In times of market uncertainty such as now, clients are commonly prone toward selling equity positions. But Lenox Advisors' clients who were invested in guaranteed annuity products “felt more comfortable when the market pulled back 10 percent in the first few weeks of the this year,” says Gregory Olsen, a partner with the professional fiduciary firm.

Sales of variable annuity products were down across the market by 18 percent in that first quarter compared with the same period in 2015, according to the LIMRA Secure Retirement Institute's first quarter 2016 U.S. retail annuity sales survey. Instead, the market appeared to turn toward fixed-rate deferred annuities in the first quarter, raising sales 90 percent year over year, according to researchers.

“We bucked the trend,” says Olsen. “Sales were higher on the variable products versus the fixed products, but that is normal for us as the demographics of our clientele are more suited toward variable annuities than fixed annuities.” This profile, which places the firm's clientele as better-than-average informed, is based on data from the firm's client management system. Also, the resulting average client age, he says, is at least 10-plus years younger than those of the average wealth management firm, as reported by advisor marketing groups such as PriceMetrix.
 
While not dismissing current negative indicators -- such as global volatility, absence of a robust U.S. economy, underemployment close to 10 percent, low wage jobs being added, and “a lot of discontent” -- Olsen says most of his high-net-worth customers understand that it's still better to be in the market than out. “If you're investing for the long term, why not be in a product where you can't lose money, but which has the upside market appreciation?” he reasons.

Lenox sells the majority of its variable annuities with income riders. For example, it offers annuities with Guaranteed Minimum Accumulation Benefits (GMAB), which guarantee a client’s principal, and Guaranteed Minimum Withdrawal Benefits (GMWB), which guarantee a withdrawal stream for a client in retirement. Details such as return lock-ins and distribution restrictions may apply.
 
Clients are willing to take on some risk in order to ride a market up, Olsen says. They understand intuitively that if a fixed-rate annuity can only give a 1 to 3 percent return, they should be able to do better with a variable annuity that can return 10 percent over time. Of course income riders add to fees. “Everyone's fee conscious,” he says, including his clients with $1 million and up in liquid assets, who constitute the firm's $3 billion AUM. Still, Olsen notes, a 7 percent after-fee return that the variable product could realize (after deducting a 3 percent rider fee) could return twice that of a fixed-rate product.

Clients act out of tax incentives, too, says Olsen. “We have clients that invest all of their high-yield bond fund allocation in variable annuities without income riders due to the fact that they defer the tax until retirement.”