Why Advisors Ignore ‘Simplified Annuities’

By Linda Koco
InsuranceNewsNet

NEW YORK CITY – “The term ‘simplified annuities’ normally means ‘watered down guarantees,’” according to a securities executive during a wide-ranging and unscripted panel discussion here at LIMRA’s annual meeting.  For that reason, many advisors aren’t interested.

Ultimately, everyone likes to go to simplicity, but “there isn’t a lot of demand for that,” said Robert Pettman of LPL Financial, a big variable annuity distributor.

And “who said retirement income planning is simple?” Pettman asked rhetorically. He is senior vice president-investment products and planning solutions in the San Diego office of LPL.

Annuity contracts are complex, he allowed, but they are also “incredibly valuable products that do a number of tremendous things for consumers. So to simply water them down to make them simple…I’m not sure you’re adding value at the same time.”

The issue

The comments stem from arrival to the market of products that are designed, in part, to address an issue that has long plagued the industry. The issue is, how to make annuity products less confusing for consumers to understand and easier for producers to present.

Some insurers made the simplifications at the same time as they rolled out curtailments to their living benefit guarantees and made other product changes in the prolonged low interest rate environment. Some producers did protest the tweaks to the living benefit guarantees, but until now, there has been little to no public complaint about “simplified products” (some of which may have fewer options or moving parts, for example).

For that reason, Pettman’s comments are likely to draw industry attention. The comments shed light on feelings that may lurk beneath the surface in certain distribution channels, and they may help explain why some firms aren’t moving as many of the newer annuities as carriers had hoped.

Industry people assume that producers are not engaging in annuity conversations because they can’t understand the products, Pettman said.

“But these people (at securities firms) are selling managed futures, structured products and other things that are complicated.  So they get that. They can understand how an annuity works. They just haven’t chosen to do it.”

The answer, he said, is not in carriers offering simpler products as a way to get producers to adopt annuities.  Carriers should use other ways, such as education, he said.

It hasn’t worked

Another panelist, John C. Kennedy, agreed with Pettman. “Companies have tried to come out with a simple annuity, and it hasn’t worked when there are other products that might look a little more attractive.”

Some advisors say they want to go away from those more attractive products, said Kennedy, who is senior vice president and head of retirement solutions distribution at Lincoln Financial Distributors, Radnor, Pa.  When he hears advisors say that, “I always ask why,” he said.

Five or six years ago, he explained, variable annuities from Lincoln were being sold with a 5 percent living guarantee. At the time, those annuities were being compared, for income purposes, to 10-year Treasuries, which were then trading at 5.25 percent, he said. Now, in today’s market, the  company’s variable annuities are selling with a 5 percent living benefit but the 10-year Treasury yields are at 2.60 percent — effectively cutting income in half (for those relying on the Treasuries for income purposes).

“I would say the value proposition of what we sell today has never been greater in the history of variable annuities,” Kennedy concluded.

Later, he added that the word “’simple’ in our industry means ‘not as good.’”

He conceded that he would like to develop a simple variable annuity. “But honestly, there are too many other complex variable annuities that people will sell because the perceived value is better.”

So to deal with the complexity issue, his firm continues to send out wholesalers every day to educate on the products it offers, Kennedy said. The products are somewhat complicated and people have to understand them, he said, but they are also “really good, and they work.”

A different view

The third panelist was Chris Grady, who is executive vice president and head of retail distribution of Athene Annuity Life and Annuity Assurance Co. The carrier’s parent recently completed acquisition of Aviva USA, which has now been renamed Athene USA and is still based in Des Moines, Iowa.

The company specializes in fixed annuities, including indexed annuities, and is a relatively new player in that market, Grady pointed out. It uses traditional distribution channels.

“We look at it (simplicity) a bit differently,” Grady said. The focus is on designing simpler solutions that evolve out of the marketplace” as generational changes occur in America.

People today will buy their product from their financial planners, he explained. But the next two generations, and particularly Generation Y, will be buying these products differently, Grady said. With them, it will be a buyers’ cycle instead of a sellers’ cycle, so that is what Athene is beginning to focus on.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.