A “somewhat surprising” trend in annuity ownership among affluent investors declined in 2014 to 33 percent from 36 percent last year, according to Julia Johnston-Ketterer. Meanwhile, ownership of cash rose to 83 percent in 2014 from 78 percent.
The trends suggest that affluent investors are “scaling back from interest-rate sensitive products,” said the senior director for investor-based products at Cogent Reports during a webinar on the firm’s annual Investor Brandscape report.
The stock market hit new highs in 2014, but the environment was one of “complex investment choices, global unrest, and political uncertainty here at home in the U.S.,” Johnston-Ketterer noted.
The shift away from interest-rate sensitive products is consistent with a lower risk tolerance that is emerging among affluent investors in this environment, she said.
For instance, the proportion of affluent investor assets in low-risk investments has increased “significantly” to 38 percent in 2014, while the portion of portfolios in high-risk instruments has decreased to below 20 percent.
The multi-generational study tracks financial trends among adult investors who have $100,000 to $1 million or more in investable assets, excluding real estate.
Cash is rising
Ownership, which refers to the percent of people owning a financial product, fell in several other product categories in addition to annuities, the data show. Mutual fund ownership fell to 67 percent from 69 percent in 2013; individual stocks fell to 63 from 65; bank certificates of deposit (CDs) fell to 32 from 36; and individual bonds fell to 31 from 33.
When viewed by average allocation, the picture was similar for several products. For instance, mutual funds, the largest allocation category, stayed flat at 30 percent, Johnston-Ketterer said. So did individual stocks (19) and annuities (11). As for CDs, at 8 percent, they were down from 2012.
This signals that mutual funds and stocks did not fall out of favor. However, their allocations between products didn’t grow either, indicating that a holding pattern of sorts had occurred.
Meanwhile, average allocation to cash in 2014 it was at 18 percent, up from both 2013 and 2012, according to the report.
The annuity data
The researchers initially found the decline in annuity ownership surprising “given the record sales being reported for the category in 2014,” Johnston-Ketterer said.
The decline was driven by younger investors, she added, noting that annuity ownership by affluent Generation Y investors dropped to 34 percent in 2014, and Generation X at just 23 percent. But older investors had “relatively higher” ownership and average allocation, she said, noting they are now one year closer to retirement.
Current owners have maintained their allocation to annuity products, she pointed out, so this has resulted in a “slight but not significant” decline in overall average allocation to annuities.
For instance, from 2012 to 2014, the average allocation to variable annuities stayed in the 4 percent range, though with a slight decline in 2014; fixed annuity allocations stayed in the 5 percent range in all three years, but with slight increases; and fixed index annuities stayed in the 1.5 percent range with a slight drift downward.
Concerning annuity ownership, the product lines seeing the greatest decline were variable annuities. In 2014, variable annuity ownership among the affluent came in at 18 percent, down four points from 22 percent the year before, according to the report.
Fixed annuity ownership fell too — to 21 percent in 2014 from 24 percent in 2013. Ownership of fixed index annuities declined as wel l— to 9 percent in 2014 from 11 percent the year prior.
Lower risk tolerance
The tilt towards lower risk tolerance among affluent investors is occurring across all generations, not just those nearing or in retirement, according to the data. For instance, 38 percent of Gen Y was in the low risk tolerance category in 2014, up from 35 percent in 2012 and also in 2013.
Similarly, 30 percent of Gen X was in the low risk tolerance category in 2014, up from 27 percent in 2012 and from 29 percent in 2013.
The Gen X shift may not seem to be significant, especially when compared to the low risk tolerance of younger investors. However, compared with the percentage of Gen X affluent adults in the high-risk category in 2014, it takes on meaning. This figure dropped to 27 percent in 2014 from 29 percent in 2013 and 30 percent in 2012.
Baby boomers increased their low-risk investments too, even as they dialed back on high-risk investments.
For instance, first wave boomers (born 1946-1955) increased their low-risk investments to 45 percent from 39 in 2013 while second wave boomers (born 1956-1964) increased low-risk investments to 36 from 34. As for high-risk investments, the first wave cut back to 12 percent in 2014 from 15 last year while the second wave cut back to 17 from 21.
In general, the lower level of risk tolerance and the increased allocation to cash “are clearly having an impact on investment performance,” Johnston-Ketterer said.
The changes may have implications for product positioning in the year ahead, particularly if the affluent in all generations continue to favor low-risk investments.
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