Annuities Have A Story To Tell Now, Producers Say

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Right now, consumers are pretty much in a holding pattern, where their annuity purchases are concerned, say producers interviewed by National Underwriter about how to position annuities in todays uncertain market.

In fact, in the wake of the September 11 terrorist attacks, consumers are pretty much in a holding pattern on finances in general, they say.

Clients are keeping cash “on the sidelines,” for instance. Theyre also holding onto stocks, annuities, and other investments they own, with few bailouts. And theyre investing little extra–other than through the asset allocation, dollar cost averaging, and rebalancing programs previously set upeven though stock prices are lower.

“Theyre holding tight on everything,” notes Ann Fenwick, owner of Fenwick Financial Service LLC, Baltimore, Md. “Some wont buy anything.”

Part of that is due to reduced portfolio values, she speculates. “If the values have dropped by 20% to 30%, people feel as if they cant afford to buy clothing, cars, vacations, or anything else.”

Fenwick also blames the constant flood of “short-term and negative media stories” about the economy. “Were bombarded daily with reports that this went down and that went down,” she says. “It makes investors feel afraid.”

But uncertainty about the future direction of the country and the economy is perhaps the biggest reason, Fenwick says. “Some people are waiting to see what President Bush will do from a defense standpoint,” she says.

“We do get some phone calls from clients about what to do,” allows Stuart H. Leaverton, an insurance broker at Custom Structured Insurance, Katy, Tx.

“But only three of my clients have asked to move their money from the stock market into a fixed product (a single premium deferred annuity). In all cases, the moves were made because clients were entering retirement, not because they were running scared.”

In fact, a number of the calls into his office have been to inquire about whether this is the best time to buynot sellstock, Leaverton says. (His answer: Look ahead five years, and if you do anything, use dollar cost averaging.)

Michael MacDonald, owner of Michael MacDonald Financial Management, Pleasant Hill, Ca., has noticed the same trend. “A lot of people understand this is a buyers market now. So more people are asking me, `Is there something I should start looking at?” (His answer: “This is a choppy market, so why not ride it out? Focus on investing, not timing the market.”)

Where do annuities fit into the holding pattern? More to the point, what can producers say to clients about annuities right now?

“We take an unbiased approach to annuities, whether fixed or variable, as compared to mutual funds,” says Leaverton. “In fact, most of our clients have money in both variable and fixed annuities.”

Some clients may now want to go to fixed annuities, to shelter money from fluctuations or because they want to annuitize, he says. But, even when they express that interest, “I always sit with the client, knee to knee, to discuss ways to manage their money.”

This is not a product sale, he said. “Think of it as selling backwards, from the clients needs and then finding the product.” He uses the approach in all markets.

For instance, if a client wants to move money from mutual funds into a fixed product, he says, “we have a long, three-hour talk.” That “talk” covers the clients time line, goals, options, risk tolerance, and whether they understand the possible results of what they want to do.

“We counsel against making rash judgmentsMy approach is to measure twice and cut once.”

Many times, he adds, “they decide to stay put. They think it will take too much time to `heal back their mutual fund losses in a fixed product.”

“The key to everything is to know your clients,” says Gregory Skrabonja, president of Investment Concepts, Franklin Lakes, N.J.

“Always keep your lines of communication open, and reinforce the message that there is no get-rich-quick method; youve got to give it time.” Now is a time to get back to basics, he stresses.

In particular, Skrabonja says, do whatever is consistent with the clients risk tolerance. And use asset allocation, portfolio diversification, and dollar cost averaging as the tools to help clients get where they want to goas you would in any market, with any product.

About the present uncertainty, “try talking to clients about market volatility and how the economy has responded to past military actions,” from the Gulf War on back, suggests MacDonald of California. “Note what markets were like 12 months later.”

He has been doing this himself, phoning clients and sending them follow up letters, since September 11. This is a planning approach to client concerns, not a product selling approach, he says.

Overwhelmingly, he says, “clients are happy I called, especially those who are nervous. They need to be assured they made the right decision, and affirmed that they are diversified and allocated appropriately to get them through this turbulent time.”

