Finance

Consumers are on pace to buy about $360 billion of annuities in 2023, beating last year’s record of $311 billion, according to LIMRA.
Higher interest rates and anxiety about the stock market and economy were the primary drivers.
There’s a mismatch between the types of annuities consumers are buying and the ones financial planners generally recommend.

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What are annuities?

Annuities are issued by insurance companies. Consumers generally hand over a lump sum of money in exchange for an income stream for life, similar to a pension or Social Security.
Financial planners sometimes recommend them to guard against the risk of outliving one’s savings — though some kinds are much better at doing so than others, they said.
“There are all different types of annuities, and to me, the majority are not necessarily good,” said Carolyn McClanahan, a certified financial planner based in Jacksonville, Florida, and a member of CNBC’s Advisor Council.

Why annuity sales spiked in 2023

In 2023, the U.S. Federal Reserve raised its benchmark interest rate to the highest level in 22 years. That nudged up the returns and income that consumers could get from annuities, thereby making them more attractive, said Todd Giesing, head of annuity research at LIMRA.
While the stock market has bounced back from a dismal 2022, there’s “still a lot of uneasiness with investors,” who are grappling with unknowns like the trajectory of inflation and the economy, Giesing said.

Such malaise pushed consumers to seek out relative safety, in fixed-rate deferred annuities, for example. They’re like certificates of deposit in annuity form, protecting principal while delivering a fixed return over a few years.
Fixed-rate deferred annuities currently pay average rates around 4.5% — triple the 1.5% just two years ago, Giesing said. They constituted the bulk of overall annuity sales this year, at an estimated $140 billion.

What kind of annuities financial advisors recommend

There’s somewhat of a mismatch between the types of annuities that consumers buy and the ones typically recommended by financial advisors.
Generally, planners use annuities to hedge against longevity risk — the risk of living so long that one outlasts their retirement savings.
An annuity might help cover any shortfall in funding for basic necessities like food and housing, after accounting for guaranteed income streams like Social Security and pensions.

There are all different types of annuities, and to me the majority are not necessarily good.

Carolyn McClanahan
certified financial planner based in Jacksonville, Florida

McClanahan, founder of Life Planning Partners, generally uses single premium immediate annuities — also known as SPIAs — with clients.
These annuities are the simplest, she said. Generally, a buyer hands over a lump sum to an insurer, which immediately starts paying a fixed monthly sum to the buyer for the rest of their life.
The “sweetest time” to buy a SPIA is when people are in their late 70s or early 80s, when it becomes clearer that a healthy retiree may have the potential to live a long time and run out of money, McClanahan said.
Paul Auslander, a CFP and director of financial planning at ProVise Management Group in Clearwater, Florida, doesn’t use many annuities with clients. When he does, he generally opts for SPIAs over other annuities to generate an income stream.

Deferred-income annuities, or DIAs, generally work the same way. However, they don’t start paying right away: People might buy them in their 60s, for example, and the annuity will pay a set monthly amount in the future, perhaps in one’s 70s or 80s. The income stream is generally larger than with a SPIA but carries additional uncertainty around when one might need that money.
In the year through Sept. 30, consumers bought $9.7 billion of SPIAs and $2.8 billion of DIAs, according to LIMRA.
By comparison, they bought $71 billion of indexed annuities and $39 billion of variable annuities. Such annuities are often more complex and carry higher fees than SPIAs and DIAs, according to financial advisors. Insurance agents may also have an incentive to sell more of them to consumers because they often carry higher commissions, advisors said.

One potential downside of SPIAs and DIAs is that buyers generally can’t get their money back once they hand it over to an insurer.
Conversely, indexed and variable annuities carry so-called income riders that can offer both a future income stream and liquidity if buyers need to access their money early. However, they generally carry relatively high costs and strict rules about access, which have financial penalties if breached, planners said.
“All these bells and whistles are really hard to understand,” McClanahan said. “If you can’t explain it in two pages, then is it really a good thing?”
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Economists polled by Reuters had expected a decline in the headline consumer price index to 4.4%, after the 4.6% annual reading of October surprised to the downside by dropping to a two-year low.
The Office for National Statistics said the largest downward contributions came from transport, recreation and culture, and food and non-alcoholic beverages.

