In the world of financial services, the term “conservative” can take on many meanings. For some, it may have negative connotations, describing an individual or financial strategy that’s missing out on the potential gains made possible by being more open to risk. For others, it’s the hallmark of a sound financial strategy built on less volatile returns with limited highs and lows.
Regardless of your personal feelings about conservative savings strategies, one thing is certain – the “great recession” has many people more interested in a conservative approach than ever before. According to Allianz Life’s “Reclaiming the Future” study, when Americans aged 44-75 were asked to describe their ideal financial product, the most selected feature was “ the ability to create a stable, predictable standard of living.” In second and third place was the “ability to provide a guaranteed income stream for life” and “guaranteed not to lose value,” respectively.
In fact, when asked to choose between high returns or guarantees, 69 percent of those surveyed said they prefer a product that was “guaranteed not to lose value,” while only 31 percent chose a product with a goal of providing a high return.
Another factor backing this claim is the sales of fixed indexed annuities (FIA), a product that offers the attributes described above. According to AnnuitySpecs.com‘s Indexed Sales & Market Report, FIA sales for the third quarter of 2010 hit a record-breaking $8.7 billion, up 16 percent from the third quarter. Total FIA sales through the third quarter of 2010 have increased four percent year-over-year and 28 percent since 2007. Through the end of September, conservative-minded consumers had put nearly $24 billion into FIAs – a particularly notable feat in today’s low-interest environment.
A surprising source
It’s interesting to see just how much of these sales are coming from an unexpected source – banks. In the past, banks may have steered their more conservative customers toward CDs. For several years, CDs, which are financial instruments backed by the FDIC, provided annual interest rates of more than 4 percent (Bankrate.com) and offered the principal protection that conservative consumers sought. Since CDs are generally considered a relatively liquid asset, they also provide the easy access to money that many people desire.
Things began to change around September 2006, when the Fed cut interest rates to combat the global financial crisis. At that time, the national average interest rate for CDs was 4.53 percent. A November 2010 analysis by Market Rates Insight found that the average interest rate for CDs ranging from three months to five years has dropped to 0.99 percent, and the national average for interest on CDs, money markets, savings, and checking accounts stood at 0.80 percent.
For people who want to see a decent return on their investment, that just won’t cut it. Slowly but surely, banks have begun realizing this and offering a different retirement planning alternative to complement the use of CDs – in the form of an FIA.
Because FIAs are insurance products, it’s important to note that they are designed for consumers who not only wish to accumulate funds for retirement, but who are also looking for guaranteed lifetime income – a guarantee that is backed by the financial strength and claims-paying ability of the insurer. However, it’s also essential to understand that there are fees included with FIAs that don’t exist with a CD, such as surrender penalties with early withdrawals that could result in loss of principal and any interest.