Advisors May Have Little Power to Bridge the Annuity Divide

The findings of a new research report point to both the promise and the peril of reliance on fiduciary financial professionals to guide clients to greater use of annuities.

According to the analysis, advisors themselves tend not to recommend annuity purchases to their retirement clients, even as they broadly harbor concerns that some could run short of funds late in life.

What’s more, even when such recommendations are made, planners say their annuity-focused advice isn’t followed as often as other suggestions, calling into question advisors’ ability to influence the purchase of annuities.

The new report was put together by Karolos Arapakis and Gal Wettstein, both senior research economists at the Center for Retirement Research at Boston College. The duo investigate how financial professionals perceive longevity risk and the value of annuities for their clients, seeking to illuminate the broader question of why American consumers appear to be significantly “under-annuitized” even in the face of widespread fears about longevity and market risks.

Why Such Low Annuity Ownership?

Arapakis and Wettstein suggest that much of the prior research work has failed to adequately account for the way that financial professionals view annuities — and how their recommendations may or may not actually affect the purchase of annuities among their clients.

“The rate of ownership of annuities in the United States is low, with only about 10% of older Americans having a commercial annuity,” the authors point out. “Researchers have offered many potential rationales as to why people approaching retirement have so little interest in annuities.”

Ultimately, the pair finds that financial professionals are currently doing little to encourage people approaching retirement to purchase annuities. In addition, it is less than clear what effects a change in advisors’ behavior would even have were they to start promoting annuities more aggressively.

Rather than relying on advisor promotion, the pair suggests, more individuals would likely buy an annuity if the process were made simpler. It appears that otherwise interested consumers are commonly prevented from buying income insurance simply due to the real-world complexity of the task.

Consumers Missing a Baseline of Knowledge

As Arapakis and Wettstein explore, much of the complexity in annuity purchases stems not from the need to understand esoteric financial concepts. Rather, annuity purchases involve a series of small educational steps and decision-making hurdles, which together could stymie even a motivated potential buyer.

“For example, knowing a product like an annuity even exists is not trivial,” the researchers note. “Survey evidence suggests that even among relatively wealthy households (over $100,000 in financial assets) near or in retirement, more than a third were not familiar with lifetime income products, and another 40% were only somewhat familiar.”

According to Arapakis and Wettstein, these estimates “probably overstate” familiarity for the population as a whole, since respondents often dislike admitting ignorance, and these wealthier respondents are more likely to be acquainted with annuities than their less affluent counterparts.

The authors say that financial professionals could help by explaining what annuities are, who sells them, how to contact providers and how to prepare for signing a contract. According to the duo, these steps could get individuals who need no convincing to simply proceed from a desire for lifetime income to actually acquiring it.

An Uncommon Suggestion

The survey data cited by Arapakis and Wettstein shows that many advisors aren’t doing many of these things, despite growing awareness of longevity risk.

For example, the data shows about two-thirds of financial professionals recommend an annuity to less than half of their clients, while more than two-fifths recommend an annuity with guaranteed lifetime income to less than a quarter of their clients.

When financial professionals do suggest annuities, just 40% report that most of their clients follow their suggestions.

What It Means for Advisors and Clients

While they suggest that there are some open questions about the apparent underuse of annuities, the researchers say the available data includes one potentially disappointing finding: Financial professionals seem to have the ability to influence only a modest portion of their clients with respect to annuity purchases.

Further, advisors seem not to be taking full advantage of the influence they do have when it comes to helping clients consider guaranteed income as a means of hedging longevity risk.

Arapakis and Wettstein say the results also point to areas for further research. For example, how should professionals identify which clients would be receptive to annuities? And should certain messaging approaches (e.g., saying “lifetime income” rather than naming a specific financial product) work better than others to convince those clients who are on the fence?

Overall, they conclude, the lowest-hanging fruit is likely helping the clients who already are open to annuities achieve their existing lifetime income goals.

A Second Opinion

Similar findings are shared in a separate research report published this week by the Insured Retirement Institute, “Advancing Digital First for Annuities.”

In its analysis, the report finds that financial professionals who do not currently use annuities are likelier to adopt them if the industry implements digital strategies that make the process of transacting and managing these products more modern — such as the elimination of paper processing and “wet signatures.”

Notably, the survey suggest that 90% of financial professionals say they would incorporate annuities into their practices more if the sales process included e-signature and e-delivery capabilities for all such transactions.

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