While serving as a student manager for the men’s basketball team at Indiana University, I learned a lot from Coach Bob Knight. Many of those lessons can be applied to the financial industry, and I’ve written about a few before. Today, as we’re on the cusp of what could be a game-changer for our industry, I wanted to share another.
Once, during a practice, a star player took an open three-point shot and missed. Like most long shots, it resulted in a long rebound and a fast break for the opponents. That’s embarrassing enough, but, to make matters worse, the player (like many college athletes) stopped and hung his head. His delayed reaction gave his opponents an advantage on the fast break, resulting in a layup.
Coach Knight immediately stopped practice. “What just happened?” he asked. Well first of all, the shot was missed for a variety of reasons. But, that was in the past – there was nothing the play could have done to change the shot after it left his hands. He could have reacted to the rebound, however.
You see, after a missed shot, the shooter actually has an advantage – more than anyone else on the court, he has the best feel for where the rebound is heading. If he’s paying attention, he can get in position to stop the ensuing fast break. Unfortunately, if he chooses to dwell on his missed shot, even for a second, it can result in an easy bucket for the other team. And we know one bucket can win or lose a game.
Today, our industry is in the same position as a player who misses a long shot. Over the last several years, we have successfully fought several pieces of legislation that would have affected the annuity industry. However, with the pending U.S. Department of Labor (DOL) ruling, it appears more likely than not that we will be required to maintain a fiduciary standard for every qualified client.
Sure, there will be litigation and other efforts to change the DOL’s proposed ruling, but it’s a long shot (pun intended). Regardless, it’s clear we will need to change in the annuity industry.
That’s OK. We can’t hang our heads for a split second, allowing litigators to attack our individual businesses under the fiduciary rule. Instead, we have to get back on defense and get ready for the next possession.
Defense means changing how we DOCUMENT business, not how we DO business. I’ve heard many financial planners planning to discontinue the use of certain financial vehicles because of the commission structure. But if a product or service is in the best interest of a client, we should be obligated implement the recommendation, regardless of our compensation structure.
We simply have to explain how the product works and how we get paid. Our clients want us to succeed as much as we do They will understand the need for compensation if they understand how the product benefits them and their financial situation. Once we document and explain, we can move toward implementation – which means we’re back on offense.
Don’t hang your head and let regulation and changes to the industry affect how you do business. Get to the next possession so you can continue to help your clients.
Annuities and Sports: What I learned from Coach Knight: http://www.ashbrokerage.com/blog/annuities/annuities-and-sports-what-i-learned-from-coach-knight/
Mike McGlothlin is the Executive Vice President of Annuities at Ash Brokerage. His strength is helping advisors become more efficient and effective in their businesses. He and his team provide income-planning solutions focused on longevity and tax efficiency, and they also assist advisors with entering defined-benefit termination planning and structured settlement markets.
How important is guaranteed income? Ask any retiree or near-retiree, or read most any survey about concerns in retirement, and the most common fear is running out of money. Financial planners must consider what assets are available and what tools they have available to create and generate guaranteed, lifetime income.
Today, one tool often used in financial plans is an annuity with an income rider. An income rider guarantees an income payment for the life of the insured, and can even be set up to guarantee income payments for the insured’s spouse. Clients may even have the option for increasing income payments under some annuity contracts.
Here’s how it works: The average payout factor at age 70 is 5 percent. If your income base amount is $200,000, then the resulting payout is $10,000. In most cases, this would be the amount the insured would be guaranteed on an annual basis for their lifetime.
With an increasing income payment option, when there is any interest credited to the annuity, the insurance company increases the last annual payment amount by the interest earned, expressed as a percentage. Say your annual income payment was $10,000; however in the last contract year, you earned 4 percent in interest. The insurance company would then increase your lifetime annual income payment to $10,400. Choosing this option would help you keep pace with inflation, and potentially help you offset higher health care and other costs.
The Bottom Line: Guaranteed lifetime income is important to many of your clients. Show them options with annuities and income riders.
Today’s income riders available with fixed indexed annuities (FIAs) have evolved tremendously over the past several years, based upon what clients want, as well as what they need. Ten years ago, clients had to turn to variable annuities if they wanted a compelling income rider, but insurance companies have heard clients’ demands and have stepped up to deliver.
Clients want guarantees, flexibility, liquidity and control. Not every income rider or annuity has all four components, but you can customize an annuity plan based on your client’s personal priorities.
