Annuities

What Fiduciary Should Mean to You


Annuities

As the NCAA tournament unfolds, many people have been asking me about my experience at Indiana University during our run to the national championship. Frequently, I get asked how it felt to be on the bench during a game played in front of 70,000-plus people. Was it easy to stay focused on the game? How did the players maintain their poise? And, the pressure must have been intense, right? 

Well, I’ll tell you. When you are “in the moment,” all the distractions seem to vanish or become far away from your focus. Even 70,000 people at high decibels won’t faze a high level athlete. You tend to be focused on the task at hand and the execution of the game plan in order to succeed. 

At the end of the day, that’s the same philosophy we need to have when it comes to our clients. If we are solely focused on our clients, we will not be distracted by factors that cause us to stray from our mission: securing the finances for our clients.   

The discussions around the fiduciary standards heats up and cools down. However, if we are truly “in the moment” with our clients, we have nothing to fear. It’s when we focus on our business model that we become incongruent with our clients’ needs and objectives. As financial professionals, staying focused on our clients and aligning our recommendations with them in mind keeps us within the fiduciary standard. Fiduciary is not a business model but a way of doing business.  

I encourage financial professionals to not be afraid of the fiduciary standard but embrace it. If we really are acting in the best interests of our clients, we won’t see a day-to-day change in the way we do business. It’s important for our broker-dealers and institutions to understand the proposed standards don’t require us to do business differently. True professionals, successful professionals, already conduct themselves in this manner.  

The Bottom Line: Fiduciary is not a business model. It’s a level of conduct where we focus on our client.  Many of us are already there.  

 

Are You Limiting Your Clients’ Potential?


Annuities

At the moment, the average seven-year fixed annuity is yielding right around 2.5 percent. To CD consumers, this rate sounds surprisingly appealing. In my experience, I feel that far too many advisors and their clients set their eyes on a fixed, multi-year guarantee annuity as being the one and only alternative to CDs and/or other investment vehicles for money they want to keep protected. Fixed indexed annuities are overlooked, even though they provide the exact same principal protection while offering the potential for gains in the neighborhood of 5 percent.

Let’s look at some facts …

  • In the last 30 years, the S&P 500 has had positive growth 24 times 
  • Out of those 24 years, growth has been 5% or more 18 times
  • Conclusion: The S&P 500 has seen growth of 5% or more 18 out of the last 30 years (60%) – this is an important statistic, so please keep it in mind

A conservative consumer may feel comfortable earning a 2.5 percent fixed rate on their money for seven years. However, the facts above support an indexed annuity’s propensity to outperform a traditional fixed annuity over time. 

Here’s why: Assuming premium of $100,000, a traditional seven-year fixed annuity with an annual yield of 2.50 percent will result in an ending value of $118,869. No more, no less. Currently, our best seven-year fixed indexed annuity annual point-to-point cap (S&P 500) for a $100,000 premium is 5 percent. According to the facts stated earlier, the S&P 500 has seen growth of 5 percent or more 18 out of the last 30 years, which is 60 percent. 

So, if the seven-year indexed annuity lives up to expectations and performs at this 60 percent average, we’d be looking at hitting the 5 percent cap four out of seven years. This would equate to an ending value of $121,551 – earning the client an additional $2,600 more than the fixed annuity. 

Of course, we can’t guarantee the indexed annuity’s performance, but one argument for an indexed annuity over a fixed annuity is potential. If we hit the annual cap five out of seven years, this will result in an additional $8,700 more than the fixed annuity. Hitting the cap seven out of seven years will give them an additional $21,800. 

The Bottom Line: I challenge you to take the time to analyze the facts and benefits behind a fixed indexed annuity. If you aren’t talking about them with your clients, someone else will. 

The Right Tool for the Job


Annuities

I’m not the handiest person around, so it’s no surprise I don’t enjoy fixing things around the house. When I do tackle a project however, the experience is completely different when I have the right tool instead of using something that just gets the job done. The right size socket as opposed to an adjustable wrench, for example.

When it comes to your clients, helping them select the best options on a fixed indexed annuity (FIA) can make it the right tool for retirement income.

We all know that over a longer time horizon you will achieve better returns in the stock market, which makes variable annuities (VAs) with subaccounts attractive to many clients. During the accumulation phase of building up your portfolio, VAs are an attractive piece of the puzzle. However, coming down the stretch or at the beginning of the withdrawal period, there are several things that work against the variable model and favor a fixed indexed option.   

First, we all know that an ill-timed negative year can have a major impact on the value of the account. An FIA takes the negative year off the table. Are you giving up the potential for a larger gain? Yes, but if your client no longer has the time horizon to weather a double-digit negative year, it’s a small price to pay. If you’re saying, “That’s why we have a roll-up and a guaranteed lifetime withdrawal benefit,” I agree.   

Fees

The fees in the VA are going to be higher than the FIA. The rider fee may be similar, but when you factor in mortality and expense fees, as well as administration and investment fees, your VA could be charging you 3 percent, 3.5 percent or even more. An FIA will limit your fees to somewhere around 1 percent annually. In distribution, fees become even more critical to your portfolio. If you’re taking a 5 percent lifetime distribution and being charged 3 percent per year, are you going to have greater than 8 percent annual returns? If you’re using the income rider, does it allow for a portfolio that can generate that type of return, or does it give you limited investment options associated with the rider? I think you would have to agree that your VA is no longer an accumulation vehicle.  

