Increasing Portfolio Risk
He cites a recent study by BlackRock that examined 20,000 advisory client portfolios and found that the amount of risk in them had increased by 25% just in the past two years. “That is staggering,” Lau says. “Advisors have to start looking at ways to de-risk their portfolios.” Moving to bonds is, again, difficult because of the yields, he adds. “But annuities can provide that downside protection along with a really nice income, and there are many types of annuities out there.”

Stolz posits that financial advisors, especially veterans, see themselves more as investment professionals than retirement income planning professionals, so they believe they can manage the risk themselves without outsourcing it to an insurance company by using annuities. “But retirement has changed, and retirement income planning is way harder than building a portfolio in retirement,” he says.

Advisors have long derided annuities as complex. Ken Fisher, the founder and executive chairman of Fisher Investments, has denounced them as not only being difficult to understand but says the contracts favor the companies that write them, not the customers. Most of them are bogus, he wrote in a 2019 article for USA Today. “All but simple immediate fixed annuities should be outlawed because buyers almost always misunderstand what they’re buying. It’s one step from fraud.”

But Lau says he and his colleagues are seeing “good advisors” making prudent pre-emptive moves and shifting to use annuities, which he says efficiently generate income. Also, “they provide risk mitigation, they pay you income for life that helps with longevity risks, and they pay you income without having to sell equities, which helps prevent sequence risks,” he says.

One of the only bright spots in the annuities space during the height of the pandemic was registered index-linked annuities, also known as “RILAs.” These are also known as “buffered annuities,” since they offer users exposure to indexes. They act as a cross between a fixed-income annuity and a variable annuity, providing attractive capped returns and downside protection. Registered index-linked annuities posted third-quarter sales last year of $6.4 billion, a 33% increase.

The year-to-date sales have reached $15.8 billion, up 26% from 2019 results, says the Secure Retirement Institute. Second quarter 2021 sales topped $10 billion, an increase of 121% over the same period a year before. And in the first half of 2021, sales for registered index-linked annuities were $19.2 billion, up 104% from the previous year. Preliminary third-quarter results are showing another strong finish for the products. SRI reported sales of $9.2 billion, up 47% from third quarter 2020.

The registered index-linked annuity “is the real star in the annuity space right now, and it really make sense because at their core the RILA products provide the end customer the downside protection that they want with upside protection they need,” says David Hanzlik, vice president of annuity and retirement solutions at CUNA Mutual Group. “The ability to provide the downside protection is important to people that are using these solutions, but that upside potential has been what’s captured everyone’s attention.”

Fixed-index annuities, or FIAs, also have posted big gains over the last few quarters, says Giesing. These vehicles posted $16.5 billion in sales in the second quarter, a 38% jump from the previous year. Year-to-date sales were $30 billion, up 6% over the first half of 2020. Preliminary third-quarter figures show sales continue to be strong, growing 30% to $17.1 billion—marking the highest quarterly sales in two years. Fixed-index annuity sales were $47.1 billion in the first nine months, up 14% from the prior year.

“I think overall, the theme of protection is going to be with us for a while, and I think people are still going to have that uneasiness in looking for that balance of growth and protection while it’s expected that products like RILAs and FIAs will continue to do well,” Giesing says.

Another popular option is multi-year guarantee annuities, which act like certificates of deposit, but with tax deferrals, Lau notes. These “are popular because they are completely simple,” he says. “You buy it. It’s a four-year term, and you get paid 2.75%,” making it an attractive option.