Wealth Management
(New York)
Annuities are a widely available and popular product, and they are heavily utilized by retirees whose main focus is income. Therefore, it would make sense that tax planning around that income would be more of a major consideration—especially because annuities have some peculiarities as it regards taxation—but in general it does not seem to be an explicit topic. One of the first things to remember is the difference between qualified and nonqualified annuities—the former being in retirement plans, the latter not. Both require mandatory withdrawals after age 72. It is critical to remember that only interest, not principal is taxable when withdrawing money from a nonqualified plan. This is a big danger zone that some retirees fall into. Two other important notes: annuity interest used to fund long-term care insurance can be used tax free; and spouses can assume ownership of an annuity in the event of the death of their spouse tax-free.
FINSUM: For advisors who readily deal in annuities, this info will be second nature. However, there are a lot of advisors who are just starting to get into annuities and this info will be quite useful.
(Washington)
In what comes as a surprise to the entire industry, President Biden’s administration has just let the Trump-era version of the Fiduciary Rule go into effect. Almost everyone in wealth management thought Biden would surely use his administrations powers to stop the rule’s enactment, but they elected to let it go into effect as of this Tuesday, accompanying the announcement with positive and supportive language. The industry’s reaction was immediate and positive, while consumer advocates were disappointed as they were hoping for a more stringent rule from the Democratic administration.
FINSUM: Frankly, we take this as an incredibly positive sign for the wealth management business. This is a big signal to us that the Biden administration is not going to be as onerous and impractical on the regulatory front as many might have feared.
(New York)
In what is easily our favorite investing metaphor of the year, Kiplinger recently wrote an article that said annuities are the broccoli of investing—many people try to avoid them, but every retirement portfolio needs them. A recent study found that while most people buy auto, home, health, and life insurance, the large majority of people avoid buying insurance for one of their biggest fears—running out of money in retirement. This is exactly where annuities come in, as they are essentially insurance contacts that provide guaranteed income in retirement (depending on the type you choose). Deferred annuities are the most common option, as they defer payment for up to decades, and then start paying out upon retirement or an age threshold.
FINSUM: Advisors who are sell annuities already understand utilities, but many don’t fully grasp their use, especially given the negative aura they have had for many years. Most retirees’ portfolios can benefit from annuities.
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(Washington)
The SEC is about to crackdown on dually-registered advisors. The regulator seems to be upset with how some firms represent themselves and their services to clients. Because of Reg BI, firms are now required to explain their business model in Form CRS. According to industry lawyers like Issa Hanna of Eversheds Sutherland, this made “distinguishing between broker-dealer and advisor services" a “hot regulatory topic”. According to Hanna, “There's an interest in the regulatory community in ensuring that dual registrants are properly distinguishing how they describe their broker-dealer advisor services and not confusing retail customers about the service delivery models and which standards of conduct, etc., apply to the types of services they're providing”. Firms need to set up good firewalls between their businesses so that if they get investigated, they have a defensible position.
FINSUM: This feels like just one of many areas the SEC is going to start to crack down on under the Biden administration.
(New York)
Most people don’t think about annuities much when rates tumble, but those who are in the market for them sure see a difference. For example, when rates plunged at the start of the pandemic many annuities providers had to significantly scale back the payouts they were offering. Since annuities payouts are highly dependent on rates, insurers need to adjust their offers as yields move. With that in mind, if you are thinking about annuities, it might be a good time to buy. For example, Prudential just announced it was eliminating all its variable annuities with guaranteed income benefits because of super-low rates and volatility. Other major insurers are likely to follow suit as the market environment makes offering these products difficult.
FINSUM: Despite the fact that yields are rising, it is starting to feel like annuities providers are throwing in the towel on some products because of the ultra-low income they can provide and the potential volatility in yields.
(New York)
A combination of factors have thrust annuities into the spotlight recently. These include super low interest rates, market volatility, and a major demographic trend of retirees. With that in mind, instead of talking about annuities’ benefits, we thought it would be worth some time to focus on their downsides. Given the audience of this article (advisors), we will leave out some of the ways annuities have been mis-sold and focus on the underlying products. In terms of their core drawbacks, there are essentially three: limited upside, surrender fees, and fixed payments. Limited upside should be fairly obvious, but most annuities limit the potential upside buyers can earn in exchange for principal protection and/or fixed payments. Surrender fees are another issue, as buyers can be hit with 7-10% “surrender” fees if they try to get out of the contract and receive their principal back. And finally, fixed payments lose value quickly, especially over a long-time horizon, because of inflation.
FINSUM: Annuities are as useful as the client you are selling them to. They definitely have a role in a portfolio, but their risks and benefits need to be well understood—which has not always been the case! One key issue is that many times the same reason people need annuities—retirement cash flow security—means they are at risk of exercising one of annuities biggest downside: surrender fees.