Tom Meyer can hardly believe what he’s saying. “I’ve been anti-annuities for 36 of the past 37 years, but there are new products that are worth considering,” he says.
Meyer is CEO of Meyer Capital Group, a fee-only investment management and financial planning firm in Marlton, N.J. Annuities, he explains, were not in his playbook because they were “hard to understand and had hidden fees. People were being sold a bill of goods.”
But now, he’s begun to change his mind. “There are some now that are basically fee-only, RIA-friendly, client-friendly, much easier to understand and far cheaper,” Meyer says.
In his past aversion to annuities, Meyer was far from alone. Last summer, a survey of more than 200 registered investment advisors found that an overwhelming majority are biased against annuities and lack an understanding of how they work.
But why? Many clients retiring today don’t have pensions and would like something that looks like one.
What’s An Annuity?
The aversion may seem odd, considering annuities have been around for centuries. Nevertheless, the study—conducted by DPL Financial Partners, the Louisville, Ky.-based insurance network facilitator for RIAs—determined that only 7% of advisors surveyed would recommend an annuity to clients who were concerned about outliving their assets, despite the fact that annuities are specifically designed to solve that very problem.
To be clear, annuities are contracts from insurance companies that guarantee clients a later payout. They come in a broad variety of sizes and flavors with an even broader array of options, including immediate annuities. The promise of retirement income is not uncommon. That’s key, because Americans are living longer than ever and retirement savings have to last longer than ever—especially considering that most Americans no longer have the kind of defined-benefit pension plan that used to support them through retirement.
“Social Security won’t get you through retirement either,” cautions Colin Devine, New York-based research fellow with the Alliance for Lifetime Income (ALI), a Washington, D.C.-based nonprofit trade group dedicated to raising awareness of and educating about the importance of protected lifetime income. “The risk of running out of money during retirement is real.”
That’s called longevity risk, and advocates contend that annuities are the only products explicitly engineered to address it. “Think of annuities as longevity insurance,” says Devine. “You have life insurance in case you die young, so you need longevity insurance in case you don’t.”
RIA Aversion
Nonetheless, many fiduciary-minded advisors have stayed away. “There is an incredible reluctance in our industry,” says Meyer. “You don’t want to get your clients into something they can’t understand, that’s full of hidden charges and fees, and that they’re stuck with for 10 or 15 years because of high early surrender charges.”
Meyer had to take a second look, though, when clients started asking about them. They had heard and seen commercials. They had been treated to seminars and free dinners with insurance sales pros. “I got so many phone calls from older clients who were going to these events that we had to investigate, we had to learn,” says Meyer. “Any fiduciary advisor will come to the same conclusion ultimately.”
What he and his team found was that a growing number of annuity providers were establishing RIA-friendly platforms that enabled fiduciaries like him to offer annuities that were more transparent and cheaper than they used to be, with no surrender charges or very low ones. “We can get our clients products that will save them 100 to 160 basis points a year, and these did not exist a few years ago,” he says. “I predict that in the next five years the days of insurance people eating caviar on the clients’ dime are over.”