Guaranteed Income Wrappers Pose Challenge, Opportunity

Or, an even deeper question might be: Will the sale of annuities—even with innovations—ever thrive in a fee-based environment?

In the recent issue of The Cerulli Edge—Managed Accounts Edition, Cerulli Associates reports that insurance vehicles such as guaranteed income wrappers represent a development in the retirement income space. However, Cerulli analysts remain skeptical that the vehicles will take off among fee-based advisers.

First, annuities in general have not easily meshed to the business model of fee-based advisers, the research firm notes. As more advises turn toward the fee-based model, insurance companies have recognized the need to make products adapt to the fee-based structure. Despite the developments, such as low-cost variable annuities, in the last decade, the use of annuities among fee-based advisers is still “underwhelming,” Cerulli says.

According to Cerulli, the reasons variable annuities haven’t stuck more to the fee-based advisory practice can be chalked up to the same criticisms people have of annuities overall: the product complexity, the stigma of annuities, and the high fees.

Commission-based advisers—whose fee structures easily coincide with the sale of an annuity—have an easier time getting past those criticisms, the numbers show. Commission-based advisers report that 30% of their revenue is from variable annuities; fee-based advisers derive less than 10% of revenue from variable annuities.

In managed account programs, Cerulli says, advisers are hesitant about using variable annuities because of the constraints the products place on the flexibility and choice of asset allocation. Advisers find both flexibility and choice important in manged accounts. However, Cerulli says that insurance companies guaranteeing principal on variable annuities or income require advisers to use specific asset allocation models in order to provide clients with consistent returns and minimize payout risk. Advisers must forfeit some flexibility to use the products.

Cerulli says guaranteed-income wrappers represent an innovative solution for fee-based advisers looking for a retirement income opportunity, since the products separate the income guarantee from the investment management arm. Even so, these products are only available to a limited number of advisers. According to Cerulli, discretionary third-party programs account for less than 10% of the assets in managed account programs.

Cerulli argues that advisers who have already outsourced investment management might find the guaranteed income wrap useful. But the feature itself is not enough to persuade the majority of fee-based advisers to hand over portfolio management to a third party, “particularly as more firms avow their commitment to building unified managed account (UMA) platforms that give the advisor the ability to build more sophisticated portfolios to meet a clients ever-changing needs,” Cerulli says.