By Daisy Maxey
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)–The retirement guarantees provided by annuities are more important to investors than ever, advisers say, even as many advisers still avoid using them in clients’ portfolios.
As a solution, some advisers say the insurance companies that offer annuities need to simplify their products, help educate investors and advisers and battle the perception that they are too costly.
In the wake of the recent downturn, which decimated some portfolios, investors understand the importance of annuities in a way they hadn’t before, said Doug Lockwood, an independent adviser, certified financial planner and president of Harbor Lights Financial Group in Manasquan, N.J. The products “play a more important role in people’s lives; they can touch it and feel it now, while they couldn’t before.”
Nevertheless, Lockwood says annuities aren’t a major part of his business. He places clients in annuities on a case-by-case basis, using them as a diversification tool. Advisers would be more comfortable using annuities if they were more streamlined and transparent, and the companies need to do a better job of explaining them, he says.
Over the years, annuity providers have worked to woo investors and advisers, designing less complex products with more flexible guarantees and introducing some lower-cost products targeted at fee-based advisers.
In April 2009, variable annuities made up 10% of advisers’ assets under management on average and fixed annuities made up 3%, according to an online survey of 1,529 registered financial advisers by Cogent Research. Among all independent advisers, variable annuities made up 17% of assets under management and fixed annuities 3%. For registered investment advisers, those figures were 6% and 1%, the Cogent survey found.
Many registered investment advisers have fee-based practices, and annuities–with a handful of exceptions–are generally a commissioned product, said Lisa Plotnick, a director at Cerulli Associates.
Bruce Ferris, senior vice president of sales and distribution for Prudential Annuities, noted that his firm and others are working on low-load or no-load annuities which fit in an RIA’s practice.
Ferris says his company is having a fair amount of success with annuities: In 2009, Prudential’s sales of the variable annuities were up 58% from 2008, and 23,000 advisers sold its products for the first time.
Still, Ferris gives the broader industry a “C” for its efforts, and says it needs to do a better job in some areas. Overall, individual annuity sales fell 22% in the fourth quarter of 2009 and 11% as compared to 2008, according to Limra International, an organization of life insurers and other financial firms.
“Our industry right now is treading water and not growing,” Ferris said. “We need to continue to focus on education of the adviser and making it repeatable to their client.”
Plotnick said it’s important to get new advisers on board. In many cases, investors purchasing new annuities are simply replacing an old one, she said.
Lockwood, the adviser, said the industry isn’t moving toward fee-based annuities quickly enough. Also, many annuities now have “too many moving parts:” the riders change frequently, which is confusing, he said. “Now is the time for insurers to go back to the drawing board–make them more transparent and less costly.”
Kevin Supka, an independent financial adviser with LPL Financial Services in Jenkintown, Pa., noted a general perception among advisers that annuities are very expensive. He calls that view “incorrect and foolhardy,” and one that the industry needs to address through education.
Frank Astorino, president of Astorino Financial Group, a registered investment adviser in Fairfield, N.J., uses annuities for preretirement customers and those retiring with a lump sum distribution to help balance clients’ risk tolerance or provide security. For the consumer, commercials would also be helpful, Astorino said. “You have to be able to turn on a TV and get the point across in 30 seconds.”
There isn’t much room for annuities to increase in price, Astorino said.
(Daisy Maxey is a Getting Personal columnist who writes about personal finance. She covers topics including hedge funds, annuities, closed-end funds and new trends in mutual funds, and can be reached at 212-416-2237 or at firstname.lastname@example.org)