How Annuities Can Fit Into a Holistic Approach to Fee-Based Accounts

Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Sep 28, 2021 Share This 

 

Fee-Based Annuities

Both clients and advisors may have their own reasons for preferring a fee-based approach to financial and investment services. 

Advisors may benefit by prioritizing asset growth over sales transactions, allowing them to really focus on helping clients grow their investments. Clients may see a fee-based relationship as less likely to be subject to the influence of sales commissions. And, with current Regulation Best Interest (Reg BI) standards, it’s more important than ever for advisors to demonstrate their fiduciary responsibilities to clients.

Traditionally, some advisors have steered clear of incorporating annuities into fee-based financial planning and investment accounts. This was true for a variety of reasons, including:

  • The complexity of annuity product structures
  • Commission-based sales compensation for advisors
  • Historically higher fees than investments without insurance guarantee
  • Limitations in terms of investment options for clients
  • How well annuity products fit with their clients’ investment goals
  • Licensing requirements, since annuities are insurance products

Fortunately, much has changed on the annuity landscape. Innovative developments in annuity products have created new opportunities for advisors to deliver the potential benefits of annuities to clients with fee-based accounts.

How a Fee-Based Approach May Encourage Holistic Financial Planning & Investment

A recent study by Cerulli Associates reports that two-thirds of investors (66%) prefer some version of fee-based financial advice over transactional commissions to their financial service providers.1 Options included asset-based fees, retainer fees, and hourly fees. The study also reports that about 70% of advisor compensation currently comes from asset-based fees — and that percentage is expected to rise.1

Advisors may find that while it takes some time and sensitivity to transition from transaction-based commissions to fee-based financial planning and investment services, the difference can pay off in ways that transcend dollars and cents. 

Some fee structures, such as fixed, hourly or asset-based fees, may have broader appeal for a wider range of clients, and that can make it possible to help more diverse investors grow their wealth. Some clients may engage more deeply in conversations about investment options when they know the product is decoupled from a potential commission payout.

And, as clients move through different life cycle phases from accumulation to spending, fee structures can help accommodate changes in an advisor’s overall client asset pools. All in all, there are plenty of good reasons a fee-based approach can help both advisors and their clients thrive. And annuity products can be an important part of strengthening the advisor-client relationship by meeting clients' individual needs and demonstrating advisor value.

How Different Annuity Types May Fit Into a Fee-Based Portfolio

Fixed index annuities, variable annuities and registered index-linked annuities may all prove useful strategies, depending on a client’s individual risk tolerance and desire to participate in the market. And nearly every type of annuity is available now in a version designed specifically for use by fee-based advisors and their clients. Here are a few examples of how these annuity products may help meet specific client needs:

Fixed Annuities with Guaranteed Lifetime Withdrawal Benefits

The protection of a fixed index annuity with a guaranteed lifetime withdrawal benefit (GLWB) can offer clients a way to achieve more guaranteed income through up and down markets than they might achieve with an unprotected market-based investment portfolio. 

How?

Many assumptions about “safe” withdrawal rates are based on more aggressive investment approaches. As clients move closer to retirement, when they will need to rely on their investments for an income stream, they may not have an appetite for the risk involved in asset allocations that can help them achieve the gains needed to sustain a 4% withdrawal rate, much less the higher withdrawal rates many annuities can guarantee.

A fixed indexed annuity with a GLWB can create an income stream, with a lower overall investment, that compares with a systematic withdrawal strategy from a risk-balanced portfolio based on a larger overall invested amount. 

And that guaranteed income based on part of a client’s overall assets may encourage greater investment in higher risk (and higher potential) opportunities with other portions of their wealth, especially when it comes to more risk-averse investors.

Even without GLWBs, fixed indexed annuities may help clients avoid interest rate risk, making them a strong replacement option for bond investments.

Variable Annuities with Risk Protection May Help Clients Diversify and Grow Investments

Variable index-linked annuities may offer even greater growth potential and a sense of engagement with their investments for some clients. Clients can personalize their level of guaranteed loss protection in exchange for a growth cap for an empowering investment experience. 

Investing part of a portfolio in a variable annuity with a GLWB may help advisors encourage clients to stay invested with confidence and ride out volatility, to make the most of market participation while limiting principal loss. 

Investors can designate their personal range of upside potential and downside protection within their own comfort zone. They can choose from a mix of equity, fixed income and specialty funds to fit their risk tolerance and investment interests.

Registered Index-Linked Annuities Combine Growth Potential and Guaranteed Income

Market volatility and low rates of return discourage many risk-averse clients from investing. Registered index-linked annuities (RILAs) may offer a “happy medium” approach, with a greater upside potential than fixed index annuities and guaranteed loss protection on a portion of the annuity account balance.

RILAs enable clients to designate allocations between a secure account with a 0% floor and a growth account, which can have a higher growth cap and a floor as low as -10%. This way, a portion of the client’s dollars are protected against market downturns, and another portion can experience limited losses with room to grow when the market is up. Fee-based RILAs typically have higher cap rates than commissionable products and come without surrender charges.

In addition, unlike variable annuities, RILAs aren’t actually invested in the market. Rather, gains or losses are linked to a specific market’s performance and locked in based on annual point-to-point change in the index from one contract anniversary to the next. Interest and guarantees are based on the client’s contract with the insurance company’s claims-paying ability.

Wide-Ranging Annuity Products Meet Diverse Client Needs

Advisors using a fee-based approach may be less product-focused and more likely to zero in on clients’ individual risk tolerances and desires for growth potential — and the range of annuity products designed for use in fee-based accounts puts a client-centric approach within closer reach than ever. 

It is now possible for fees to be deducted from annuities without reducing guaranteed income benefits, helping Advisors deliver and demonstrate integrated ease to clients in a holistic financial planning relationship.

Learn more about CUNA Mutual Group’s range of fixed annuities, variable annuities, and registered index-linked annuities, including options designed for use by fee-based advisors. Contact the CUNA Mutual Group Annuities sales desk at 1.877.345.GROW (4769), option 1, or find your designated team.

Bebunking Annuity Myths

Marshall Heitzman
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Marshall is CUNA Mutual Group's Advanced Planning Expert and has more than 25 years of experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.

 

SOURCE
1Cerulli Associates, The Price of Advice: Modernizing Fees to Remain Competitive, April 2021.

 

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Topics: Advanced Planning