Investors are looking for guaranteed retirement income, which has helped fuel sales.
Do you really want to get your clients' attention as they prepare for retirement?
Talk to them about products that guarantee them lifetime income, eliminate the downside risk of the equities market and allow them to take market gains.
That's right, we're talking about variable annuities.
With sales booming-companies saw increases of 22% across the board, while leading purveyors such as Fidelity Investments had whopping 2006 sales increases of 192%- more advisors than ever before are counseling retiring clients on the benefits of using a variable annuity as part of their retirement plan.
It's a drastic sea change from just a few years ago when nasty headlines about VA sales abuses, steep expenses and gouging commissions permeated the mainstream. "I think we're coming to a point where we're creating products that are really resonating with clients' needs for income guarantees," says Elliott Shifman, president of Outer Banks Financial, LLC, a product design and development firm in Raleigh, N.C., that has helped bring a dozen variable annuities to market in the past decade.
Today, reasonably priced product developments like lifetime income riders, combined with products that allow investors to capture the upside of their stock market investments, have begun to garner serious attention from the first wave of 40 million retiring baby boomers. With more than $1.3 trillion invested in VAs already, some estimates say VA assets could grow to more than $5 trillion by 2010, according to the National Association of Variable Annuities.
"What's driving the market is demographics," says Arthur Kopf, the senior marketing services representative and consultant at Mutual Service Corp. Kopf spends his days coaching and advising the firm's 1,500 independent advisors on annuities and other products. "Every 10 seconds, someone in this country turns 60. I work to help advisors find the best fit for clients, and think guaranteed benefits are one of the only ways to keep the golden goose alive and fatten it up," Kopf says.
These days a growing number of advisors agree. Even many who once shied away from the stigma of variable annuities believe that if they don't offer them as an option today to retiring clients, they could be liable if the stock market takes clients' retirement income down with it. "I mean the product is right there. If I wasn't at least offering it, I would feel irresponsible," says John Pinkley, a fee-based advisor and associate vice president in Raymond James & Associates' Orlando office.
"I'm definitely seeing an uptick in sales among retirees," says Pinkley. One reason is richer benefits, he adds. Many insurers such as MetLife, for instance, are lowering the age at which you can begin to receive guaranteed withdrawal benefits to 591/2. At the same time, companies are increasing the frequency at which annuitants can "step up" their income bases to reflect any market gains their investments have experienced, thus providing higher annual incomes on top of their guarantees. While three-year and five- year step-ups were once common, many companies are moving to annual step-ups.
Pinkley says he also offers accumulation annuities to clients as much as ten years away from retirement, because it allows them to protect their income base and guarantee that their money will grow by at least 5% annually or more if their chosen investments outperform their floor.
"If the market does better, you get that floor and all the upside, too," Pinkley says. "At a minimum, if you invest $1 million, you're income base ten years later will be nearly $1.7 million." That may not be an earth-shattering result for those lucky enough to retire at the height of the bull market, but it's the kind of guaranteed minimum return that would have been an absolute godsend to those who waited until 2001 to retire and watched their portfolio take a haircut of 25% or more.
"From a personal point of view, having seen what happened to my own IRA in 2000, if I had been 60, I would have had to wait until age 70 to retire," says Scott Stolz, president of Raymond James Insurance, which has pressed annuity companies to slash their fees. "I would have loved to have my IRA in a variable annuity with a living benefit that provided a floor, so when my account value dropped by almost 50%, I would have been completely protected against loss."
The sting of those stock market losses seems to be very fresh in the minds of boomers approaching retirement who may have once boasted that they were perfectly able to self-direct their own IRA accounts. "I just see more and more folks who, when given the option, decide to guarantee some portion of their retirement income with a variable annuity," Pinkley says.
Today more than 70% of variable annuities are sold with some type of living benefit guarantee, while more than 80% of contracts at Raymond James carry this kind of rider. "The time for variable annuities is really arriving, particularly with the rise in guaranteed living benefits," says Stolz, who helped engineer the company's radical plan to reduce costs and commissions and standardize contracts. The mandate, which went into effect July 31, limited the number of variable products on the broker-dealer's platform to those who complied.
Stolz believes that product design and pricing are driving sales as well. "We know that investors need equity exposure to make sure they have enough assets. At the same time, they can't afford to have their retirement benefits decline. When we put in a floor that increases over time so you protect the downside and turn it into a lifetime income at a reasonable price, it attracts a range of investors, including those who might not otherwise buy equities or mutual funds," Stolz adds.
Lifetime benefit guarantees can be critical for a large group of investors Pinkley says are in "no-man's land."
"They have assets but none they can really afford to lose. At the same time, they can't afford to invest everything in municipal bonds either," Pinkley says. "We simply can't duplicate or mimic the living benefits that the VA provides, which has the upside of the investments along with the guaranteed income stream."
The cost for a living benefit rider ranges from 40 to 75 basis points on most contracts in the industry today, NAVA reports.
"I think people are happy to pay 50 or so basis points for this kind of peace of mind," Stolz says. "The appeal is that when you elect to start receiving income from your annuity, you're guaranteed a certain cash flow, usually 5%, which will go higher if you invest well, but can never go lower." The guarantee usually runs for 20 years or the investor's lifetime, whichever is longer. I f the annuitant dies, say in the tenth year of receiving benefits, his or her beneficiary will receive the remaining ten years of benefits."
While the costs of VA contracts have come under glaring scrutiny, slowly but surely they are dropping, mostly due to a flattening competitive playing field and extremely cost-sensitive boomer investors. The cheapest lifetime income VA contract is offered by Fidelity, which charges just 60% for the contract and saw it's sales increase a whopping 192% in 2006, while the next biggest sales leader, GE Financial, saw an increase of 64%. John Hancock, which dominates sales at the broker-dealers we interviewed for this article, experienced a VA sales increase of 50% in 2006.
As part of its mandate, Raymond James required that its VA providers lower their M&E charges to 1.15%, down from as much as 1.6%. Commissions are shrinking, too, at least at Raymond James, which lowered up-front sales commission maximums to 5% from an average of about 6%. Annual commission payments stayed at 0.25% a year. The combination of up-front and annual commissions cannot exceed 7% over seven years on contracts sold through the company.
"We really believe that the compensation structure on VAs needs to get closer and closer to mutual fund pricing," Stolz says. "We think we helped this along by capping commissions and reducing fees. We're starting to see some bigger bank broker-dealers start to do this, as well."
Raymond James is also encouraging VAs with no loads, no commissions and no surrender charges. The first manufacturer on their approved list to bring one to market is Pacific Life, which is charging just 40 basis points.
The next focus will be on performance and fund selection and management, says Outer Banks' Shifman, "You have to give advisors the ability to add alpha for clients. If you just provide them with downside protection, and they're investing in low returns or index funds, you won't add value. They'll be getting a CD rate."
Shifman recently created a new variable annuity (the Midland Vector Variable Annuity) for Midland National Life. It's designed for active money managers who like to engage in momentum and sector rotation investing. Forty-nine of the annuity's 79 subaccounts have no trading restrictions and five allow twice daily trades. The annuity also offers two high-yield junk bond funds.
Shifman predicts that as fund companies themselves step up to the plate to do VA product development, they'll be able to utilize their wide distribution channels and cheaper institutional funds to bring prices down further. "I think these folks burning the midnight oil may be able to come up with the next wave of solutions," he says.