As we ate at our usual Chinese take-out spot not long ago, a fee-based advisor told me he was wrestling with his conscience. That says a lot, because his conscience is big.
He believed that one of his clients, a 70-year-old businessman with no spouse or heirs would benefit from putting about a quarter of his wealth into a single premium income annuity, or SPIA. But that would nip my friend’s own income, so he was torn.
“I have to admit,” he said in a low tone over his spring rolls, “that I’ve thought twice about buying the SPIA.”
Perhaps you too have hesitated to recommend a SPIA to a client for a similar reason. I know I’m on delicate ground. Conventional wisdom is that SPIAs don’t sell well because their illiquidity, irrevocability and low return on investment make them unpopular with investors.
But anecdotal evidence says that compensation is also a factor. In cases where a registered rep takes commissions, SPIAs don’t pay as well as other products. SPIAs typically pay only a 3 percent commission, compared to 4 percent for load mutual funds, up to 7 percent for B-share variable annuities and 8 percent for indexed annuities.
More importantly, for the rising number of fee-based advisors, a SPIA purchase can shift assets from an advisor’s purview, where it brings a 1 percent or 2 percent management or wrap fee into the general account of an insurance company.
Together, these factors help explain why intermediaries sold only about $3.8 billion worth of SPIAs through June 2009, compared to some $62 billion in variable annuities and $15 billion in indexed annuities. As for mutual funds, about $90 billion worth were sold in June alone.
That’s unfortunate. Academics, policymakers and AARP have all cited the need among boomer retirees for income annuities. They eliminate longevity risk and allow owners to invest other assets more freely. They boost income through mortality pooling and smooth tax liabilities across retirement. Surveys suggest that annuity owners sleep better.
The solution to the SPIA sales gap may involve new product design. Some issuers have tweaked their SPIA compensation regimes. Others are making income products more flexible. The latest retirement planning software shows advisors how to integrate income annuities with risky assets.
Income annuities may be an idea whose time hasn’t come. Most boomers are still accumulating wealth, and have had little need for income annuities. As more mass-affluent boomers retire and grapple with the task of turning savings into income, SPIA sales will probably rise.
But advisor attitudes will have to evolve too. Advising retirees is different from advising younger investors. It’s not about chasing alpha; it’s about reducing risk. It’s not about probabilities of success; it’s about guaranteed outcomes. It’s about putting your clients’ interests ahead of your own.