Just this week, Robert O’Donnell was named president of Prudential’s annuity business. Previously, he served as senior vice president, head of product, investment management and marketing for Prudential Annuities.
Before his promotion, O’Donnell (below right) spoke to LifeHealthPro.com about investor behavior within variable annuities, and how Prudential manages risk in a volatile market.
What the company has found through general industry research and its own experience is that the presence of a guarantee embedded in a variable annuity does not alter an investor’s basic investing preferences. “The investor, the person who owns this money, allocates their dollars according to their risk tolerance, and that is a very important element of the variable annuity experience,” he says.
In other words, a conservative or moderately risk-tolerant investor is not going to suddenly deviate from their core beliefs and start investing in riskier investment options just because there is a guarantee. They don’t like to see the value of their VA portfolio dip and dive, even with guaranteed income. Plus, “Using 2008 as an example, someone who is a conservative investor would not have been comforted by allocating to meaningfully more aggressive funds and losing tremendous amounts of market value by the existence of a lifetime income guarantee,” O’Donnell says.
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Contrast that to managed accounts without a guarantee. In those instances, “meaningful amounts of assets deviated from the core investment profile during times of stress,” O’Donnell says. Meanwhile, with a guarantee, investors are more likely to stay the course in stormy markets, he notes.
That said, Pru’s VAs are set up with a more conservative investor in mind. “If you had a truly aggressive investor who wanted 100 percent of their money in equity investment options, they can come to Prudential but they cannot get these protection features with that type of investment objective,” O’Donnell says. Instead, they can place no more than 80 percent of their money in equities, and even if an investor puts say, 60 percent in equities, that amount cannot be invested in a single asset class, such as an international small cap growth fund.
Those risk-management strategies are fairly consistent with the industry as a whole, O’Donnell says. Prudential takes it one step further, however, by monitoring the value of the investor’s diversified pool of assets against the guarantee promised by the company. If the gap is deemed to grow too wide or when it exceeds a specified ratio, money is moved from the investor’s diversified pool of investments into an intermediate duration bond fund.