Close Close

Portfolio > Mutual Funds > Bond Funds

Variable Clients Flock To Conservative Options

Your article was successfully shared with the contacts you provided.


“I need to stop the bleeding.” “I cant take it anymore.” “I think we need to look at how my assets are performing.”

These are some of the comments Bruce Ensrud has been hearing from clients lately. The feelings range from fear to reasoned concern, he says, but most come with a request to find a safer place for the clients money.

A senior financial consultant with Thrivent Financial in Golden Valley, Minn., Ensrud concludes the overall financial mood right now seems to be “discomfort.”

Financial advisors from around the country are reporting similar trends. The talk of the town, they say, is safe money options, reducing volatility, and the value of guarantees.

Executives at many variable companies tell National Underwriter they see the same trends.

As a result, advisors are directing more of their energies toward educating clients on the ins and outs of conservative investing.

And many variable insurers are introducing more conservative options in their policies–several fixed accounts (some with market value adjustments), more bond funds, more conservatively structured equity subaccounts, etc. Theyre putting out educational materials on conservative strategies, too.

How all this is playing out is the subject here. But first, it should be noted that overall market trends demonstrate this is no small change. Going conservative is becoming big business. Consider:

The asset mix between bond/fixed accounts and equity accounts has changed the past two and a half years, says Rick Carey, editor of The VARDS Report, Roswell, Ga. As seen in the charts, by year-end 2002, the bond and fixed accounts had taken a much larger share of the variable annuity pie as compared to June 30, 2000.

Some of the equity assets did lose value during this period, Carey allows, “so not all the growth in the conservative options is due to asset reallocations.” Still, he says, the percentage increase in conservative allocations is unmistakable.

Executives at various insurers confirm Careys observation. They, too, have seen fixed and bond accounts at their own companies rise in recent times.

In 2002, fixed annuity providers tracked by LIMRA International, Windsor, Conn., saw premium volume rise by 40%, to $103.8 billion. This is the third consecutive record sales year for the product line, says LIMRA.

In February 2003 alone, government and corporate bond funds tracked by Financial Research Corp., Boston, recorded a total net inflow of $14.3 billion. This was up from just $7 billion in February 2002.

The question is, what are advisors saying to clients who see these trends and wonder if they should follow suit?

Most of Elaine Todds clients have not been comfortable with the equities market for three years. Therefore, she says she no longer waits for clients to broach the topic. “I bring it up myself, before they do.”

The principal of Todd Financial Services, Lafayette, Ind., Todd says she does this because she is concerned for her clients long-term welfare. “People are living longer today, so I typically run plans out to age 95 or even longer,” she explains. “We want to be sure their money will last the whole time.”

How does she bring up the topic of taking a potentially more conservative path toward that goal? In her twice-a-year reviews with clients, she frequently says: “Lets sit and talk about the market. Where is your risk tolerance? Based on what we find, we might want to consider reallocating some assets into the fixed account or some other place.”

She often also asks: “How much of your money do you want to protect?”

Most people respond to that last question by saying, “I want to protect all of it,” Todd says. When that happens, Todd begins reviewing with clients the objectives of the various subaccounts. She also discusses risk tolerance, goals, available options, where the clients other money is invested, the clients age, and whether the money will be needed for income in the near future or later on.

Depending on the outcome of those discussions, “we might split the conservative portion two or three ways,” she says.

If someone is “extremely nervous,” Todd says she suggests putting assets in the money market account for a while. The person can always move it later on, she explains.

When clients speak with Terry Nelson, a personal financial representative with Allstate Financial Services in Rochester, Minn., some are very cautious now, he says. “Theyll say things like, maybe I ought to stop investing and put my money in bank CDs,” he says.

In his view, “the recession, Enron-itis, and now the Gulf War have brought folks back to (the recognition that they need to do some) planning.”

People are concerned about the past money they have invested and the future dollars they will be investing, Nelson adds.

His response? “I tell them the variable annuity is like the SUV of the vehicle world. It has a lot of benefits and features that I just cant deliver in another type of investment product.”

In short, he points out that he can satisfy the clients need to mitigate volatility right inside the VA. He points to the products dollar cost averaging feature as one example.

