Today's advisors continue to be bombarded with negative headlines about fixed income solutions. The media harps on the low interest rate environment to the point that advisors and clients fear making a mistake on timing, resulting in lost opportunity. Reality is, standing on the sidelines is the true lost opportunity.
What needs to happen for the industry to grasp that we are closer to normal long-term interest rates than we are to low ones? The historical average during the entire 20th century was 4.9 percent. Looking at the past 50 years, the average on the first 25 years was 3.3 percent, and it rifled upward during the late ’70s and early ’80s. The average for the second half of the period averaged only 6.7 percent – double the average in a period that included 15 percent interest and inflation rates. Today, long bonds have yields around 3.5 percent. Clearly, we are closer to normal than many would like us to believe.
It's time to reset expectations. Today's interest rates remain in line with the amount of risk taken. For clients who want zero risk, fixed annuities and fixed indexed annuities are a great alternative. And, in the unlikely event of skyrocketing rates in the next year, annuities provide a shelter for price depreciation. Let's have meaningful conversations with our clients about the virtue of annuities in our "new normal."
Annuity Awareness should be an ongoing initiative for our industry – not just a focus in June. I read article after article about the complexities of annuities; however, when we explain to clients that annuities provide guarantees, protection from outliving their income and tax advantages, they easily understand. Advisors who engage their clients in annuity discussions get ahead of the game for several reasons.
In our industry, we spend a lot of time talking about the interest rate environment, regulation, compliance and product training. Regardless of the challenges and perceived impediments, the future holds unlimited possibilities. Americans need our services and products at unprecedented levels. It's up to us to help them.
Make yourself aware of all the opportunities. Once you consider them, you can't help but want to talk about using annuities to positively change a person's retirement.
National Annuity Awareness Month spotlights the need to for a financial vehicle that provides abundant client value and creates predictable income, but comes at the highest level of scrutiny. In June, we need to focus on the real benefits of annuities and maximizing those benefits for our clients.
Tax-deferred growth: With increased tax rates as high as 39.6 percent, it has never been more important to protect the growth of non-qualified savings. At a 3 percent growth factor, a $100,000 account would grow to $134,391 over 10 years. In a taxable account, taxes would account for $14,719. That’s $1,400 per year, which will make a significant difference for many Americans.
Alternative income: The average IRA balance at the end of 2012 surged to $81,100, according to a Fidelity Investments analysis of nearly 7 million IRA accounts. For today’s near retiree, the reality is that they do not have enough assets to live a comfortable retirement on interest only. We must look at vehicles that provide guaranteed income for basic living expenses. Annuities are the only vehicle that can provide lifetime income and longevity credits to increase payouts.
Peace of mind: More people are afraid of running out of money than they are of public speaking or dying in a plane crash. The year a person runs out of money is not their worst fear, however. It’s the months and years leading up to a zero balance that they fear the most. Retirees and their families experience a lot of anxiety knowing their income will diminish and their lifestyle will dramatically change. With a guaranteed stream of income, annuities can provide peace of mind like no other vehicle.
Safety: Annuities continue to be backed by an industry that has not defaulted on its clients. Even through the Great Depression, clients remained whole with the protections of our industry and its state insurance protection. In turbulent times, and uncertainty with interest rates, annuities continue to provide more value to clients than comparable no-risk investments.
Many public pundits continue to question the value of annuities, focusing on cost. Instead, our industry needs to turn the conversation to value. We need to focus on delivering solutions to clients needing guaranteed income, safe investments and tax-efficient distributions. Annuities are a great solution for many Americans.
How many of your clients have asked if you think this market is due for a correction? Who is more concerned about it – your clients or you? I’m not saying that the party is over on Wall Street, but I do know the bears haven’t eaten in a long time.
My point is this: Every day that we let go by without taking some part of our clients’ gains off the table, the greater we are multiplying their risk. Yes, multiplying! Adding risk occurs when we change their asset allocation to a more aggressive mix. Multiplying risk occurs when we stack or compound risk factors, such as a market that hasn’t retraced gains in nearly five years with P/E’s nearing the range of the 1987 crash, coupled to an economy with the lowest employment rate in 39 years and a bond market that mirrors Japan’s 20 years ago.
I’m sure some of you will accuse me of fear mongering. That’s what those FIA guys do, right? Except I also wholesale three VA’s and a mutual fund family, and I have a Series 24.
So how do I suggest we proceed? I thought you’d never ask! To help take your clients’ gains off the table, Ash Brokerage has four distinctly different alternatives, one of which looks and feels a lot like a balanced fund with no downside risk. Please call us for ideas to help your clients avoid being bitten by the hungry bears.
Way back in the dark ages (pre-Internet), nearly 30 years ago, I earned my bachelor’s degree in psychology. Throughout my sales career, it has been enlightening and affirming to observe just how much of what we feel, believe and perceive is governed by our emotions. The investor experience is wrought with visceral emotion, much to the chagrin of those who do not seek any professional guidance. Human nature compels us to buy high and sell low.
When I studied for my licenses, I took batteries of tests, studying many terms and investment scenarios. Nowhere was there any mention of controlling investor emotions and expectations. As an advisor, you have to control two powerful client emotions: fear and greed. The overall strong 2013 stock market is a recent example, as some clients are now expecting higher returns and overall portfolio performance.
Now more than ever, it is important that you manage your clients’ expectations, along with their fear and greed. Fixed Index Annuities (also known as Equity Index Annuities) may be a great part of your clients’ portfolios, and they may address all three of these challenges.
Fixed Index Annuities remove fear from the equation with their downside protection. Zero is your hero when an index is way down on the anniversary date. The annual re-set creates a new starting point and upside opportunity for your client for the following year. When an index is up, you have satisfied their greed as long as you have set the proper expectations regarding the upside potential. Don’t make it complicated or confuse your client; remember that a fixed index annuity is simply a fixed annuity with a different way to credit interest.
Today’s fixed index annuity solutions have evolved tremendously from just a few years ago. Whether your clients’ require income, seek accumulation or are looking for bond alternatives and safe money vehicles, Ash Brokerage is ready to help you navigate the right course.
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