While they count as illiquid investments, they can provide liquidity in certain cases and situations
While annuities are considered long-term, illiquid investments, it is important to recognize how different types of annuities can differ in terms of liquidity.
In a piece published by ThinkAdvisor, Scott Stolz, senior vice president for Private Client Group Investment Products at Raymond James Financial, noted that statements from the U.K.’s Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) indicate that both agencies consider annuities as illiquid.
Surrender charges for early exits from commission-based annuities, tax consequences of early liquidation of nonqualified annuities, and optional living and death benefits that are too valuable to give up also support a characterization of illiquidity.
“Even with these instances of illiquidity related to annuities, viewing all annuities as automatically illiquid is simply an invalid assumption,” Stolz said.
Citing nonqualified annuities as an example, he said that policy owners are able to receive the entire value of the annuity at any time once they’ve gone beyond the surrender charge period. In his view, that made such annuities just as liquid as any other investment asset from which taxable gains would arise upon liquidation.
Similarly, he said clients with qualified annuities are taxed the same as other assets in a qualified account when they go beyond the surrender charge period. C-Share and advisory annuities, he continued, carry no surrender charges, allowing policy owners to liquidate them at any time at no cost.
Finally, Stolz said that for fixed annuities with a return of premium guarantee, surrender charges cannot decrease the initial amount investment. That means the worst outcome would be for the policy owner to sacrifice interest, similar to a certificate of deposit.
While annuities can provide benefits of liquidity in these cases, he said that their blanket classification as illiquid investments means they are limited by suitability rules built around concentration. “Most distributors set a maximum annuity concentration guideline of 30%-50% of an individual’s assets, based on liquidity,” he said.
The result, he noted, is that certain problems — an income gap, for example — that can be best solved with certain types of annuities could remain unaddressed, assuming doing so would trigger a violation of concentration guidelines set by distributors.
“I am not advocating for annuities to be considered liquid investments,” he clarified. “I am advocating against a one-size-fits-all categorization.” He emphasized different types of distinctions, including immediate, indexed, fixed, and variable annuities; non-qualified annuities and those in qualified accounts; annuities with and without surrender charges; and different riders that may come with annuities.
“[I]f we are going to help more clients navigate retirement with limited assets, we must provide a more thoughtful view of annuity concentration,” he said.