Investors are recognizing a potential change in the financial landscape. While current interest rates are decent, offering 5% yields on high-quality, money market mutual funds, a key indicator suggests that these relatively high yields may not last. The CME FedWatch Tool shows that the Federal Reserve is expected to lower its policy rate later this year. Although the Fed maintains its outlook of no rate cuts in the near future, the market has a different belief.

Yields Are Likely to Decrease Soon

If the so-called “wisdom of the crowd” holds true, then risk-conscious investors will soon have to look elsewhere for decent interest rates on their savings. One area some advisors suggest their clients consider is the certificate of deposit (CD) market. With regional banks struggling to keep deposits, many small financial institutions currently offer multiyear CDs with rates materially above comparable-term Treasuries. Like so many good things, however, they will not last. If rate expectations continue to decline, even CDs will be less appealing in the years ahead.

Now May Be the Right Time to Secure Yield

While there’s no single elixir to meet all investors’ income needs, 2023 may be the opportune time to add annuities to client portfolios. Retirees, in particular, must weigh the reality that today’s era of appealing rates could be a blip on the long-term radar of fixed-income returns. We anticipate that this year will surpass the record annuity transaction volume achieved in 2022.

The Annuity Market Continues to Thrive

Some advisors were stunned at how popular annuities became last year. Perhaps it was the perfect storm of falling stock prices, steeply rising interest rates, and ongoing equity and fixed income volatility that attracted the growing populous of Baby Boomer retirees to the relative safe haven of guaranteed income strategies. Now, with ongoing talks of government defaults and debt ceiling arguments, some fear that even laddered Treasury securities are no sure thing. While that’s a discussion for another day, annuities offered by financially strong institutions might appear all the more attractive.

2023 Trending Toward Another Record

Last year featured a record-high $312.8 billion in domestic annuity sales – a massive 23% increase from the previous year’s sum and an 18% leap from the previous record set in 2008, according to LIMRA. What’s more, the annuity train shows few signs of slowing. The advisory community recently got a first read on first quarter 2023 annuity volumes, with LIMRA reporting a whopping 47% year-on-year jump in sales. Nearly $93 billion of annuities were purchased by investors in the first quarter, marking the biggest quarterly figure on record.

Looking ahead, LIMRA expects another year of more than $300 billion in annuity sales. Digging into the details, fixed-rate deferred (FRD) annuities are hotter than ever; FRDs scored $40.9 billion in sales during the first quarter of 2023, up 157% from the same period a year ago. FRDs now represent 44% of the total annuity market, according to LIMRA, compared to just 18% three years ago. It is another sign that retirees and those nearing retirement put a high priority on locking in a guaranteed rate of return to manage their longevity risk.

A Variety of Yield-Focused Options Are in Demand

Other annuity types are flying off the proverbial shelves, too. Fixed-indexed annuities (FIAs), single-premium immediate annuities (SPIAs), and deferred-income annuities (DIAs) all saw robust annual sales jumps. Writ large, yield-hungry investors aim to reduce risk and tone-down equity market exposure through low-cost income products, the data suggests.

Delivering Value to Clients Through Improved Planning Solutions

As annuities continue to gain popularity and represent a larger portion of retirees’ portfolios, independent advisors have an opportunity to grow their business while maintaining (if not amplifying) their fiduciary responsibilities. Relying solely on passive bond ETFs and active mutual funds may prove ineffective when faced with rising rates and market volatility – that’s underscored by market performances in the past few years. Not only are there potential paper losses to consider, but risk-averse clients have likely grown increasingly anxious about all that red on their accounts. It makes managing the behavioral component all the more difficult.

Don’t Underestimate Behavioral Quirks

Annuities can be an effective solution to help investors across generations stick to their long-term investment plans. The assurance that an annuity will keep providing a certain income level no matter the goings on with the Fed, the debt ceiling debate, or uncertainties in the corporate credit environment allows retail investors to rest easy about what the bond market might do next. That saves wealth managers’ time so they can focus on other value-add planning activities.

How Will New Rules Impact Annuity Sales?

Something our team is curious to see unfold is how the new SECURE Act 2.0 will impact future annuity sales. One of the provisions in the vast piece of legislation is that advisors can research and price annuities without the compensation requirement of yesteryear. Hypothetically, that may mean more advisors will have the freedom to tailor plans for each client. In order to keep up with the industry, RIAs may be forced to compete by offering more guaranteed-income solutions.

MYGAs’ Growing Popularity

But that is also an opportunity. Annuities can be used in many ways to meet a plethora of client goals. For instance, there’s growing interest in multiyear guaranteed annuities (MYGAs) that are comparable to CDs, but with higher yields. MYGAs may be ideal to house cash for nearer-term objectives. Moreover, with inflation expectations hovering near 2.5%, securing a MYGA rate, say, near 5% over a three- to five-year period could be a better fit than parking cash in a money market, Treasury bill, or other short-duration, fixed-income product.

The Bottom Line

Annuities scored a banner year in 2022 and initial clues on this year’s sales trends are impressive, too. Advisors are increasingly meeting client demand and allocating to annuities amid ongoing bond market volatility. Independent wealth managers have an opportunity to deliver better solutions customized to each client through a variety of annuity products.

Annuities are not suitable for all investors. All recommendations for annuity products must be suitable and appropriate for the client and must be based on a thorough fact finding and understanding of the client’s unique financial situation, needs, goals, and risk tolerance.

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