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Imagine a sore tooth in the back of your mouth. The dull, aching pain nags, but lights up your jaw when you chew something the wrong way. It's unbearable, and you call your dentist seeking relief.
What if on that visit your dentist doesn't offer you the full breadth of options for your dental care, would you still want to stick with them? If your dentist says she doesn't "believe" in local anesthesia, for instance, would you start looking around for a dentist who’s more in line with your preferences for care?
As a financial advisor, ignoring annuities out of hand may force your clients to see you in the same light – or force them down the street to a new advisor – especially those clients who come to you with annuities they've owned from prior relationships. An annuity may be the best solution for a particular client. In some cases, they are not.
Insurance-backed investments, including annuities, offer unique benefits not available in other asset management or investment strategies, including:
- Lifetime income guarantees that use mortality pooling, just like traditional pensions;
- Tax deferral that allows for the advisor to actively manage their clients’ accounts or manage tax inefficient investments; and
- Principal protection guarantees with rates that are higher than those offered through CDs and other risk-free investments.
Regardless of the need, it is imperative to know how to best serve your client.
RIAs are no longer without options when a client walks in with an annuity, or a specific need that an annuity can address.
I get it. Because of how they were sold, insurance-based investments have a gray cloud hanging over them. But times have changed. Recent product and technology innovation has fostered the growth of next-generation advisor-friendly annuities. And open-source fiduciary insurance and annuity platforms have made these solutions possible for clients of RIAs.
Today's zero-commission annuity solutions, built expressly for RIAs, are often low-cost, liquid and transparent. A private letter ruling from the IRS in 2019, providing tax relief for some fee-based annuities, enabled pain-free billing directly from the assets under management, and data connectivity between insurance companies, open-source annuity platforms, and portfolio management systems have made them accessible on advisor desktops.
When you consider that nearly half (48%) of Americans own or previously owned annuities, you understand that declining to offer guidance on those investments could mean that you are turning your back on a large swath of potential clients, and/or client assets.
Besides, if you stiff arm annuity solutions, are you capable of offering your clients all of the investment opportunities that are right for them? Being a fiduciary means you can't dismiss investment options that may end up being the best solutions for your clients.
It’s incumbent upon you to do your research and understand how annuities work and how you can offer them to clients via a fiduciary marketplace partner. This is especially critical during this time of high equity valuations and low fixed income yields. Savvy advisors must be able to demonstrate via models how replacing fixed income holdings with, for example, a fee-based fixed-index annuity can improve portfolio performance and decrease risk. The tools are here. The guidance is available.
Advisors ask me all the time, "But how can I recommend annuities if I'm not insurance licensed and I don't have my FINRA licenses?" You can't. Licensed experts are required to handle the recommendation(s) and transact the business. You refer a client with a specific annuity need for analysis and design to a platform partner with the capabilities to do so objectively. Licensed experts work with you to craft a design that fits the client's best interests, and you advise and bill on the allocations and management of the underlying investments.
Ignoring client annuities is a big mistake. Here’s what ignoring annuities means:
- Advisors can't provide holistic advice as they are not advising on all client assets.
- An advisor could be missing out on greater wallet-share of nearly half of clients and prospects.
- Clients are more vulnerable to being poached by junior-level brokers at the broker-dealer where they are held.
- The advisor is leaving money on the table, and can't include those annuities (possibly millions of dollars in client assets) in their AUM/AUA, can't bill on them, and can't include them in firm valuations.
- You are ignoring solutions that offer unique client benefits.
As simple as an annual dental checkup, I encourage you to stop ignoring client annuities, and consider not only how they can improve performance in your client’s portfolios, but also how you can leverage them to expand your capabilities and grow your business.
David Stone is founder and CEO of RetireOne®, the leading, independent platform for fee-based insurance solutions. Prior to RetireOne, David was chief legal counsel for all of Charles Schwab’s insurance and risk management initiatives. He is a frequent speaker at industry conferences as well as an active participant on numerous committees dedicated to retirement income product solutions.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.