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Financial Planning > Tax Planning

Your Annuity Can Do More

By Craig Hawley

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(Related: How Nationwide’s Advisory Solutions Unit Head Sees the World)

In a world where Netflix and Amazon have raised the bar for ease, convenience and choice, while keeping costs low and creating greater value, shouldn’t the financial services industry be doing the same?

More investors are demanding unbiased advice. More advisors are making the move to the independent fee-based and fee-only approach. Both are embracing products that are transparent and simple to use. At the intersection of these important trends, the annuity industry is starting to change.

More companies are cutting costs and cutting out commissions to attract RIAs and fee-based advisors. We know that RIAs and fee-based advisors require far more than this to truly fit the way they work. Their needs include fewer asset-based fees, less complexity, greater flexibility, along with integration capabilities, direct data feeds and self-service tools that today’s tech-savvy advisors demand—and their tech-savvy clients have come to expect. A new generation of annuities must be built.

Built to Fit The Way You Work

There are pioneers who can provide the total package for RIAs and fee-based advisors—fee-based annuities that are built from the ground up to align with their fiduciary standard, fit the way they work and meet their clients’ needs. They offer simplicity, greater transparency and more choice. They leverage technology to transform how advisors and investors manage their annuities.

For example, best of breed fee-based VAs are now compatible with leading data aggregation services. The most innovative have even “built the pipes” to provide direct data feeds straight into independent advisors’ portfolio management systems and workstations. The net result—VAs that can be managed side-by-side with clients’ other assets, taxable alongside tax-deferred, for more holistic financial planning.

These fee-based VAs are also aligned with the trend of greater self-service. In fact, at Nationwide Advisory Solutions, with our fee-based VA we consistently see that roughly two-thirds of advisors and their clients are performing their own transactions, such as trading and rebalancing the assets inside their VAs. It’s not just about ease and convenience—it’s also one more way to keep costs low and pass greater value back to the advisor and their client.

With this new generation of user-friendly fee-based annuities, RIAs and fee-based advisors are now armed with a powerful financial planning tool that can meet a range of client needs—no matter where they are within the different stages of the financial lifecycle, from accumulation to income to legacy planning. New fee-based annuities can help RIAs and fee-based advisors do more to give these three types of clients what they desperately need.

Protect High Earners from Tax Impacts

The accumulation phase of the financial lifecycle is so important for investors looking to prepare for and live out a more secure and satisfying retirement. But high-earning clients can quickly max out their 401(k) plans, with contribution limits of only $18,500 in 2018 (or $24,500 for those over age 50).

For high-earning clients looking to minimize the impact of taxes on their portfolio, and maximize accumulation for retirement, a simplified, fee-based Investment-Only Variable Annuity (IOVA) may help solve the challenge, with low or flat fees, greater liquidity, and a broad diversity of fund choices, to take full advantage of the compounding power of tax deferral.

Help Risk-Averse Clients Accumulate More

More risk-averse clients, particularly those in their late 50s and early 60s who are approaching or entering retirement, want to protect financial assets for the long haul. But from a tax perspective, the shift into more conservative investment options can be a double-edged sword. Fixed income and dividend yielding stocks, while more stable and predictable, also face a much higher ordinary income tax burden. Likewise, allocating to liquid alternatives and managed volatility options may potentially protect the downside for these clients—but these funds may also come with higher tax implications.

For the risk-averse client who holds a considerable amount of conservative assets and risk-managed funds in a taxable account, employing an asset location strategy with a fee-based Investment-Only VA is an effective way to improve the tax-efficiency of their overall portfolio as part of a more holistic financial plan. Tax-efficient investments, such as long-term buy and hold stocks, equity funds and ETFs, can stay in their taxable brokerage account. But the tax-inefficient assets, such as bonds, dividend yielding stock funds, liquid alternatives and managed volatility funds, should be relocated to a tax-deferred fee-based IOVA. By deferring taxes, clients can increase returns without increasing risk, to let the assets compound and grow—helping them get to their retirement finish line faster.

Safeguard Heirs from the Typical Trust Tax-Drag

It is projected that a great transfer of wealth valued at roughly $30 trillion—almost twice the GDP of the United States—will pass from Baby Boomers to their Gen X and Millennial heirs in the next three decades. An estimated $12 trillion has already changed hands, as Boomers inherited wealth from their parents.

Helping older clients prepare for and live in retirement may also include helping them plan a secure financial future for their heirs. Trusts are a common vehicle used by individuals, especially the high net worth, to leave a financial legacy and transfer wealth to the next generation. But distributions from trusts over $12,500 are taxed at the highest rate, which can negatively impact the trust investment.

Advisors can help clients mitigate this negative impact by locating that trust structure in a low-cost IOVA. This annuity structure allows distributions to be re-invested in a way where they can compound and grow, without the tax-drag that may hinder NIMCRUTs, charitable remainder trusts, and other trust structures. While traditional VAs may not work, due to costs, layers of asset-based fees and limited investment options, fee-based IOVAs are the right fit.

Taxes on trusts are high, but in a flexible fee-based IOVA, clients and their heirs can benefit from a diversified portfolio and compound what is saved on taxes. It also allows clients to control when trusts generate taxable income, thereby accumulating and compounding more savings for future generations. Now, clients can make the most of their transfer of wealth.

The Right Fee-Based Annuity to Meet Clients’ Needs

Annuities are long term investments and should be considered carefully, because there can be tax penalties on withdrawals made before age 59½. But even though a certain type of annuity may have been a good fit when it was originally sold to a client, as advisors know all too well, over time clients’ needs can change.

If clients are seeking to shelter investment gains from future taxes over a long accumulation period, a simple low-cost fee-based IOVA with more funds and flexible technology to trade and rebalance may be the right solution to maximize the power of tax deferral. If clients are seeking to protect their principal, mitigate the downside or protect retirement income, there are more fee-based annuities being built to meet these needs.

If an annuity is no longer the right fit, advisors can help a client transition from an old annuity to a new one through a tax-free 1035 exchange. Before switching, advisors should fully understand the client’s needs and evaluate the loss of any benefits or guarantees, as well as the impact of any surrender fees if they choose to switch too soon.

Your Annuity Can Do More

For a clear majority of current clients—and the growing ranks of younger digital natives poised to be the clients of the future—there is an expectation that financial services should offer them the tech-enabled ease, convenience, choice and value that they already enjoy from consumer giants like Netflix and Amazon. With this innovative new category of fee-based VAs, RIAs and fee-based advisors can give their clients the simplicity, transparency and choice they demand—along with providing an enhanced tech-enabled experience that is transforming how both advisors and investors manage their annuities.

As the industry continues to change, these new fee-based annuities can help advisors do more, to meet their clients’ most important investing needs as a part of a comprehensive and holistic financial plan—from minimizing the impact of taxes, to maximizing accumulation potential, to optimizing their financial legacy. And because they are built from the ground up for RIAs and fee-based advisors, these fee-based annuities align with their fiduciary standard—and their clients’ best interests—to help create trust, deepen the advisor/investor relationship and keep their practice strong, profitable and poised for future growth.

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Craig Hawley (Photo: Nationwide Advisory Solutions)Craig Hawley is the head of Nationwide Advisory Solutions, the fee-based distribution arm of Nationwide.

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© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.