LONDON, UK – Sept. 2021: People seen dining outdoors in Soho in London in September 2021.
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LONDON — U.K. inflation fell by more than expected in to hit 3.9% in November, in the lowest annual reading since September 2021.
Economists polled by Reuters had expected a modest decline in the headline consumer price index to 4.4%, after the 4.6% annual reading of October surprised to the downside by dropping to a two-year low.

Month-on-month, headline CPI fell by 0.2%, compared to a consensus forecast of a 0.1% increase.
Core CPI — which excludes volatile food, energy, alcohol and tobacco prices — came in at an annual 5.1%, well below a 5.6% forecast.
The surprisingly large falls prompted a spike in bets that the Bank of England will cut interest rates in 2024, which manifested in a sharp fall in British bond yields.
The U.K. 10-year gilt yield sunk to an eight-month low, dropping 11 basis points to around 3.54%. Yields move inversely to prices. Meanwhile, the U.K.’s FTSE 100 was the only major European stock index in positive territory on Wednesday, climbing 0.8% by mid-morning trade.
The Office for National Statistics said the largest downward contributions came from transport, recreation and culture, and food and non-alcoholic beverages.

The Bank of England last week maintained a hawkish tone as it kept its main interest rate unchanged at 5.25%. The Monetary Policy Committee reiterated that policy is “likely to need to be restrictive for an extended period of time.”

The central bank ended a run of 14 straight interest rate hikes in September, as policymakers looked to wrestle inflation back down towards the Bank’s 2% target from a 41-year high of 11.1% in October 2022.
U.K. Finance Minister Jeremy Hunt cheered the Wednesday figures and said the country was “starting to remove inflationary pressures from the economy.”
“Alongside the business tax cuts announced in the Autumn Statement this means we are back on the path to healthy, sustainable growth,” he said in a statement.
“But many families are still struggling with high prices so we will continue to prioritise measures that help with cost of living pressures.”
Significant fall ‘undermines’ Bank of England caution
The Bank of England has repeatedly pushed back against market expectations for significant cuts to interest rates in 2024, noting last week that “key indicators of U.K. inflation persistence remain elevated.”
Suren Thiru, economics director at ICAEW, said the “startling” fall in inflation recorded on Wesdnesday will reassure households that there is a “light at the end of the tunnel,” with easing core CPI figures showing that underlying price pressures are relenting.
“The likely squeeze on wages from rising unemployment and a stagnating economy should help to continue to keep them on a downward trajectory,” he said by email.

“These inflation numbers suggest that the Bank of England is too pessimistic in its rhetoric over when interest rates could start falling. A deteriorating economy could push the Bank to start loosening policy by the Autumn, particularly if inflationary pressures continuing easing.”
A ‘glimmer of relief’
Richard Carter, head of fixed interest research at Quilter Cheviot, said the latest inflation print adds to a sense of “cautious optimism” in the U.K. relative to the cost of living crisis and bond market chaos of last year.
Despite the drop in CPI, he noted that the broader economic picture remains “complex, marred by stagnation and subdued growth prospects.”
The U.K. economy contracted by 0.3% month-on-month in October, after flatlining in the third quarter.
“This stagnation, leaving the output no higher than it was in January, paints a picture of an economy struggling to rebound from a series of unprecedented challenges,” Carter said over email, while acknowledging that the pace at which inflation is slowing offers a “glimmer of relief” for households.
“The pressures are manifold – from the cost of living crisis, volatile energy markets, Brexit aftershocks, to enduring productivity issues. These factors have collectively dampened economic prospects and consumer confidence.” More

Tesla cut prices for its electric cars in China by more than BYD did for its flagship Han sedan, according to analysis from U.S.-based firm JL Warren Capital.
The Han sells in a similar price range as Tesla’s cars — above 200,000 yuan ($28,000).
Most of BYD’s many other cars cost much less.

BYD’s Han electric car, pictured here at the 2021 Shanghai auto show, is one of the most popular new energy vehicles in China.
Evelyn Cheng | CNBC

BEIJING — Tesla cut prices for its electric cars in China by more than BYD did for its flagship Han sedan, according to analysis Wednesday from U.S.-based firm JL Warren Capital.
Tesla reduced the price of its Model 3 by 6% compared to December last year, and cut the price of Model Y by 11% during the same period of time, JL Warren Capital CEO and Head of Research Junheng Li said in the report.