Another example is auto rebalancing–something he prefers to do quarterly in this market. “I set it on auto pilot. Then if the results dont meet the clients expectations, or my expectations, we can always change the portfolios.”

Still, another example is the guarantee riders available in many VAs today, Nelson says. “They are like guardrails. They make you feel more comfortable, so its easier to stay in the middle.” He recalls one client was very upset about the 28% downturn in his VA account value until Nelson reminded him about the guardrail (in his case, a living benefit rider with a 10th year principal guarantee).

For a similar reason, Nelson likes the enhanced benefit income rider. “With this feature, I can tell my clients what their minimum annuitization amount will be at retirement, regardless of what the market does,” he explains.

Thrivents Ensrud has been concerned about people trying to chase returns by moving money into the short-term bond market from equities or some other place.

“To me, this is the worst thing they can do,” he says. In many instances, he says he finds the clients do not understand how bonds work, nor do they realize bonds pose risk.

Therefore, Ensrud says he spends time educating clients about bond options. “I show them the trend lines, that equity valuations are below historical norms right now, and bond valuations are above historical norms. If they sell equities now and go into bonds, they will be selling low and buying high.”

How do clients react to hearing that? “Most say, “Humph, well, oh,” Ensud says. “Then they want to be more careful about going into the bond market. So, then we talk about dollar cost averaging and other options.”

Eventually, he says, the conversation “circles around” to the importance of being well-diversified and avoiding knee-jerk reaction to the market. “I suggest maintaining a stake in equity markets and using fixed options in the product to make a more conservative allocation.” He may recommend some bond funds but on a selective basis.

“My goal is broad asset allocation, not “asset allocation only in the conservative options,” Ensrud concludes.

At Northwestern Mutual Life, Milwaukee, the recommendation is for advisors to “tilt” more to the conservative options, says Leonard Stecklein, senior vice president of annuity and accumulation products. People today have learned what true risk is, he explains, and they are searching for safety.

Advisors can help clients deal with the volatile market by ensuring they have a good relationship with the client, Stecklein stresses. This entails doing thorough interviews, selling the right product for the client in the first place, annual servicing and possibly rebalancing, he says.

As for investment choices, “if this is the clients only money, maybe move it into the fixed account,” Stecklein says. But if the risk profile and other factors warrant, a diversified portfolio can be considered. VAs often have subaccounts, such as balanced funds, that combine equities and bonds, and several have multiple asset classes, he notes.

The important thing, Stecklein says, is that “clients understand what they have, the risks they have and their personal risk tolerance. If we do that right, we can get the product sold right and get through these rough times.”

Like Todd and Nelson, Ensrud emphasizes that any recommendation should be based on the clients risk tolerance and goals. “Its a difficult world were living in now,” he says, “so we need to be prudent in making any changes to the asset allocation.”

Eventually, he says, “the discussion circles around to the realization that its better to be well-diversified–and to avoid knee-jerk reactions to the market.”

Executives at Thrivent Financial are recommending that its reps use a new asset allocation modeling system the company has co-branded with Ibbotson Associates of Chicago. The models range from conservative to aggressive, and there are computer-based training modules to help the reps with the concepts.

“The modeling program is just the starting point for the reps discussion about allocating the clients investment dollars,” says Bill Idzorek, manager, product marketing. If the final selections deviate from the model, the rep indicates the reason in the comment section and the client signs the document.

Like most variable insurers, Thrivent has witnessed increased allocation it is variable products toward the fixed options in the past year or two. But Idzorek says, “our message is, if you adjust to this, do it with care. For example, people with a long time horizon may want to consider moving money into equities right now, not the fixed account.”

To help reps balance out the volatility in the allocation, the company has recently done what other variable insurers are doing. It has introduced more conservatively inclined subaccounts (in this case, a mortgage-backed securities fund, a small cap value fund and a real estate equity portfolio). This should help with diversification, says Patrick Egan, manager of investment product marketing.

The companys variable products also have four fixed accounts, five other bond funds and a money market. “Reps are very interested in fixed income investing right, now,” explains Egan. “They are hungry for information about this.”

Trying to guess the direction of the stock market, or which stocks make sense for which market, is very hard for anyone to do, observes Nelson. Therefore, he says he tells clients: “Lets err on the conservative side right now, so what we do does make sense.”

Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 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.