Sequence of Returns

Just as important as the fees is the sequence of returns. If you’re arguing that you are using the VA to maintain an account value or grow the asset during distribution, a double-digit negative year can make than prospect almost impossible. Obviously, a repeat of 2008 would be devastating to any allocation, but even during the early years of distribution, a 15 percent decrease would be difficult to overcome. Add in the fees, and what would it take to see an increase in income or maintain your account value?

Fixed Indexed Advantages

Now that we are looking for an annuity that works as a distribution tool, why is an FIA a better option?  FIA offer your clients:

  • Higher rollup rates than you will find in VAs, which allow for greater guaranteed income potential
  • Higher distribution rates, which allow for higher guaranteed payments in retirement
  • Increasing payout options that aren’t tied to the account value, eclipsing the income value
  • Fees only associated with the benefit of having a guaranteed income that you cannot outlive
  • No negative performance impacts to the account 

 

The Bottom Line: An FIA can be the right tool for the income portion of your client’s annuity portfolio. The right product and rider can be an efficient income generator to meet their income needs for a lifetime.

 

Fixed Annuities

Help Minimize the Impact of RMDs


Annuities

Who would’ve ever guessed that one day we’d be saying, “I may actually live longer than expected”? It’s true – we’re actually living longer! According to data compiled by the Social Security Administration:

  • A man reaching age 65 today can expect to live, on average, until age 84.3
  • A woman turning age 65 today can expect to live, on average, until age 86.6*

Those are just averages – the SSA also reports about one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

Since we can expect to live longer, then we need to help our clients’ retirement funds live longer as well. QLACs (Qualified Longevity Annuity Contracts) are one new option to help ensure your clients don’t outlive their income. These long-term investments designed for retirement income planning are a contract between your client and an insurance company. Though annuities are not new, QLACs were only introduced to the market last year. 

On July 1, 2014, the U.S. Department of Treasury and IRS issued the final rules regarding deferred income annuities (DIAs), thereby deeming longevity annuities that meet specific requirements QLACs. Like all annuities, QLACs help retirees plan for their retirement by using a portion of their savings to purchase a guaranteed income stream. This income stream is backed by the financial strength and claims-paying ability of the issuing insurance company. With QLACs, however, this income stream begins much later in life. 

By purchasing a QLAC, retirees can reduce their RMDs (required minimum distributions) by up to 25 percent (a maximum of $125,000) and not have to take distribution on those funds until later (up through age 85). This is not ideal for all clients, but it's a good opportunity for clients who aren't using their RMDs for necessary income. 

Carriers had to create specialty DIAs to meet QLAC guidelines. They started rolling out products at the end of 2014 - more are likely coming soon. 

The Bottom Line: As your clients approach retirement and their life expectancies increase, QLACs can help them hedge the risk of outliving their retirement income. Contact your Ash Brokerage annuity team for information explaining this new offering. 


 *March 1, 2015: "SSA Calculators: Life Expectancy," http://www.ssa.gov/planners/lifeexpectancy.htm

For financial professional use only. Not for use with general public. #E1503-591 Rev. 3/15

Sweeping Gains Off The Table


Annuities

Over the last five and half years, we’ve seen a 192 percent increase in a bull market … it’s been a nice ride! However, the average bull market only last four years. Are your clients ready for the next big market change? 

Even the experts aren’t sure how long this performance will last, and our clients are more uncertain than ever about when they will retire. Worker confidence is down 43 percent. With only 19 percent of them having some type of pension outside of Social Security, many are concerned with their accounts taking any losses ... and having enough time to make up with gains.

Now more than ever, clients want the flexibility to turn on income whenever they need … and not be locked in. 

Of the 76.4 million baby boomers, the oldest are currently in their 60s, and the youngest are entering their 50s. That puts the median age at 57, and we’re finding that 50 percent of retirees are retiring sooner than expected.

So, if a 57-year-old client is still looking to retire age 65, they have about eight years left. But in reality, the average retirement age is closer to 62, so they would only have about five years left. Maybe it’s time to start looking at age-based, in-service withdrawals. Now might be the time to sweep their gains off the table, locking them in and eliminating risk to their principal.

We’ve got to ask ourselves: What are the ramifications for staying at the party too long? Do these baby boomers have time to make up for any market losses? What would it take to get back to even? Based off where we are in the market now, where are we going next.

With a fixed indexed annuity, a client near retirement can protect a portion of their portfolio from downturns and still participate in gains. When the market is up, interest is locked in and account value is intact with any growth that might have been credited – not capturing 100 percent of the gain, but protecting the loss to principal when the market goes backwards. Even if the market would be down every year, with a fixed indexed annuity, there still is a minimum guarantee somewhere close to 1 percent.

The Bottom Line: Now is the time to sweep gains off the table and reduce portfolio volatility. Talk to your clients now – you never know when the bull market will end. 

bull market