What Do You Say To Clients Who Want Safety?
“Many mutual fund investors feel theyve been slapped in the face,” says Daniel Mulheran.
“Not only did their fund values fall in 2001, but now they must pay taxes on fund dividends and capital gains,” explains the principal of Town & Country Financial Inc., Minneapolis.
Anger about that, and concern about the future, is spurring consumer demand for investments that offer “real security and less risk,” he says. “People dont want what happened in 2001 to happen again.”
This mood has been a boon to annuity sales, especially annuities containing guarantees, in recent months.
But its also stirring up a sales quandarynamely, when a client asks for a “safe” annuity, perhaps a fixed annuity, should the producer automatically sell it to the person? If not, what should the producer do?
Before looking at specific strategies, it helps first to review the prevailing trends, say experts.
“People are no longer calling to ask, why am I only getting an 85% return?” explains Donald Davis, an annuity wholesaler who is director of market initiatives for Personalized Brokerage Services in Topeka, Kansas.
“There has been a dramatic shift in expectations. Now, people are happy to get a zero return rather than a 25% drop!”
Indeed, industry sales results show that fixed annuities, equity index annuities, market value adjusted annuities, and the brand new guarantee-rich variable annuities are all selling briskly, even as sales of more traditional VAs have slowed.
People hear about financial products that have “floors,” and they come in asking for floors, points out Davis.
Some even ask for specific products, adds James Loveridge, senior vice president at IFS, a subsidiary of Western-Southern Life Assurance Company, Cincinnati, that serves financial institutions. Some come into a bank and simply ask for a product or feature theyve heard about, Loveridge says.
The dominant concern has become “getting a return of my money, not a return on my money,” adds William Lowe, senior vice president-investment products distribution at ING in the Des Moines, Iowa office.
Even high net worth clients are asking about greater predictability, says Gerald Butrimovitz, a registered principal with Associated Securities Corp. in San Francisco who specializes in the high net worth market.
“Our clients did stay fully invested” during the past 1.5 years, he allows, noting that many are sticking to their allocations. But those in Silicon Valley whose investments were highly concentrated in stocks, especially tech stocks, “have become aware of what risk actually means,” Butrimovitz continues.
Such individuals now are seeking “reassurance,” he says. “They want reassurance that the world wont come to an end, and that things will return to a normal framework in the future.”
What does “normal framework” mean to these individuals? “They want a balanced portfolio, and real rates of return above the rate of inflation, and a steady long-term rate of return,” Butrimovitz says.
Lowe sees the shift in consumer attitudes as one from greed to fear. “In the late 1990s, greed was the dominant motivator, so we saw a lot of investing in aggressive equity funds.” In fact, as recently as 2000, growth and aggressive growth were among INGs top 10 funds for new VA flows.
But now, he says, fear is the dominant emotion, and “were seeing a dramatic move to guarantees.”
This is showing up in increased sales of FAs, especially those with long-term rate guarantees; equity-index annuities; and VAs having living benefit guarantees as well as death benefit guarantees. Its also showing up in less aggressive investing, Lowe says. (For instance, in 2001, balanced and value were among the top 10 funds attracting new flows in ING VAs.)
Today, Lowe surmises, buyers are willing to give up some upside potential in order to gain comfort and security. Its like the confidence and courage people get from driving on a bridge, he says. The guardrails help the driver deal with the fear of sliding off the sides.
Demand for safety has become so pronounced that several annuity insurers recently enhanced their VAs with additional guarantees, expressly to respond to the demand.
“With this years significant market uncertainties, it became clear that we need to offer clients safety and guarantees for their investments,” explains Dewey Bushaw, senior vice president-sales in the annuities and mutual funds division of Pacific Life. The Newport Beach, Calif., insurer debuted such an enhancement as this article was being written. (It is a rider that guarantees VA purchase payments for a number of years.)
In such a market, selling clients a “safe” annuity product, like a FA, just because the clients come in asking for such products, could be a mistake, say annuity professionals.
Its not that producers shouldnt sell FA or related products to the security-minded, clarifies Peter Hill, a financial advisor at Vision Financial Group in Des Moines and a member of INGs career network. But whats needed first is client education, he says.
For instance, the newer VAs that have death benefit guarantees plus living benefit guarantees might be more suited to a certain clients needs than an FA, he says. “Most people today dont realize these enhanced VAs even exist,” Hill continues, so that might be part of the reason they arrive asking for some other type of product.
To address the issue, Hill has taken this position: “Sell the customer what the customer wants, but only after the customer has been educated.”
Right now, “were seeing a lot of rear-view mirror thinking” on the part of customers, he says. Its emotion, not logic, thats driving much of this, he contends.