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Life Health > Annuities > Fixed Annuities

Winning Over Conservative Savers

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For many prospective clients, the path to a comfortable retirement centers on storing up cash in traditional safe havens–money market funds, certificates of deposit and savings accounts.

For registered reps, the path to a successful close with such clients starts with pointing out the obvious disconnect–that the money may be “safe,” but the returns are likely to disappoint when retirement rolls around.

“We as advisors have to determine whether the vehicle in question matches up with the goal,” says Mark McCandless, a financial planner and vice president of RAV Financial Services, Beachwood, Ohio. If the client is thinking about retirement, the question to ask is whether the assets in a cash account will generate a sufficient return to offset inflation, plus any current taxable income.

If the answer to that question is “no,” then an insurance product may be just the solution to meet the client’s long-term retirement planning objectives. One reason: tax advantages.

Funds accruing in the cash accumulation component of a permanent life insurance policy grow tax deferred. That can have a huge impact on the client’s retirement nest egg, particularly in the case of variable and variable universal contracts, the subaccounts for which are invested in equities that potentially can yield high rates of returns.

The variable annuity is another long-term savings vehicle that gets high marks. Reps say VAs, particularly those offering a guaranteed income rider, appeal to clients who want to secure a guaranteed income stream that meets at least part of their long-term retirement needs. And while the product offers upside potential to meet targeted rates of return, its income guarantee protects clients against loss due to market downturns.

Roger Green, a principal at Green Financial Resources, Duluth, Ga., says he has more than $100 million in client assets invested in VAs. The assets are typically combined with other equity vehicles, including open-end and closed-end mutual funds and exchange-traded funds.

“Most retirees don’t care about their net worth, only what that net worth will produce in terms of cash flow,” says Green. “If they have a guaranteed income stream, they also don’t care as much about the market’s volatility.”

Fixed income products have their place in the client’s portfolio, too, when conditions warrant their inclusion, say reps. For instance, the traditional fixed annuity should be considered when interest rates–and thus annuity payout rates–are high.

Green notes that so long as the interest yield on a fixed annuity exceeds the client’s targeted rate of return, then leveraging the vehicle makes sense. He adds that fixed annuities were very attractive when interest rates were very high.

McCandless agrees, but observes that the fixed annuity appeals to few of his clients in the current market environment. Diversification within an equity-based portfolio, he says, offers the best route to financial security, including portfolios that feature a fixed component. Example: a bond fund that resides inside a variable annuity. Or an indexed annuity, which links credited interest to gains in a market index but also has the guaranteed minimum interest rate promised by traditional fixed annuities.

That combination of benefits has contributed to a dramatic increase in index annuity sales in recent years. Since 1995, the index annuity share of the fixed annuity market has risen from 0.5% to 26% in 2004, according to the National Association of Variable Annuities, Reston, Va. The products represent a still higher percentage–30%–of deferred fixed annuities.

A new report based on an informal review of data from EIA customer statements further reveals that EIAs have produced results superior to bank certificates of deposit during the past five years. The report, from Advantage Compendium, St. Louis, Mo., found that the value of assets in the sample EIAs increased an average of 24% during the five-year period, compared with an average increase of just 14% for the value of assets held in certificates of deposit.

To be sure, bank CDs and other conservative savings vehicles have a role to play in the client’s cash management strategy. Green advises clients who anticipate drawing on a reserve within five years to maintain these assets in laddered Treasury bonds and Treasury-only money market funds. Because of the short-term need for cash, clients would be taking on unnecessary risk by investing in equities, he says.

McCandless observes, however, that the market risk tied to exposure to equities has to be balanced against the purchasing power risk associated with fixed income securities (i.e., the risk of earning a rate of return that is below the rate of inflation). He adds that interest gains on such vehicles may also be subject to current income tax.

Must clients needing cash in the near term forsake high rates of return? Keith Newcomb, financial planner with Full Life Financial, Nashville, Tenn., thinks not. He often suggests an “intermediate strategy” wherein the client establishes a reserve account that combines a money market fund, bond fund, a floating rate fund comprising senior collateralized loans, a preferred stock mutual fund and a master-limited partnership. The last integrates the benefits of a limited partnership with the liquidity of publicly traded securities.

“This [portfolio] yields steady and stable gains in our target range of 4% to 6% annually,” says Newcomb. “It’s much safer than equity investments but offers a higher yield than a money market fund or CD. The reserve account acts as a sort of buffer to cover unanticipated expenses. The client is not completely in cash, nor exposed to the volatility of the average bond or stock investment.”

Newcomb says this strategy is designed for clients desiring to protect against the risk of having making near-term withdrawals, as opposed to individuals who anticipate making such withdrawals. Hence, clients whose cash needs unexpectedly rise during periods of unemployment or when transitioning to retirement are good prospects.

Whatever the advisor’s preferred cash management strategy, nudging the conservative saver from a CD or savings account fund into higher-yield vehicles can be a big challenge. And, reps acknowledge, their efforts are not always successful.

“Ultimately, you have to demonstrate to the client that your presentation is in furtherance of their financial goals,” says McCandless. “There’s often a disconnect between what the client is trying to accomplish with a cash account and the objective laid out in a financial plan.

“If someone is tied to a particular asset,” he adds, “you might use that asset, as I’ve done, to fulfill not a pre-retirement or investment goal but an estate planning objective. You can thus diversify the family’s holding, even if the individual’s portfolio remains as before.”

This article originally appeared in the November 2005 issue of Registered e-Report, an online publication of National Underwriter Life & Health. You can access this monthly e-newsletter for free by going to


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