“Every client who comes into my office gets a financial plan, be it fee-based or non-fee based,” says Lori Rogers. “That’s how I determine what product is right for the client. If they don’t want a plan, I won’t engage in the relationship.” Rogers, a producer affiliated with New York City-based AXA Advisors, says the plan is one of a number of best practices she subscribes to when discussing variable annuities. Others that she has adopted–guiding principals bearing on product suitability, disclosure of contract features, benefits and costs, among others–are key not only to staying on the right side of the law. They’re also essential to establishing a trusting, profitable and long-term relationship with the client, Rogers says. Chief among these best practices is a determination on product suitability. Sources say that a recommendation for or against purchasing a VA will hinge on a host of factors. Among these are the client’s age, cash needs during retirement, and cash (or cash-equivalent) reserves outside of the annuity. “You never want to put someone into a VA or other equity-based investment, unless there is the ability to take care of short-term emergencies from other assets,” says Kevin Loffredi, a senior vice president at Advance Sales Corp., Oakbrook Terrace, Ill. “The client should have at least one-to-two-year cash reserve.” Another factor, says Rogers, is the client’s risk tolerance. A VA invested in a conservative portfolio may be better suited for the individual who is risk-averse or near to retirement than one that takes an aggressive investment position. The make-up of the portfolio takes on added weight in situations where the client decides not to opt for optional living benefit guarantees that can protect the account principal. Also to consider are objectives for the money to be invested. Will the annuity need to provide “income now, income later or income never?” If it’s the former two, the financial analysis needs to ascertain which product and optional guarantees can maximize payout to be in tune with the investor’s retirement horizon and/or legacy objectives. At a minimum, advisors should become well-versed in three variable annuities offering complementary benefits, says Kirby Noel, head of sales, for the financial planner channel, at AXA Distributors, New York, N.Y. These include an immediate annuity for retirees needing income currently; a deferred annuity for clients looking to derive income in the future, and a third annuity for those aiming to maximize the death benefit for estate beneficiaries. Producers should also look to partner with 2 or 3 wholesalers that have competitive offerings, adds Noel. The wholesalers must be able to deliver the support services and resources needed to get agents up-to-speed on product and regulatory changes; assist with sales and client servicing activities; and, when necessary, recommend a solution from an alternative carrier more suited to the prospect’s financial situation. One indicator of the wholesaler’s technical and support capabilities, he says, is how the company is organized. If the broker-dealer has a department dedicated solely to facilitating VA sales, then producers can expect greater assistance there than, say, from a wholesaler lacking a specialized VA staff. “As producers, we want to know that people are looking over our shoulder to ensure we’re doing the right things with respect to [product] suitability,” he says. “It only behooves us to have a firm that will appropriately scrutinize sales practice.” It’s not enough, however, to depend on the wholesaler alone for expertise and support. New producers should seek out veteran agents who can offer useful advice–or, better yet, mentoring–for dealing with client situations and managing one’s practice, says Noel. Rogers, agrees, noting that experienced advisors can also be helpful in focusing one’s market efforts. Producers also need to do their own due diligence on their product manufacturer partners to ensure that the companies, and the product guarantees, are financially sound. To that end, Noel counsels advisors to consult the companies’ financial reports and investment ratings from such ratings agencies as S&P, Moody’s and A.M. Best. But even when a particular manufacturer has a strong rating, clients may be well advised to spread their investments among different insurers, says Noel. This helps reduce investment risk, and the clients may also get to enjoy additional features and benefits they wouldn’t otherwise have if invested in just one manufacturer’s product. Before the client signs off on one or another VA, be sure that all pertinent terms of the contract–features, benefits and costs–are disclosed, say experts. High on the list are front- and back-end fees, as well surrender charges for folding the contract before the end of the stipulated term. The surrender charge can be an especially important factor in cases involving 1035 exchanges of one VA for another. Loffredi says such exchanges can be justified while the old contract is still in its surrender period, if the benefits of the transaction outweigh the costs. But high payouts offered by “bonus contracts” to cover the surrender charge should not be counted among the benefits. Says Loffredi: “The promise of a bonus is not a valid argument anymore because typically bonus contracts charge a higher fee or extend the surrender charge schedule to be able to deliver the bonus. You’re not getting something for free.” Also to be disclosed, he adds, are the implications of the VA’s tax-favored treatment. Because account funds grow tax-deferred, there is no added benefit to placing the VA inside another tax-deferred product, such as an individual retirement account. Too often, he observes, advisors pitch an IRA wrapper by addressing the VA’s tax treatment. The focus should instead by on benefits that enhance an IRA’s value to the client, such as a VA’s living benefit guarantees. Or the death benefits. Often overlooked in advisor-client discussions are issues impacting the amount, timing and method by which account assets get passed to beneficiaries. As noted, for example, in the February edition of Annuity Sales Buzz, withdrawals made according to proportional reduction method will reduce an account by a larger amount in a down market than will the dollar-for-dollar reduction method. Also frequently avoided, says Loffredi, is a substantive discussion about how best to title the contract–should the husband be named as the insured or both husband and wife–and whom to name as beneficiaries. When, as a result of this failure, a spouse or child doesn’t receive the death benefit when needed or is disinherited entirely, the result can be devastating. Should a producer’s commission also be disclosed? Experts say that how a producer is compensated, but not necessarily the amount of the compensation, should be the focus of this discussion. They add that those producers whose practices are sufficiently mature to support trail-based compensation–receiving a small up-front commission, then a stream of payouts over the life of the contract–will be better positioned to establish a trusting relationship with the client. “The trail option would be a lot easier to explain than [a large] up-front commission,” says Loffredi. “If clients know that you’re being compensated by how well your account value does, and that you have a vested interest in the account performance, they’re going to be more accepting of what you’re being paid.” Noel agrees. “The days of transactional commissions have passed,” he says. “By creating a fee- (trail-) based income, you put yourself on the same side of the desk as the client. The better the contract does, the better the client does and the better the advisor does because the advisor is receiving a fee on the assets in the contract. One thing that cannot be disclosed, unless prompted by the client, is any assurance that the client’s funds are safe should the insurer go bust. Loffredi says that’s because funds deposited with an insurer have no guarantor comparable to the Federal Deposit Insurance Corp. (FDIC), which backs commercial bank accounts. “Because there’s no guarantee, the regulators don’t want agents marketing insurance policies as if the products have something equivalent to FDIC insurance,” says Loffredi. “They don’t want agents creating a false belief as to what might happen if the insurance company becomes insolvent.”
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