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A few weeks ago, I engaged in some rather spirited discussions on a topic that is typically a less-than-lively one: income annuities and the role they may play in the context of fiduciary retirement advice. The conversations I had on this topic came about while I, a non-financial advisor, was speaking to an audience of CPA advisors at a panel at the AICPA Engage conference in Las Vegas. The panel was hosted by Advisor Perspectives’ own Bob Huebscher.
As someone who works for an actuarial consultancy and not with retail clients, I was struck in these conversations by how difficult it is to be an independent advisor, held to a fiduciary standard of conduct, but without a single agreed-upon framework for what the “best” retirement solution is supposed to mean. The outcome of these discussions led me to conclude that holistic tools are sorely needed to give fiduciary advisors a bridge between “investment-oriented” retirement income generation and annuity-oriented approaches to retirement income. The advice industry still treats them as mutually exclusive.
Better tools and investment products can help fiduciary advisors easily blend these approaches.
Well-respected researchers have demonstrated theoretically that Americans are sub-optimizing their retirements by not at least partially annuitizing in greater scale. This premise begins with Menahem Yaari’s seminal proof of the concept in 19651 and continues with the work of modern academic practitioners such as Wade Pfau, who articulates the “safety first” school of retirement planning that naturally blends annuity and investment based income approaches.
Those academic perspectives are hardly the only valid ones for demonstrating how having protected lifetime income can improve Americans’ retirement security. Milliman’s RISE ScoreTM, for example, is a free framework available through The Alliance for Lifetime Income to investors and advisors. This score, evaluated before and after annuity inclusion in a portfolio, is useful in demonstrating how the addition of an income-generating annuity to a portfolio of investments can improve retirement income security. The framework for the RISE scoreTM was inspired by the credit score framework with which many Americans are familiar. For those who are unfamiliar, the Alliance for Lifetime Income, of which Milliman is a founding member, is a nonprofit 501©(6) organization founded by a consortium of financial services organizations in an effort to provide consumers and financial advisors with the educational resources, tools and insights they can use to build plans for protected retirement income.
But regardless of which framework is the advisor’s preferred method for substantiating the value of adding protected income to a portfolio, the advisors with whom I spoke during this panel raised an important set of challenges that we face now as an industry that is moving towards supporting a fiduciary standard of advice in the annuity space. These fiduciary advisors are looking for advice on how we can substantiate to both ourselves and our clients that we are applying the appropriate standard of care to the advice we give. The advisors I spoke to laid down the gauntlet for our industry to solve the following challenges:
- How can I access institutionally priced, simple, consistent-attributes-across-carrier income annuity products, so that an economical contract can be appropriately placed without conflict of interest? (one, and the author is not currently aware of another, answer to this question may be Income Solutions)
- How can I charge fees for advice upon a portfolio including annuitized income streams that may perform like a fixed-income asset, when there is not yet an independent third party valuation service that will substantiate a reasonable and ongoing value for the annuitized income stream?
- When choosing to evaluate more complex annuities, how do I get access to conflict-free subscription-based annuity analysis tools that compare not only accumulation values over time, but also income stream valuation within a portfolio context over time?
- How do I get access to conflict-free, simple annuity education for fiduciary advisors, so that I can confirm I am continuing to make the most informed possible recommendations to my client given how much the world of fee-based insurance/annuity advice has so rapidly evolved?
These questions are answerable and this dialogue is ongoing. Annuity product development advances, technological advances, and changes in the regulatory landscape have all led to an era of convergence for insurance and investments by fiduciary advisors that I believe to be inevitable and welcome.
Anyone who would like to be a part of this dialogue can contact me, and the Milliman team dedicated to helping with these challenges, here.
Michelle Richter is responsible for several proprietary Milliman retirement products, and she advises on the packaging, product development, market launch and distribution tactics of life insurance and annuity product initiatives. Michelle seeks to connect the advisory space with solutions to historically insurance-and-annuity-solved challenges. Michelle works out of the New York office of Milliman. She joined the firm in 2017.
1 Menahem E. Yaari, Uncertain Lifetime, Life Insurance, and the Theory of the Consumer, The Review of Economic Studies, Volume 32, Issue 2, April 1965, Pages 137–150, https://doi.org/10.2307/2296058.
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