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September 10, 2015 at 08:57 AM
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.
