Uncapped FIAs seem particularly pertinent these days with interest rates on the rise. “The recent low-rate environment has motivated more advisors to look for alternatives to bonds for a portion of clients’ retirement portfolios, and more and more advisors have been identifying uncapped FIAs as the right alternative,” says Dady. “A rising interest-rate environment reinforces the need to consider bond alternatives.”
Trade-offs
While some form of annuity may have a place in most retirement portfolios, if for no other reason than they mitigate longevity risk—i.e., the chance that clients outlive their savings—uncapped FIAs aren’t necessarily right for everyone. “There are trade-offs that clients need to understand and be comfortable with,” says Dady.
So it’s understandable that some advisors are more cautious. “Policyholders with an uncapped strategy will benefit more than policyholders with capped strategies in the years where the market goes up by 10 plus percent,” acknowledges Scott Stolz, senior vice president of the Private Client Group Investment and Wealth Solutions at Raymond James in St. Petersburg, Fla. “On the other hand, because of the spread that is deducted from the returns, policyholders with uncapped strategies will also experience more years of a 0% return than policyholders with capped strategies.”
Uncapped FIAs may be best, he says, for clients who are tempted by the stock market but wary of equity volatility. “While we never believe in positioning FIAs as an equity alternative,” Stolz says, “uncapped strategies can be a good alternative for clients that want to reduce their exposure to equities but still benefit from years where the market outperforms long-term averages.”
Maturity Counts
They are also a better fit for more mature clients. “Uncapped FIAs would be most appropriate for conservative to moderate investors that would like to have principal protection features. These clients may be approaching retirement,” says Jessica Rorar, a senior planner at ValMark Financial Group in Akron, Ohio. “These types of products would be inappropriate for younger investors who are aggressive investors. Usually, principal protection isn’t a concern for these types of investors. Also, indexed annuities don’t credit dividends. These younger, aggressive, risk-tolerant investors want to fully participate in the upside opportunity of the market, and FIAs don’t allow them to do this due to participation rates and/or spreads/caps.”
She adds that timing may be key. “Rising interest rates usually push up participation rates and/or caps of FIA products. The client may want to hold off locking into a [fixed-index annuity] until rates stabilize,” says Rorar.
Proprietary or Custom Indexes
Another important consideration is the particular index that the uncapped FIA follows. “I am a fan of uncapped FIAs that use non-proprietary indices,” says Rorar. “Some carriers market uncapped FIAs [with] proprietary indices upon which the client doesn’t know the underlying holdings.”