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A Sea Change for Variable Annuities: Investments Come to the Fore

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Over the last few years, consumers have focused on the need for guaranteed retirement income. Not surprisingly, variable annuity living benefits sales rose like a Nova Scotia flood tide. But now that companies have repriced their living benefits in order to reduce risk, will the tide recede?

Not likely, in my view. According to LIMRA’s March 10, 2010 “Variable Annuity Guaranteed Living Benefit Election Tracking Survey,” 84 percent of variable annuities sold in the fourth quarter of 2009 came with a guaranteed living benefit option, compared with 89 percent or higher over the prior four quarters. Some market leaders are seeing uptake rates north of 90 percent.

This demand suggests consumers will continue to value — and purchase — guarantees for their variable annuities. And they’ll appreciate that decision when the market experiences short, sharp drops, as it did this past May.

Still, the massive rebound of 2009 has created a sea change — a growing awareness of the need for upside growth exposure. Advisors and consumers now realize that a quality investment platform makes variable annuity guarantees possible, and so valuable when they lock in. By stressing investments alongside guarantees, advisors can facilitate growth when markets are calm while providing a safe harbor when the markets turn stormy.

If that proposition resonates with you, you might consider augmenting your variable annuity selection process. Continue to spreadsheet guarantee provisions, but also start evaluating the investment platforms of competing products. Here are some things to look for:

  • Innovation. Asset management is a rapidly evolving industry. Make sure your provider delivers intelligent and innovative investments that keep you on the cutting edge. Look for asset allocation solutions that are as simple or as sophisticated as you need them to be. Also look for a balanced combination of well-known brand-name and boutique asset managers, along with alternative-investment asset allocation portfolios for dampening volatility.
  • Oversight, To help protect your clients’ investments, make sure your carrier has a demonstrated methodology for both quantitative and qualitative asset manager monitoring. Having working relationships with hundreds of asset management firms is important, too. This will allow your carrier to help you protect clients’ interests — in real time. And if a manager underperforms, make sure your company has the fiduciary commitment to make appropriate firing and hiring decisions.
  • Active management. Many variable annuity firms have reduced risk by restricting their asset allocation options and/or by offering only index funds. Let’s be clear: There’s nothing wrong with indexing. But if your clients need a brand-name manager to feel comfortable investing, wouldn’t you like to meet their needs? Plus, the ability to continue offering active management has become the hallmark of a financially strong carrier.
  • Choice. Merely having innumerable investment choices isn’t always better; you need access to quality as well as quantity. Find a company that offers more than ample choices to cover the vast majority of client needs in your book. A blend of choices should ideally include:
  • Traditional brand names offering tried-and-true asset management strategies (based on longer-term views of the capital markets)
  • Tactical strategies from boutique and institutional managers (based on shorter-term views) offering options not otherwise accessible to retail investors
  • Quantitative strategies (based on disciplined, quantitative approaches to portfolio management)
  • Alternative strategies (based on traditional and non-traditional investments that are less correlated to the market)
  • Flexibility. Look for a carrier that offers an array of turnkey asset allocation portfolios that deliver diversification based on your clients’ goals, risk tolerance and investment time horizon. The portfolios should also offer rebalancing to ensure your clients’ money tracks their investment goals over time. However, asset allocation and rebalancing does not guarantee a profit or protect against a loss. You should also have the flexibility to combine asset allocation portfolios to address specific client needs.

In short, as your clients embark on their retirement voyage, encourage them to bring two things on board: strong investments backed by solid guarantees. These two variable annuity features will help them to get on the right course to reach their goals.

Doug McIntosh is vice president of investment management for Prudential Annuities. He can be reached at (973) 802-4446.


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