In 2016 we experienced a large rise in the sale of fixed annuities. This makes some sense as we moved through an uncertain political landscape in a falling interest-rate environment ... clients were looking for safety and guarantees. However, the use of fixed indexed annuities can provide the same downside safety and produce similar, if not better, returns than a traditional fixed annuity.
Our office took a look at the past 30-year-returns of a fixed indexed annuity—using current cap rates—and compared the results from a multi-year fixed rate annuity. The results surprised me. With a 5.25 percent cap rate in years 1-4; a 5.00 percent cap rate in years 5-6; and a 4.75 percent cap rate after that, we compared the 7-year accumulation values against a 2.85 percent guaranteed return over the same period. More than 93 percent of the periods over the past 30 years resulted in a higher fixed indexed annuity value than the 2.85 percent guarantee.
When the fixed rate did exceed the FIA accumulation, the difference was only an average of $288 over the 7-year period. When the FIA’s accumulation was higher, the average gain over the fixed rate was $7,876 over the 7-year period. While the risk exists that the client may have zero interest credited during a period when the index had no gains, history tells us that there is a 93 percent chance the client will have more value with a FIA versus a fixed-rate instrument, given today’s rates.
Even better, we are seeing the use of advisory-based FIAs emerge in the market place. Due to the lack of commission built into the product, cap rates are substantially higher. However, even with a 75bps fee assumed in the analysis, there was a 100 percent historical experience that the FIA outperformed the interest rate. Too often, we look at fixed annuities or bonds to balance our equity risk or remove interest- rate risk. The FIA can provide the same downside protection and higher potential returns if the client is willing to risk the small guaranteed rate. In forgoing that guarantee, the client maintains principal protection and higher potential yields.
It’s time to relook at FIAs as a part of the portfolio and not just sell what is easy. Instead, let’s take time to educate our clients on the value and potential benefits of owning a FIA, which can provide access to downside protection, no interest rate fluctuations, guaranteed income and tax-deferred growth (assuming non-qualified assets). And, historically, your client is in a better position to earn a higher accumulation value over a typical 7-year surrender period. Take the time to look at an alternative to bonds for a portion of your clients’ portfolios.
Call Ash Brokerage for more information on our research and learn how FIAs can be a better solution for your clients’ annuity and bond needs.
Research shows that the accumulation values in FIAs have outpaced multi-year guaranteed fixed-rate annuities. Take time to look at alternatives that can better your client portfolios.
Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”
“The best ‘worst case’ alternative” – that’s how a large variable annuity producer recently described and positioned fixed-index annuities with income riders. It’s not the most ringing of endorsements – a glass-half-empty view – but it’s still extremely significant and impactful.
I would argue that a more accurate description may be, “the best ‘most probable outcome’ alternative” – a glass-almost-full view.
Whether you see the glass as half empty or half full, making the right choice between VA and FIA income riders can mean the difference between having a client whose objectives and expectations have been met OR having a client who may have to settle for less than expected – or worse.
There are three steps to making a good decision:
Positive or negative, whatever happens after the decision is made won’t change the fact that you made the best possible decision.
So, if we just look at the income rider portion of the VA or FIA choice, what are the facts you should consider to help your client make a good decision?
Next, what other factors should you consider in your decision process?
BUT … (glass half empty) if circumstances are such that your client can’t wait the planned number of years to take income, and they need access to their account values NOW, poor market performance in the VA could result in a diminished account value or even one less than the original contract deposit. This would not happen in a FIA.
In summary, a FIA provides greater guaranteed income – that can be structured to increase – as well as an account value protected from negative market performance. A VA could potentially provide a somewhat higher guaranteed income and a fluctuating account value.
So, what’s your decision? A FIA? A VA? A combination of both?
© 2018 Ash Brokerage LLC.