Let’s discuss guarantees, flexibility, liquidity and control. FIAs always have a guarantee on the downside, and now a rider may be added to guarantee that a client will never run out of income. These are not annuitized riders, they are guaranteed minimum withdraw benefits. Yes, if the contract value does go to zero, there is no cash value left, but the income continues until death of the client(s).
This approach also gives the client much more flexibility in how they receive the income and take the withdrawals. The withdrawals may be stopped and started, and in some cases, the deferral will go back into the contract or be held in a separate “bucket” for future use. This may be useful from a tax liability standpoint if a client is close to moving into a higher bracket.
Because the withdrawals are not annuitized and the client can turn them on or off, this also gives them control. It enables them to maintain contract value for a longer period of time if the value does start to decline and they do not wish to take all of the income available. The degree of control varies between carriers – some allow the income to start immediately while some require at least a year of waiting and also restrict the client as to when they can turn on the rider (anniversary date only or daily rollup).
All insurance companies reward clients who wait by offering rollups and/or age-based withdrawal factors. Find out when and how the client plans to use the rider, and we will find the best fit.
Most annuities have more-than-adequate liquidity provisions as well. With FIAs, it is generally 10 percent – this is either 10 percent of the premium or contract value. If it is the contract value, the client usually must wait a year. Some carriers even allow withdrawals without triggering the income rider.
The best recommendation I can make is to ask your client what they feel is most important. When do they want to start taking income? How much flexibility do they want with those withdrawals?
The Bottom Line: Know your clients and their hot buttons – drill down and find the best match for them. It may even make sense to split your client’s funds between two carriers, based on what they are trying to achieve.
We all know annuities are a great solution for retirement. But have you ever considered annuities as a retirement solution for businesses? If you’re working with business owners and executive-level clients, ask if their company has a defined benefit pension plan.
Why? Traditional pension plans have become a thing of past as 401(k) and other contributory plans have overtaken the retirement landscape. As a result, many businesses have decided to do two things:
Here’s how it works: Businesses with a defined benefit pension plan can remove plan liabilities from their books by transferring the risk to a group annuity issued by a top-rated insurance company. This transfer allows the company to eliminate premiums paid to the Pension Benefit Guaranty Corporation along with significant cost savings in the plan administration. These cost savings can be reinvested in their business. Most importantly, the transfer allows the company to make good on the benefit promises made to their employees.
Plan participants benefit from the transfer because it ensures payment of the plan benefits promised to them at retirement that may include guaranteed income, the ability to provide ongoing income for a joint annuitant, and options such as payment frequency or cost-of-living adjustments.
You don’t have to be an expert to help your business clients execute this unique solution – Ash Brokerage has a dedicated team who can do it for you. You should call us – (800) 589-3000 – to learn more or to start identifying opportunities today.
Too many advisors follow the herd to manage assets without focusing on the client need. This behavior leads us to overlook solutions that clients desire and that will add value to the client/advisor relationship. If we look at products in a different light, we might see new avenues to enhance our clients' portfolios and solve one of their biggest uncertainties - retirement.
Advisors continually tell me that they don't want to lock up their clients' assets with annuities, and advisors tell me their clients don't like all the fees. In a recent survey, 91 percent of annuity owners had positive or neutral impressions of them. When you dig deeper into the survey, you find that 70 percent of annuity owners say the annuity's expenses are worth the benefits they are receiving from it.
Financial professionals need to present annuities to their clients. Nearly 40 percent of the people surveyed who did not own an annuity indicated they would consider buying one but have not been presented the opportunity to do so by their financial professional. This opens a large opportunity to have a meaningful discussion with pre-retirees and prospects about the benefits of re-positioning a portion of their assets into annuities.
Liquidity remains a hurdle for many advisors. It's important to position the correct amount of assets into an annuity when working with clients. However, the same study found 78 percent of people who own annuities are satisfied with the access to their money. More importantly, many new immediate annuities provide liquidity features that allow as much as 90 percent of the period certain to be provided in a lump sum to the annuitant. These features provide ample opportunity for the advisor and client to be flexible in retirement planning.
Regardless of your view on annuities, it's time to have a quality conversation with your distributor on the new generation of annuities. You don't know what you don't know until look at things differently.
1 The Future of Retirement Income Study, Putting your clients in control of their future; page 6, Genworth, 10/9/213
2 The Future of Retirement Income Study, Putting your clients in control of their future; page 5, Genworth, 10/9/2013
3 The Future of Retirement Income Study, Putting your clients in control of their future; page 5, Genworth, 10/9/213
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