Doing Homework Will Benefit Brokers And Purchasers
By Rich Lane, Director, Sales and Marketing
Published in the June 2014 issue of California Broker. Reprinted with permission.
The fixed annuities marketplace is getting crowded. New entrants mean that seasoned and new advisors have a lot of information to review in order to make educated product recommendations to their customers. Brokers can develop a secure and long-term client base by developing a thorough understanding of the big picture of the annuities market – the sales process, what a purchaser is looking for and the carrier's integrity.
Aging Workers Seek Conservative Investments
Since the 2008 market downturn, there has been a shift in the way investors – particularly baby boomers – invest their retirement money. The average age of an annuity purchaser is 651 and getting younger. Life expectancies are on the rise, so workers will need more income to sustain them past retirement. This, coupled with risk aversion, has led to strong growth in fixed annuity sales.
Fixed annuities are a great option for purchasers who want an investment that will provide a guaranteed rate of return. Workers nearing retirement age are at a life stage where investment objectives – and risk tolerance – decrease. A fixed annuity can be a practical alternative for investors who don't want to gamble with the money they've worked so hard to accumulate for retirement.
Payout options for fixed annuities make them an attractive option for purchasers as well. A deferred annuity enables workers to accumulate savings – on a tax-deferred basis – until it's distributed as a payment stream or a one-time, lump-sum payment. An immediate annuity guarantees payments, which start right away, for a specified time period or a lifetime. Whichever path a purchaser chooses, a fixed annuity offers the safety of that guaranteed minimum for those who are close to retiring and more conservative with their nest eggs.
The bottom line is that most people buying fixed annuities are more concerned about the return of their principal balance than the return on it. Unlike bond funds or other types of equity-based product, the principal that is put into a fixed annuity is guaranteed at a minimum return if maintained for the life of the annuity. If an employee's life savings is $250,000, his or her investment objectives are likely very conservative. The employee wants to purchase a product that guarantees him or her a stock market crash won't reduce that $250,000 to $150,000 and send them back into the workforce.
Take Care Choosing A Carrier
Finding an annuity carrier that is a good fit for brokers and their clients can be a challenge. New entrants that haven't previously carried annuities products have increased the type and number of carriers to consider. Because of this, brokers have a lot of questions that must be answered before recommending a product. Which company will add value to the service you provide your customers? Will they help you stand apart from the competition? Is the carrier's focus on short-term gains or a continued presence in the annuity marketplace for the long term?
When determining which carrier to work with, consider these four things: long-term outlook, ratings, how funds are invested and the company's assets.
Consider carriers that have been around for decades – or even more than a century. Do they have a track record of successful, long-range investing for their customers? Today, a 65-year-old retiree can be expected to live at least another 20 years. Brokers and their customers need to know that the company will be available – and able – to pay out benefits.
A retiree's main concern is that his or her assets will be available at retirement – and even beyond for heirs. Make sure the carrier's outlook matches that of the customer's. Will the carrier be there to support that claim and help the retiree move forward, or sell the liability off to another carrier?
In addition to longevity, the quality of a carrier is important. Working with a respected, high-quality company can eliminate default risk and guarantee income for purchasers when they need it the most. Financial strength ratings factor in a company's investment portfolio, cash flow, earnings and other internal and external factors. Ratings serve as an indication of a carrier's vulnerability to unfavorable economic conditions and the ability to meet its financial commitments.
Strong financial support is the basis of a fixed annuity. A strong reputation is one of the highest qualities in a carrier. Consider only the highest-rated companies that meet brokers' and customers' needs. This information can be found by contacting well-respected ratings agencies such as A.M. Best, Moody's and Standard & Poor's.
How Funds Are Invested
It's important to investigate a carrier's financial standing and history to confirm its strength and stability. Brokers should review the investment portfolio of carriers they're considering for fixed annuities. Does the company invest in high-risk assets that don't align with their customers' needs? How do its investments or liabilities match up with fixed annuities?
Although every carrier has to make investments to support its annuity responsibilities, investment portfolios can vary from company to company. Carriers that align investments and liabilities with those of fixed annuities know that their policyholders don't want to outlive their money.
A financially strong and stable carrier is dedicated to meeting the long-term needs of its policyholders. Be sure that the fixed annuity a broker offers his or her customer comes from a carrier that has shown its stability through turbulent economic conditions such as those we've had over the last decade.
Understanding The Purchaser Mindset
Although rate of return may be important to a broker, often it's the opposite for a purchaser. Funding a comfortable retirement and leaving money to heirs are what the safety of a fixed annuity can offer. Brokers should focus on the features and benefits of a fixed annuity and align with a carrier that acts as they do – with integrity, personalized service and customer satisfaction.
1 The Standard internal data.