Last year, Citywire RIA published an article by Andrew Foerch, "Attack of the Annuities: Should RIAs Reevaluate the Controversial Insurance Product?" The piece offers a balanced analysis of the insurance products by giving voice to both proponents and detractors. Ultimately, he concludes that while annuities are making progress, they're too controversial for many advisors to consider.
"The curse lives on," he said.
But Does It? Are Annuities Cursed? Are They Even Controversial?
In 2021, RetireOne conducted a survey of fiduciaries, and we found that only about a fifth of them object to annuities on general principle. That doesn't seem controversial; it seems like a vocal minority are still making arguments that may have once been true but no longer hold much water. According to our survey, most fiduciaries would recommend annuities if they served the client's needs.
Objections From an Earlier Time
To be fair, there have been many valid criticisms of annuities over the years. The article talks about stiff, opaque fees, liquidity risk and hidden profit spreads "many times in excess of 200 basis points."
I'm sure you can find examples for which these criticisms are true, but those are the annuities of the past. As the industry trends away from commission-based and toward fee-based structures, fees are becoming more transparent, surrender penalties are disappearing, and those old objections are relics.
Another concern raised in the article is single-entity credit risk, which is common to nearly every kind of insurance. When you insure your home, for example, a single entity is responsible for paying your claims.
And that brings up another salient point: Annuities are not investments, as many detractors seem to frame them. They may include an investment component, but annuities are valuable because of the insurance they provide.
If an investor isn't concerned about the company insuring their house going belly-up and leaving them holding the bag, why would they worry about that with an annuity? Highly capitalized and highly rated insurance companies alleviate such concerns.
Not Attacking, but Protecting
I also find the title "Attack of the Annuities" ironic. Annuity issuers are unique in their ability to provide durable protections aimed to insure against terrible market events. This is why these protections can even be called "guarantees."
We live in a time of tremendous financial uncertainty. Earlier this year, Barry Ritholtz wrote about the "post-normal economy," making the point that it's hard to find normality no matter where you look in our current economic climate. Between the pandemic, supply chain issues, trade wars, Russia's invasion of Ukraine, and other recent factors, traditional economic measures and signals have become increasingly difficult to separate from the noise, and this has made people understandably nervous.
Meanwhile, we're seeing more talk about the need for Social Security reform if it's to support the thousands of boomers retiring every day. Pensions are no longer prevalent, so retirees are on the hook for, and bear all of the risk, of generating enough income from their retirement savings to last a full retirement. It's a heavy burden.
Consider that low-for-long interest rates have also made it difficult for traditional asset allocation strategies to properly protect client portfolios. Now, academics are voicing concern that traditional drawdown rules of thumb such as the 4% rule need to be revised to account for lower-than-expected safe withdrawal rates.
