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Some Pointers For Offering Clients The Right Variable Annuity

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Some Pointers For Offering Clients The Right Variable Annuity

Most registered reps selling variable annuities regularly face a key decision: “Which VA offers the right investment programs and choices for my client?”

You probably have some guidance with a so-called “short-list” of VAs recommended by your firm. Unfortunately, this list may contain five, 10 or even more products. As a result, even after screening the recommended VAs for client suitability, you may still need to choose among several products.

Some reps make this choice by randomly picking one of the remaining VAs or one with handy sales materials. Others decide on the basis of incentives, commissions, the relationship with the VA wholesaler or firm quotas.

But to select the VA with the right investment programs and choices–that is another matter. To do this, you need some key information. Here are some critical questions to ask and why.

Can clients diversify broadly within the VA?

It is no longer uncommon to find 40 or more subaccounts in a VA. Thats important for investors seeking broad diversification, but be sure your client has a good selection of funds in all investment categories, particularly in categories he or she will most likely need or want.

The most popular categories–large-cap funds (value, growth and blended), balanced funds, and foreign/global funds–should be represented in depth, with several portfolios, or broad diversification becomes more difficult.

Of course, it is not enough that a category be represented by at least one portfolio. It should be represented with at least one and preferably several having a satisfactory performance record. Be particularly wary of VAs with only one poorly performing portfolio representing an important investment category.

Finally, make sure the fixed account buckets offer a broad choice of maturities. These offerings are particularly important for clients who wish to retreat to cash or diversify across asset classes.

How does the insurer manage its managers?

Find out how the insurer manages the managers of funds in the VA, how the company selects, monitors, evaluates and sometimes even terminates them. For example, what selection criteria do they use? Do they use Morningstar data or more advanced analytics to monitor and evaluate portfolio returns and risk? How do they decide to terminate a manager?

It is often helpful to know if the VA has advisor funds that the advisor manages or insurer funds where the fund manager functions as subadvisor. (Subadvisory arrangements give insurers more control and allow for greater ease in replacing a fund manager should performance falter.)

How do the fund charges stack up?

Fund charges affect reported performance; the higher the charges, the lower the return. They help determine your clients return and their satisfaction with the VA you sold them.

These charges fall into several categories–investment management fees for managing the portfolio and other expenses for costs (such as administration, legal and accounting). In recent years, some funds have added distribution fees, so-called 12b-1 fees, to recover sales and distribution costs. Of course, such fees, which are calculated as a percentage of fund assets, reduce the investors return.

Some VAs levy an excess reallocation charge for each investment reallocation above a certain level. If frequent reallocation is likely–to maintain asset allocation, say–this charge may come into play.

Are popular investment programs built into the product?

VAs often offer various investment programs, such as dollar cost averaging (DCA), asset allocation and automatic rebalancing. If your client is likely to use any of these, make sure the variable annuities you sell offer them and that the programs are well designed.

If your client needs a DCA program, check the programs structure. Most call for making a lump-sum investment into the VAs money market fund or a fixed bucket and then shifting the funds into the variable portfolios via DCA. This is typical when an enhanced fixed-bucket rate is being offered to attract new clients. Your client, however, may also want a DCA program that allows for automatic investments from a checking or savings account.

If your client is particularly interested in asset allocation, be sure the program is sound and can stand up to careful scrutiny. Some are home grown and have not been developed with a systematic, comprehensive approach.

Finally, check to see how frequently the portfolio can be automatically rebalanced. Some products allow for automatic rebalancing annually, semi-annually and quarterly.

Does the insurer provide solid service?

Some insurers have better records than others in areas such as providing error-free administration, reader-friendly statements, helpful investor services and prompt problem resolution. Ask your colleagues about their experiences in these areas with different VA providers.

Pull it all together.

Try developing a table that pulls together the important information about each suitable VA. Like the one in the chart, it could show the main factors to consider in making the selection, the importance to the client of each, and the rating of each potential VA. Doing this can put you in a better position to select the right VA for the client.

In sum, although VAs are powerful tools for helping clients reach their retirement objectives, they must offer the right investment programs and choices, if your clients are to get full benefit from them. Careful review of the investments available in the VA and the investment programs offered can pay big dividends for your clientand for you.

Harvey D. Hirsch is a financial-services marketing consultant in New York. His e-mail is

[email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 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.


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