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.

Producers will best serve clients by taking a forward-looking, or logical, approach, he contends.

For instance, when clients voice market concerns and preferences for safe products, he often explores their reasons. Hill asks them several questions such as: “Why is it you are afraid of the market now?” Or, “Would you rather buy high and sell low, or the other way around?” Or, “Do you want to insure this money or not? You dont have to, but you might want to.”

He uses their answers as a starting point for educating the client, fact finding, and assessing goals, needs, risk tolerance, etc.

Do discuss guarantee options, he suggests, noting lawsuits may even result for failure to cover the topic. But discuss them in the context of the persons needs, goals and other particulars, he says.

In the end, its still an emotional decision, Hill concedes, “because people now realize their money can go down as well as up.” But once theyve been educated, he says, people make better decisions.

Butrimovitz, a Ph.D. who teaches, speaks and writes about financial issues as well as advises, likewise favors a strong educational approach.

To provide the reassurance his clients seek, Butrimovitz says he uses data and charts reflecting the range of possibilities, and opens up discussions about needs, fears, and concerns. He might ask: “Have your goals changed? Has anything in your personal life changed? Do you feel confident about the futureand why or why not?”

Such conversations might lead to discussions of various solutions, like how the new guaranteed principal riders (on VAs) work, Butrimovitz says.

“Have an open discussion, and be a good listener,” he adds, noting that this, plus client education, often helps people regain their confidence. “The knowledge of investing realities” makes a difference, he contends.

In the bank marketplace, education is also the strategy of choice, says Loveridge of Cincinnati. But the process occurs differently in a bank than in the independent agency marketplace, he says.

First, he says, insurers are educating bank staff about how to identify needs of bank customers and also about how to use various annuitiesFAs, EIAs, and VAsto meet those needs. The idea is that bank people will then educate customers about the same things, Loveridge says.

Bank customers tend to be older and at least 53% female, he notes. Such a customer base requires a “low impact, patient sales process,” he says. In fact, it may take two or three contacts, or even more, before a sale is made, he says.

But that approach, combined with the fact that CD interest rates are very low and the demand for financial predictability and security is rising, is helping bank customers see the advantage of annuities, Loveridge contends. Its a “hey, tax deferral works” kind of thing, he says.

However, “needs analysis must be done,” he stresses, and “the producer must be comfortable with the financial security of the insurer.”

If a customer requests a particular productsay, one owned by a relative or friend”we do a competitive analysis, so we can help the producer help the customer understand exactly what it is they are asking for.”

Not all clients want safety type products, points out Mulheran of Minneapolis. “For instance, weve seen very little change in the investments of our clients who are in the 40 to 55 age range.”

But older clients and those who are retired are “definitely clamoring for safety,” he says. “They tell us they want long term guarantees, less exposure to volatility in the markets, and better security.”

So do customers who lost a lot of value in their mutual fund investments, he says.

For such clients, “its a great time to learn about annuitiesstandard FAs and also VAs.” These people are “starving for education. They want to understand. And if they know you know, they will want to talk to you.”

The good thing is, “you can offer an annuity or design an annuity (from an unbundled product) that meets just about any long-term need,” Mulheran says. “But first, be sure the product meets the need.”

If your client wants more security but is not sure how to get there, Davis of Kansas, who does a lot of EIA wholesaling, suggests asking this question: “Are you interested in market-like returns without any downside risk?”

To that, most people say “Yeah, tell me more,” Davis says. This can open up discussion of needs, preferences, and product solutions, he says.

But if someone starts talking about putting their money in a CD from now on, he says first ask: “What is this money for?” If its long term money,
Davis says, “ask, would you like to get tax deferral and a better rate than the 2% to 3% youll be getting in a CD?”

The idea, he says, is to open customers up to ideas they may not have considered when they asked for safety.

If they ask for a FA, adds Mulheran, remember that FAs arent for everyone. Some customers, who came to him last year, feeling depressed about their mutual funds values and wanting safe-money solutions, did cash out of their funds, he says.

However, instead of putting that money in a FA or EIA, they reinvested it in the same asset classes within a VA–because they liked the guarantees, tax deferral, and upside potential. (This was long-term money, he points out, so “the surrender charge was not an issue.”)

Its true that people dont always like paying the cost for the protection that guarantees provide, agrees Lowe of ING. But they like the protection and comforteven courageit provides.

The point is, he says, “its not about the cost of the product but what the product can do.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 4, 2002. Copyright 2002 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.


Copyright 2002 by The National Underwriter Company. All rights reserved. Contact Webmaster