The Biggest Misconception About Annuities

On this episode of The Long View, CEO and founder of Hueler Companies, Kelli Hueler, discusses Income Solutions, retirement, and the role of annuities.

Here are a few excerpts from Hueler’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

The Biggest Misconception About Annuities

Ptak: What do you think is the biggest misconception about annuities?

Hueler: This is a great question we struggle with a lot, because in fairness, people have the right to be very skeptical about annuities given how they’re packaged and sold in the retail space. They’re complicated, they’re opaque, you can’t ever really figure out the fees, even if you learn some, you don’t usually know all. And I think that whole reality has bled over into every time they hear the word annuity. So, I think what’s important is for people to know annuity is a big catchall term and it doesn’t really have to apply a lot of the ills of the annuity space. We actually used to say it’s like the A word. It’s just something that you don’t want to say because it evokes all of this emotion about expensive, complicated, scary products. But actually, the purpose of the annuity should be to do one thing, which is to provide sustainable guaranteed income for life. And if you take out that baseline capability and you look at it and that’s what an annuity vehicle is, it’s very different from what people’s perceptions are and the reality of what people buy in the retail space. So, in fairness to everybody out there, there is probably a very good reason that people feel skeptical and hesitant around when the word annuity is mentioned.

Why Are Consumers Averse to Purchasing Annuities?

Benz: What are some of the other reasons that you think consumers tend to be averse to purchasing annuities? I know that there’s been a lot of academic research that shows that people are probably under-annuitized relative to what they could be doing and how that might help them extract maximal retirement income. But can you talk about the other impediments in addition to the fact that there are just some really poor products out there that have tainted the reputation of annuities?

Hueler: I think there’s maybe a couple of key things to think about. I think people have heard over and over it’s an irrevocable decision. Once you put your money into an annuity, you can’t get it back. You lose all your liquidity. You lose control. Those are very strong words when investors are trying to make decisions for themselves. Rather than having the explanation that an annuity, number one, should only be a small portion of your total income strategy, most likely. Maybe not at all. It’s not for everyone. But I think key things that you hear that turn people away is that lack of control, lack of liquidity, inability to make a different decision. And because it’s portrayed that way, people never get the real opportunity to say, well, I’m going to have a whole variety of resources that I’m going to employ during my paydown phase. It’s not one product. It will probably be several and should be. So, I think people shy away because those realities that when you put your money in and it turns into income, you don’t get to have it back. You’re transferring risk. You’re transferring risk to the insurance company with a portion of your resources to guarantee income for life. But what’s not talked about is the fact that that decision should never be made in isolation. It should be made along with looking at your whole savings portfolio.

Incentives to Using Annuities

Ptak: What about incentives? One theory for under-annuitization among investors is advisors have certain conflicts of interest. They’re charging clients a percentage of their assets on an ongoing basis. So, they don’t necessarily have an incentive to recommend a strategy that removes fee-generating assets from the portfolio. Do you think that’s another major factor in why there aren’t more people using annuities?

Hueler: I will say I do. That’s in both the institutional and retail space. That’s not just retail alone. That’s also advisors that are fiduciary advisors and they’re compensated through assets under management, AUM. So, I think that that’s been a conflict that we should all just put out on the table and be very candid about. But I do want to say that in the last five years, we’ve seen a dramatic shift in understanding within the advisor community. It’s interesting, I did a podcast actually for the CFA group at one point about curriculum and why this risk management capability is missing from the curriculum, whether you’re a CFP or a CFA. You didn’t learn about risk mitigation, longevity, and market risk during the paydown phase. Nobody talked about the risks of retirees in the paydown phase being so different and the sequence of return risk being so much greater in the paydown phase than in the accumulation phase. Nobody really has given advisors those tools early on in their thinking and developing their strategies to understand annuitization as a form of risk mitigation.

And also, another key thing is I think advisors have been sensitive to what the truth is around annuity products, which the pricing of those products is not beneficial to the end user, to the individual investor, and it does impact the return over time. I think until they see, when advisors can see modeling that shows low-cost lifetime income being used as part of a portfolio, I think they’ve been much more receptive to that. So, yes, I think that conflict of interest is there. But I think really what’s been missing is a discussion about where this fits in as a tool to manage risk and longevity and market risk in the paydown phase. So, I’m hoping that this continues to be a conversation that the academic community has but also that the advisor community has more openly about how these products and this capability and this risk mitigation fits into a balanced portfolio.