Now that you know a little more about IOVAs, such as when to consider them and what type of client might benefit from them, it’s time to dig deeper and do your due diligence. Below are a few recommendations for additions to your due diligence process.
1) Look beyond diverse investment options. A plethora of investment options can be enticing, and todays IOVAs are known for a vast array of offerings that span different asset classes, equity styles and investment philosophies, but beyond the breadth and depth of investment options, it’s important to “look under the hood.”
- Track records. While we know that we cannot predict future performance, the best indication of how a fund might perform is to look to the past. Look into how each fund has performed and the skills of the investment manager. Where do you find this information – a third party that provides data on most investment products, including variable annuity investment options, like Morningstar.
- Independent investment research and ratings agencies. Enlisting the help of a third party independent investment research firm such as Morningstar can provide information on how well an investment has performed and give insight into fund managers. Through this service you can determine which investment options have a ten, five or even three-year track record. Has the fund been rated? How many stars did it receive – three, four, five? How does each investment stack up against similar options? You can even research the fund manager – what are his/her risk and cost-adjusted returns, performance consistency, style, etc.?
- Alternative investments. Alternatives are a great addition to the annuity lineup but it’s still a good idea to dig a little deeper when making your selection. Begin by looking into how many alternative investments are available. How many of those investment strategies have unique asset classes that may help to reduce portfolio risk? Do those options have a track record as mentioned earlier? Keep in mind, an alternative investment strategy is subject to a number of risks and is not suitable for all investors. Your client should carefully review and consider potential risks before investing.
2) Freedom and independence to make the best choices. Given today’s challenging economic environment, it is especially important that advisors not only act in the best interest of their clients, but that they have the independence and freedom to make the best choices to build the best possible portfolio.
- Third party asset allocation and third party fund selection. IOVAs are noted for offering many investment options, but it can be difficult and time consuming to research each one. Third party asset allocation resources can be helpful in several ways in including determining if the IOVA has fund specific portfolios that meet your client’s investment strategy and risk tolerance. Or you can use the suggested portfolio as a starting point to whittle down the options and then customize the portfolio from there.
- Unbiased funds. In the theme of maintaining independence, something else to consider is the proprietary versus third party investment options. Are you and your client comfortable with the possibility of being automatically moved if a non-proprietary fund is replaced in the carrier’s IOVA lineup with a propriety fund? Or would you prefer to be in complete control of asset allocation with an annuity that exclusively offers non-proprietary investments?
3) Charges, fees and other considerations. Annuity contracts can be intimidating and fees and small print can be difficult to navigate, but again IOVAs are known for simplicity and cost efficiencies. However, there are a few considerations that you should look for to make sure that certain points are included. Keeping a watchful eye out for these is critical in determining if what you are considering is the right choice for your clients.
Mortality & Expense (M&E). IOVAs usually offer a fairly straightforward fee structure, but you should look for answers to the following:
- Are the Mortality & Expense charges reasonable?
- Does the Mortality & Expense buy the client a death benefit?
Several features that should be included at no extra charge:
- Reallocation and rebalancing
- Automatic required minimum distributions
- Stretch options; confirm availability and what they are (request a copy of the restricted beneficiary form)
- Telephone withdrawals
- Sales support – especially locally
Hidden tips. A few more points to consider. These are often overlooked, but are just as important as the rest of the contract:
- Is the death benefit “baked into” the contract or is it available for an additional cost?
- What is the maximum issue age?
- When will annuitization automatically kick in? This is especially important for clients with assets earmarked for beneficiaries.
Keeping up with all the options available today can be time consuming and even overwhelming, but everyone knows it is critical to make sure your client’s investments still fit their needs. The best possible solution doesn’t always have to be the most complicated. Sometimes simple and straightforward gets the job done.