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Annuities as an Asset Class for Fee-Based Advisors l 3 © Envestnet 2022 Advisors wishing to use a broader range of tools, such as annuities, with their clients have faced constraints over the years. Historically, annuities have mostly been sold through financial advisors who serve as intermediaries and receive a commission on the sale, rather than being sold directly by the insurance company to the consumer. Having insurance companies compensate the advisor through a commission has created problems for financial advisors who only accept fees from their clients rather than commissions for selling financial products. In recent years, the fee-only model for financial advice has grown in popularity. It is often designed to charge a percentage of assets under management or charge hourly fees or fixed fees for providing planning services. Fee-only advisors have effectively won the public debate about this type of compensation model being more aligned with serving consumer interests. Commissions were argued to create a conflict of interest, as a commission-based advisor need only to sell suitable financial products that are not necessarily putting the client's needs first. While fee-only advisors can be aligned with client interests during the accumulation phase by seeking to accumulate more assets and grow the investment portfolio, the fee-only model does not necessarily align with managing retirement risks during the distribution phase that focuses on lifetime income rather than portfolio growth. It is concerning that fee-only financial advisors have been particularly slow to adopt the use of annuities. Caution about annuities relates to their complexity and the confusion this complexity can create among consumers, their built-in fees and surrender charges for early distributions, and their commission-based compensation model. This has left their clients more exposed to market volatility and longevity risk when seeking to build retirement income plans than they may truly be comfortable with taking. This is changing. Insurance companies are now creating annuities that can fit into the toolbox of fee-only financial advisors in a much more effective manner. It is now increasingly possible to treat the annuity assets in the same manner as other investment options are treated on the platforms used by fee-only advisors to consolidate and manage client assets. For deferred variable and index annuities, the contract value is known, and income annuities can be managed by accounting for the present value of their remaining payments. This makes it possible for advisors to charge their fees on the assets held inside the annuity in the same way as for other investment assets. In recent years, the fee-only model for financial advice has grown in popularity. © Envestnet 2022

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