New Year, Same Challenge: The Search for Income Continues

One of the most pressing challenges heading into 2022 is one that has confounded advisors for more than a decade: The search for income. With rates tethered well below historical norms, many investors have ventured into riskier alternatives in search of yield or tilted their portfolios even heavier toward equities. A new approach is required, says David Lau, Founder and CEO of DPL Financial Partners. In an interview with InvestmentNews Create, he explained how non-commission annuities have removed barriers advisors traditionally associated with the product set, and why they may be the optimal solution for today’s retirement income challenges.

InvestmentNews Create: Give us the 10,000-foot view of the challenge low interest rates present, and some perspective on how far away we are from a normal rate environment.

David Lau: We’ve been stuck in a low rate era – not low-rate environment at this point, but era – for 13 years. I don’t think many investors appreciate how far we are from a normal rate environment. Even if we continue to see inflation, and the Fed responds by raising rates, we’ve got a long way to go before the yield on a 10-year Treasury reaches its historical average, which is around 5.1%.

As we’ve been stuck in this era of low interest rates, we’re seeing two dynamics. First, many investors are getting heavily over weighted toward equities. Traditionally a retiree may have a 60/40 or even 50/50 stock and bond portfolio. Now we’re seeing that allocation creep up to 70/30 or 80/20. In other instances, advisors are allocating “safe” assets to riskier credit strategies or alternatives in search of yield. Both mean taking on a lot more risk in the portfolio.

InvestmentNews Create: What do low interest rates mean for a client’s financial plan?

David Lau: Many advisors’ financial plans may be far too optimistic because of the assumptions they are making about fixed income returns. For example, if you build a financial plan that has a 90% probability of success using various assumptions that include a 5% interest rate, and then change no other variable except to bring the interest rate assumption in line with today’s 1.5% yield for 10-year Treasuries, the probability of success falls from 90% to 37%. That’s a striking difference.

InvestmentNews Create: DPL is in the camp that annuities should replace bonds as the go-to income source. Make the case for why.

David Lau: We believe advisors often constrain themselves to the investment world when it comes to income planning. If an advisor opens themselves up to other products – which we believe you have to given today’s fixed income reality – an annuity is purposefully built to generate income and it does it very well. Commission-free annuities produce income 40% more efficiently than a bond portfolio today.

InvestmentNews Create: That’s an attention-getting statistic. Explain what you mean when you say annuities produce income 40% more efficiently than a bond portfolio.

David Lau: Think of it as buying income for your client. If you were to buy $50,000 worth of annual income for your client, and expect that income to last 30 years, at today’s interest rates, you’d need a $1 million (or more) bond ladder. You could fund that same income level with an annuity for about $600,000. That’s a massive difference.

InvestmentNews Create: As you know, many advisors have been hesitant to embrace annuities. What’s changed?

David Lau: Commission-free annuities change everything. Getting rid of commissions makes some comparable products 80% cheaper than a commission-based counterpart. Fee-based annuities also have removed much of the complexity around product features. Commissions have at times led to adding bells and whistles to products that may not have been that useful, but were added so sales teams had something new to sell. Commission-free products are bought, not sold, and so have been simplified, focusing on what’s usable, not what’s “sellable.”

InvestmentNews Create: Any additional thoughts on why annuities deserve a closer look?

David Lau: It’s become a lot easier to integrate annuities into all the components of an advisors’ technology. The annuity can be integrated into a portfolio management system. We’ve developed product discovery tools that allow advisors to easily compare annuities to each other or to a fixed income portfolio. Technology makes it easier to identify annuities that best meet an income need or other needs in the portfolio, like asset growth or protection. And importantly, technology has made it a lot easier for an advisor to show their client what the plan looks like with and without an annuity, and let them decide how they want to fund their retirement income. Once you give commission-free annuities a look … you can’t unsee it. The annuity advantage is right there. In 2022, we believe advisors should take that look.