Many producers struggle to provide their fixed-income clients with attractive options to boost their returns. The challenge is, how can you pursue higher returns without exposing the client to significantly higher risk? Because while a client who loses money on equities may get upset, a fixed-income client who gets a down statement might just get a new advisor.
In many scenarios, these clients have a significant amount of money in bonds or CDs. They have benefited from the relative stability of these instruments throughout the recent economic turmoil, and are justifiably apprehensive about re-entering the equities market. Even those who understand the benefits of some market exposure may remain edgy, holding their bond positions a little longer as an endless series of job reports and foreign economic developments reinforces their impression that the “timing isn’t right.”
Sitting tight, however, may not always be the best choice. The fear right now is that, as interest rates start to rise, clients who invested in bond mutual funds to preserve their wealth will indeed see their NAVs drop. What’s worse, as interest rates begin to rise, bonds will see lower flows, which means the NAVs will remain lower for a longer period.
Producers may be able to pre-empt this situation by investigating the suitability of an indexed annuity for these clients. Indexed annuities (IAs) have a few features that make them a potentially attractive alternative to bond or CD investments in the current environment.
1. Potentially higher interest crediting
Since these IAs are tied to an index such as the S&P 500, there is the opportunity to earn a solid return within the product. Although cap rates can change, these annuities currently might have a 4 percent to 6 percent cap rate. This means that if the index rises, the client could earn a credited rate up to that cap rate, which creates the potential for comparatively attractive returns given the current environment: Money market returns currently are extremely low; three-year CDs might offer over 1 percent; even 10-year CDs might only get the client 3 percent in today’s historically low-interest-rate environment.
2. Downside protection
As noted earlier, fixed-income clients don’t like to see down statements, and with index annuities they won’t. There is no principal fluctuation due to the product’s downside protection guarantee. CDs and bonds have this kind of downside protection only if held to maturity. This is also important for the producer: Trail commissions, like customer accounts, don’t go down.
3. Annual reset