Dealing with market volatility is a fairly normal part of the financial planning process. Markets go up, they go down, they stabilize…and then they take us on another wild ride when we least expect it. Financial professionals understand this reality and the need to help their clients prepare for a variety of outcomes, but some clients are a different story.
For these nervous investors, any mention of the market brings intense feelings of fear and loathing that, while understandable, are not conducive to long-term financial planning. Although volatility can certainly be unnerving, substantial assets are needed to fund retirements that now routinely last 30 years or more, so staying away from the market is simply not an option if your client still needs to grow their retirement assets.
Thus, the challenge for many financial professionals becomes convincing their hesitant clients that markets are inherently volatile and keeping their money in cash or other low-yielding products may not be not a viable solution. Yet, as we continue to see, any market volatility can elicit an emotional response and give these clients another reason to sour on market participation.
That was certainly the case with the 2008-2009 market crash, and unfortunately, the effects of that event are still being felt today. According to S&P 500 historical data, despite a more than 1,400-point gain in the S&P 500 Index from its low point in March 2009, many consumers remain hesitant. In fact, nearly $8.9 trillion in cash is still sitting on the sidelines as reported in J.P. Morgan Asset Management’s “Market Insights Guide to the Markets U.S.” in May, 2015. A 2015 survey by Allianz Life Insurance Company of North America found nearly four out of five respondents preferred financial products with guarantees over those that had higher growth potential, but the possibility of losing value. Forty percent of those surveyed said they feared market uncertainty in investing for their retirement.
But, as we know, this timidity can backfire when it comes time for retirement and investors find they may have failed to accumulate enough assets. These individuals may benefit by discovering new ways to build assets, while having confidence that they have some level of protection from loss.
Financial professionals can appeal to these unready and unsteady clients by offering them new options with products that may offer traditional variable options as well as growth potential through indexing features and that provide a level of protection. Financial professionals may want to learn more about a product that offers these benefits—the indexed variable annuity (IVA).
For today’s financial professional, the appeal of helping clients accumulate assets for retirement while helping to eliminate some of the risk of loss is very compelling. The appeal is even stronger when we can help clients find products that offer death benefits and tax provisions as well.
Mechanics Of Protection
The mechanics of these variable products are straightforward: There is a trade-off between potential growth and a level of protection. Positive index returns are credited up to a specified limit (a cap) over a specific time period. If there is an index loss, there are two ways to get some level of protection. One option has the insurer absorbing a specified portion of the loss (a buffer) before the investor experiences any losses. In another option, the investor absorbs a specific portion of the loss (called a floor) and then the insurer covers the remaining loss. Finally, some products offer an option where the investor would be protected against any index loss.
Financial professionals can play a role in ongoing client guidance to help them navigate volatility. Throughout the life of a contract with one of these products, contract owners can make changes to pursue the accumulation strategy that best suits them at each investment period. This includes transferring to/between index options at the end of each investment period subject to transfer rules which vary by product.