Longevicide Will Erode Clients and Assets

These retirees need protection against multiple risks starting with longevity. Addressing this risk implies a more robust and complex planning approach (including ensuring a floor to support non-discretionary spending) than a systematic withdrawal strategy.

But most investment advisors fail to address longevity risk.

This is an unconscionable failure when it comes to working with constrained investors.

When I raise the issue of annuities with RIAs, the common refrain I hear is, “I don’t offer (or sell) annuities.”

This is typically followed by tiresome criticisms of annuities centered on commissions and high fees. But those criticisms are longer valid. Annuities changed some time ago. Ironically, they changed to accommodate the RIA business model. That happened with the availability of annuities with very low fees, and zero commissions.

In recent years, to facilitate RIAs usage of annuities, visionary businesses (like RetireOne and DPL) have emerged that cater exclusively to RIAs These companies make it seamless and easy for RIAs to introduce the longevity protection that only annuities can provide. These developments mean there is no room for further delay.

The era of trite excuses for eschewing annuities is over. Continuing criticisms of annuities, when faced with clients who need longevity protection, is nothing more than drivelous distraction. Disparaging and disregarding the RIA-friendly transformation of annuities only exposes hypocrisy and conflicts of interest.

Here’s my message to RIAs who have not yet embraced annuities: Put retirees’ interests first. You can rightly disregard my advice if your practice is comprised solely of overfunded investors. This is not about them. But if you count constrained investors among your clients, there will be blowback in terms of client defections as these individuals learn that their retirement standards-of-living have been needlessly and tragically degraded. They will not be happy with their RIAs once this realization takes hold.

RIAs clearly have substantial investment-oriented skills, and they should build retirement income investing strategies that incorporate an appropriate allocation to risk assets. But equally important is an annuity allocation that provides the necessary level of lifetime guaranteed income.

RIAs who continue to state that annuities are niche products for a minority of clients – as one told me very recently – are missing the big point. Income is the common need retirees of all wealth levels share. Income, not wealth, determines a retiree’s standards of living.

Allow me this prediction if the RIA community does not embrace annuities en masse: Constrained investor clients will increasingly abandon RIAs and take their assets to protection- focused advisors. And deservedly so. I see no alternative to this outcome unless the Fed unexpectedly reverses its policy course and acts swiftly to reinflate equity markets. But in the face of high inflation – and the Fed’s own recent statements – does anyone believe it will choose this course?

RIAs should be concerned with the recent decision by Fidelity to offer guaranteed income annuities to all its 32 million plan participants. Fidelity’s program encompasses multiple insurance carriers with institutional pricing. With millions of participants in Fidelity’s plans approaching retirement age, the rollover market will be disrupted by this move. It is hard to imagine that Empower, Vanguard, T. Rowe Price and other recordkeepers won’t soon follow in Fidelity’s footsteps. Before long, one-hundred-million plan participants will gain ready access to institutionally priced annuities. That will shrink the finite asset pie that wealth advisors will compete over. Moreover, it establishes the importance of guaranteed income for millions of Americans.

RIAs should up their game in terms of their approaches to income planning. Recognizing the limitations of the systematic withdrawal plan and accepting that there is no safe withdrawal rate is the first step. Learning how to plan income for constrained investors is an essential commitment.

Absent making these changes, RIAs should expect longevicide to infect their client base. Sporadic notifications will show up as a symptom in transfer paperwork. Later, the disease will progress as a steady stream of client defections with retirees seeking to protect the reduced income generation capacity annuities gives them.

Annuicide, the failure to offer annuities, begot longevicide, the loss of clients and assets.

Wealth2k® founder David Macchia is an entrepreneur, author, IP inventor and public speaker whose work involves improving the processes used in retirement income planning. David is the developer of the widely used The Income for Life Model®, and the recently introduced Women And Income®. David has authored many articles on the subjects of retirement income planning and financial communications. He is the author of two books, Constrained Investor®, and Lucky Retiree: How to Create and Keep Your Retirement Income with The Income for Life Model®

Read more articles by David Macchia