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Helping clients understand fixed index annuities

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I recently completed a continuing education course on fixed index annuities (FIAs). It was a useful review of the products, but what struck me was the difference between FIAs’ internal structures and the outcomes that the client sees. 

FIAs have lots of moving parts that advisors consider to best meet clients’ needs: index selection and methodology, crediting factors, participation rates, floors, caps plus the usual annuity details — it’s a financial engineer’s dream.

Advisors must master the product details, but ultimately, the outcome to the FIA-buyer is straightforward. Over the FIA’s term, the buyer will earn a predetermined minimum return with the potential to earn more, depending on the selected index’s performance and the contract’s features. This summary ignores potential complicating factors, such as early withdrawals or changes to the cap rate, but from the earned-return perspective, the outcome is less complicated than the input. 

Making it clear

So how do you present the products adequately to meet compliance guidelines without burying the client in details? Kyle Atkins, CFP, ChFC with Kyle Atkins Financial Group in Spartanburg, South Carolina, has worked with FIAs for about 20 years. When discussing FIAs with prospective buyers, he initially reviews suitability, charges, surrender penalties and other contract details; he also provides them with an annuity buyer’s guide. However, in the presentation, he does not use material in addition to what the insurer provides.

The reason he avoids giving clients his own internally developed materials or analyses is to avoid compliance problems, he explains. He relies instead on helping clients understand the concepts behind annuities in general and FIAs in particular.

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“We give the client the quick overview of the three different kinds of annuities,” he says. “Fixed annuities would be likened to CDs. Fixed indexed annuities would be likened to the bond market, in general and, then, the variable annuity would be likened more (to) the stock market.”

This approach lets clients work through the products’ varying degrees of complexity and risk, he says, and it helps them understand the factors that drive each annuity’s returns. It also allows Atkins to avoid projecting returns apart from what’s specified in the annuities’ contracts. 

Reviewing FIAs this way appears to work — Atkins reports that most clients tell him it’s the first time they’ve understood annuities. Many clients are inundated with annuity pitches, he notes, and they develop preconceived views on the products.

Explaining the products with simple concepts gives them a much better idea of if and how annuities might fit in their portfolios. Overall, he says, client response is positive: “Clients really appreciate it and they love it.”