Why Do Clients Really Ignore Advice on Annuities?

What You Need to Know

New research finds advisors are unlikely to recommend annuities and clients often do not take their advice when they do.
David Blanchett is skeptical that these clients are driven to ignore their advisors.
A more likely story, he suggests, is that advisors are unenthusiatic about annuities, in large part because it’s difficult for them to get paid on annuity assets.

A recent paper and summary brief published by two experts at the Center for Retirement Research at Boston College has sparked a debate about financial advisors being able to steer clients toward guaranteed income annuities in the retirement planning process.

The paper in question, by CRR research economists Karolos Arapakis and Gal Wettstein, cautiously draws the conclusion that advisors seem to have little power to bridge the annuity divide for their clients — at least at the current moment.

According to the duo, the results suggest that financial professionals are concerned that many clients could deplete their savings too quickly, but the majority of them do not recommend annuities and, when they do, many clients do not take the advice.

Arapakis and Wettstein say these findings point to both the promise and limitations of reliance on financial professionals to guide clients to greater use of annuities.

Commenting on these conclusions on LinkedIn, PGIM’s David Blanchett said he was “a little surprised” at the relatively low rate of annuity use, and he wonders whether there are other trends playing out in the data.

“I would have thought [the uptake of annuity recommendations] would have been significantly higher,” Blanchett wrote Monday, sparking several dozen commenters to offer their own thoughts.

“How many times when advisors recommend portfolios do the clients not follow the recommendation? I get that annuities can be complicated, but products/strategies that may provide lifetime income can do something a regular portfolio can’t, which is why I believe, we need more retirees with more lifetime income … not less,” he explained.

Expanding on his comments in a follow-up email to ThinkAdvisor, Blanchett said the research is interesting and informative, but it also leaves some unanswered questions, as Arapakis and Wettstein themselves warn.

Are Advisors Really Being Ignored?

Asked whether he would interpret the results to suggest that advisors are being ignored when they make annuity recommendations, Blanchett said he doubts it.

“I have mixed feelings that it’s really clients not following advisor recommendations versus advisors not actively positioning them with clients,” he explained. “I mean, do you think the clients aren’t taking the advisor portfolio recommendations? I highly doubt it.

“To me this suggests that while advisors in the survey might ‘recommend’ an annuity, they don’t necessarily really believe in the benefits. [If they did,] the take-up would be significantly higher,” Blanchett added.

Related: Ken Fisher Can’t Have It All

Another important consideration, he said, was raised in a comment by Kelby Meyers, who runs a retirement income planning firm called Nestimate: “Do clients need better longevity literacy?”

Blanchett wrote in reply that it still seems like a lot of advisors don’t “really understand annuities, and they don’t necessarily mesh well with AUM business models,” but he’s not so sure a lack of longevity literacy is itself to blame.