One thing is for sure in the financial services industry, things change.
Everything from regulations, to how we interface with our clients is very different from it was even just 10 years ago. In the past, when I would call an investment advisor about a fixed indexed annuity (FIA), the most common responses I would hear ranged from “I’m not interested,” to “I’m a fee-only advisor,” to “I use bonds for fixed income,” or to my personal favorite, the dial tone. Remember getting that good ol’ dial tone when you were building up your book of business?
Fast forward to today, it’s the opposite.
In his recent white paper Fixed Indexed Annuities: Consider the Alternative, respected industry expert Roger Ibbotson of Zebra Capital Management said, “Annuities have for a long time deserved a place in retirement portfolios, and the evolution of the industry has made these vehicles more flexible and attractive.” Ibbotson went on to say, “It is our view, considering today’s low interest rate environment and our modest expectations for bond returns in the coming future, FIAs are an alternative to consider.”
Consumer and advisor interests are at an all-time high. With retirees focusing more on income, the guaranteed income benefits of FIAs have taken center stage for advisors. (With, of course, due attention to the disclaimer that annuity guarantees are based solely upon the claims-paying ability of the issuing company, and the annuity holder’s compliance with product terms.)
During retirement, when every day becomes Saturday, income is very important to retirees. With pensions quickly becoming a thing of the past for most, advisors are challenged with the task of making clients’ money last as long as they do. Annuities, by design, generate lifetime income. They are the only financial instrument that is designed to do that contractually. When evaluating FIAs, advisors should focus more on the annuity’s ability to satisfy a client’s required income need, rather than its ability to keep up with equity like returns.
With so many different options available in this space, how does an advisor choose the best fitting one for their clients?
To help, here are five questions to ask when choosing the right guaranteed income benefit for your client:
1. Does the income base grow with a guaranteed growth rate or a participating grow rate?
Some products offer a guaranteed income rate for growth such as 7% while others are tied to the performance of the underlying product’s cash value.
2. What’s the cost of the feature?
There are guaranteed income benefit options that have fees while others have no expense at all.
3. Does the product offer both level and increasing income potential?
Inflation is very real. There are products that offer income streams that can rise over time to keep up with inflation. The tradeoff is typically that you start with a lower income.
4. Do you have to choose a single or joint lifetime payout at the time of policy inception or can you choose that later when the guaranteed income is activated?
Some living benefit options allow you to choose single or joint life income at any point in the future, giving more flexibility.
5. What is the cash value of the FIA’s growth potential?
Many FIAs that offer guaranteed income benefits have lower cash value potential. However, some offer a great balance of guaranteed income and accumulation potential.
With the innovation of low-cost or even cost-free living benefits, advisors are using FIAs in a whole new way. What we are seeing is a re-engineering of the fixed income portfolio with the purpose of solving for a client’s required income need in retirement. Once this is achieved, the advisor has more flexibility to manage the remainder of the client’s funds with equities or other vehicles. Accommodating the business models of advisors has become a top priority for manufacturers of FIAs. Recently, a number of carriers began offering fee-based, commission-free FIAs to accommodate the fee-only advisor.
Change is necessary when demand meets a lack of supply. The acronym FIA has taken on a new meaning to many advisors, now referring to them as the Fixed Income Alternative. Using guaranteed income benefits to take the grey out of retirement makes income planning more black-and-white.
Ray Kathawa is vice president of practice development at M&O Marketing.