How Annuity Hatred Melted For These Advisors

By John Hilton

"I was an annuity hater," said Dan Rohlfing, a senior financial advisor with Lantz Financial Team in Naperville, Ill.

The main reason is pretty simple, he said during a webcast sponsored by DPL Financial Partners Thursday: annuities of the early 2000s were expensive and offered little more than tax deferral.

But times have changed and so has Rohlfing.

"This product that really had just been extra tax deferral now is offering something dynamic that that really could make a difference, now or in the near future for someone who is retiring," he said.

The webcast -- "Annuities in the Age of COVID (& Zero Interest Rates)" -- drilled down on annuities as a fit for clients today. In particular, three advisors from across the country discussed how they are using the products.

Rohlfing was not the only one with a confession.

"Up until a few years ago, I was pretty negative on annuities," said Shannon Stone, financial planner, advisor and operations manager at DHR Investment Council in the San Francisco area.

"As a registered investment advisor, they're difficult to access when they are purchased through that commissioned marketplace," she explained. "Trying to gain the information that we need to break it down for our clients to understand what they own and how it works is very challenging."

'Very Illuminating'

DHR Investment Council has shifted over the past few years to rely more and more on annuities to counterbalance a client's securities portfolio, Stone said. "Seeing that illustrated through the financial planning software has been very illuminating," she added.

Historically, annuities have lived in the insurance world, with financial advisors largely uninterested. Several trends are combining to break down that wall, however, many advisors remain resistant.

They shouldn't be, said David Lau, founder and CEO of DPL Financial Partners.

"Investment people tend to try to solve problems with investments, and insurance people tend to solve problems with insurance," he said.

The problem is an investment-only retirement plan often leads to advisors telling clients they need to spend less than they had planned.

"Behaviorally, it's not necessarily something that consumers want to be told," Lau said. "And the other thing is, it's IF you can spend less. You know, spending is not always in the control of the retiree."

The big trend is super-low interest rates. The 10-year Treasury rate checked in at 0.74% Friday afternoon, or less than half what it was a year ago, and down 73% from October 2018.

Low interest rates mean low return on fixed-income vehicles such as certificates of deposit and bonds, Lau noted. And heavy reliance on equities, while performing very well over the past decade, leaves clients vulnerable to sequence of returns risk. A market correction at the wrong time can severely damage the most careful retirement plan.

That leaves annuities.

"If rates do stay low for five or 10 years, it's going to lead to significant, long-term shortfalls for retirees because they're relatively safe investors," said David Blanchett, head of retirement research for Morningstar Investment Management. "So it actually kind of improves the decision to move more to guaranteed income versus the opposite, even though it is a harder choice, given the fact that payout rates aren't what they used to be."

Opportunity Is Knocking

Lawmakers and rulemakers are trying to help the pro-annuity trend. The year started with the newly passed Setting Every Community Up for Retirement Enhancement (SECURE) Act, which removes some of the barriers to annuities inside 401(k)s and other retirement plans.

The act creates a safe harbor that employers can use when choosing a group annuity to include as an investment within a defined-contribution plan. With a minimal amount of gatekeeping, a plan sponsor can add an annuity option, which doesn't have to be the lowest-cost option, to a plan with little liability.

At the end of the day, however, it is going to be up to advisors to change longstanding attitudes about annuity products. Jason Branning is a certified financial planner with Branning Wealth Management in Chapel Hill, N.C.

The ongoing COVID-19 pandemic is yet another reason advisors should be warming up to annuity options, he said. The pandemic is one of several "black swan" events that disrupted the economy in just the first two decades of this century, Branning pointed out.

"Humans are not always rational," he said. "So even though historically, markets recover, people do bad things at the wrong time. And an annuity can offer a buffer against ourselves and our reactive nature."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.