Automation also addresses regulatory concerns

As the 10-year-old equity-indexed annuity industry has matured, it has grown both in complexity of products and product selection. It is so complex that manual analysis of competing products isn’t feasible. Responding to a bewildering array of products and features, however, a few technology firms have created software tools that make it possible for agents to illustrate a range of possible EIA returns in a way that is convincing to clients and keeps the advisor out of regulatory hot water.

These unique fixed annuities, designed to provide investors with a share of the stock market’s gains without corresponding losses, receive their returns from a derived relationship to an equity index known as a “crediting method.” Although studies show that the crediting method selection will substantially affect the annuity’s performance, the financial advisor is solely responsible for determining which EIA crediting method is best for a client’s particular need. But technology provides techniques for due-diligence research and proper presentation of equity-indexed annuities that can be done.

Online Calculators

Since one EIA index crediting method will capture more of the gains than another during different market periods, it is crucial to test the various EIA index crediting methods in more than one type of market environment to find the crediting method that performs best during the expected market type. A basic online EIA calculator allows the advisor to select from standard credit method strategies and historical time periods to view hypothetical performance of that credit method. These calculators run on a Web site. Unfortunately, the credit method choices are typically very limited, the online interface can be awkward (too simple or too complex) and the output (usually on-screen display only) is probably not something you’d show a prospective client.

The adage “you get what you pay for” holds true with these calculators, and most are free to contracted agents. If online tools really are your preference, however, consider purchasing one that offers comprehensive credit methods, simplified input fields, and the ability to produce side-by-side comparisons and printable reports you’d be comfortable showing a prospect.

EIA calculators are often used by wholesaler/marketing firms as a value-added service to agents. Firms looking to add these tools to a Web site should be sure that they personally can control which products their agents can compare (a contracting incentive), as well as track and report on the product comparisons each agent has been running.

Spreadsheet Software

Like their online counterparts, spreadsheet software programs like Excel provide a minimum level of due diligence for the advisor. They usually facilitate side-by-side comparisons of multiple EIA crediting methods or a benchmark, although the crediting methods available are still limited.

An additional caveat: If you aren’t comfortable keeping track of all the EIA internal rates and caps for each crediting method, these aren’t the tools for you. Also, the “spreadsheet” look and feel can be intimidating if you aren’t a frequent Excel user. Further, the output isn’t recommended for use with prospects. On the plus side, these programs are downloadable and are affordable.

Because the National Association of Securities Dealers has been paying close attention to sales materials for EIAs, the smart advisor will follow basic, balanced presentation standards. One-sided presentations can create a false expectation in the client’s mind that the EIA index crediting method will outperform the stock index. Therefore, it is important to show presentations of the crediting method’s performance during both good and bad times for the stock index while also showing the performance of the prevailing fixed interest rate vehicle for perspective. If your current spreadsheet software doesn’t help you do this, look for a system that can.

Desktop Software Solutions

If you are an advisor who doesn’t mind investing a bit of your own time and money into your practice, Windows-based software has the most to offer. A complete EIA evaluation platform can provide a greater array of crediting methods, flexible inputs, retirement income scenarios, portfolio modeling with the EIA and even PowerPoint presentations. Featuring colors and easy-to-read charts, report quality is usually much better than online or spreadsheet tools, and reports can be presented to prospective clients.

As an alternative or supplement to historical hypotheticals, many advisors are looking to the forecasting methodology of Monte Carlo simulations. Monte Carlo simulations are an academic, time-tested forecasting technique that will serve you and your client well. Monte Carlo (so-named after the famous casino games of chance) lets you illustrate various outcomes that reflect the random nature of stock market returns. They are ideal for projecting the success of meeting retirement income needs.

Wholesaler/marketing firms looking to incorporate EIA software to support their agents should look for the ability to personalize reports easily for both the agent and client. For efficiency, good software should create reports that can be converted to electronic format and e-mailed to the agent without the sender having to leave the program.

EIA index credit methods are numerous and their attributes can be complicated. All educated advisors need to have a method for comparing and contrasting EIAs, which must be presented using fair and balanced standards. Employing software that aids in this process can be an efficient way to satisfy the requirements of regulatory bodies and your discerning clientele.

Mitchell M. Maynard is CEO of MCP Premium Software, Orange, Calif., which offers software tools for analyzing equity-indexed annuities. He can be reached at mitchm@mcppremium.com.