Financial Advisors on the Defensive as Variable Annuities Prove to be Among Best Wealth Management Vehicles of Past Decade

A recent article from Wall Street Journal columnist Leslie Scism discusses the value that has been preserved and delivered over the past several years by variable annuities and living benefits.

Despite intense media criticism and generally negative perceptions among financial advisors, variable annuities have been among the best wealth management vehicles of the past decade.

The performance and value have been especially evident during the recent capital markets implosion.  Scism makes the following comments on guaranteed living benefits:

Last year's steep market slide showed the value: In simplest terms, the guarantees commit the annuity issuers to paying lifetime income streams based on past market gains in the customers' underlying fund accounts, plus minimum annual increases in years when the market is sluggish. For those who hold the guarantees, retirement can proceed largely according to plan--a contrast to the millions of baby boomers who have watched big chunks of their portfolios evaporate.

Some financial columnists have made similar comments regarding living benefits over the past several months.

The article suggests that many financial advisors are scrambling to explain why they did not at least discuss with their clients a product option that has proven to be so valuable.

Source: Wall Street Journal

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Why have so many financial advisors been reluctant to recommend the use of annuities if there is such a strong case to be made for their role in planning?

There is absolutely a strong bias against annuities among the financial media and certain segments of the financial advisor community.

The typical criticisms include cost, inflexibility, etc.

To be fair, there is a huge amount of product innovation that has taken place over the past several years in the annuity industry, and the products are very different than 10 years ago.

There are also many business models that simply are not set-up to deal with insurance and annuities. For example, fee-only planners cannot accept commissions. Makes sense that they are averse to annuities. Also, many registered investment advisors (even those who are not fee-only) are not insurance licensed and as a result have no interest in the insurance stuff.

Perceptions need to and will change.

If a financial advisor is a fiduciary aren't they obligated to advocate or present what is in the best interests of the client?

If so, what are the implications for all of the advisors/fiduciaries who--for whatever reason--were reluctant to discuss or recommend variable annuities?

Good question.

One way to answer this--and the point of the article--is to simply look at how effective guaranteed living benefits have been in hedging the portfolios of their owners during the financial crisis.

You could simply compare a GLB owner's portfolio performance over the past several years to a broad index such as the S&P.

This is very high level and maybe not all that meaningful statistically since it only involves a couple years worth of data.

More robust or in depth comparisons typically involve simulations. This is the approach that larger advisors, asset managers and insurers might use in examing various scenarios.

Obviously something that is not exactly common--it is time consuming, complex and expensive. Sophisticated financial models are typically involved, the outputs are never certain, and model results are pretty much as good as the inputs.

Take a look, for example, at the study conducted by Wharton professor David Babbel to see how much time/effort is involved in making reasonable and responsible comparisons of annuity performance compared to alternative asset classes: http://www.annuitydigest.com/category/key-phrases/david-babbel