Some comments that came up in the phone calls:

Will my fixed annuity company endure? “Clients who had heard that reinsurers were affected asked this. They wondered if their own insurer would be affected, too,” MacDonald says.

Should I move my VA money into cash? “I point out that they can always do that if they choose to, and with no taxable event.” Not even one client has asked to move the money, however, “because they see they were properly allocated in the first place.”

What is the cost/benefit of VA ownership anyhow? MacDonald reminds clients of stabilizing VA features like the fixed interest account, the guaranteed death benefit, and the guaranteed income rider. A climate like todays “is a time when VAs really earn their pay,” he says.

Some clients are showing interest in moving money into long-term maturity bond funds, points out Skrabonja of New Jersey. But moving that money into a fixed annuity might be a better alternative for certain safety-minded clients, he says.

With a fixed annuity, he explains, “what you see is what you get. Your principal will never go down.” And if the money is in a good company, theres little reason to worry about defaults, he adds.

By contrast, Skrabonja says, “bond funds are harder for some clients to understand than fixed annuities. For instance, some clients dont see why the principal in a bond fund goes down, when the yield goes up.”

Bonds and Treasuries do have a place in a portfolio, he adds. But he is concerned that, if people sell stocks at todays depressed prices in order to put the money into a seemingly safer bond fund, they could end up being “hit twice,” if the bond fund later tanks.

“That could be devastating,” he says.

Hence, his approach is to advise such clients: 1) dont put all your eggs in one basket; 2) evaluate whether a fixed annuity would be better; and 3) if you need money to live on or for emergencies, put that money in the bank.

However, Skrabonja adds, “if someone advises only putting money into fixed products right now, I think it would be criminal.”

Whats essential, he insists, is diversification. “You need to have money in cash and fixed products but you also need exposure to equities.”

VAs, in particular, are a “wonderful” product for this purpose, he maintains, because they have so many internal options (investment choices, dollar cost averaging, etc.). But he cautions that VAs work best when clients have the risk tolerance for securities, a five- to 10-year time horizon, and a willingness to do asset allocation.

Fenwick, of Maryland, especially likes the newer VAs for todays market, because they have several features that provide clients greater reassurance, even in down markets. These include enhanced death benefit guarantees and term life riders.

She also likes the auto rebalancing features that many VAs now include along with asset allocation programs. Auto rebalancing, in effect, “forces” clients to sell high and buy low, she explains. Thats good, she continues, because many people wont sell high/buy low on their own and they often end up getting hurt as a result.

In general, Fenwick says, people who own VAs “feel safer and are glad about the death benefits they offer.” The fact that annuity money bypasses probate is a plus, too, she adds, “because it means a family doesnt have to wait a long time to get the money.”

For all these reasons, she says, “we have an annuity story to tell”once people start buying again.

Michael Sause, principal of Annuity Marketing Services, a Baton Rouge, La., wholesaler of variable, fixed, equity indexed and immediate annuities, couldnt agree more.

VA sales will come back when the economy rebounds, he says. But even now, it is a good time to present other annuities–in particular, EIAs.

Why EIAs? For one thing, they have a guaranteed minimum interest rate as do all fixed annuities (thus appealing to growing buyer interest in guaranteed rates of return), he says. But they also have interest crediting thats linked to performance of an equity index (thus appealing to consumer desire to benefit from upswings in equity markets).

In view of todays lower interest rates and equity index levels, Sause says, EIAs have the potential of performing better over time than traditional fixed annuities.

But he, too, favors diversification. “Position only some of the clients money in EIAs, for instance. Also, since EIA designs react differently in different market conditions, try diversifying among EIAs (say, by using both an annual reset EIA and a point-to-point EIA in the clients portfolio).

“This is a very emotional time for all of us,” Skarbonja of New Jersey concludes. But eventually, he says, a portion of the trillions of dollars now sitting on the sidelines–in savings accounts and money markets–will move into other financial products. When that happens, producers need to be ready to offer solutions.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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