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?”
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.