A similar note of caution comes from Frank O’Connor, vice president for research and outreach at the Insured Retirement Institute in Washington, D.C. “The custom indexes used in the products can be complex,” he says, “so I think it’s important that advisors are clear in explaining to clients how a custom index works and how the return would differ from the market index, or indexes, on which it is based.”
A Good Alternative for Some
For the time being, though, the consensus seems pretty positive about uncapped FIAs. “They make sense for people that are looking for fixed investments and are willing to take on the risk of underperforming other fixed investments,” says Andrew Murdoch, president of Somerset Wealth Strategies in Portland, Ore. “We feel the underperformance risk is very low in this environment. [In a] higher rate environment, we recommend the bird in hand of higher rates. But right now we like the FIA.”
And within the FIA world, Murdoch tends to favor the uncapped option. “When the market moves, it can really move,” he says. And that, he adds, is “why I personally prefer uncapped indexes.” Drilling down deeper within uncapped FIAs, he likes those with “high participation rates on low volatility indexes, or roughly 50% participation rates on the S&P 500,” he says. “They give a decent chance of beating bond funds without [the] interest rate risk.”