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?”