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Help Clients Dip Their Toes into the Investment Waters

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It’s impossible to predict when the market is going to change, but that doesn’t mean your clients shouldn’t dip their toes into the investment waters. Dollar cost averaging (DCA) is a good way to ease your variable annuity clients and prospects into a well-diversified portfolio at a comfortable pace.

DCA is an arrangement that allows your clients to invest a fixed amount of money into a fund or investment option at regular intervals regardless of what the market is doing. Conventional wisdom tells us that with a disciplined approach to investing over the long-term, such as dollar cost averaging, clients may purchase more shares or units when prices are low and fewer shares when prices are high. Of course, dollar cost averaging can’t guarantee a profit or protect against a loss.

To demonstrate how the discipline of DCA could be a good tool for your clients, think about the following: Clients can get nervous when the market falls (let’s face it, so can professional advisors), and become fearful that if they hold onto investments too long they will lose more and more. Therefore, they may unload shares as the market descends, or conversely, get caught up in buying shares as the market rises. Dollar cost averaging can help combat this fear. Instead of purchasing a fixed amount of shares all at once, shares are bought on a regular basis as prices fluctuate, and clients may actually pay an average cost that is lower than the average price over the long term.

In a variable annuity, it is typical for DCA programs to allocate client dollars into a fixed account (or money market account) initially. The account pays a stated interest rate and then automatically transfers money every month or quarter for a certain period of time, into variable investment options.

Dollar cost averaging is nothing new. This tried and true strategy has been used for decades to help clients ease into the market. Some variable annuities on the market today offer a newer strategy called Enhanced DCA (EDCA). EDCA arrangements provide additional flexibility to design customized strategies for your clients. With an EDCA program, the period of time the money is invested in a fixed account may be shorter, typically six months, but the interest rate is greater than the normal DCA interest rate.

For example, a client might invest $120,000 into a variable annuity using a six-month EDCA with a current annual interest rate of 6% and request $20,000 in transfers each month. Since the unit values of variable investment options fluctuate daily, using a six-month EDCA to invest at regular intervals means your clients will be investing in variable investment options at a variety of unit values, sometimes high, and sometimes low.

Hypothetical example of a six-month EDCA:

Fixed Account Balance + Interest EDCA Amount Unit Value Number of Units Purchased
$120,000 $20,000 $14.55 1,374.57
$100,487 $20,000 $12.20 1,639.34
$80,879 $20,000 $11.52 1,736.11
$61,175 $20,000 $12.25 1,632.65
$41,375 $20,000 $10.98 1,821.49
$21,479 $20,000 $11.14 1,795.33
Total Units with EDCA: 9,999.50
Total Units without EDCA: 8,247.42
Additional Units with EDCA: 1,752.08

For simplicity, the above chart shows one set of unit values instead of one for each variable investment option that a client’s funds may be dollar cost averaged into. This hypothetical example does not reflect the past or future performance of any investment portfolio. It assumes no additional purchase payments, contingent deferred sales charges, rider charges, mortality and expense risk charges, administrative charges or underlying portfolio expenses. It is provided to demonstrate the concept of how EDCA might work.

In this example, the client purchased fewer units of the variable investment option when the unit value was high and more units when the unit value was low. Without EDCA and the initial unit value of $14.55, the client would have purchased only 8,247.42 units. By using EDCA instead of a lump sum investment, the client obtained 1,752.08 additional units that can grow over time.

A variable annuity can be an integral part of clients’ long-term retirement planning strategies, providing direction to help them overcome unnecessary risks and important optional benefits to help protect their financial future. Variable annuities provide a tax-deferral benefit that can work well with clients’ goals of investing for long-term retirement. Variable annuities offer professionally managed investment options, guaranteed death benefits and payment options to meet clients’ needs, but clients should always read the prospectus before investing in variable annuities to make sure they understand the risks and charges involved.

If a variable annuity is a suitable option for your clients, help them back into the investment waters by offering an investment strategy that involves DCA or EDCA in a well-diversified portfolio.

Fred Burkey, CLU, APA, is a senior advanced sales consultant for the UNIFI Companies. For more information about the UNIFI Companies, please visit Each UNIFI company is solely responsible for its own financial condition and contractual obligations.

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