Melbourne Business School's Teagan Altschwager

Advisers are a vital conduit for annuities to reach consumers broaching retirement, yet advice business models and other factors are often blocking this passage according to research out of Melbourne Business School.

Teagan Altschwager, a senior research fellow at MBS, says the largely set-and-forget nature of annuities often makes them an awkward fit with advice business models.

“Our research highlights that the financial advice business model, as well as institutional factors such as increased regulatory compliance following the Financial Services Royal Commission, have created considerable barriers for advisers to offer annuity advice to retirees,” Altschwager tells Professional Planner.

Altschwager is involved in a three-year project devoted to the retirement ecosystem called The Orford Initiative, which has produced a series of recent reports focussing on the annuity experience from both an adviser and client perspective.

Consumers are often “paralysed” by the complexity of annuities, she says, and advisers play a vital role in helping them overcome this inertia.

“The role of the adviser is crucial,” she says, “Many had little prior knowledge of annuities and really relied on their adviser to introduce them to the idea, teach them about the mechanics and options, and give them the confidence to make such a large – and often irreversible – investment.”

Setting a client up into a lifetime annuity product, however, can be seen to limit the ongoing value an adviser provides.

“Some advisers said that because annuities are a ‘set and forget’ kind of product, it actually limits the value they can add to a client,” Altschwager says.

Even under a fee-for-service arrangement, she continues, putting clients into an annuity decreases the likelihood of an ongoing relationship.

“The set-and-forget nature of annuities means the adviser is committing to a ‘fee-for-one service’, rather than the opportunity to provide ongoing service over time (fee-for-many services) through reviews and modification of investment portfolio,” she explains.

Recommending an annuity can also be problematic for advisers due to the intangible ‘peace of mind’ nature of its benefits.

“Advisers were saying it’s harder to argue the value of an annuity over an investment because from a purely quantitative perspective the annuity will tend to have lower returns because it is a longevity product, not a return product.”

The annuity puzzle

The lack of annuity uptake is a well-known issue that has prompted a number of explanations.

According to the US Society of Actuaries reasons range from the rational (loss of liquidity, low risk aversion, lack of access etc) to those that stem from behavioural biases such as decision framing, lack of control and regret aversion.

Domestically, a 2015 study on the annuity “puzzle” published in the Australian Journal of Actuarial Practice, identified factors included the provision of the age pension “which provides mitigation against longevity” and the nature of our super system, “which predominantly focuses on the attainment of savings rather than the provision of a retirement income”.

Altschwager agrees that advice business models aren’t the only barriers, with a belief among government professionals that annuities are “unpopular” contributing to a lack of top-tier support.

“Internationally, annuity products have far greater prominence because government policies are in place to incentivise people to take this option and protect themselves against outliving their retirement savings,” she says.

The current ultra-low interest rate environment is a clear factor as well.

“The last time we looked at annuities was in the GFC,” says one Gold Coast adviser. “Why would I lock it in now, with rates as low as they are?”

Provider innovation

The companies that provide annuities and retirement products know all about the aforementioned roadblocks and doing their best to innovate around them.

Allianz Retire+ head of distribution Caitriona Wortley says her product development team is “acutely aware” of the role advisers play in the distribution of retirement products. She gives the example of Allianz Retire+’s Future Safe product – a 7-year fixed term retirement income product rather than an annuity – that’s tailored not only the client but the client/adviser relationship.

“With this one we really wanted to work with the advisers so we built a feature which works as an annual reset,” she says. “Each year there’s a trigger for the adviser and the client to have a conversation and possibly make changes to the arrangement.”

Innovation is key in retirement product development, Wortley explains, whether it relates to straight annuities or otherwise.

“It enhances the adviser/client engagement piece,” she says.


4 comments on “Advice business models stifling annuity take up: Study”
  1. Avatar
    Melinda Houghton

    Most people who need an Annuity to assist them with retirement longevity issues do not just hold an Annuity. The Annuity is often a relatively small portion of an overall portfolio that can assist with many issues such as: borderline eligiblity for Age Pension, Estate Planning, Income streams with non-super dollars after contributions are no longer an option, longevity risk, and retiree peace of mind.
    People dismissing Annuties based on low interest rates should check with their Annuity provider for updates on their options. I have been pleasantly surprised at some of the quotes recently providing an effective return of over 5% without risk and with a guarantee and withdrawal option. Much better than cash right now, and with Centrelink benefits that effectively increase the return.
    People who need to place a portion of their funds in an annuity still require advice.
    And as Jason has said, for some people where an Annuity is their only and best option, they probably don’t need ongoing advice, so why charge for it?
    Advice should be in the best interests of the client.
    I suggest you check out Annuities as for many retirees they are a valuable and important part of a retirement income strategy.

  2. Avatar
    Michael O'Hara

    Any analysis of annuities that i have performed shows them as virtually worthless other than for their Age Pension impact. That makes them susceptible to government policy, which is a pretty thin thread to hang your long term financial future from.

    I think the focus on advisers in this article is ill-considered. Start with whether the product is competitive with alternatives. Move on to the ability of the product to provide sound long-term outcomes for the average individual. Look at its ability to weather government policy flips. Ask whether the product suits current economic presets.

    In an ideal world, a chunk of the defensive component of a portfolio would be through annuities. Guaranteed income, no capital fluctuations, ability to link to inflation are all excellent characteristics for that exposure. However, centuries-lows in interest rates, estate planning issues and poor government integration of legislation with outcomes all combine to reduce their applicability to most people.

    If any of this doesn’t make sense, contact an annuity provider and ask for the capital cost of a lifetime pension of $x, linked to inflation, with a 75% reversion to spouse. Then work out how much of your portfolio must be put aside to provide that level of income. Given you have just handed over that chunk of capital, how much money do you have left for accessing capital growth to meet inflationary outcomes, provide an estate to beneficiaries, meet longer term capital expense needs (renovations, holidays, car turnover et al).

    Practicalities of annuity application will be the first consideration. When they become more useful to the average person, the average financial planner will recommend them more often.

    At that stage, you can start to argue adviser business models.

  3. Avatar
    Murray Wilkinson

    I agree with Jason. Its obvious from the low rates on offer from annuities that tying your retirement monies into that solution would be shortsighted to say the least- particularly as interest rates move up in the coming years. Thats the real nub of the issue – they just dont work in the current market. Its got nothing to do with whether there is an ongoing advice relationship – thats just a smokescreen. comment.

  4. Avatar

    Why does the advisor have to have an ongoing relationship (as a default)? Some work is one off. If a client sees a lawyer for just a will, do we feel sorry for the lawyer that there is no ongoing relationship? Let’s build in a yearly trigger so the lawyer gets paid again…really? Very rarely does a retirement plan involve just a lifetime annuity. There is regularly a variety of products/vehicles used to spread income and investment risk. Just price the advice accordingly. If the fee is lower due to a lack of complexity then it is lower. Find another client. If every client you see forms an ongoing relationship you are going to max out pretty quickly how many people you can see and prove that you are seeing. The advisors need to improve how they explain and present the value. They then need to price for this value. Annuities are complex, so this can command a premium for the initial advice. If they form part of an overall comprehensive retirement plan a fee can still be charged if you are providing ongoing service and reviews.
    It sounds like the research shows the advisors are bummed because they cannot charge on the FUM. Surely we are better than this?

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