Annuities: More Choice Equals Less Simplicity

By Cyril Tuohy
InsuranceNewsNet

Financial advisor Carrie Turcotte wants to share a lesson with her peers: never confuse choice with simplicity.

It’s a lesson that Turcotte, president and senior financial consultant with Crest Financial Strategies in Chattanooga, Tenn., has learned in recent years as the annuity industry expands its arsenal of guaranteed income products.

Turcotte admits to being overwhelmed by the recent changes in the annuities sector. “Even for me, sometimes, I find myself saying ‘Oh, what do I sell?’ as I once again review the contracts that could potentially fit the client’s objectives,” she said.  

No one said becoming a financial advisor would be easy, but annuity sales, if not necessarily easy, were at least more circumscribed.

Like the Ford Model T, which for several years came only in the color - black - annuities used to come in only one flavor, the single premium immediate annuity (SPIA).

For advisors who sold them and consumers who bought them, an annuity universe anchored in the SPIA was easy to understand.

Then came the torrent of variants: fixed-rate deferred, book value, market-value adjusted, index, fixed deferred, deferred income and fixed immediate annuities.

Add the living benefit riders and it’s easy to see Turcotte and her peers running to the “help desk” of their broker/dealer platforms.

Remember ice cream? Parlors used to offer vanilla, chocolate and strawberry. Maybe you could even find pistachio.

Then came Baskin-Robbins, and offered the sweet tooths among us 31 flavors from which to choose, and Ben & Jerry’s ice cream pushed the boundaries even further, inventing mixes and matches that no one even thought of.

Turcotte says she no longer trusts herself to do an annuity review for a client without first revisiting the product details for each annuity contract “to ensure I correctly remember and explain all the details and nuances of the product.”

The rainbow of options within the annuity universe is a relatively recent phenomenon. It stems in part from annuity carriers “pushing” products into the market, and the baby boom generation’s “pull” on the industry to come up with answers that generate guaranteed income.

The demand for the guaranteed income that annuities are designed to provide is expected to keep on growing as boomers age and the generation’s trailing edge relies less on defined benefit plans to fund retirement.

Jafor Iqbal, assistant vice president with LIMRA Secure Retirement Institute, said that 20 years ago there were two dominant types of annuities: those focused on tax-deferred investment growth, which were used primarily as a savings vehicle, and annuities designed to preserve capital in which the original investment would remain intact and deliver a fixed rate of return to the annuitant.

Originally geared toward the older and the affluent, annuities tended to be sold to consumers who were already in retirement.

Now, annuity carriers see an opportunity to reach younger buyers who stand to rely only on a defined contribution retirement model. “Today people in their 40s and 50s buy annuities and defer the income until they retire and they aren’t necessarily affluent,” Iqbal told InsuranceNewsNet.

SPIA’s are still around and going strong, and many advisors looking to place clients into an annuity will swear by them.

But often, it’s clients who push advisors because clients are the ones who “want to know about everything that is available to them and want to make an informed decision,” said Erin T. Botsford, founder and CEO of Botsford Financial Group in Dallas, Texas.

She said that any reputable advisor has an ethical obligation — if not a fiduciary obligation — to explain the annuity choices available, even if the client opts not to settle on an annuity as part of a retirement solution.

That means advisors need to brush up on the expanding annuity choices available in the marketplace.

“To deny them information about products that provide a guaranteed income is, in my opinion, negligent,” said Botsford, whose advisory offers securities through LPL Financial. “If (clients) choose not to avail themselves of the guarantees, then that is their choice.  I believe it is incumbent upon all credible advisors to present them all options.”    

Turcotte said that clients trying to research annuities on their own face “paralysis by analysis,” and even risk losing money due to the “cost of inflation from inactivity.”

But she said that just because some annuities are complex, “doesn’t mean it isn’t worth investing the time to understand, as it could potentially be a good tool to consider as part of your overall financial plan.”

Iqbal said that while annuities serve many needs, “it all depends on what the investor really wants.”

He said that before the financial crisis of 2008, advisors focused on asset accumulation for their clients, including growing assets within an annuity.

“After 2008, more people said guaranteed income was more important than accumulating a pile of money,” Iqbal said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].