Navigating Annuities With A Neutral Stance

By Kyle Atkins

Special to Advisor News

The annuities debate is among the most intense and divisive in the financial services industry but the truth is much less flashy than the hardliners like to imply: as with most investment and insurance options, annuities can be a helpful tool for some, but are not a good fit for everyone.

By taking a neutral stance, you can incorporate annuities into your offerings while still respecting all your clients’ wishes and best interests.

Annuities Span Investment Spectrum

When I start building portfolios with clients, I always explain annuities last and keep it simple.

Many clients walk in with their minds already made up on annuities, and those opposed usually don’t change their minds. It’s best to provide a basic overview to everyone and give more details only when clients display genuine interest. This preserves the trust clients have in me as their advisor and lets me focus on investment strategies clients will approve of.

There are a variety of annuity types, and each type may work better for different clients. Fixed annuities draw payments from portfolios invested in government and top-rated corporate bonds and pay out guaranteed amounts of money, putting them in the safest tier of investments.

It must be noted that this guaranteed annuity income will stay the same even if the bonds themselves become more profitable, so clients can make more money if they directly invest in the bonds themselves instead of with an annuity.

Clients with slightly higher risk tolerance and an ability to pay higher fees can try equity-indexed annuities, which base part of their returns on the growth of index funds.

Variable annuities have subaccounts that allow returns to rise and fall similarly to those of mutual funds, potentially increasing profit. Like fixed annuities, they insure a client’s principal investment, so they’re less risky than directly purchasing stocks.

Although, variable annuity fees can quickly add up to be a genuine burden, and the tax benefits from investing in them generally aren’t any better than those for a 401(k) or IRA.

When Annuities Won’t Work

Clients who struggle with regular investments over periods of time will not derive much value from an annuity, as fees can add up and some clients may be unwilling or unable to pay them.

This is especially true for variable and equity-indexed annuities, since they offer similar chances at profit to mutual fund and stock purchases without the risk of losing one’s principal. For fee-averse clients or those with less money, it’s often better to directly invest in stocks, bonds and other options.

Age plays a major role in determining annuity suitability. Older clients who have significant income from other “protected” sources, like Social Security or pension funds, may be better off investing their money elsewhere. Not to mention, many annuities are not open to people older than 80 or 85.

Younger clients won’t be barred from purchasing an annuity, but these investments are meant to provide stable retirement income and have corresponding risks and return potential. Clients in their 40s or younger, with more time before retirement, can handle riskier funds that can often provide greater returns.

Annuities are regulated by state insurance commissions, so rules vary across state lines and you should avoid adhering to any proclaimed universal standard. Check your state’s regulations to see if you need to be more selective about which clients buy annuities. Along the same lines, advisors must pick financially healthy companies with positive long-term outlooks in which to invest their clients’ money.

When Annuities Can Help

Annuities work best for clients who can stick to an investment plan for 10-20 years, since most annuities take that long to start delivering income. This means consistent and reliable investors will gain the most income at the end of the day.

There are some annuities that provide immediate income, but a delay in benefits often means the annual stipends become larger through regular investment.

Clients with low risk tolerance or who scare easily during recessions or periods of market instability can also benefit from annuities if they can afford the higher fees. The guarantee against losing one’s principal can give these clients extra psychological security that they may find worthwhile.

Annuities are controversial in part because the extremes of the opinion spectrum can often shout down the middle. In this environment, clients need us to be objective teachers with clear understandings of their financial goals and abilities to avoid confusion and hostility around annuity options.

Follow this rule, and you will be able to easily distinguish between those who would benefit from an annuity and those who would not.

About The Author

Kyle Atkins, CFP, CLU, ChFC, is the founder and president of Kyle Atkins Financial Group, an independent financial consulting firm. Kyle is a 22-year qualifying and Lifetime member of MDRT and is also a member of the National Association of Insurance and Financial Advisors. He regularly speaks at financial education workshops throughout the American South, and is an active member of the Spartanburg Rotary Club and his church. Kyle lives with his wife, Andrea, in Cowpens, South Carolina.
Advisory Services offered through Investment Advisors, a Registered Investment Advisor and division of ProEquities, Inc. Securities offered through ProEquities, Inc., a registered Broker/Dealer and member FINRA/SIPC. Kyle Atkins Financial Group, Inc. is independent of ProEquities, Inc.