Talking To Seniors About Annuities Now
Senior clients who were burned by the three-year economic downturn are not wasting any time in reacting to recent changes in the financial environment.
These changes include the new federal tax bill, the once-again rising stock market and the plunging interest rates.
Advisors say clients in the 55 to 70 age range increasingly have been calling their advisors, asking, “Is it time to move my money?” “How should I invest now?” Or, “what should I do about this annuity, in view of the changes?”
How to respond is the focus here, using annuities as the illustrative product.
As far as James McKeever is concerned, the new tax cut bill is the one development that is having “virtually no effect” on his annuity practice. Based in Newport Beach, Calif., he is director of financial services for Precept.
Its the same for Mark Marroni, general agent with John Hancock Life Insurance Company, Boston. “We havent heard anything from our customers relating to the tax law change and product decisions they might be making as a result,” he says.
“No matter how low the taxation of dividends goes, or how low the capital gains rate, some seniors wont go back into the market,” sums up Brian Lipinski, director-annuity marketing at Executive Brokerage Service, Pittsburgh, Pa. “Even if logic says now is the best time to get in, they wont budge, especially if theyre over age 70.”
Yet, others do see an impact. Take Brent Brodeski, for example. He is managing director of Savant Capital Management Inc., a fee-only practice in Rockford, Ill.
The newly inked tax law is definitely making a difference in his business, Brodeski says.
“Annuities arent any different than before, but the alternatives are now better.”
Brodeski says he sold variable annuities in the past, when, say, a client had an older annuity that no longer made sense compared to a new VA with lower loads. But now, he says, he is hesitant to recommend such rollovers. The tax changes have made it “mathematically impossible” for even low-load VAs to stay competitive with market-based equity investments, he maintains.
Concerning the other two developments–the rising stock market and the falling interest rates–the advisors are in greater agreement: Younger seniors have noticed the changes and they are wondering what, if anything, they should do about it.
In fact, Brodeski says he has picked up a few new clients, who had grown uneasy with the low interest rates (1% or less) in their CDs and low returns in their money market accounts. “After factoring in taxes, inflation and the Federal Reserves latest rate cut, they decided it was costing them too much to stay there,” he says.
Younger seniors (age 55 to 65) who have money in cash and fixed accounts in VAs have been calling McKeever, too. He says his response is to focus on planning fundamentals, the same way he did three years ago. Also, he says he tells clients the following:
“First, you cant do planning based on tax law.
“Second, if youre going to put money into an annuity, dont do it because of an interest rate–because interest rates cycle. Do it because the product fits you goals, objectives and time horizon.”
“Third, goal setting and ongoing monitoring are critical to the decision process.”
If the fundamentals are done right, clients will make good decisions, McKeever contends. But he says most seniors do need advice from a skilled advisor.
Some younger seniors have been calling around to sample views on getting back into the market, he notes. If most of their assets are in cash and if these seniors have not been working with an advisor, the seniors may be feeling anxious and they may be trying to time the market, he says.
Some call and say, “This could be it. The S&P is up over 10%. Is it time to get in the market?” They are feeling excited and want to make a financial move, he surmises.
For such seniors, McKeever has a warning: “I tell them that this (uptick) could be it for the whole year.” In other words, no one knows if more increase will come this year, so dont make moves based on timing.
But some dont want to hear that, he says. “They want to get out a scalpel and give themselves an appendectomy.” Advisors cant help these people, he concludes.
As for making decisions on interest rates, McKeever tells clients that, if the annuity is appropriate for them, then “dont pay attention to todays low rates.”
Unless interest rates make extreme changes–as happened the late 1980s when annuity rates hit the double digits–its best to stick with fundamentals, he stresses. “That is, if you want a floor, the fixed annuity is for you. Or if you want one foot on the boat and one on the dock, the index annuity might be best.
“Or, if you need an annuity but not those guarantees, use a VA with asset allocation and auto rebalancing.”
Its tough to generalize about what to say, McKeever adds. “For instance, some clients might be better off right where they are, say in a money market.”
Some of the calls coming in about interest rates are from seniors age 70 or more who have suffered a drastic financial impact from the interest declines, says Lipinski, the brokerage general agent. “This is affecting product positioning with seniors more than anything else right now.”