Charging consumers more for less is hardly a conventional way to create a buyer’s market for a product-unless the product happens to be a variable annuity. Variable annuities appear to be gaining appeal among investors, despite the fact that some insurers have lately diluted the richness of their most popular optional features, increased the cost of those features or pulled them off the shelves altogether.
For advisors such as Daniel Alberth, CFP, of Partners Wealth Management in Naperville, Ill., the surging popularity of variable annuities across his firm’s client base is no mystery. “Variable annuity products,” he says, “are of more interest today than they have ever been because, we think, they bring potentially more value than they ever have.”
These days, advisors say, the variable-annuity value proposition – a vehicle that wraps equity market exposure with optional guarantees that, for an extra cost, protect contract-holders against market and longevity risk – is especially appealing because it combines upside potential with downside protection. Amid high market volatility and the lingering sting from the financial meltdown, investors who once scoffed at paying relatively high fees for such a package have done an about-face. “We have clients who we have been trying to ‘educate’ for years about variable annuities, but for a variety of reasons just haven’t pulled the trigger,” says John Freiburger, CLU, ChFC, CFP, principal at Alberth’s firm. “In the last nine months or so, many of them have come back and told us, ‘We want one of those.’ Market volatility has woken them up.”
While more clients appear receptive to Variable annuities, a significant segment of the senior market has yet to experience the awakening to which Freiburger refers. Many are loathe to invest in a product they view as too risky and expensive, even when it’s clearly in their best interests to do so. How is an advisor to overcome that stigma? Nowadays, the variable annuity discussion usually begins and ends with guarantees, the most popular class of which is known generally as living benefits. Indeed, the variable annuitiest majority of variable annuity contracts initiated today carry some form of living benefit rider. Here’s how advisors are using those guarantees – and other tactics – to gain traction with variable annuities.
Inform and educate, then let the sale take care of itself
People don’t want to be convinced they need a variable annuity, they want to understand why they need one. Besides explaining how specific features work, it’s also important to point out to clients that when it comes to an insurer’s ability to back the guarantees it offers with its variable annuity contracts, not all companies are created equal, notes Rich Schuette, CFP, an advisor with Vida Wealth Partners in Santa Barbara, Calif. “These guarantees are only as strong as the insurance company that provides them.”
Show them the “What if…?”
“Our clients do not want to re-live what happened [to their investment portfolios] at the end of 2008 and the beginning of 2009,” says Alberth. Certain clients are compelled to act when an advisor shows them just how much better their portfolios would have fared had more of their assets resided inside a variable annuity with a principal-protection guarantee instead of in equity vehicles that lacked downside protection. “We have folks,” he says, “who bought into variable annuities and [in 2008 and 2009] saw their account values tumble 40 percent or more, but whose benefit base stayed the same or even increased.”
Tout the “toe in the water” option
For investors who moved money out of equity investments, into cash, a variable annuity offers a chance to gradually transition back into equities via a dollar-cost-averaging feature that Baker says is valuable but underutilized. With many variable annuities, a contract holder can start conservatively with fixed subaccount investments and over time, have their money shifted into more aggressive equity-based accounts. “It’s a type of market re-entry plan,” he explains.
Explain how living benefits address longevity risk
People are living longer, which explains why variable annuity riders that guarantee to deliver a certain level of income for a lifetime resonate with clients.
Explain how living benefits address market risk
Sometimes, when the client is a senior with a shorter investment horizon, having a solid floor underneath one’s principal appeals as much or more than having a high growth ceiling on that investment. With certain living benefits riders, they can get both.
Reinforce the value proposition.
Don’t let the fact that living benefit riders are more expensive and less robust obscure the value of investing in one. “We explain it this way,” says Freiburger. “If we could be sure the market would behave like a straight line going up, then you might balk at the three percent per year or more you pay in fees [for a variable annuity] because you would be sacrificing a lot in terms of overall returns. But that’s not how the market behaves. It’s volatile. Then you factor in longevity risk, and the value of some of these guarantees becomes clear. Clients are never happy about paying these fees. However, they are doing it.”
Living benefits can be a worthwhile investment because they can coax an investor out of “preservation” mode. Instead of keeping their money in a CD, money market account or savings vehicle to get peace of mind, they can instead gain that sense of comfort from a variable annuities with a living benefit guarantee, while also enjoying the upside potential that a variable annuities offers but those other fixed vehicles cannot.
Having a living benefit rider in place lets contract holders tune out the daily noise on Wall Street, so they can focus not on day-to-day, week-to-week fluctuations in subaccount value but rather on bigger-picture growth and other variable annuities benefits, such as tax-deferral.
Offer less costly options
An emerging class of no-load variable annuities caters to clients for whom the relatively high commissions associated with traditional Variable annuities are a sticking point, says Freiburger. “It’s good for clients who are accustomed to the institutional investment management model of advisor compensation.”
Still, clients today appear more willing than ever to bear extra fees and commissions to access the unique combination of benefits a variable annuity can deliver.