Will RIAs Start Using Fixed Rate Annuities in Portfolios?
What You Need to Know
A rise in bond yields has changed the investment landscape, especially for fixed income.
Like CDs, multi-year guaranteed annuities provide a guaranteed return for a stated period, generally up to 10 years.
They offer tax-deferred growth, which can be especially compelling when purchased in a taxable account.
The notable rise in bond yields starting in 2022 has changed the investment landscape, especially for fixed income-related strategies. In addition, taxes have become more important, increasing the importance of asset location.
Annuities are relatively underused by investment advisors, whether they are viewed more from an investment-related lens or as a product that provides protected lifetime income. A rise in fee-friendly products, though, may lead to higher adoption by investment advisors.
Given their relatively competitive yields and tax-deferred nature, fixed-rate annuities, also called multi-year guaranteed annuities, are one type of annuity that should be especially attractive from an investment perspective. Insurers are increasingly offering no-commission MYGAs that have higher yields than similar commissionable strategies. Yields on fee-friendly five-year term MYGAs are about 60 basis points higher from the same insurer.
While there are a variety of reasons that advisors have not openly embraced annuities, MYGAs represent a relatively attractive way to increase the potential risk-adjusted, after-tax returns of clients’ portfolios and to learn more about the annuity space in general.
Understanding MYGAs
Multi-year guaranteed annuities are relatively straightforward as far as annuities go, providing a guaranteed return for a stated period, typically between two and 10 years. They are comparable to certificates of deposit, where the quoted yield includes all fees, although the yields for MYGAs have been notably higher than CDs historically.
Sales of MYGAs have exploded over the past few years. Estimated 2023 annuity sales were $385 billion, according to LIMRA, with MYGA sales estimated to be $165 billion, up from $113 billion in sales in 2022 and $50 billion in sales in 2021.
More traditional MYGAs typically include a commission, generally around 3% of the total premium. This commission is lower than other fixed products, such as fixed indexed annuities, where commissions between 5% and 6%, paid by the insurer, are more common.
Commissions effectively reduce the quoted yield of MYGAs, since they are typically amortized over the term of the product. Because fee-friendly MYGAs have no (or lower) fees, they have the potential to generate higher yields. Worth noting, though, is that the advisor using a fee-friendly MYGA is likely going to receive payment for services some other way, such as by billing on assets under advisement.
