Insurance companies have long beat the drum of annuities, which have met resistance from advisors on several fronts, the largest being, 'How do I get paid?" according to David Lau, founder of DPL Financial Partners, who was one three experts on the "Annuities, Past, Present and Future" panel during the Morningstar digital annual conference on Thursday.
Moderated by David Blanchett, Morningstar's head of retirement research, the panel looked at products from a retail, RIA and defined contribution standpoint. The group explored what has changed to make these products more attractive to advisors than they had been in the past.
Advisors have been "historically opposed" to annuities largely because they didn't fit their business model, explained Lau, whose firm is a turnkey insurance management platform for RIAs. "Annuities were commission-driven, so there was a conflict of interest [for fee-only advisors]." Also, annuities didn't fit into their technology.
He pointed out five macro trends that were changing thinking:
- The commoditization of asset management has forced advisors to expand their services to move toward wealth management and financial planning to maintain billing rates.
- Advisor compensation was moving to fees, and fee-only insurance could act as a differentiator for an advisor.
- Life expectancy is expanding, especially for wealthier and healthier clients. Data shows that one in a couple will likely live to age 95, and will need to self fund that 30-plus year period.
- The prolonged, historically low interest rate environment is a challenge. Today to generate a 7.5% return on a portfolio would mean 96% of it would have to be in equities, as opposed to in 1989 when that mix would have been 75/25. "It's just not appropriate to have all stocks in retirement portfolios," he said.
- Advent of commission-free insurance products.
In addition, Lau pointed out the cost difference between now and then. Whereas costs with a commissioned annuity, amortized with a 7-year duration would be 1.43% today, the commission-free annuity with 5-year duration would be 0.20%.
Matt Carey, co-founder and CEO of Blueprint Income, which offers annuities on a digital platform, pointed out research that showed from the first quarter of 2019 through Q1 2020, fixed income annuity sales had dropped 26%. However, his firm has had 336% growth in the same period.
He points out that the decline is seen as caused by low interest rates, and though that might account for some of that, there is a "supply shock" of lack of product "because distribution is so antiquated."
Technology Importance
New buyers don't want face-to-face sales, the traditional way of offering annuities, he said. Digital platforms solve this problem.
He also pointed out that their main audience averages age 62, so the belief older Americans aren't web savvy is wrong. Further, his firm, which works with 40 insurance firms, only offers the "simplest products," which is where demand is today, despite the low interest rate environment.
