Why is This Topic Important to Wealth Managers? Our discussion today is focused on Annuities. There has been a lot of talk recently in the major media about the use of Annuities to meet certain financial planning objectives. We thus continue this discussion which focuses on how wealth managers can take advantage of the situation.

Earlier this week, Advisor’s Journal presented an article discussing a recent Securities Litigation & Consulting Group white paper which captures the sentiments of the anti-annuity press, commenting that, “[a]nnuities stand out as the investment most likely to be unsuitable since in virtually every instance, the investor would have been better served by mutual fund or a portfolio of individual stocks.” See AMAFX: Annuities: They Get No Respect. [1] But the bad press may be unwarranted.

National Underwriter reports variable annuities in 2010 were bullish by virtually all measures. 2010 new sales totaled $136.6 billion, an increase of 10.3% over 2009 sales of $123.9 billion. [2]

New sales surged in the 4th quarter of 2010, reaching $37.1 billion which represents a two-year quarterly high and posting a 17.4% increase over 4th quarter 2009 new sales of $31.6 billion.

Furthermore, year-end assets under management reached a milestone of just over $1.50 trillion, an 11.2% increase over year-end 2009 assets of $1.35 trillion and the highest recorded in almost 20 years of variable annuity asset tracking. This also represents a return to pre-financial crisis asset levels as the previous high water mark of $1.49 trillion was reached in the third quarter of 2007.

Not since 2006 has the change in year-over-year net flow been more positive than the change in sales, and at 15.7% the ratio of net flow to new sales was the highest since 2007; both measures point to improvement in terms of new money vs. exchange fueled sales.

Advisor’s Journal also reported earlier this year that sales of variable annuities (VA) with guaranteed living benefit (GLB) riders continue to grow exponentially, according to LIMRA’s Variable Annuity Guaranteed Living Benefit Election Tracking Survey. The Survey showed a 78 percent increase in assets of VAs with GLB riders, from $292 billion in the fourth quarter of 2008 to $521 billion in the fourth quarter of 2010. See Advanced Markets Advisor FX: Guaranteed Living Benefit Riders Breathe Life into Variable Annuity Sales [3]

As Sterling noted earlier this week, the case studies too represent a positive outlook. He cites to an article by Professor Richard H. Thaler, a University of Chicago professor, which explores one example showing the value through stability and security to the average individual planning for retirement. [4]

The Professor asks readers to assess the financial challenges of identical twins approaching retirement. One twin has a pension that will pay him $4,000 a month for the rest of his life. In contrast, his brother will sustain his retirement income by withdrawals from self-directed accounts. Financial projections confirm this brother has enough assets to fund his retirement through age eighty-five—an age he has a 30 percent chance of reaching. This assumes financial conditions based on historical averages; hardly a fair representation of events during the past decade.

Professor Thaler surmises that, when given the choice between the two retirement options, “nearly everyone” would prefer the guaranteed pension to the uncertainty of self-managed investments.  In sum, according to the Professor, annuities purchasers generally end up with more post-retirement income than their peers.

Tomorrow’s blogticle will present discussion on issues surrounding the wealth management practice.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] Citing Craig McCann  & Kaye Thomas. Securities Litigation and Consulting Group. Annuities. http://www.slcg.com/pdf/workingpapers/Annuities.pdf. Last Accessed 6/20/2011.

[2] Frank O’Connor A Year to Remember. National Underwriter Life & Health. April 4, 2011. http://www.lifeandhealthinsurancenews.com/Issues/2011/April-4th-2011/Pages/A-Year-to-Remember.aspx?page=2. Last Accessed 6/20/2011.

[3] Citing LIMRA. Assets of Variable Annuity with Guaranteed Living Benefit Riders Improve By Almost 80 Percent in Two Years, LIMRA Reports. March 8, 2011. http://www.limra.com/newscenter/NewsArchive/ArchiveDetails.aspx?prid=170. Last Accessed 6/20/2011.

[4] Citing Richard H. Thaler. The Annuity Puzzle. New York Times. June 4, 2011. http://www.nytimes.com/2011/06/05/business/economy/05view.html?_r=2&adxnnl=1&emc=eta1&adxnnlx=1307963257-8N4qBWZGH3BH8+ydWXq9TQ. Last Accessed 6/20/2011.