How Advisors Can Give Lackluster Annuities New Life

Not every annuity deserves a lifetime commitment.

Financial advisors have traditionally struggled to address their clients’ held-away annuities and plan for the significant wealth tied up in those commission-based products. Annuities are inherently complex, and as a result, few advisors are in the business of dealing with them. However, there is a long-standing technique, known as a 1035 exchange, that allows annuity owners to effectively trade in existing annuities for a more suitable contract tax-free. New technology is making them much easier to implement and could help advisors add additional lifetime retirement income for clients. 

“It’s a win-win situation,” said David Lau, president of DPL Financial Partners, which helps connect advisors with commission-free annuities and insurance products. “The annuity is converted into a billable asset for the advisor, while delivering superior value for the client. There’s no excuse for fee-based advisors to overlook annuities anymore.”

Nothing New 

Though they have remained on the sidelines for many financial planners, 1035 exchanges have existed for decades. The basics are pretty straightforward: 

• Section 1035 of the IRC allows clients to directly transfer funds from an existing annuity into a more suitable annuity contract without triggering tax consequences.
• Funds must be transferred directly between the two insurance companies, however, and clients who cash out one policy before buying another may owe taxes. 

Traditionally, advisors considering 1035 exchanges had a lot of leg work to do, and many simply lacked the expertise to feel confident comparing annuities and making recommendations on their own. 

Technology is quickly changing that, however. In about 70% of cases, Lau said, a given commission-based annuity contract can be mapped to a higher-value fee-based product available in the marketplace. Beyond facilitating 1035 exchanges, such tools can also help DIY investors who have previously shied away from annuities sift through products to identify those that closely fit their goals. 

Annuities Reduce Anxiety. “The academic research and real-world evidence of [annuities’] value are overwhelming,” Lau said, adding that they can also improve outcomes and reduce retirement anxiety. “Failing to discuss them with clients approaching or in retirement isn’t just outdated, it borders on malpractice.”