The story surrounding annuities is a textbook example of the adage that there are two sides (at least) to every story.
Many people love annuities and what annuities can do for them. Consumers cherish the host of guaranteed income features that annuities offer.
But mention the word “annuity” and some clients are likely to recoil behind a phalanx of objections — real or perceived — that include high fees, surrender charges and inflexible product designs.
Google the expression “love or hate annuities,” and up come financial advisor Ken Fisher and talking head Suze Orman, blaring on about why they detest annuities. Several Google pages on, though, other articles show how annuities can improve your life.
Even the same financial advisor can change his or her mind about annuities.
Harold Evensky, chairman of Evensky & Katz/Foldes Financial, recently told a financial planning publication he’d had a change of heart regarding annuities. Now he endorses immediate annuities as a vital tool to secure a client’s standard of living in retirement.
Then there’s Social Security, the most far-reaching annuity program ever invented. Detractors say the safety net program is headed into the red and won’t last much longer in its current form.
Social Security recipients, on the other hand, might just take to the streets if politicians even hint at lowering these benefits — long-known, along with Medicare, as the third rail of retirement politics.
Individual surveys reveal similar rifts among consumers over annuities.
People who don’t know anything about annuities tend to discount them, yet surveys show people who own them would recommend them to friends and family by overwhelming margins.
What is it about annuities that attracts and repels people all at the same time?
For advisors, opportunities abound to explain what annuities do and how they fit into a guaranteed income strategy.
Consumers of Two Minds
Of the following, there’s no doubt: Support for what annuities are designed to accomplish remains rock solid and consumers want the income guarantees that annuities provide.
TIAA-CREF’s 2015 Lifetime Income Survey released earlier this year found that out of a random sample of 1,000 adults nationwide, 48 percent of respondents said that having guaranteed income to cover living costs should be the primary goal of a retirement plan. This is a 14-percentage-point increase from 2014.
Yet only 28 percent of the 1,000 survey respondents said they had a favorable impression of annuities, and 12 percent had an unfavorable impression of them.
The good news for advisors is that 39 percent of the respondents in the TIAA-CREF survey said they remained neutral in their impression of annuities, which means people are open to discussing them.
“Once people realize what annuities are designed to do, they open themselves up to have a conversation,” said Sterling Raskie, a fee-only advisor and planner with Blankenship Financial Planning in New Berlin, Ill.
More problematic, perhaps, for the annuity industry is that 61 percent of people said they had no plans to buy an annuity in the future, the survey found.
So, although 100 percent of retirees stand to collect — and rely heavily in some cases — on an annuity known as Social Security, more than six out of 10 adults say they have no intention of going into the marketplace to buy a product designed to achieve the same goal.
It’s an incongruence not lost on Ed Van Dolsen, president of retirement and individual financial services at TIAA-CREF. “For many Americans, annuities are often unknown or misunderstood, which is unfortunate since they are the only way to generate retirement income that cannot be outlived,” he said.
For retail investors, annuities often come across as complicated, expensive and even intimidating.
For consumers, the idea of handing over a portion of their life savings only to see the balance disappear into corporate coffers if they die a day after buying the annuity leaves a bad taste in their mouths.
That’s all true, annuities experts say, but it pertains only to certain kinds of annuities. The objections people put forth in an effort to disparage annuities represent only half the story.
“I don’t like painting annuities with broad [brush] strokes,” said Assaf M. Pinchas, a wealth manager with Allegiance Financial Group in Vienna, Va.
Today, the market supplies dozens of different annuities to fit every need, and many annuities — designed to protect people against living too long — come with all sorts of features designed to hedge against the risk of an annuity buyer dying too soon.
Six out of 10 advisors said guaranteed income solutions, such as annuities, are well-received by their clients, according to “Advisor Perspectives on Retirement Planning” issued by LIMRA Secure Retirement Institute (SRI).
Jafor Iqbal, assistant vice president for LIMRA SRI, said he was “astonished” to find that eight out of 10 annuity owners were “moderately conversant” about their annuities and the features annuities offer.
“They know what they own and why they own it,” he said. “They also believe that annuities are a good fit for their financial needs.”
LIMRA SRI published the report “Annuities: Love Them When You Know Them, Hate Them When You Don’t.” LIMRA data show that 70 percent of annuity owners — people who know how annuities work and what they are designed to do — said they would recommend them to friends and relatives, Iqbal said.
Shifting the Perception
Is the term “annuity” in need of a makeover? Perhaps, although strict regulatory guidelines prevent advisors from discussing annuities by any other name.
Getting people to think about lifetime income isn’t lost on annuity proponents. Referring to annuities in terms of “guaranteed income” and “lifetime income” is a good start.
Sheryl J. Moore, president and CEO of Moore Market Intelligence, a firm that tracks the annuity industry, said thinking of annuities as guaranteed income “can be helpful to people in thinking about annuities and the benefits of annuities.”
“I have seen a push by industry groups to educate people on how an annuity would be helpful,” she said.
And many people will need all the help they can get when it comes to guaranteeing income.
The leading edge of the baby boom generation, which turned 65 in 2011, still benefited from professionally invested defined benefit plans. But as more boomers turn 65 every year, more of them will have to rely on the savings accumulated through an employer-sponsored retirement plan.
However consumers perceive the $236 billion annuity industry, advisors say education remains the most effective antidote to perceptions, misperceptions and outright falsehoods surrounding annuities.
Thomas Brueckner, president and CEO of Senior Financial Resources Inc. in Nashua, N.H., and Strategic Asset Conservation in Scottsdale, Ariz., spends weeks on the “seminar circuit.”
“The whole idea is to be talking to the right people in the first place; not only to people for whom your specialty is a fit, but to their peers and referrals as well,” Brueckner said.
Advisors have an uphill battle when it comes to selling annuities and that’s why consumers need to get into a conversation about annuities. Broker/dealers and registered representatives who derive their income from assets under management — an average of 1.3 percent every year on a growing amount — aren’t about to play up annuities, where the average compensation is 0.63 percent per year.
For registered reps, Brueckner said, citing a financial columnist, placing retirement funds in an annuity amounts to committing “annuicide” (with the registered reps trailing commission).
“Don’t expect to hear about fixed index annuities from your stockbroker,” said Brueckner, who also hosts radio shows on retirement planning. “It’s hysterical the way some advisors denigrate annuities.”
Explaining how annuities work and where they fit in a retirement program is a test of patience, said Carrie Turcotte, president and senior financial consultant with Crest Financial Strategies in Chattanooga, Tenn.
Turcotte, whose services are offered through LPL Financial, said that in some cases it has taken years to make a sale. She added that annuities, almost by definition, require that advisors be willing to enter into a relationship — not a transaction — with clients.
“The hostility you can face at simply the mention of annuities as a product to consider is fascinating,” she said.
She added that in one case, where an annuity was “the perfect solution,” the client objected to her getting paid through annuity products.
But when complicated annuity products fit tightly into a long-term retirement program, adds Turcotte, “they are beautiful.”