Why RIAs are Slow to Adopt No-load Annuities

Why RIAs are Slow to Adopt No-load Annuities

July 23, 2018 by David Stone

We sent an email to our subscriber list. The normal number of advisors opened it and read it. A smaller group clicked the link in the body of the email. Some folks called in to learn more. It wasn't anything out of the ordinary. Just an email announcing the addition of some new principal-protection solutions to our fiduciary marketplace.

But then...

We got a very terse response from a fiduciary in northern California. We disappointed him. He had trusted us. He wanted to unsubscribe. Normally, when customers respond directly to emails requesting to unsubscribe, our team will simply unsubscribe them and send a follow-up email acknowledging the request, offering an apology.

This time was different.

"I'm very disappointed and you no longer have my respect."

This particular email was so impassioned and thoughtful that I wanted to speak with the author directly. When our team followed up, I asked if the advisor, Glen Davenport, would be willing to speak with us and explain what inspired his response so we could learn how we could improve. I offered my phone number. This was not an ordinary all-caps rant, and I had a feeling he wasn't just having a bad day. We hit a nerve, and I wanted to know why.

We work with RIAs and fee-based advisors offering a platform of insurance solutions. It takes time to build trust, and precious little to lose it. If Glen was moved to write us directly, how many others were silently thinking the same thing? Was it the solution, the message or both that triggered Glen's action?

It didn't take long for him to respond. He called me directly within 30 minutes of our reply. He was pleasant. Remarkably pleasant. Disarmingly so. It wasn't what I was expecting.

I read his email back to him, "Please! I thought you were pursuing better products for those of us who are fiduciaries. I am very disappointed, and you no longer have my respect. Time to unsubscribe you with all the other pretenders."

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A passionate one

When I finished reading, Glen broke a short silence. "It's a passionate one, isn't it?" He seemed a little surprised with the tone. "It's not written out of any hatred or anything," he assured me. "It was just disappointment."

It seemed to him that something had changed. Maybe we were pivoting from our mission. Maybe now we were going to focus on old insurance solutions.

By "old insurance solutions" Glen meant the annuities we added to the platform last quarter. For industry veterans like him, annuities conjure the "bad old days" of pushy insurance companies offering rich commissions to snake-oil salesmen with Rolex-knockoffs peeking out from French cuffs.

They signal the one-size-fits-all approach some advisors have employed in the past ? an exercise that's antithetical to the fiduciary's way of doing business. Even though this new, simpler breed of annuities came with no commissions, and much lower costs.

Risky business

Glen had sold products for commission. Before the financial crisis, he worked for a broker-dealer. But he wasn't comfortable with that model. "I was getting well rewarded and the broker was getting well rewarded at the expense of the client," he said, aided, of course, by a lack of transparency.

"We would be trained to tell the client that these things were very safe, they paid a very regular income, and that it would be a great retirement solution when in fact I already knew that they were very risky and they [insurance companies] weren't paying for that risk. It was highly uncompensated."

I learned over the course of a couple of conversations with Glen that the specter of risk takes on many shapes. To him, and I wouldn't disagree, annuities were so expensive that the risk of not fully participating in the markets was too great. And this lead to the risk of not meeting retirement goals, which was too great.

These products had so many fees and charges baked into them to pay for distribution, etc., that investors weren't getting performance in line with the fees they were paying. And they didn't even know it. Failing to meet retirement goals increased the risk that the client might have to go back to work ? too much risk for Glen to stomach.

I thought back to Glen's email. The language was strong, as was the punctuation. Somewhere along the line his passion grew him into a vocal advocate for his clients and the fiduciary standard. Maybe it was the efforts he undertook to better understand efficient markets and the theories of Fama and French.

Welcome to the comfort zone

Glen understands the need for products and portfolios that protect us from ourselves. "Human nature

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is nothing new and humans have a tendency to gravitate toward bad things ? whether it be our diet, our exercise, our entertainment ? we gravitate toward things that are risky and destructive. Unhealthy," he said. "And our comfort zones are in all the wrong places."

In his opinion, packaged products won't solve that behavioral problem. At least not for his clients. The solution is to believe in the efficiency of markets. Heck, packaged products might even be the behavioral problem in his estimation. I can't tell for sure.

"I try to keep them [clients] distracted with the things that they can control and that they enjoy and controlling taxes, getting a better Social Security benefit. I try not to make a big deal out of performance. I try not to discuss it. I try not to celebrate it when it happens." What if his clients don't believe in efficient markets? What if they are obsessed with performance, or are too skittish to follow his advice?

He won't work with them.

That's the key. He vets his clients as rigidly as they vet him, which is smart. But what about advisors who can't afford to "fire" clients who won't stop obsessing about performance, or fear of market losses? A new generation of no-load solutions built for fiduciaries and their clients can help, especially in cases where the client only needs to protect a portion of their portfolio ? maybe something earmarked for some period down the road.

After all, it was our former stand-alone living benefit (or contingent deferred annuity "CDA") that caught his attention several years ago. He kept it in mind as a possible solution for some of his clients. Decoupling the annuity's insurance component from the investment component offered compelling value to him, a self-avowed hater of annuities.

A portable solution, the "CDA" could be wrapped around client brokerage accounts to offer a guaranteed income stream. A sort of "personal pension," this product would allow investors to have an insurance-like guarantee on their account, without forcing them into a packaged product. That way, investors could keep their money in ETFs and mutual funds in their brokerage account(s).

"It was an inexpensive way to solve some of the behavioral problems while preserving a world-class portfolio," He said. "I was very impressed, and I felt that that was a big step in the right direction for a fiduciary."

It wasn't that he hated the concept of annuity, just the typical execution of it.

He continued, "And then, I was hoping when I got the email from you folks that that would be even more refined or more improved on and I felt that it was slipping back to sort of the old insurance solutions where they're really completely at the other end of the fiduciary standard for an advisor."

Clearly, we have some work to do. We have to dig for and discover more valuable products for the folks who want and need them, and work with our insurance company partners to build them. We need to increase awareness of these solutions and prove their value. Until then, manufacturers and

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distributors of annuities will meet resistance from the staunch veterans, like Glen Davenport, who took the time to tell us about it. David Stone is founder and CEO of RetireOneTM, the leading, independent platform for fee-based insurance solutions. Prior to RetireOne, David was chief legal counsel for all of Charles Schwab's insurance and risk management initiatives. He is a frequent speaker at industry conferences as well as an active participant on numerous committees dedicated to retirement income product solutions.

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