“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?
I’m often asked where advisors are finding client funds for fixed and indexed annuities in our current economic environment. In my opinion, most annuity sales are coming from three sources: equities, banks or bonds.
As financial markets reflect increasing volatility, more and more advisors are suggesting that their clients take some of their gains from the last few years off the table. Clients are increasingly open to the idea of protecting their gains by moving some of their equity assets into guaranteed products such as fixed and indexed annuities. Investors who, during the past 14 years, patiently stayed in the market through two severe corrections, are anxious to protect themselves against another potential downturn.
I think banks are the most obvious source of annuity funding. With consumer deposit rates hovering at historic lows for more than five years, clients who’ve been waiting for higher rates are running out of patience. The quest for a higher return without principal fluctuation risk lends itself naturally to fixed and indexed annuities.
In bonds and bond funds, there’s an entire generation of investors who’ve never experienced a prolonged bear market. As advisors are looking at their clients’ asset allocations, many are looking for bond and bond fund alternatives that are not subject to principal deterioration if rates start to rise. Again, fixed and indexed annuities are often the best solution.
You should take a fresh look at your practice’s current client files. Chances are, annuity sales are waiting to be uncovered. Ash Brokerage is here to help you choose the appropriate fixed or indexed annuity for all your clients’ needs.
Annuity sales typically fit into one of three categories: accumulation, distribution or wealth transfer. However, with the rise in the importance of retirement income planning and all of the income riders now available, there is another category: transition.
Individuals who are 5-10 years from retirement are usually considered to be in the transition phase. These clients have a few more years to invest for growth before they need to start their retirement income stream.
Think about this hypothetical client:
Assuming a 9.2 percent compound rate of return, in five years the variable annuity would be worth $155,000. At a 4.5 percent payout rate, it would generate a lifetime income of $7,000 annually.
Now, take the same client and invest his $100,000 in an indexed annuity with a lifetime income rider. This client could be better off because even in a Doomsday scenario the indexed annuity should perform at least equal to the variable annuity, while keeping the charges much lower than traditional VA fees and expenses.
With so many income rider options available on indexed annuities today, it can sometimes be a challenge to determine which rider is the best choice for your clients in transition. At Ash Brokerage, we take great pride in the fact we are one of the largest independently owned marketing organizations in the country and always work to make sure we are recommending the product that is most suitable for each situation.
In today's current interest rate environment, have you ever wondered what it would take to generate $10,000 in annual income?
According to BankRate.com, the current national averages on one-year and five-year CDs are .23 percent and .78 percent, respectively. The highest rates are 1.10 percent on a one-year CD and 2.30 percent on a five-year CD. The 10-year treasury is approximately 2.58 percent.
At those yields, this is what a lump-sum deposit would have to be to get $10,000 a year in annual income:
With an indexed annuity, executing the guaranteed income rider after one year, a 65-year-old client would only need a deposit of $166,800 to generate the same $10,000 a year in annual income.
With so many investment options, an indexed annuity with an income rider may be a good solution for your clients to help them overcome this low interest rate environment.
Many articles and news reports have covered the Federal Reserve's concern about the apparent investor complacency bubble. Based on the market, I believe it to be a legitimate concern. We have higher than normal price-to-earnings ratios and all-time market highs, and the annuity industry is similar to that of the pre-financial crisis.
Given that the normal P/E ratio is around 16 for the S&P 500, we are approximately 20 percent overvalued in the stock market. When you look at the Baby Boomers, how many can sustain their standard of living if their retirement assets decreased by 20 percent in the next 90 days? My guess is many would suffer a nearly unrecoverable decrease in their standard of living.
More importantly, what is the psychological effect on those pre-retirees who have been battling to get back to their pre-financial crisis retirement accumulation? This generation has spent the last decade pushing a large boulder up the hill. Boomers have felt the impact of 9/11, the technology bubble, the financial crisis and now an apparent complacency bubble. Why would we let our clients continue to make the same mistakes?
It's time we stop waiting for interest rates to increase or for there to be a "better deal." Doing nothing only perpetuates the risk that is already being taken. If we don't protect our clients’ assets and wealth, they’re likely to repeat the same errors over and over again. Let's get off the merry-go-round and help them.
You should ask for meetings with your top clients to talk about taking their risk off the table and protecting their wealth. If you don't, someone else might do it for you.
© 2018 Ash Brokerage LLC.