Choosing the Right Annuities Getting More Complicated

Choosing the Right Annuities Getting More Complicated

There are currently millions of baby boomers on the doorstep of retirement. As such, financial advisors and securities brokers are looking for every opportunity to steer boomers in the right direction for cashing in their retirement plans. Among the many options are annuities. Unfortunately, choosing the right annuity is getting increasingly more complicated.

It used to be that annuities were fairly simple products that came in a limited number of flavors. You had basic fixed rate products, a couple of variable-rate products, and nothing else. Pasadena-based Western International Securities says that is no longer the case. There are now dozens of different options intended to cater to every individual need. So, what is a broker or advisor to do?

A MarketWatch post written by Robert Powell and published on August 29 says it is all about digging into the numbers. Powell wrote that that “the insurance industry introduced almost two dozen feet-based variable and indexed products in the last 12 months”, illustrating just how complex and crowded the market has become. The only way to differentiate one annuity from the next is to dig into the details.

A More Competitive Market

Powell also made a point of explaining why so many annuities have come about in recent months. He blames the Department of Labor (DOL) fiduciary rule and its demand that financial advisors always put the best interests of clients first. The rule has made annuities incredibly competitive in the run-up to baby boomer retirements.

New annuities are largely feet-based products and a perfect target of the fiduciary rule. As such, insurance companies are racing to produce the lowest-cost and most attractive annuities they can in order to get their slice of the baby boomer pie. What this means to financial advisors is of no consequence. Insurance companies are going to get in on the action one way or the other.

For financial advisors, this means having to go through all new products with a fine-tooth comb. They cannot afford to miss something and then have the DOL rule come back to bite them. Thus Powell’s advice to dig deeply into the numbers to determine exactly which annuity is best for each client.

More Complex for the Investor Too

Experts say that the sudden flood of fee-based annuities are as mind-numbing to the investor as they are to the advisor. In fact, advisors have it a little bit easier. They can work on the general principle that commissionable annuities will be less expensive over a term that lasts 7-10 years, or longer. Fee-based annuities are more cost-effective for shorter terms.

Where investors find annuities more complex, it will be in terms of the benefits offered. As Powell suggests, investors have to think about things like guaranteed death benefits, cost of living benefits, and other such benefits that might be costlier under a fee-based product. It is very much a ‘you get what you pay for’ scenario.

There is little argument that the DOL fiduciary rule has been good to the extent that it requires financial advisors to put the interests of clients above their own. But as all rules go, this one has created a more complex environment by inviting insurance companies to flood the market with a full range of new products.

What used to be as easy as looking at half a dozen annuities has now become a much more complex process. It is up to broker-dealers, advisors, and clients to work together to determine what works best in each case. As for the simplification of annuities in the future, no one should be counting on it.

A Catch-22 is a paradoxical situation in which contradictory rules prevent a truly satisfactory outcome. Such a situation accurately describes where broker-dealers find themselves as the nation’s baby boomers get set to start retiring. Broker-dealers are looking at technology to improve business among millennials; technology like robo advisors. But doing so creates a paradoxical position that may end up hurting more than it helps.

At Western International Securities in Pasadena, California, they work with their brokers to provide the kinds of products and services baby boomer investors appreciate. The rest of the nation’s broker-dealers do the same thing. Yet all of them are looking to get beyond baby boomers in order to attract more millennials to the fold. Why? It is simple math.

Broker-dealers tend to lose between three and five percent of their assets per year simply due to attrition. Clients pass away, retirees withdraw, and so on. Those assets have to be made up by bringing new clients on board. That is not as easy as it sounds.

New Ways of Investing

Broker-dealer firms like Western International have traditionally used fairly standard marketing practices to recruit new clients. To say that marketing has changed since the days when baby boomers first started working is to understate a very significant issue. Rapid changes in technology have completely changed the way people invest.

Thirty years ago, it was almost unheard of for someone to plan for retirement and handle all the investing independent of an advisor. There was very little in the arena of online trading, and the idea of robo advisors leading the way was not even a thought.

Millennials see things much differently. Being raised on technology, they think nothing of self-investing platforms and robo tools. In fact, they fully embrace them. The need to have a human broker just doesn’t seem as important as it once was. This is causing problems for broker-dealers looking 20 years down the road when a significant portion of baby boomer assets have already been drawn out.

The Bigger Problem for Broker-Dealers

Investment technology is just the start of the problems for broker-dealers. A much bigger problem is the fact that millennials tend to turn to robo advisors only after establishing investment accounts elsewhere. In other words, the millennial investor is more likely to open an account and begin investing without any help at all. Only if he or she runs into trouble will he/she consider a robo advisor. This leads us to the Catch-22.

A broker-dealer offering a robo advisor platform as a less costly way to self-invest will probably not see a major influx of assets as a result. In fact, it may cost more to operate the platform than the firm gains from it. Yet not offering millennials a robo option would almost certainly steer them away from the broker-dealer.

Better Marketing to Millennials

It seems as though there is no good scenario for using robo advisors to reach a millennial audience. So what is the solution? Marketing. Millennials still have both a need and desire to invest for retirement. They still want access to all the best securities. What they need is a new message.

Broker-dealers who intend to be successful two decades down the road need to be crafting a new millennial message today. They need to start speaking the language of millennials rather than relying on the decades-old marketing principles that attracted their parents and grandparents. Come up with a strong millennial message and you will attract the millennial investor – and you will not necessarily have to rely on a robo advisor either.

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