BY SHANNON STONE
I’m a financial advisor with DHR investment Counsel, a fee-only advisor, located in Oakland, California. Until recently, we rarely recommended annuities to our clients. Most were too costly and complex and didn’t fit our fiduciary model. But with the persistence of low interest rates, COVID-19 and a wave of clients seeking secure income in retirement, we’ve had to take a look. Both the advent of commission-free insurance products and significant academic research supporting the use of annuities as part of the planning process means we are now more regularly recommending annuities as part of our financial plans.
Today, annuities are part of our overall planning toolkit and we often recommend them as part of a client’s asset allocation. We recommend commission free annuities which are different from the legacy commissioned base annuities so many of us avoided in the past.
THE ANNUITY STIGMA
In the past we occasionally used investment-only variable annuities in our clients’ portfolios, but rarely used them to generate guaranteed income. Like many other advisors, we felt annuities carried a stigma due to high commissions. We also felt they were difficult products to understand and were not user-friendly or advisor friendly. We were also concerned about liquidity and the lack of access due to high surrender charges. We weren’t alone in not fully understanding them—we’ve had clients come to us who owned a $50,000 or
$100,000 annuity, yet they don’t recall why they purchased it.
RETIREES WANT INCOME
In our experience, people want in-come in retirement. They want to feel secure and safe. With interest rates as low as they are, we’ve looked more closely at annuities to see how they can enhance a client’s retirement picture and build future retirement income. We are now modelling annuities in our financial planning software and the results have been dramatic.
Introducing another source of fixed income into a client’s portfolio can dramatically change the total retirement picture. Research from academics like Wade Pfau, Michael Finke, Robert Merton and others have helped us better under-stand strategies around funding efficient retirement income with annuities. That research supports annuities as a partial bond replacement in a traditional asset allocation to cover an individual’s non-discretionary spending. It makes a lot of sense and can give a client comfort to know that their basic expenses are taken care of.
Today, annuities are part of our over-all planning toolkit and we often recommend them as part of a client’s asset allocation. We recommend commission free annuities which are different from the legacy commission-based annuities so many of us avoided in the past. When you can strip away the commission, it can have a significant effect on the end benefit to the client.
CONVINCING CLIENTS
The challenge comes in overcoming client objections to annuities, because of their historical reputation. Many of our clients have heard of annuities, and all they know is to stay away from them. It often takes a couple of conversations to lay the groundwork and show them how they could benefit them. Clients really come around when we are able to show them, using financial planning software, the results of multiple scenarios with and without an annuity. It becomes visibly clear what an annuity could do for their overall outcome. In one specific case, I worked with someone in a local school district who, prior to hiring our firm, had suffered investment losses. An annuity was a great way for him to secure another source of income in addition to his pension. Even after realizing the investment losses, our plan, including an annuity, gave him new hope that he’d be able to retire when he hopes to. In multiple cases, my clients need to see the results modelled in our soft-ware compared to their alternatives. This grabs their attention.
CONSIDER A PARTNER
I know other fee-only advisors who remain skeptical about using annuities. Annuities can be complex, and based on past experience and training, many advisors are simply dismissive. But they’d be surprised at the solutions available to meet clients’ needs. What is true is that it can be hard to explore all the possibilities for your clients if you aren’t a specialist. To address this challenge, we work with a partner to help us do our due diligence and research. When considering an annuity for our clients, we engage with DPL Financial Partners, a platform offering commission-fee insurance products, to support us and help us find the right solutions.
I think one of the most valuable pieces of our partnership with DPL is the educational piece. The illustrations and education on various solutions have raised our awareness of all aspects of the products and their uses.
As fiduciary advisors, we have to consider what is best for our clients. We found we can’t ignore annuities. Now that we are regularly including them in our clients’ financial plans, we find they are giving our clients peace of mind and helping meet their retirement income needs.
SHANNON STONE, CFP®, is a financial planner, advisor and operations manager at DHR Investment Counsel, Oakland, Calif. In that work, Shannon manages investment portfolios and places annuities as part of “longevity portfolio” planning. Previously certified as a Performance and Family Coach, Shannon’s passion is working with people, whether it’s through advising and financial planning or creating high touch and memorable client experiences. Her value draws on many years of experience in investment advisory work including wire houses, a municipal bond firm and RIAs. shannon@dhrcounsel.com