Do Financial Advisors Commit Malpractice When They Don’t Consider Annuities?
In the recent Barron’s Advisor article “How to Make Sure You Have Enough to Retire, No Matter What,” a number of financial advisors provided advice on how to work with clients to prepare them for retirement. To no surprise, advisors recognize that many of their clients are “nervous about running out of money.” However, none talked about income-generating annuities—the one solution that ensures a client will have a stream of guaranteed income that will last their lifetime.
Yes, you read that last statement correctly. While it should be incredibly obvious that an income annuity should be discussed with clients who are concerned about running out of money in retirement, I am no longer surprised when advisors don’t. I have read too many similar articles and encountered too many “fiduciary” financial advisors who refuse to present annuities as an option when they are designed to effectively address that specific concern. Instead, I read about complex investing strategies, variable spending plans, and advice to take on more investment risk to try to boost returns to address longevity.
Think for a moment how crazy that is.
I believe advisors should be held to the same professional standard as the doctors we entrust to safeguard our health, and many advisors consider themselves equally vital in clients’ lives. With that in mind, imagine this scenario: You tell your doctor you’re concerned about persistent foot pain that you have had for years. The pain is so severe it keeps you awake most nights and has you constantly focused on your foot during the day. You’re afraid you won’t be able to walk in the future. The doctor listens and knows there is a product that can cure your foot pain but refuses to tell you about it. Instead, he or she tells you not to fixate on the pain—or its root cause—because there are many ways to work around it. There are pills to help you sleep and a knee scooter to help you get around. If the sleeping pills don’t work, you can try different pills. And there are plenty of anxiety medications to help you cope with your pain-related stress during the day. If the knee scooter is too inconvenient, perhaps crutches would work better. And if the crutches are too burdensome, maybe some gym work to strengthen your upper body. As long as the pain persists and no solution is offered to resolve it, you’ll keep coming back to try yet another workaround.
That would be considered malpractice.
So how is it acceptable for a fiduciary advisor to not discuss income annuities that can guarantee a stream of lifetime income and provide peace of mind for clients who express fear of outliving their assets?
The financial and behavioral benefits of annuities in retirement have been demonstrated by economists for decades. However, high costs and sales commissions have turned many advisors away from the products. Instead, they sell complex investment and planning strategies to try to tackle retirement income challenges—approaches that attempt, but are inadequate, to replicate what annuities do very well.
Today, there is no excuse for advisors to overlook annuities, especially—but not only—for clients who fear running out of money in retirement. The landscape has changed dramatically. For many years, a range of low-cost, commission-free annuities has been available to advisors, along with technology that integrates these solutions into the advisor’s software and workflows to manage alongside traditional investments.
Annuities are purpose-built to provide secure lifetime income, and they do so very efficiently. Too many advisors dismiss annuities based on very little knowledge of the products or their uses. The academic research and real-world evidence are overwhelming: Annuities can meaningfully improve financial outcomes and reduce retirement anxiety for many retirees. Failing to discuss them with clients approaching or in retirement isn’t just outdated, it borders on malpractice.
David Lau is founder and CEO of DPL Financial Partners, which helps financial advisors offer commission-free annuities to their clients.
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