“I Don’t Want to Outlive My Assets" - Identifying Clients Who Need Annuities

Am insightful conversation with Practice Management Subject Matter Expert, Linda Eaton.

Annuities are one of those investment vehicles that regularly cycle in and out of fashion with investors and advisors. Like every investment, annuities have disadvantages, yet for some clients, an annuity can be exactly the right investment. Who those clients might be is what we will explore.

First, just to be clear, what is an annuity? According to the U.S. Securities and Exchange Commission, “An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future.”¹

In considering which clients might benefit from an annuity contract, we turn to Linda Eaton, one of Cannon’s foremost practice management experts. Linda notes, “We at Cannon talk a lot about listening to your clients because listening is the foundation of a successful practice. This seems self-evident, but many advisors don’t probe beyond the bare facts clients give them. This shouldn’t be the end of the process; this should be the beginning.”

Linda points out that “know your customer” is one of the first rules we learn early in our careers as financial advisors.  “Whenever we have a meeting with a client or a prospect, we need to learn as much as we can so we will have the ability to recommend suitable investments. For those of us who began our careers as brokers, we’ve heard the famous Rule 405 of the New York Stock Exchange ― know your customer ― at least a thousand times.” (An expanded version of Rule 405 took effect in 2011 and is now FINRA Rule 2090.²)

And we shouldn’t listen for just our clients’ goals and dreams, but what keeps them up at night. Linda adds, “I can say with certainty that almost every one of your clients wants financial peace of mind. Unfortunately, like virtue, every client has a different definition of what constitutes financial peace of mind. When it comes to truly knowing your customer, you must discover what the vision of financial peace of mind actually is for that person.”

Annuities can be a great fit for clients who have a deep and ingrained fear of outliving their assets or—to put it bluntly—running out of money and being completely broke when they are elderly. This fear is especially prevalent in women.

A 2013 survey of 2,200 women by the Allianz Life Insurance Company found “bag lady fears persist even among the most successful women.” According to the Allianz study, “Almost half of all women who responded said they ‘often’ or ‘sometimes’ fear losing all their money and becoming homeless. And fear is not just found in lower income levels. Twenty-seven percent of higher income earners ($200,000 and above) say they worry about becoming a bag lady.”³

Linda emphasizes, “As financial professionals, it isn’t for us to judge the financial fears of our clients but to do all we can to ameliorate those fears. But this isn’t only a fear felt by women. Any of your clients—male or female—who are older, single, never had children and hasn’t anyone of a younger generation who might step in and help them if they run out of money is likely to have this fear.” And unless your client has a rich uncle, any friends or relatives who want to help your client financially are likely around the same age as your client and perhaps in the same boat; the help they can give is probably minimal.

No one is going to “run out” of their Social Security, Medicare, or Medicaid. And while most of us don’t like to think about this, the federal government can raise taxes to keep these programs solvent. But even a person receiving benefits from all three of these major programs still has expenses because these income transfer programs don’t cover every medical or living expense. In fact, twenty percent of people who receive Social Security have incomes below the Federal poverty line.

Because people today can easily live to age ninety-three according to the Social Security Administration, many of your clients, especially women, rightly fear running out of a means of support. For many of those with this fear, an annuity with reasonable fees is an appropriate strategy to provide income as they age and peace of mind now.

To learn more about this topic, register for our Investment Management curriculum or our Issues & Updates: Moving Beyond Alpha online course.

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Resources: 

1 https://www.investor.gov/introduction-investing/basics/investment-products/annuities

2 https://www.finra.org/sites/default/files/NoticeDocument/p122778.pdf

3 https://tinyurl.com/Allianz-2013-Survey-of-Women

Contributing Writer: Subject Matter Expert Charles McCain