Are Annuities Really That Bad?

I think the hate toward annuities has gone too far, even among my peers in the industry, particularly in the fee-only community.

The fee-only movement did a lot of good. It made consumers more aware of the commissions they were paying when purchasing products like annuities. It also gave people another option and helped reduce some very real conflicts of interest.

But somewhere along the way, I think the pendulum swung too far.

Annuities became something many advisors simply hate or refuse to consider.

At the end of the day, an annuity is just a tool. And for the right household, it can be a really useful piece of the puzzle.

But I can't help wondering if part of the industry's dislike of annuities has something to do with what happens when those assets leave an advisor's management.

Here's a recent example.

I was working with a household that really values certainty in their retirement cash flow. We compared two ways to fund a portion of their spending over the next 10 years: a bond ladder and a 10-year single premium immediate annuity (SPIA).

In this particular case, the SPIA provides roughly 0.8% more annual cash flow relative to the amount committed than the bond ladder I would build for them.

There's a trade-off, of course.

The bond ladder provides more liquidity and flexibility. The annuity provides more guaranteed cash flow. Neither is inherently better. It comes down to what the household values.

And here's the important part: they only need to move about 20% of their overall portfolio into the annuity to create the cash flow they're looking for. The other 80% remains invested and available to provide flexibility and long-term growth.

Now Let's Add One More Wrinkle

What if I charged a percentage of their assets instead of a flat fee?

For a $1.5 million household, an advisor charging based on assets under management might generate roughly $15,000 to $17,500 per year in revenue.

Move $300,000 into an annuity that is no longer included in billable assets, and that advisor could be giving up roughly $2,000 to $3,000 of recurring revenue every year.

That's a double-digit percentage reduction in revenue from one household.

Under our flat-fee model, my revenue doesn't change whether that $300,000 stays in the portfolio, goes into a bond ladder, or moves into an annuity.

That doesn't automatically make my advice better. But it removes one financial incentive from the decision.

And the more I've thought about this example, the more interesting that distinction has become to me.

I'm not suggesting advisors are consciously avoiding annuities because they don't want to lose revenue. There are plenty of legitimate reasons to dislike certain annuities, and plenty of situations where I wouldn't recommend one either.

But when moving 20% of a client's portfolio out of managed assets can mean a double-digit reduction in recurring revenue, it's fair to at least ask whether that incentive influences the conversation.

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