Volatility Still Throwing Annuity Clients

By

Annuity clients are once again reacting to equity market conditions, according to annuity marketers.

Volatility is still evidentlast years 20%+ gains in the equity markets seem to be holding, but there are swings up and down on a weekly basis. Even so, some annuity clients are starting to get itchy. They are calling their advisors or coming in, wanting to know if its time to shed their “safe money solutions” (cash and fixed annuities in particular) and get back in the market.

Or, as some put it, they are wanting to know if its time to time the market.

Given that many advisors scrambled to offer these same clients a raft of safe money solutions all during the recession, this raises the question: What should the producer say now? What to do?

Once clients notice that market conditions have changed, “they do say, gee, maybe I should move this money,” observes W. Andrew Unkefer, owner of Unkefer & Associates, a Glendale, Ariz., annuity wholesaler.

His response: Focus first on reviewing the clients actual goals. “When we do that, we identify the money they want to protect and whether they have enough money to sustain a change in their current financial position.”

He also reminds clients that if they cannot sustain much change, making a move now, say from a fixed annuity or account, can work against them. Such clients may need to keep their money in safe accounts that just grow slowly but dont pose any market risk, he says.

Some clients now are convinced that the worst of the recession is over and they believe they can take some risk, Unkefer points out.

“In that case, you can show the volatility in the market over the last 5 to 10 years. Discuss safety vs. risk with the client. Point out that that even when the market is up, sometime the other shoe will drop.”

If the client is a retiree, as are many of his clients, that is an important message to deliver, he says. “Remember, the retiree has no way to recover what they lose. You might want to say something like this to the client: We didnt talk about safety when you were in your 40s, because you still had time to recover from market lows. But now you are in your 60s. You need to look at things differently. You may even want to think about using this current upturn as an opportunity to transfer money from the market and into something safer.”

In particular, he says, if a fixed annuity is appropriate for the client, “you should point out that the gains will be locked in, the principal is protected and the taxes are deferred. This is guaranteed.”

For boomer clients, the discussion is different, Unkefer allows. “They are generally young enough so that they can benefit from taking on the risk that goes with volatility.”

“What the producer needs to do is figure out how to float in mid-air,” contends Frank Gencarelli, executive vice president in the Retirement Services Group at GE Financial, Richmond, Va.

By that, he says he means “the producer needs to take a balanced approach to the discussion. And, a planning mentality has to rule.”

Operating in the extremes, of market ups and downs, is a “bad idea,” Gencarelli explains.

Still, consumers do tend to hang on the one side or the other, in different market environments, he says. For example, last year, many were “scared,” even though the market was up 20%. They were “circling the wagons with 3% guarantees, and they missed out on opportunities” for equity growth. But now that people are aware the market is back up, some are feeling “greedy,” and want to get some of that gain, he says.

“The question you have to ask is, can people make money that way?” Gencarelli says.

Today, more and more planners are adopting a long-term model, he continues. “They are taking the position that if the client stays with them and the recommended approach, they will achieve their goals.”

The advisors role, when clients bring questions about moving their annuity money, is first to “calm the client down,” he says. “Then, give the best advice you can give.”

Set the tone of balance and long-term planning, Gencarelli suggests. “Be rational. Help the client understand volatility and long-range planning.Create a climate of balance.”

The most winning strategy is to move into equities when others are retreating from equities, and to move into bonds when other people are retreating from bonds, he adds. But some people will do the wrong thing.

In fact, he says, even the best advisor will sometimes need to accommodate a client who insists on say, 3% interest guarantees or, conversely, some kind of futuristic equity account.

Still, Gencarelli is convinced that advisors who take the long-term planning approach will be successful in deterring clients from “chasing guarantees when markets are down and 40% returns when markets are up.”

“People need a process and a plan, and they need to stick to it,” says Kathleen Hunter, vice president-marketing at Pacific Life Insurance Company, Newport Beach, Calif.

Otherwise, many will end up trying to time the market, she says.

Diversifying client investments and keeping them on track is the approach her company recommends for annuity buyers, in any market.

But the company believes the safety of guarantees is important, too, she says.

So, Pacific Life has begun linking the 2 concepts. It now requires that variable annuity clients who want to purchase one of its VA guaranteesthe guaranteed minimum income benefit, guaranteed minimum accumulation benefits or guaranteed minimum withdrawal benefitparticipate in one of the VAs diversified asset allocation models.

This way, Hunter says, the annuity advisor can ensure that clients have both guarantees and equity exposure.

This does appeal to clients who want to take on more risk than staying inside a VA fixed account, Hunter says. For example, in January 2004, 77% of VA deposits were going into the asset allocation models. Meanwhile, the percentage of money in fixed accounts fell from a high of 56% in 2002 to 25% by year-end 2003.

(Note: A factor influencing the decline in VA fixed account deposits was that Pacific Life stopped offering its one-year fixed account option in July 2003. However, Hunter points out that “we also had a huge drop in money markets.” Furthermore, in July 2003, the company removed restrictions on the ability to move money out of the fixed accounts of existing VA ownersand she says a lot of owners took advantage of that and moved into the asset allocation models.)

“Weve had asset allocation models since 1994,” Hunter recalls. “But tying the guarantee riders to our models” is what caused the surge in model participation.

In any market, the annuity advisor who has built trust with the client will be better off, contends David Miller, co-chief executive officer and co-founder of Pareto Systems, a business development firm in Ottawa, Canada.

Without that trust, it is difficult to get the client to listen to the advisor and heed advice offered, Miller says.

In times like today, when markets are changing, clients do want to know if they should start moving money into other instruments, he says. “But the producers job is to help clients see whether such moves will help them reach their long-term goals. You need to discuss the worth and value of moving money in terms of the clients own goals and objectives.”

To do that, advisors need to keep communicating with clients, in all markets and situations, he says.

That is not always easy, Miller continues. He tells of one producer who complained that clients were leaving himand blaming him for their poor investment returns during the recession.

Millers suggestionthat the advisor “talk forthrightly with clients about market conditions, their accounts and alternative strategies”fell on deaf ears. The producer believed such talk would invite more complaints.

Eight months later, though, the producer did finally try a communications campaign, Miller recalls. The man held client workshops, invited them in for personal interviews and took other steps to keep them informed.

The result? The producer did lose a few more clients at first, Miller says. “But the remaining clients started giving referrals, citing his honesty and forthrightness. Sales picked up, and now the producer raves about the value of communicating with clients.”

Building trust this way should help annuity advisors meet another challenge, Miller says. This is what to do if clients call with concerns about recent Securities and Exchange Commission inquiries into VAs.

Sometimes advisors “want to hide” when bad information comes out, he says. But, he says a proactive communications approach is better.

Right now, it does not appear that annuity producers are being swamped with questions about the SEC actions. Several companies and agencies say no one has called them about it, and that it is a unique issue for some insurers. Further, the National Association for Variable Annuities, Reston, Va., has not received requests from industry members to develop a position on it, says Deborah Tucker, assistant vice president-communications.

But even if clients arent directly affected or calling, annuity advisors should still consider contacting clients about what is going on, says Miller. “Let them know you are researching it and monitoring it as best you can.”

This diffuses anxiety when the client does hear about it, he contends. “The client thinks, my advisor is on top of it. I trust him.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 13, 2004. Copyright 2004 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.