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Life Health > Annuities

Indexed Annuities Can Move the Volatility Out of the Client's Hair

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What You Need to Know

  • The stock market has bounced back.
  • Client portfolios may be at or close to all-time highs.
  • Greg Fortier says you should consider helping clients add a floor.

Employers are buying big group annuities to carry out pension risk transfers.

Greg Fortier believes that more investment advisors should talk to their clients about using individual annuities to do something similar.

Fourier, a financial advisor at Centinel Financial, talked about the value of individual annuities in reducing clients’ portfolio risk recently in an email interview.

“An index-linked annuity and fixed indexed annuity allow for risk transfer rather than just diversification,” Fortier said. “This is important for folks that are approaching retirement.”

What It Means

Financial professionals have talked for years about the importance of risk management and risk diversification.

Now, the idea of risk transfer — simply putting the headaches associated with investment market risk in someone else’s head — may be getting more attention.

The Nest Egg Today

Fortier, a holder of the Chartered Financial Analyst professional designation, has been a financial advisor at Centinel since 2018. Before that, he worked as a wealth manager, financial advisor and financial consultant at firms like Merrill Lynch and John Hancock.

He likes to help clients with high-end investment management strategies, such as using security-backed lines of credit to tap large assets for cash without incurring taxes on investment gains.

“Financial professionals should be looking at three pillars,” he said. “Tax, fees and risk. Most forget taxes are usually their biggest expense.”

But Fortier said that it’s also easy for advisors who are focusing on maximizing clients’ return on investment to lose track of the need to help clients cope with risk.

Now that interest rates are higher, issuers of registered index-linked annuities and non-variable indexed annuities can offer clients more attractive terms, Fortier said.

“We use these tools to help craft an asymmetrical risk reward for clients by retaining upside but transferring the downside risk,” Fortier added.

What the Big Players Are Doing

When your retail client transfers investment risk to an insurer, that’s the purchase of an annuity contract.

In the world of employer-sponsored pension plans, that’s a pension risk transfer.

An issuer survey from LIMRA, a nonprofit life insurance and financial services research organization, shows that pension risk transfer volume increased to $6.3 billion in the first quarter of this year, which ended March 31, from $2.7 billion in the first quarter of 2021.

LIMRA is predicting that pension risk transfer volume will be strong this year, in part because pension yields are up, making the amount of value that can be locked in through a pension risk transfer more attractive.

If individual clients nearing retirement age can buy annuities and set a floor under nest egg value at a time when the investment value rollercoaster is at a high point, that could make IRA risk transfers and 401(k) account risk transfers as appealing to individual clients as pension risk transfers are to the giant corporations of the world.

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