Advisors need to educate affluent clients about the importance of diversified and balanced portfolios–because high-net-worth clients, like everyone else, are vulnerable to market volatility.

Point out that the days of chasing returns are over. Now is the time for long-range strategies, especially for the protection features, tax deferral and income streams annuities can offer, and the tools that empower clients to think beyond daily portfolio values.

Annuities that guarantee income are one piece of such a plan, especially since many high-net-worth clients wont be able to rely on pensions or 401(k)s to fund their retirement.

Deferred fixed annuities. For conservative investors, deferred fixed annuities may be ideal. After all, even wealthy clients may have used bank certificates of deposit in the past year to park assets in a safe environment. What these clients may not know is that fixed annuities have enhancements–like competitive interest rate designs and multiple duration periods–that may make the products a quality choice for this purpose.

The products also have the added attributes of tax deferred accumulation and flexibility of ad-hoc withdrawals. And, unlike CDs, most such annuities allow withdrawal of up to 10% of contract value a year without surrender charge.

Immediate annuities. Single-premium immediate annuities also provide guaranteed income with tax advantages.

Here, in exchange for a sum of money paid into the contract, the client is guaranteed income based upon the payment option chosen (e.g., monthly payment for life.) Such annuities can provide automatic, reliable income that cant be outlived, and they are useful for distributions from Individual Retirement Accounts or qualified plans. Their payouts can be deposited directly into a clients bank or brokerage account, distributed to multiple payees through electronic funds transfer, and directed to pay long-term care insurance and life insurance premiums.

Variable annuities with value-added tools. With effective use of value-added tools and services, a high-net-worth client can use variable annuities to make a comfortable retirement happen, while still taking advantage of long-term returns from equity markets. Since boomers are increasingly worried about outliving their assets, such equity investments will play a crucial role in retirement planning.

However, advisors should be sure the client chooses the VA and its subaccounts carefully. To help accomplish this, suggest using the value-added tools offered with many of todays VAs, such asset allocation programs. These tools can help clients consider how and when they want to retire, why they chose previous portfolios, and what kinds of income streams they will have when not working. Some of these tools are:

Asset allocation programs. As you know, asset allocation reduces risk associated with investing. It does this by distributing funds among various asset categories–stocks, bonds, and cash equivalents, based on results of proprietary questionnaires. The questionnaires assess the clients risk tolerance in conjunction with the intended time horizon for taking income and the persons goals and objectives. Ideally, the advisor can base specific portfolio recommendations on the clients personalized score.

The advantage: These programs can empower clients to select VA subaccounts that will weather economic volatility and last to meet increased life spans. The result can be consistent retirement income streams that are structured to take into account specific goals (such as early retirement or paying for college expenses), as well as limiting federal and state tax liabilities.

Diversification. Especially in todays choppy market, advisors need to keep their clients investment portfolios consistent with financial objectives. They can do this by illustrating all the investment positions and then presenting recommendations in a clear, concise manner.

A formal diversification analysis can help make this happen. Using a strong visual presentation that reviews fundamental investment concepts, the advisor can present the clients existing portfolio and then recommend complementary investments. Then, the advisor can show a customized summary page; this will detail the newly balanced portfolio, with both existing and complementary investments, in a structure tailored to the clients investment objectives.

Guaranteed minimum income benefit features. Available inside many VAs today, GMIBs allow even the most affluent clients to invest during uncertain markets with the security of knowing the VA will pay a guaranteed minimum benefit when the VA starts paying out income. This minimum income is guaranteed, regardless of how the financial markets perform.

Earnings protection. The earnings protection feature can help protect a wealthy clients assets in two distinct ways. First, upon death of the VA owner, it pays the beneficiary a percentage of contract earnings, in addition to the VAs current contract value. This additional money is intended to help pay taxes related to the VA-related inheritance. Second, in some VAs, the feature can also provide a significant benefit while the wealthy client is alive, via an option that directs a portion of earnings to nursing home care.

In conclusion, the right annuities and value-added services, offered in a balanced and diversified portfolio, can go a long way toward helping high-net-worth clients achieve a comfortable retirement.

Michael J. Gilotti is executive vice president–wholesaling distribution and marketing at The Phoenix Companies Inc., Hartford, Conn. His e-mail is michael.gilotti@phoenixwm.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 28, 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.