BYD’s Han only saw a 5% price decrease during that time, she said.
The Han, the company’s premium electric sedan, sells in a similar price range as Tesla’s cars — above 200,000 yuan ($28,000). Most of BYD’s other cars cost much less.
The report showed that BYD increased its sales promotions throughout the year, shaving 10% or 17% off the price of some mass market models. “Double-digit discounts are a common promotion by [original equipment manufacturers] to stimulate sell-through and meet the sales target,” Li said.

High-end electric car startup Nio also cut prices this year, despite initially trying to avoid getting caught up in an industry price war.
“Unlike in the EU or the US, residual values do not appear to feature highly in Chinese consumers’ purchase decisions,” HSBC analysts said in a Dec. 4 report about the auto industry. “That is perhaps the reason why price competition is so severe in China relative to EU/US.”

Thanks partly to government support, penetration of new energy vehicles, which include battery and hybrid-powered cars, has surged to well over one-third of new passenger cars sold in China.
Li expects that penetration rate will be around 40% next year, while electric car sales grow by 20%, a slowdown from a 35% increase in 2023.

Read more about electric vehicles, batteries and chips from CNBC Pro

Already for this year, the industry’s largest automakers had an “overly ambitious goal” of 93% sales growth, Li said. She pointed out that among 13 major EV manufacturers in China, only Tesla and Li Auto are set to reach their respective sales targets for the year.
That signals competition is about to get fiercer in China, the world’s largest auto market, which could lead to the potential for industry waste.
“New models spur EV demand, but at the cost of intensifying [the] pricing war as the market is flooded with inventory of ‘obsolete’ models,” Li said, noting the new car development cycle in China has been reduced to one or two years versus about three years previously.  More

Alibaba Group CEO Eddie Wu is taking over the top role at the company’s Taobao and Tmall e-commerce business, replacing Trudy Dai in the Chinese internet tech giant’s latest management shakeup this year.
Wu replaced Daniel Zhang as the group’s CEO in September.
Wu also became acting chairman and CEO of Alibaba’s Cloud Intelligence Group in September after Zhang abruptly left the business unit.

Trader works at the post where Alibaba is traded on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 28, 2023. REUTERS/Brendan McDermid
Brendan Mcdermid | Reuters

BEIJING — Alibaba Group CEO Eddie Wu is taking over the top role at the company’s Taobao and Tmall e-commerce business, replacing Trudy Dai in the Chinese internet tech giant’s latest management shakeup this year.
Dai, who is one of the 18 cofounders of Alibaba, will assist in establishing an asset management company, according to an internal letter from Alibaba Chairman Joe Tsai seen by CNBC.

Alibaba’s announcement Wednesday comes after Wu replaced Daniel Zhang as the group’s CEO in September.
Wu has been chairman of Taobao and Tmall Group since May 2023.

The e-commerce business that once propelled Alibaba to success has run into challenges with rising competitors such as PDD, while consumption growth in China remains sluggish.
PDD’s U.S.-listed shares have gained more than 80% so far this year, driving the company’s market capitalization higher than Alibaba’s. In contrast, the company founded by Jack Ma has seen its shares fall by about 14% year to date.
Contributing to a recent decline in Alibaba shares was news last month that the company had scrapped plans to list its cloud business due to U.S. restrictions on exports of advanced chips to China.

Alibaba in March had announced a massive restructuring into six units, paving the way for individual stock listings, especially for its cloud business.
Wu became acting chairman and CEO of Alibaba’s Cloud Intelligence Group in September after Zhang abruptly left the business unit.
“Eddie’s leadership of both Alibaba Cloud and [Taobao and Tmall Group] will ensure total focus on, and significant and sustained investment in, our two core businesses of cloud computing and e-commerce, as well as enabling TTG to transform through technology innovation,” Tsai’s letter said.
“Soon, we will empower a new cohort of management leaders who have developed fundamental skillsets and experience from the bottom up.”
Dai “accomplished” the company’s mission regarding Taobao and Tmall, and her new role in the asset management company would allow her to “play to her strengths,” the letter said.
During Alibaba’s latest earnings call in mid-November, the company said it planned to monetize its non-core assets and noted it had $67 billion on its balance sheet in equity securities and other investments.
Tsai’s letter did not provide details on those non-core assets. More

The number of “accredited” investors swelled to 24 million in 2022, the SEC said. That’s 8 million more than in 2019, and the number is poised to keep growing.
Accredited investors can buy private securities such as private equity, hedge funds and venture capital funds. They generally meet financial requirements tied to net worth or annual income.
Private investments used to be earmarked for roughly the top 2%. Now, about 1 in 5 households can buy them.

