Many leading economic analysts think we’re already in a recession, or headed for one, and Wall Street is reeling. During the last economic slowdown, anxious investors pulled their money from stocks, mutual funds, and other financial instruments and headed for the housing market, which was still booming despite all odds. In fact, for decades, housing has been the fall-back position when Wall Street goes south.
No more. In today’s economic climate, it’s anyone’s guess as to which option, if either, is more viable. Anxious boomers and retirees increasingly demand anything they can to protect their nest eggs and, hopefully, realize at least some return on their investments.
In today’s volatile markets, diversification may well be more important than ever, and clients realize that. For agents selling fixed index annuities, this presents a problem: How can you offer diversification when the S&P 500 Index is the de facto standard for index annuities?
The S&P 500
It’s not that there is anything inherently wrong with the S&P 500. In fact, one of the reasons why index annuities have been so successful is the underlying stability and growth potential offered by this index. Consumers recognize and trust the S&P 500 brand, and that brand has played a large role in establishing index annuities as a viable retirement vehicle.
A problem arises, however, because crediting methods for annuities are tied almost exclusively to the S&P 500. True, the S&P represents 500 diverse companies, and carriers achieve differentiation in the way the interest is ultimately calculated. Annual point-to-point with cap or participation rate, monthly cap, and the high water mark crediting methods are among the most popular. Unfortunately, there is very little index diversification. While a few carriers offer products tied to other indices — NASDAQ, S&P 400 MidCap, and Russell 2000 — most index annuities are based on the S&P 500 and if it doesn’t thrive, neither do the annuities that are based upon it. In addition, if the American market is down, those few annuities that are based on other U.S. indices may falter, as well.
What the market demands is a big step forward in index diversification — more breadth and depth, more options — and a few progressive companies are answering the call. There are new index annuities offering the kind of diversification that can help protect your clients in a tumultuous market, and more are in the pipeline. Annuities based on new types of strategies and indices will meet this need for diversification — for example, those based on international indices and those that “blend” various indices. Agents who adopt these new offerings stand to do well in today’s economy, as well as in the future.
Annuities based on international indices offer a rare opportunity to participate in the world economy while still enjoying the benefits of an S&P-based annuity. Although we recently witnessed the negative impact that the U.S. economy can have on the world market, for the most part, markets in other countries are experiencing tremendous growth, and nobody expects that to end anytime soon. Because various markets respond differently to economic conditions and regional events, an annuity based on an international index offers the diversification that makes sense in a down U.S. market.