Financial Advisor
Annuities During Economic Uncertainty
In March, a survey of people between the ages of 61 and 65 found that those who have secured guaranteed retirement income were less likely to alter strategies (or their portfolios) during the current market volatility. That doesn’t mean they weren’t worried.
“Though 61% said they’re concerned about the volatility, those with pensions or annuities—that is, protected lifetime income—were far more at ease and aren’t making changes to their portfolios,” says Mike Harris, senior education advisor at the Alliance for Lifetime Income, which conducted the study.
But are they right? Shouldn’t advisors be telling them to stay the course?
“This is great advice for clients with longer investment horizons who have the ability to endure market cycles, to delay retirement or start saving more, but not all clients have those luxuries,” says David Lau, founder and CEO of DPL Financial Partners in Louisville, Ky., which works with RIAs to identify low-cost, commission-free annuities and life insurance products. “For someone retiring into this market where they may have seen their assets drop by 30%, the impact is devasting to their financial plan.”
The Dangers Of Investment-Only Portfolios
It’s especially devastating, of course, for clients with investment-only portfolios. Lau says many advisors have pushed clients into risky income-generating investments to counter the low interest rates of traditional retirement income generators such as Treasurys and “AAA” corporate bonds. “So when we experience a market event like we are today, retirees’ portfolios are impacted like never before,” he argues.
Protected lifetime income can be a better solution. Since pensions are rarer and rarer these days, annuities are the primary source for such income. But some advisors may be having a hard time convincing clients of the virtue of annuities.
Graham Day, Raleigh, N.C.-based managing director of individual retirement at insurance and annuities provider Equitable, says those who have protected retirement income are “less likely to sell low or stay out of the market [and] potentially miss a rebound. Protection is valuable when it comes to weathering economic volatility or prolonged uncertainty like we are experiencing today.”
Eric Henderson, Columbus, Ohio-based president of Nationwide Annuity, adds that variable annuities can “give investors greater confidence to stay in the market for the long term. This helps them stay invested over time—rather than trying to time the market.” Because of their built-in guarantees, he adds, annuities are made for risk-averse clients. “Skittish investors [who have annuities] may have the confidence to keep more money in the stock market. That’s the appeal.”
A Bigger Menu Of Annuity Options
To get more clients to consider annuities, many carriers are offering an ever-growing array of options. Two of the most significant product developments of recent years have been structured or buffered variable annuities (sometimes called registered index-linked annuities, or RILAs) and fixed-indexed annuities (FIAs).
Registered index-linked annuities work like this: Say the annuity is linked to the performance of the S&P 500, and has a 10% upside and downside cap. If the S&P 500 rises 7% in one year, the investor gets the whole gain. But if it rises 15%, he or she only gets the first 10% of that gain because of the upside cap. On the other hand, if the index falls by 10%, the client loses nothing. But if it falls 12%, the client would lose just 2% because the insurance company would absorb the first 10% of losses.