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Inflation has given millions of people new access to certain investments earmarked for the wealthy — and consumer advocates argue that’s not a good thing.
Americans must generally be “accredited” to invest in private companies and investments such as private equity and hedge funds.

That accredited status is a consumer protection issue: To qualify, households must meet certain requirements — like a minimum net worth or annual income — which helps ensure they’re financially sophisticated and can sustain the risk of loss from private investments.
Over 24 million U.S. households — about 18.5% of them — qualified as accredited investors in 2022, the Securities and Exchange Commission said in a report issued Friday.
That’s an increase of about 8 million households from 2019, the last year for which the SEC published an estimate. That year, 13% of households qualified.
The increase is “largely due to” inflation, the SEC said.

How inflation affects accredited investor ranks

Individuals can generally become accredited by having a $200,000 annual earned income, or $300,000 for married couples. Individuals or couples can also qualify with a total $1 million net worth, not including the value of their primary residence.

However, those financial thresholds aren’t pegged to inflation. They stay the same even as wealth and incomes naturally grow over time — meaning more people have gradually become accredited over the years.
Indeed, the thresholds haven’t changed since their creation in the early 1980s. In 1983, just 1.5 million households — 1.8% — qualified as accredited investors, according to SEC data.

Most Americans will join the ranks of accredited investors in coming decades if the financial thresholds remain unmoored from inflation: By 2052, nearly 119 million households would qualify — or about 66% of them, the SEC said.
“The pool keeps increasing,” said Micah Hauptman, director of investor protection at the Consumer Federation of America, a consumer advocacy group. “If we don’t do anything, the standard will be rendered meaningless.”
If the financial standards had been indexed to inflation since the 1980s, a married household would need a roughly $3 million net worth or a $911,352 joint income to be accredited in 2022, the SEC said. Just 5.7% of households — about 7.4 million — would qualify, according to its data.
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The difference between public and private investments

Private investments differ from their publicly available counterparts.
Public investments include ones with which most households are familiar, such as the stocks and funds available for purchase on a stock exchange. Generally, anyone can buy them.
Private investments let people invest in companies that aren’t listed on a public exchange.
Some argue that private investments should be available to a broader pool of investors due to benefits such as higher average returns.
Private equity returns, for example, have outperformed the S&P 500 stock index by 1% to 5% on an annualized basis since 2009, according to a 2021 report by Michael Cembalest, chair of market and investment strategy for J.P. Morgan Asset & Wealth Management.

Others argue that private markets are less transparent, with information about companies and funds less readily available to many investors, and carry additional risks.
“Without information, you have no ability to value the company to make an informed investment decision,” Hauptman said. “You’re investing blind.”
Private investments are also generally illiquid, and investors should be prepared to lock up their money for maybe 10 years in some cases, said Paul Auslander, a certified financial planner and director of financial planning at ProVise Management Group in Clearwater, Florida. That longer holding period could make them riskier for some investors, he said.
“It’s like any other investment,” Auslander said. “You have to read the fine print and make sure you know what you’re investing in.”

Shift away from pensions helps investors qualify

Aside from inflation, trends like the move toward 401(k) plans and away from pensions have contributed to the swelling ranks of accredited investors over time, according to the SEC.
About 85 million people actively participated in 401(k)-type plans in 2020, about three times the number in 1982, the SEC said. Such private retirement savings is included in calculations of net worth.

The pool keeps increasing. If we don’t do anything, the standard will be rendered meaningless.

Micah Hauptman
director of investor protection at the Consumer Federation of America

The shift from pensions may have also “created investor protection considerations” that weren’t present in the early 1980s, according to the SEC. That’s because the responsibility for investment decision-making shifts from employers to individuals, who may lack the experience to appropriately manage investment risk, the SEC said.
There would be about 5 million fewer accredited investors in 2022 if retirement savings were omitted from the net-worth calculation, the SEC said. More