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.
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.
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.
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.
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.
Most investors don’t fully understand the differences and benefits between fixed annuities, variable annuities, and fixed index annuities, so it is only natural that most clients would not even begin to understand deferred annuities and their benefits. Deferred annuities work just like other types of annuities except they explicitly defer any payouts for a set number of years. It is essentially a lump sum that gets invested, with no planned withdrawals for, say, 20 years. In many ways that makes them like an IRA. These can be very useful for clients who have are conservative in their outlook, have a nest egg to buy an annuity, and don’t need income right away.
FINSUM: In our view this is a perfect product for Millennials and Gen X who are 15 years or more from retirement. It is like a self-funded IRA and completely fits with Millennials’ bearish view of markets and the economy. It may also be a good choice for clients who tend to overspend, as this can do a good job protecting them from themselves.