Is This the End of Annuities?
I got a call from a buddy in the insurance business last week.
“Hey, Marc. I don’t know if you know this, but I started working for a new company, and I want to talk to you about annuities,” he said. “They might be able to help you reach your financial goals.”
I started to laugh. “I’m not a fan of annuities,” I said understatedly.
In fact, I have railed against annuities for most of my career (see here and here for examples). Steve McDonald and I recently debated the topic, and I outlined the reasons I think annuities are a horrible investment.
I understand the appeal of “guaranteed” income. But annuities are a rip-off for most investors.
Though perhaps not for much longer…
A new rule may drastically change the way annuities are structured and sold.
Your Best Interest
Starting next April, the Department of Labor has mandated that an advisor counseling a client on his or her retirement account must act as a fiduciary.
This means the advisor must recommend what is in the client’s best interest, not just what is suitable.
This is a game changer.
In the past, clients who wanted guaranteed income would be sold an annuity before you could say, “Where are the customers’ yachts?”
Even though annuities had high fees, costly riders and restrictive terms, technically they were a “suitable” option. The annuity offered “guaranteed” income (assuming the insurance company stayed solvent and didn’t change the terms)… and that’s what the customer asked for.
But, next April, the big changes will hit the annuities industry. Advisors will have to show clients why an annuity (with its high fees, costly riders and restrictive terms) is in the client’s best interest.
The advisor will need to demonstrate a thorough understanding of the client’s assets, income, spending and goals.
Showing that an annuity is in an investor’s best interest will be harder to prove than Clinton’s and Trump’s “misstatements” in Monday’s presidential debate.
If insurance companies want annuities sold in retirement accounts, they’ll have to slash the fees and commissions paid to brokers and lift some of the ridiculous penalties – like losing all of your money if you die too soon.
Even then, I’m sure some slick salesmen will still try to convince seniors that it’s in their best interest to gamble their nest eggs on living long enough to start collecting.
Of course, brokers will still be allowed to sell annuities in nonretirement accounts, without consideration of the client’s best interest… So there will be plenty of opportunities for them to collect their outrageous fees.
But the majority of annuities currently sold are in retirement accounts. As a result of fewer annuities being sold in retirement accounts, brokers will likely be much more aggressive in hawking them to customers for their nonretirement accounts.
I’ve never liked annuities, but if the industry reduces fees and commissions, lets up on restrictions, and improves clarity, then annuities may be something I can get behind for some investors.
But my best guess is that the industry will simply shift instead…
It’ll go from selling annuities funded by retirement accounts to ramming them down the throats of investors with nonretirement accounts (keeping their sky-high fees and muddy disclosures)…
At least until the rules state that all financial products must be in the client’s best interest.
At that point, we may see some real change to the price and structure of annuities.