Instead of selling enhancements, as professionals, we should be selling what the client needs. Here's how. (Image: Cap Pannell)

As an advisor, your role is to bring the right products to clients, taking into consideration their current life stage and goals for the future. However, when positioning an annuity, many advisors think recommending the most robust option possible is the best approach for their clients.

More often than not, these annuity recommendations are coming with numerous bells and whistles in the form of elaborate riders, such as a guaranteed minimum withdrawal benefit (GMWB) rider, to “help” generate an income that, most likely, isn’t needed.

In other words, advisors are frequently positioning income access benefits to people who aren’t going to use them — reducing the earnings potential for wealth accumulation and for your clients to earn the biggest bang for their buck. If they don’t use the rider, the fees for these riders will eat away at interest that clients would otherwise earn.

We recently saw an example of how this type of benefit rider took a toll on a client’s policy. A client who purchased an annuity with $1 million in premium paid more than $160,000 for this type of access — a benefit the client wasn’t going to use. Although this may sound like an extreme example, the point is valid. Paying for a feature they will never use reduces an annuity owner’s earning power.

Instead of selling enhancements, as professionals, we should be selling what the client needs. A simple, straightforward fixed annuity sale can benefit your clients and save them money. To do this, all you need is ask your clients a simple question: “Are you looking to accumulate savings to possibly draw income from in the future, or are you looking for income now?” With the answer, you can set your clients up for future success and maintain your status as a trusted financial advisor.

Competing Priorities

In today’s low-interest-rate environment, some advisors may prioritize adding an income rider over selecting an annuity with an appropriate rate of return. Income riders are a relatively new phenomenon in the world of nonregistered annuities. These add-ons were developed because of the influx of baby boomers who are transitioning from their working years, when they’re accumulating funds, to their retirement years, when they need money.

Adding a GMWB rider on a fixed indexed annuity might sound great to a client looking for income down the road. But these two forces work against each other. A client’s goal of accumulation should have a singular focus at this stage. Instead, the annuity sold with a GMWB rider is trying to accumulate and plan for income distribution simultaneously, all while the client is paying fees for income access.  

To avoid this double-dip loss, we suggest you simplify your sales approach. For a client who wants income down the road, position a deferred annuity, which will allow him or her to turn on — or annuitize — their income stream. If your client needs income immediately, suggest an immediate annuity that allows instantaneous access to funds. We’ve outlined a few considerations below to help you better define and practice this approach.  

Get to Know Your Clients

Before you recommend a deferred or immediate fixed annuity, you need to know more about whom you’re selling to and your client’s overall financial goals. This includes their life goals, what they want to do with their money and how conservative of an investor they are.

Once thought of as an investment vehicle for older clients, the majority of today’s purchasers are in their 50s and 60s. This is the life stage when most gainfully employed individuals are focused on — or should be focused on — accumulating savings for the future. Individuals nearing retirement age who already have a sizeable nest egg may have no intentions of creating an income stream, let alone taking any type of distribution from an annuity. You may want to consider how they’ll want to accumulate if the annuity will be later used for wealth transfer purposes. An individual who knows they will need an income at some point in the future, but not sure when, should also stay focused on accumulation. 

No matter the choice, the answer to that question will determine your focus for which product to position with them. To identify the right product for your clients, we recommend asking three questions to get insight into your client’s time horizon for accessing their money:

  1. What kind of money do you need in the next five years? This will help you with suitability in determining if your clients have enough liquid assets to pay for ongoing expenses.
  2. Do you need income immediately? This can help determine if an immediate or deferred annuity should be positioned.
  3. If accumulation is the current goal, will you be OK with years of little or no gain? Or would you prefer a steady competitive gain each year? This question helps identify if the client should review a fixed indexed annuity or multiyear guarantee annuity.

Even with the answers to those questions, it’s still important to take into account if your client is a conservative investor. Many times, a financial advisor has different goals in mind for a client than the client does.

Usually, clients at around this age often are aggressive with their financial portfolios — until they stop working. Because of this, their whole demeanor may change once they retire, and their perspective may have changed around their investment goals and what other assets are being held. Clients seeking an annuity most often aren’t concerned with losing money, but they do want to try and see a solid rate of return on their investment. Make sure this concern is top of mind when you broach the topic of annuities with your client.

Recommending a Fixed Deferred Annuity

Fixed deferred annuities are great for clients with low risk tolerance who want growth as well as strong guarantees. They know their hard-earned savings will be there if and when the need arises. In many cases, those seeking to purchase a deferred annuity have absolutely no plans to ever tap into the accumulated value but want the safety net of knowing they can.  

Deferred annuities also have an income stream built into the chassis, rather than an extravagant withdrawal benefit rider. They all have a basic, fundamental feature that allows the annuity owner to elect a guaranteed payment stream on or before the annuity’s maturity date. And the best part? It doesn’t cost the owner a thing! Why would you want your clients to pay fees tied to a GMWB when the ability to create an income stream if and when the time arises is already built into the product?

As an advisor, you should concentrate on finding the deferred annuity with the interest crediting rate guarantees, or in the case of an index annuity, the best crediting strategy that helps your client meet their future financial planning goals within their level of risk tolerance. There are excellent products provided by reputable, well-established carriers that will meet your clients’ needs. The payment stream, if needed, can and should be addressed later. 

Positioning a Fixed Immediate Annuity

Fixed immediate annuities are simple, clean and do exactly what your client wants, which is provide guaranteed income. This is especially true for longevity protection. Specifically, single premium immediate annuities (SPIAs) are a way to maximize income and to protect clients from outliving their savings. 

Fixed SPIAs are a great idea for clients who are interested in maximizing the income from their nest egg while guaranteeing they can never run out of money. If your client needs a steady stream of income to supplement Social Security, the SPIA can’t be beat. It’s the highest payout for the money, and your clients get the best guaranteed-income stream for their dollar.

Immediate annuities provide your clients with a liquid stream of income. Clients can structure payouts from an immediate annuity in many ways to meet their needs and minimize the need for a rider to access their income. Although there are dozens of ways to structure payouts, here are a few of the most popular options for payouts:

  • Life only. This is the least-commonly selected payout. When your client passes away, payments cease — no matter what. This can be risky, but the upside is this option provides the highest payouts.
  • Joint life. This option provides income for two people, as long as either client is alive. When one client passes away, payments continue to the survivor.
  • Period-certain only. This allows clients to target how long they need an income stream. If they pass away before the end of the certain period, remaining payments continue to the designated beneficiary.  
  • Life with a period-certain. In this scenario, the annuity sponsor will pay out income for a client’s lifetime. If the client were to pass away prior to the end of the certain period elected, the beneficiary receives the remaining payments.

As an advisor, you may need to shop around to ensure you’re recommending the right annuities. Not only should you ensure that you’re working with reputable organizations, but you also should ensure the products fit your clients’ needs.