RIAs Talk The Talk But Don’t Always Walk The Walk On Annuities

The vast majority of registered investment advisors say they understand their clients are looking for secure retirement income, even as they focus their strategies on asset growth and tradition fixed income. But these RIAs have a bias against annuities and a lack of understanding about how annuities work.

Those were among the findings of a DPL Financial Partners survey of more than 200 RIAs.

“The survey illustrates how handicapped RIAs have been in meeting their clients’ retirement needs without having no-load annuities widely available,” said DPL founder and CEO David Lau. “RIAs identify needs that annuities are expressly built to address, yet they rarely use them.” Lau added that there is a growing availability of commission-free annuities that fit with RIAs’ fee-only business model, and he expects that with more awareness they will adopt the products.

Among the other takeaways from the DPL survey:

• Advisors report that “predictable income” and “not running out of money in retirement” are more important to clients than asset growth and maintaining their lifestyle. However, when looking to generate retirement income, advisors tend towards traditional asset growth and safe withdrawal strategies over guaranteed income products like annuities.
• The survey reveals a strong advisor bias against annuities. This bias is demonstrated most starkly when respondents were asked to choose between an annuity solution that is overwhelmingly better for the client and a bond solution with far weaker returns. In this scenario, one in four advisors still chose the bond solution.
• The most commonly cited strategies for addressing longevity risk—the risk that savers will outlive their assets in retirement—are relying on “safe withdrawal” rate and managing client spending to maintain assets.  Only 7% of advisors indicated they use an annuity, despite it being the only product designed specifically to address longevity risk.

The survey also found that almost half of advisors surveyed wait until five years or less before a client’s retirement to discuss retirement income strategies. Just over 25% of respondents begin planning for retirement income needs one to five years before the client retires. This short planning window represents a couple of missed opportunities: 1) to begin the retirement income needs discussion with clients while they are still in the accumulation phase and may feel less stress about the impending transition, and 2) to take advantage of income strategies that allow for asset growth while securing a reliable income stream when the client retires.

“Given that commission-driven annuities have represented a conflict of interest for RIAs, it’s not surprising that many either don’t understand how to use the products to meet clients’ income needs or lack a comfort level discussing annuities with their clients,” Lau said. “It’s clear that more education is needed, and carriers need to continue to build no-load annuity products and support specifically for the RIA market.”