“Now more than ever it needs to be considered as part of a financial plan,” David Blanchett said at the beginning of his presentation to virtual attendees of the Broadridge Fi360 Solutions Annual Conference 2021 on Tuesday afternoon.
His session, titled “Guaranteed Income: The Forgotten Household Asset” provided a holistic perspective of the different ways guaranteed income is and probably should be considered as part of a financial plan.
Blanchett, Head of Retirement Research with Morningstar Investment Management, also touched on risk and how it’s properly valued.
Claiming he sees a rise in interest among advisors when it comes to annuities and interest in guaranteed income from 401k plan sponsors, there are questions about whether it makes sense to own it with interest rates so low.
“Advisors need to take an approach without a lot of the biases that exist out there,” Blanchett added. “As part of a holistic financial plan, you have to have a good foundation and know how these products work.”
Part of the problem with the skepticism of annuities is that those who sell them are not fiduciaries, he noted.
“I’m less concerned about whether you are hourly-billed, AUM or commission-based,” Blanchett explained. “I’m worried if you’re a fiduciary. But I’m also bothered that some advisors just dismiss the category outright because certain annuities aren’t very good. Well, there are terrible mutual funds out there, isn’t it your job as an advisor to have human capital in the financial products space to figure out where and how certain products make sense?”
He then turned to what issues annuities are meant to solve; longevity, of course, being one.
“The people that work with advisors, in particular, are not the average Americans,” Blanchett said. “When you hear about life expectancy statistics on the news, usually it’s for a newborn. It’s not for someone who’s 65. It’s not for someone seeking financial advice. And those folks live an awfully long time. If we think about who needs guaranteed income the most, it’s individuals that actually have financial advisors and higher incomes and have a lower replacement from Social Security.”
They’re the ones who are truly at risk of leaving the resources and should think about what happens when their portfolio declines. When you annuitize, it becomes less of an issue.
A value beyond income
He also explained there is a value to an annuity beyond simply an income source, especially when compared with their other, more liquid portfolio assets.
“Let’s say that you’re getting a benefit from Social Security that’s $50,000 a year for you and your spouse, that’s worth like $1 million,” he said as an example. It’s worth a ton of money. If you don’t quantify that for clients, they may not realize they have a $1 million investment in U.S. government bonds, because that’s what Social Security is.”
Quantifying it for clients can, and should, affect how they invest their portfolio, how much they can withdraw, etc. The same can be said for all guaranteed income sources.
“We assume that in a financial plan that assets like an IRA are an income source, but we don’t assume that income sources are assets,” he concluded. “I think that has to change.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.