Adviser Annuity Use Down as ETFs Gain Steam

Only about 41% of advisers surveyed for the recent 2014 Trends in Investing Survey said they currently use and recommend variable annuities, compared with a high of 58% observed in 2006 and 2008 editions of the survey. Even fewer advisers (29%) said they are currently using fixed annuities in client investment strategies, down from about half in 2010.

Survey results indicate an overall increased use of cash and equivalents since 2006, when 53% percent of professional financial planners surveyed were using and recommending cash, compared with 79% today.

“The study seems to point to a shift toward investments with greater transparency and liquidity,” explains Valerie Porter, director of the Financial Planning Association (FPA) Research and Practice Institute, one of the industry groups behind the survey. “Perhaps advisers are responding to consumers’ demand for lower-cost investments that allow them to be more nimble in their investment approach. And I think it’s safe to say everyone values cash a little more since last decade’s market collapse.” 

Other key survey findings show the following:

• While 50% of advisers indicate that they do not plan to decrease the use and recommendation of any investment vehicles in the next 12 months, 15% will decrease use of individual bonds and 16% will decrease use of non-wrap mutual funds.

• Although the majority of advisers (57%) believe a blend of active and passive management provides the best overall investment performance, more advisers increased their use of passively managed funds over the last year (30%) than increased use of actively managed funds (18%).

The survey also showed that advisers maintain a positive long-term economic outlook, with 57% being “bullish” for the next five years, compared with 39% who are “bearish.”

The 2014 Trends in Investing Survey showed that 79% of advisers currently use or recommend exchange-traded funds (ETFs) with clients, up from just 40% in 2006. Further, 39% of advisers surveyed said they plan to increase their use of ETFs over the next 12 months—the highest anticipated increase among 17 investment vehicles.

Advisers expect inflation to rise over the next five years, to more than 3%. They are primarily using equities as inflation hedges, according to the survey, although alternative investments such as real estate investment trusts (REITs) and commodities are also commonly used as hedges.

The majority of advisers are currently re-evaluating the asset-allocation model they typically recommend or implement. When asked why, 56% of those advisers said anticipated or existing changes in the economy in general are necessitating changes to their asset allocations. Many also indicated they regularly review and adjust asset allocations regardless of market activity.

Forty-five percent said anticipated or existing changes to specific investments are making them re-evaluate asset allocations, and 28% said anticipated changes in inflation are making them reconsider allocations.

A full summary of The 2014 Trends in Investing Survey, sponsored by the FPA Research and Practice Institute and the Journal of Financial Planning, is available here and includes additional details and narratives.