Very few products in this industry have evolved like that of the annuity, which has come to take on a variety of shapes and forms while promising to become increasingly flexible as people's future needs continue to change.
"Variable annuities were often used to provide clients with a platform of multiple money managers," recalls Roch Tranel, CFP of Tranel Financial Group in Libertyville, Ill., with a slight twinge of nostalgia in his voice. "This was somewhat of a precursor to fee-based money management and was very cost effective."
Most advisors would agree that not only has the many shapes of the annuity evolved but that they're swamped with information on upgrades and new products on practically a daily basis.
"New advisors are inundated with variable annuity information," Tranel says. "It can be overwhelming, especially for those new to the field."
As Tranel intimates, the industry is rapidly moving to a fee-based advice model and this trend should continue. According to the Tiburon Research and Analysis report entitled "Fee-Only Financial Advisors Best Practices Survey," more than two-thirds of consumers prefer fee-based advisors to commissioned-based ones. Fee-based/fee-only advisors managed more than $2.2 trillion in 2006 – and should handle over $10 trillion by 2010. The annuity has gone under a near-constant modification process to reflect the growing preference towards fee-based planning as well as other trend factors.
Similarly, as Ibbotson Associates notes in its research paper, "Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit," adding a variable annuity with a lifetime guaranteed minimum withdrawal benefit to a traditional stock and bond retirement portfolio can increase income while decreasing income risk. Studies such as these indicate that there will be good reason to support annuities as part of a long-term retirement strategy.
"Americans are becoming increasingly dependent on their own savings to finance longer retirement horizons, and they need advice, tools, and products to help them and their advisors develop portfolios that mitigate both market risk and retirement income shortfall risk," says Peng Chen, Ibbotson's president.
The parade of living benefits now includes such items as automatic rebalancing, optional income, death and accumulation benefits, guaranteed returns, competitive fees, shorter surrender periods, income for life, a wide range of asset-allocation choices, the ability to lock-in gains combined with "floor" protection, tax deferral, various withdrawal options, index linking choices, inflation-adjustment as well as borrowing choices have given annuities a long list of features that advisors have communicated to prospects in order to provide an effective solution. Along the way, fixed and immediate annuities have also evolved, offering many of the same features VAs do, plus we've witnessed the dawn of the indexed annuity and its numerous spin-offs. And it's been sociological and demographic factors that have caused more individuals to consider how an annuity can help them, including Social Security's questionable future and the gradual demise of company-managed retirement plans. But probably the greatest single factor when considering an annuity is the ever-expanding American life span.
"Even those retirees who truly personify the expression that ?60 is the new 40′ must still prepare for their financial future, many more carefully than their parents did," says senior advisor Tracy Brown in Latham, N.Y. "The trick is that each client's financial future is an individual proposition unlike any other. What may have been an ideal solution for one pre-retiree may be entirely wrong for the next."
Tranel agrees. "Just as advisors need to be informed about the various annuities they need to be equally informed about their clients' lives. We're their advocate and must do what's completely good for them."
But despite the progressive innovations annuities now offer, the path to retirement may not be obstacle-free and as different factors work their way into the retirement picture, annuity providers will need to continue coming up with fitting solutions.
