As a CERTIFIED FINANCIAL PLANNER™, former advisor and portfolio manager for one of the nation’s largest wirehouses, Andy understands what it is like to sit across from a client during good times, but more importantly, during bad times when markets are down.
A recent article from David Macchia of Financial Advisor Magazine is gaining traction with advisors throughout the country. He posed a question, or possibly even a slight accusation, aimed at advisors who refuse to recommend annuities. By completely declining to discuss them with clients, are they breaching their fiduciary duty?
Macchia worked in the annuity industry until 2007, giving him a good look at what annuities and other guaranteed growth rate options can do for retirement clients. It also exposed him to doubters of annuities, some of whom opted to keep their clients invested in the market in order to keep their AUM higher.
He didn’t refute legitimate criticisms, like excessive costs, inferior rate-of-return potential or limited liquidity, which he said are historically characteristics of many annuities. He did, however, counter that today’s annuities are easily accessible and consumer friendly. Macchia added that reluctance from advisors might come from what he called “annuicide,” which is the inability to collect a fee when shifting part of a client’s investment assets under management to an insurance company.
The main argument segmented investors into two types: overfunded and constrained.
Overfunded clients tend to have more assets than they need to live comfortably. For overfunded clients, there is less reason for annuities in retirement because they have accumulated enough assets to weather market downturns and avoid sequence of returns risk.
Constrained investors, on the other hand, don’t have the assets to generate enough income to live comfortably during retirement, nor can they withdraw money for income during stock market downturns without risking that they will run out of money. They often rely exclusively on their savings, meaning they need protection from factors threatening their monthly income like timing, inflation, longevity and confinement risks.
He even notes that other options are available. Sometimes Social Security provides enough income for a client to live comfortably, so an advisor could recommend an investment strategy with more risk.
Macchia isn’t asking advisors to step away from investments with the largest potential yield. He simply asked them to acknowledge that a portion of their investment clients need guaranteed income in retirement, and annuities can be the most efficient way to guarantee that income. If advisors serve a client who could be a constrained investor, unable to tolerate the risk of failing to meet income requirements, Macchia said they have no moral basis to refuse to recommend annuities, therefore they may not be fulfilling their fiduciary duty.
He closed by asking advisors to compare the situation to their own assets. Would they leave the house without insurance against fire or drive an uninsured car? If the advisor wouldn’t, Macchia questioned why they wouldn’t advise similar protections safeguarding retirement income.
To see the entire article and read Macchia’s expanded take on annuities in relation to fiduciary duties, you can click right here.