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.”

Commissions

Besides being cheaper and more transparent, the new breed of no-load annuities is specially tailored for fee-only RIAs.

David Lau, founder and CEO of DPL, the firm behind the survey, says the main problem with traditional annuities “stems from commissions.” Many annuities are sold on commission, which doesn’t work in the fee-only RIA’s business model, Lau says. Clients are paying RIAs for unbiased expertise, regardless of the products recommended.

Moreover, in order to pay the commissions to their sales force, insurance carriers charge customers a premium. “Commissions are what drive the pricing up,” Lau says.

Many fiduciaries are also leery of annuities because some have been misrepresented or sold with misleading promises. “The industry doesn’t do itself any favors when you have bad actors who use deceptive sales tactics or are overly aggressive in selling the products,” Lau acknowledges. “But again, that comes down to the commissions they’ve stood to gain. They’ve been incentivized to sell as much as possible.”

Licenses

But commission-free annuities solve only part of the problem. “It’s one thing to remove commissions from the products, but then you still have to integrate into an advisor’s desktop with appropriate software,” explains Lau.

Annuity providers that want RIAs to represent their products “have to be able to support a nonlicensed advisor within their software,” says Lau, noting that most RIAs aren’t licensed to sell insurance products like annuities, which require separate certification, “so they can have oversight just like they do with their custody platforms.”

At the same time, a growing number of advisors are getting multiple certifications so they can represent the full spectrum of investment products, including annuities. One example is Global View Capital Management, a full-service firm in Milwaukee. “Even though the majority of our business is fee-only, there are times when a commission-based product can be appropriate for certain clients,” says Global View’s president and chief investment strategist Dina Fliss. “A lot of our advisors are actually triple-licensed.”

Still, Fliss anticipates there will be more commission-free annuities coming to the market. Clients are demanding the kind of ongoing advisory relationships that only true commission-free fiduciaries can provide, she says, as opposed to the quick-sale, commission-based transaction. “In today’s fiduciary environment, people don’t want to be sold a product with no long-term relationship, no service model,” she says. “They want somebody who will hold their hand and develop a relationship.”

Lau would agree. “If you’re an RIA today and you don’t provide annuities,” he says, “you’ve almost got a kind of negative differentiation.”

Other Pressures

Another reason more RIAs should consider annuities: mounting pressure from robo-advisors, which offer cut-rate services at cut-rate prices. “RIAs need to provide more holistic wealth management services,” says David Stone, founder and CEO of RetireOne, a San Francisco-based insurance and annuity back-office platform for fee-only advisors.

RetireOne works to bridge the divide between insurers and RIAs. “Simply removing commissions is not the silver bullet,” says Stone. “There needs to be more product innovation to significantly grow RIA adoption, [and] the insurance industry has been slow to go there.”

Integrated technology platforms like RetireOne’s—that incorporate annuities as part of overall retirement planning—are part of a growing field. “In the past two or three years, we’ve seen tremendous growth in this area,” says Cyrus Bamji, head of communications at the Alliance for Lifetime Income.

Besides third-party technology providers, some annuity companies have stepped up, too. Insurance carrier Lincoln Financial Group, for example, has developed a suite of RIA-friendly, commission-free annuity products and related support services. As of June 2019, its sales in the fee-based space increased more than 150% year over year. “We’re focused on providing solutions that help meet the needs of advisors and how they choose to do business, investing in our capabilities among RIAs,” says Tad Fifer, vice president and head of the Radnor, Pa.-based Lincoln’s fixed annuity and RIA annuity distribution division.

Among other measures, Lincoln recently implemented “a more seamless tax treatment of advisory fees taken from certain nonqualified fee-based annuities,” says Fifer, referring to an August 2019 ruling from the IRS that allows affiliated RIAs to deduct most client fees without triggering a taxable event for their clients. “This development could be huge,” says Fliss at Global View. “Once the management fees can be taken out tax-free, the market will balloon.”

On The Other Hand

Of course, not everyone is on board. “Annuities are a bit like ordering takeout—you don’t know exactly what you’re getting, it’s more expensive and, in the long run, it will be unhealthy for you,” says Jim Besaw, chief investment officer at GenTrust, a New York-based investment management firm with $2.5 billion in assets under advisement.

Besaw’s objections aren’t just about fees, lack of transparency or lack of liquidity. It’s all of the above and more. “The issue is the product design and its features,” he says.

Generally speaking, he prefers bond ladders or unit investment trusts (UITs), which are essentially fixed portfolios of stocks, bonds, options or other securities that are redeemable for a specified period of time. “You can purchase a UIT with a similar payoff to an annuity but with daily liquidity and much lower fees,” says Besaw. “As these become better understood by RIAs, it will be much more challenging for annuities to gain traction.”

Yet others are cautiously dipping a toe in. Timothy Brown, managing member at 360° Family Office, a private wealth management advisory in Marina del Rey, Calif., often likes using a fixed index annuity (FIA) within a Roth IRA. FIAs offer either a fixed monthly payout for the rest of a client’s life or growth in the annual payout amount, benchmarked to a stock market index. A Roth IRA, of course, is a tax-advantaged retirement plan with zero taxes on distributions after retirement age. The combination, he says, “can offer a lifetime stream of growing tax-free income that delivers stability and longevity.”

He laments, however, that there are “few products worthy of consideration.” He would like to see more fee-only FIAs come to market.

What the future will hold is anybody’s guess, but Meyer insists that the demographics are changing. “More of our clients are looking for a lifetime income guarantee,” he says. “We’re doing our clients a disservice if we continue to pooh-pooh annuities. Isn’t it our job to get them the best possibilities out there?”