It's debatable if the fiduciary standard is 'higher' than suitability. But the better question might be, who's holding the bar?
By Chris J. Brown and Laura H. Varas
InsuranceNewsNet Magazine, March 2012
With the aging U.S. population, many financial professionals are hoping to see a steady rise in annuity sales in the years ahead, as Americans convert their nest eggs into predictable retirement income. Indeed, this uptick may have already begun, but consumers remain uneasy with annuities.
When conducting focus groups with older investors for our retirement and savings research firm, Hearts & Wallets, we often see annuity owners express embarrassment or even apologize for owning this product. Annuity manufacturers and marketers must confront this issue that has a major impact on annuity sales. Can the old adage that annuities are bought and not sold finally be turned on its head for the boomers, or even their children who are sobered by observing their parents’ woes?
Ultimately, the answer will depend on whether insurance companies can be sufficiently creative and flexible to transform the consumer experience amid changing technology, onerous regulations and consumer clutter. But there still is a lot that producers and marketers can do now.
Our data shows that the opportunity is increasing, especially among older, wealthy investors. The major hurdle is, however, that many Americans place little faith in these products and the companies behind them. Changing the perception of these firms and products remains a key challenge for anyone seeking to expand this market. And perhaps most importantly, for advisors who are challenged with helping millions of aging Americans generate a secure income from the assets they’ve worked decades to accumulate.
The Expanding Opportunity Among High-Net-Worth
Each year, Hearts & Wallets conducts its, “Investor Quantitative Panel,” which is an online survey of more than 4,500 U.S. households on their finances and financial attitudes, concerns, relationships and experiences. We analyze and publish this data in a series of syndicated “Insight Modules” and prepare customized analyses upon request.
Reviewing the data on the interest in and ownership of annuities reveals a prime opportunity for sellers and marketers of annuities. Although ownership of annuities among households in which the key decision maker is 55 or older remained relatively flat from 2010 to 2011, ownership among high-net-worth households (those with $2 million or more in investable assets, excluding real estate) rose from 42 percent to 46 percent. Hearts & Wallets’ annual marketing-sizing study, “Portrait of U.S. Household Wealth,” reveals that this segment controls roughly $9.4 trillion, 34 percent, of U.S. household investable assets.
Even more encouraging for annuity manufacturers and sellers is the percentage of these investors who say that they “don’t own an annuity [now], but are interested in learning more” about them, which jumped from 23 percent to 32 percent. At the same time, the potential resistance declined. The percentage of households that indicated that they “don’t own an annuity and are not interested” in them fell from 35 percent in 2010 to 22 percent in 2011. This suggests that selling annuities to older high-net-worth investors should be a lot easier in the future. However, other data collected by Hearts & Wallet suggests that, despite these numbers, annuity sales will remain difficult for the foreseeable future. But our research also reveals ways these difficulties can be overcome.
A Loss of Faith
Many investors have serious concerns about the reliability of insurance companies. As part of Hearts & Wallets,’ “Quantitative Panel: 2011,” we asked investors to rate several retirement income product and service concepts and their attributes, such as “income floor,” sustainable withdrawal and time-based buckets approaches. Some of the most interesting findings were investor opinions about the underlying attributes of each offering.
For example, 36 percent of those ages 55 and older agreed with the statement: “I am concerned about the insurance company behind the annuities going out of business.” If the less affluent are fearful, the affluent tend to be cynical. Only 35 percent of high-net-worth households aged 55-plus agreed with the statement that “guaranteed investments like annuities or CDs give me peace of mind.” Why don’t guaranteed products like annuities provide peace of mind to roughly two-thirds of these investors? At least one likely primary driver was uncovered through our focus group work.
Before taking the “Investor Quantitative Panel” to the field, Hearts & Wallets tested out some of these concepts for our qualitative-based research report, “Reactions to Retirement Income Concepts.” Many times during the focus groups, which were held with affluent and high-net-worth investors in their 50s and 60s, we heard strong doubts expressed about the financial strength of the annuity issuers. In discussing annuities, one participant stated to the others, “It’s not safe, it’s not guaranteed—it’s only as strong as the company is.” Another participant asked, “Is it insured? Is it really guaranteed? What happens if the company folds?” We could fill many more pages with quotes like these.
Earning Back Investor Trust
Given the collapse of AIG along with other leading financial institutions, investor concern about insurance company solvency is not likely to dissipate anytime soon. Today, anyone selling annuities has to make a strong case as to why the company they’re recommending is financially strong and likely to remain so for a long time. They’ve got to establish credibility on behalf of the firm making the guarantee. The guarantee is meaningless otherwise.
Furthermore, given the poor image of rating agencies in the wake of the Fannie Mae and Freddie Mac melt-downs and the downgrade of U.S. debt, just offering up an opinion from a rating agency is not going to cut it. Advisors need to be able to discuss the firm’s history and how it has survived economic turmoil in the past, how it manages its assets and reserves, and why this means the company is highly likely to remain solvent for decades to come. Another key driver our research has shown is that they need to clearly disclose the fees and commissions they earn from selling product—but that is an issue for another article.
As the data on annuity ownership and interest among older, high-net-worth households show, there is a tremendous opportunity for annuities to capture more investors and a larger share of their investment dollars. (See accompanying chart.) However, success that is achieved because investors lack a better alternative, as opposed to actually liking the product they’re buying, is likely to be fleeting. There are alternatives to annuities for generating income streams today and there will be even more introduced to the market in the years ahead—annuity providers, and advisors who encourage their clients to buy them, will need to do a better job convincing buyers that the guarantees really mean something. We hope to see fewer embarrassed annuity owners in future focus groups, and perhaps even some proud ones, too.
Chris J. Brown and Laura H. Varas are co-founders and principals of Hearts & Wallets, LLC, the research firm whose multiyear retirement and savings investor research series is outlined at www.heartsandwallets.com. Brown is also founder and principal of Sway Research LLC, and Varas is also president of Mast Hill Consulting Inc. They can be reached at either [email protected][email protected].
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