’t embrace annuities, it’s far from the only one. 

If it were, we would have seen a swell of interest in such products after 2019. That’s when the IRS issued a private letter ruling allowing advisors to collect a fee of up to 1.5% annually from variable or fixed index annuities without triggering a taxable distribution for clients. 

Yet, there hasn’t been a notable uptick in the number of RIAs using annuities since then—which suggests commissions were never really the only reason they avoided them in the first place. Beyond commissions, here are other key reasons many RIAs still avoid annuities. 

• They believe they are too costly. At one time, that may have been the case, especially when it comes to variable annuities. However, it is now possible for RIAs to access advisory variable annuities that exclude a long line of fees that at one time were standard. That includes commissions, surrender charges, 12b-1 marketing/distribution fees and additional expenses for previously elected optional benefits that may no longer meet the needs of individual clients. As a result, fiduciaries can consider these products for cost-conscious clients. In other words, innovative fee structures have emerged that acknowledge how many advisors today get compensated: through a percentage of assets under management. 

• They’ve spent their entire careers selling against them. Many RIAs have gone to great lengths to differentiate themselves by contrasting their approach with how registered representatives or insurance agents do business. RIAs would often argue that they sit on the same side of the proverbial table as clients, focused on delivering comprehensive and ongoing wealth management and financial planning advice. On the other hand, anyone offering any type of annuity was different. The perception was that not only were the products flawed, but anyone promoting them was nothing more than a transactional salesperson. Even though annuities have evolved, some may find it difficult to recommend something they’ve been railing against for years. 

• They think annuities are challenging to integrate into commonly used RIA platforms. Historically, it’s been tough to integrate the product into an RIA’s existing tech stack. Nobody likes to toggle back and forth between separate platforms, no matter what their business model is. It’s wasteful and inefficient, and because RIAs are fee neutral, they are not likely to recommend any investment vehicle that makes it more difficult to serve their clients and offer holistic advice. But more and more, this is changing, with providers now offering annuity products that RIAs can integrate into a broader range of portfolio management, billing and financial planning systems more easily.

The IRS made it possible to manage and bill directly on nonqualified variable annuities without triggering taxable events. This development should have created a watershed moment. But since it did not, it’s clear that the annuity industry has work to do to overcome some of the negative perceptions still lingering in the RIA marketplace. 

These potentially valuable retirement savings vehicles have evolved over the last few years. The landscape has shifted so fundamentally, in fact, that RIAs owe it to themselves—and their clients—to let go of their preconceived notions and learn more about a product that many of them have loved to hate.

Doug Mantelli is vice president of RIA strategy at Pacific Life.