It's debatable if the fiduciary standard is 'higher' than suitability. But the better question might be, who's holding the bar?
By Linda Koco
Not long ago, analysts at Cerulli Associates asked older 401(k) participants a seemingly routine question about retirement income expectations. The answers received were striking for their naiveté. As a result, the analysts reached an enlightening conclusion regarding the need for advisor-sold annuities.
In 2013, the analysts posed the question to people age 55 and older who were active participants in 401(k) plans. The participants were asked to indicate the size of a one-time lump-sum premium they would hand over to receive $500 a month for life beginning at age 65.
There was no mention of taxes, investment vehicle or feeds, the analysts said.
Would the participants hand over $25,000, $50,000, $75,000, $100,000 or $200,000?
(Have some fun with this question: Make your own guess about the answers before reading on.)
The majority — nearly 72 percent — answered $25,000.
Coming in second place was $50,000, with nearly 18 percent of the group selecting this answer. Third place went to $75,000, chosen by nearly 6 percent of the group, and fourth place went to $100,000, with nearly 4 percent picking that answer.
The remaining answer — $200,000 — was selected by less than 1 percent of the survey participants.
The majority answer was pretty far off the mark. Even a $25,000 single premium immediate annuity “would most likely generate less than $150 per month for a 65-year-old female,” the Cerulli researchers said. And that assumed a single-life-only guarantee.
Even when looking at the most aggressively priced products in that category, the same 65-year-old woman would most likely need to spend between $90,000 and $100,000 to generate $500 a month for life, without a death benefit guarantee, they said.
This finding speaks to the complexity of annuities and the lack of awareness of how annuities function and the tradeoffs that are involved, the Cerulli analysts continued.
“It also helps verify why annuities remain advisor-sold products, and why less than 3 percent of variable annuity sales were derived via the direct-to-consumer channel,” their report said.
The findings and conclusions drawn are among several points of interest in Cerulli’s new report on Annuities and Insurance 2013: Balancing Shrinking Supply and Increasing Demand for Guarantees. Those looking for an all-positive forecast for the annuity future will not find it in this report. The researchers present a mixed bag of potential annuity opportunities amidst cautionary warnings, some with implications for advisors.
On the plus side, the analysts predicted that net new sales of variable annuities will reach $22 billion by 2018 — up 57 percent from 2012 levels. That is based on computations Cerulli performed using data supplied by Morningstar.
Net new variable annuity sales did plummet in 2012 to $14 billion, said Donnie Ethier, associate director at Cerulli. But with interest rates now stabilizing, “we envision legacy variable annuity providers and new entrants, including nontraditional players, will join the marketplace.”
Still, the variable annuity industry has an “urgent need” to tap new sources of assets in order to increase its net sales, Cerulli said. This will not only help boost the industry’s asset base; it will also help overcome the “negative perception” that Cerulli said the industry has acquired around how it relies on 1035 exchanges for much of its total reported growth.
That perception has some basis in fact. In 2012, section 1035 policy exchanges represented about $74 billion of sales in 2012, according to Cerulli, which noted that this was more than half of total variable annuity sales that year.
Noting that the industry is experiencing outflows of more than $131 billion, the researcher concluded that this “substantiates the vital need to expand net sales.”
To accomplish this expansion, the industry will need to look into enticing more fee-based advisors and younger generations or creating new concepts, they wrote.
About fee-based advisors, the analysts noted that fee use is on the rise. In fact, advisors from all distribution channels, not just registered investment advisors, told Cerulli that more than half (51 percent) of their revenues are now generated by fees. In addition, these advisors said they expect to increase their overall fee-based percentage to 62 percent by 2015.
That will further threaten commission-based products, mainly annuities, the researchers predicted.
As for advisors who are considering moving towards fee-based sales, Cerulli pointed out that this transition “does not necessarily require an advisor to leave a broker-dealer to join a registered investment advisor.”
The report devoted quite a bit of attention to assessing prospects for variable annuities with living benefit guarantees, the highly popular annuity feature from which a number of carriers have been retreating during the post-recession years.
The trend to retreat began in 2008, with various carriers embedding their annuity products with the flexibility to make “rapid product amendments, with little notice” so they can “impact” living benefit guarantees, Cerulli said. These flexibilities include features that allow the carrier to make changes to fees, permitted subaccounts, income and guaranteed growth rates, step-up frequency, and additional premium payments (i.e., sub-pays).
The researcher predicted that this trend will continue. That’s because, “whether right or wrong from a consumer point of view, insurers are under much pressure to allocate their rationed capital to profitable and sustainable businesses, which many have already determined does not include annuities,” Cerulli said.
A joint study, conducted by Cerulli and the Insured Retirement Institute in 2013, found that nearly half of all carriers and asset managers believe the supply of living benefits will decrease over the next three years, while less than 25 percent believe the supply will increase. Though that may seem discouraging, Cerulli pointed out that new carriers have also reentered the living benefit space (New York Life), entered it for the first time (Forethought) and even enriched their guarantees (Allianz and Nationwide).
So the living benefit traffic is not moving on a one-way street.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at [email protected].
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