Financial Advisor Views on Annuities Appear Tightly Related to Business Models

A recent study from Cerulli Associates indicates that registered investment advisors (RIA) are more than hesitant to recommend annuities to their clients.

The report surveys and compares the views of various forms of financial advisors.  Not surprisingly, financial advisors’ product views are tightly related to the financial incentives that support their business models.  Consider, for example, the following:

1. Only 7% of insurance company representatives would be reluctant to recommend immediate or deferred annuities to clients.
2. 15% of independent broker dealer representatives express reluctance to recommend annuities.
3. 27% of wirehouse representatives express reluctance.
4. A full 80% of registered investment advisors eschew annuities for client rollover assets.

The results above are problematic as they appear to indicate that there is a lack of objectivity among financial advisors when it comes to the use of annuities.

Registered investment advisors typically work through an advisory account on a fee basis.  In other words, the fees charged to clients are often based on the level of assets under management.  RIAs are presumably the most objective sources of advice in the financial world because they act in a fiduciary capacity and have incentives that are somewhat aligned with their clients. 

However, commission compensation from annuity product sales is not compatible with a fee based business model.  In addition, many RIAs simply may not have insurance licenses and therefore would are unable to receive commission based compensation.  RIA annuity views may be driven in part by this economic reality.

At the other end of the spectrum, insurance company representatives are often compensated entirely on commissions that result from product sales.  It seems natural, then, that they are such strong advocates of commission-based products.

Would be purchasers of annuities need to be aware of the type of financial advisor they are dealing with and the financial incentives that likely affect those discussions.  Understand the differences between an advisory account, a brokerage account, and pure commission based compensation.  A certain amount of skepticism is in order if a financial conversation is dominated by annuity recommendations.  That said, equal skepticism is warranted for those conversations where annuity options are never discussed.