Recently, I spent the weekend in Houston, Texas. Most people would not think anything of it. However, after spending the last 16-20 weeks in northern Indiana with sub-freezing temperatures, the warmth of 80-degree days and sunshine made it feel like I was in a different world. I felt recharged, re-energized and refreshed with just a small change.
It made me think about our industry. How often do we as financial advisors get in a rut and need a fresh perspective? It seems we get in the habit of making successful sales presentations based upon one product filling a general solution. Too often, I hear advisors telling my firm they do not talk about longevity planning and insurance. Can we be so selfish and concerned about our own business as to not think it is our clients’ business that we must focus on for success? Yes, I speak and write about efficiency and effectiveness in financial services offices. But it's time to make sure our clients' retirements and legacies remain effective and efficient, first and foremost.
For example, all of us have a responsibility to have a meaningful discussion with our clients about the impact of Congress' potential decision to accelerate the taxation on retirement accounts to the next generation. This might be the most destructive piece of legislation introduced, and I would guess that 90 percent of our clients are unaware of what Congress wants to do.
Clients expect leadership from their advisors. We must continue to earn their trust by having the difficult conversation that we don't want to have with them – the one about death and taxes. Positioning a client’s assets for flexibility, income and estate planning should be our focus. That means that we need a fresh perspective with every client we meet, just like the change in temperature. We must be up to date on our tax legislation, product offerings, and solutions available for unique strategies. Focusing on those aspects important to the client will ultimately define our success as an industry.
Fee drag is an under-discussed cost to many financial plans. While I do not condone the many media reports about annuities being bad for clients, I do believe advisors need to fully understand the impact of the fee structure on many of the annuities they sell. Educating clients on how fees work creates understanding and appreciation for the value they are receiving.
When comparing income riders, it is no longer enough to just compare them by cost. For example, if two riders have the same 100bps cost to provide lifetime income, those actual fees may be dramatically different. Some riders charge their fee off the income base, while others charge the fee off the actual account value. So, when the income base has grown from the $100,000 premium to the $200,000 income base, the charge for the rider has grown from $1,000 to $2,000. If you compare riders apples-to-apples, using a zero-growth period, the rider charge has become 2 percent of the premium when calculated off the income base versus staying at 1 percent when calculated off the account value.
More importantly, once that income base grows to its maximum level, the cost of the rider continues at that level. In effect, the rider has doubled the fee drag associated with the income. This adds pressure for the account to yield an additional 100bps of return to provide the same level of benefits to the beneficiaries.
Clients generally appreciate the value that annuities bring to their financial future. However, we must do a better job showing how annuities work for them, today and in the future. By looking deeper into the fee structure, we can all make better decisions for our clients. Annuities remain a long-term funding vehicle for many; therefore, we must look at the long-term impact of fees during income phases. Call Ash Brokerage to look at solutions that make sense for your clients.
By now I think it’s safe to say we’re all aware CD rates continue to sit at all-time lows. According to bankrate.com, the average five-year CD has an interest rate of 0.79 percent.
For retirees who are using the interest from a CD as income, this is very unfortunate. Through no fault of their own, their income is being reduced by as much as 75 percent as these CDs mature.
Due to this low-rate environment, many CD buyers are looking for options and are now willing to consider an annuity when they may not have in the past.
Example: Seven-year indexed annuity with an investment of $100,000
Fixed-rate strategy: 2 percent (locked in for seven years on monies initially deposited)
Performance Trigger: 4.15 percent
Clients who are considering renewing their five-year CD at 1 percent would generate $1,000 of interest annually. However, with this same $100,000, they could place $50,000 into a fixed-rate strategy to generate the same $1,000 of interest, then position the remaining $50,000 into the performance-trigger account at 4.15 percent. If the S&P 500 ends negative, the client will still earn the same $1,000 from the fixed strategy. However, if the S&P is flat or positive, they earn an extra $2,075 for the year.
An indexed annuity could be a great way to generate a significantly better return for these investors while guaranteeing protection of their principal investment.
April 3, 1998, was the first time the Dow Jones industrial average reached 9,000 points. Many people thought the index could not go much higher, while others believed in the irrational exuberance of the stock market. Regardless of what you thought at the time, the results since then point to the value of fixed indexed annuities.
At the close of business on April 3, 2014, the Dow closed at 16,572 points. The total rate of return equates to 4.14 percent over a 16-year period. If you consider the impact of capital gains on the investment, the return decreases to 3.52 percent. After assuming a 100bps investment management fee, the real rate of return is 2.52 percent. Fee and tax drag took away nearly 40 percent of the gross return.
Many advisors are telling me that the low cap environment prevents them from showing FIAs to their clients. If you consider that an index would only need to pierce a 4 percent cap 63 percent of the time to beat a 2.52 percent real rate of return, FIAs make a great choice for many clients. Considering there is no market risk associated with FIAs, the client would see a more consistent return than having been in the market over the same period.
Relatively speaking, FIAs have performed well over long periods of time against the general market, even in a low interest rate and cap rate environment. Give FIAs a look for the conservative portion of your portfolios. You might find that the FIA portion doesn't create drag in the overall return.
One of the most unique products for income planning is Temporary Life. This single-premium annuity provides an increased income stream when the client is willing to assume some of the longevity risks. If placed correctly, Temporary Life can increase your payout and enhance the overall return associated with income planning.
If you wanted to generate $9,000 a month for a male, age 70, based upon a life and 15-year certain payout; the client would need to purchase a $134,902.09 SPIA*. If the client utilized Temporary Life for 15 years, the premium needed is reduced to $100,861.92. Let's assume the difference ($34,040) is invested, and it earns a net 6 percent for the 15 years. That investment would grow to $81,579.24 by the end of the 15th year.
If you had deposited the full $134,902, taken $9,000 annually and ended with $81,579 as an account balance, the gross return is 4.81 percent. More importantly, you would have to find an income rider generating a 6.67 percent payout to match the annual income.
In this case, Temporary Life has taken the client to near life expectancy with a substantially higher annual income. The unused premium creates a side fund to use for emergencies or for additional income at age 85. It's easy to look at variable annuities with income riders for solutions, but there are alternatives that can provide clients more options, flexibility and better benefits. Call Ash Brokerage for alternatives in your next income planning case.
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