The focus on fees and taxes is expected to make life difficult over the next year for life and annuity products in the eyes of financial planners, a new survey on investing trends found.
Usage or recommendations of fixed, variable and indexed annuities fell by several percentage points from 2016 to 2017, the survey of certified financial planners found.
Likewise, usage/recommendations of fixed and variable permanent life insurance products also fell by several percentage points. The survey was conducted by the Financial Planning Association, Longboard Asset Management and the Journal of Financial Planning.
“Within the universe of those in the survey, there’s growing focus on the tax impact,” said Dave Yeske, managing director of Yeske Buie and an editor of the Journal of Financial Planning.
Investment gains in a variable annuity are tax deferred but there’s growing awareness among planners that the deferral comes at cost. Converting capital gains into ordinary income isn’t always an ideal tradeoff, he said.
Annuities are tax deferred but even so, gains are taxed at a higher ordinary income rate at distribution, Yeske said.
Planners showed a predilection for mutual funds, exchange-traded funds (ETFs) and cash equivalents as their go-to planning products for the next year, the survey found.
While mutual funds and ETFs don’t have the same tax-deferral advantages as a variable annuity, their payouts are taxed at lower rates.
Fiduciary Rule's Spotlight on Fees
The Department of Labor’s fiduciary rule is highlighting fees and expenses that advisors will now have to justify, Yeske said.
Rolling over 401(k) money into a variable annuity incurs the wrap fee as well as any fees charged by the funds, which makes it more difficult for planners to justify.
Rolling over a tax-deferred annuity into a tax-deferred individual retirement account (IRA), makes the deferral redundant – but clients are still on the hook for the fee.
Advisors focused on fees are going to find it difficult to find insurance products as low as ETFs, Yeske said.
Though the fiduciary rules don’t require planners to recommend the lowest-priced products, advisors will need to justify their recommendations.
Of the 302 planners surveyed in March and April, 95 percent are certified financial planners and 47 percent work as an independent investment advisor representative or a registered investment advisor.
Survey Results Highlighted
Which investment vehicles do you expect to increase your use/recommendation of over the next 12 months?
Fixed annuities (immediate or deferred) 12% 10%
Variable annuities (immediate or deferred) 9% 5%
Indexed annuities 9% 5%
Fixed permanent life insurance products 10% 9%
Variable permanent life insurance 4% 1%
ETFs 46% 50%
Cash and equivalents 15% 16%
Which investment vehicles do you expect to decrease your use/recommendation of over the next 12 months?
Fixed annuities (immediate or deferred) 3% 4%
Variable annuities (immediate or deferred) 9% 14%
Indexed annuities 3% 1%
Fixed permanent life insurance products 1% 2%
Variable permanent life insurance 4% 5%
ETFs 3% 5%
Cash and equivalents 6% 9%
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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