Sizemore prefers what he calls “RIA-friendly annuities” with “low fees, short or nonexistent surrender periods and no up-front commissions,” he says. “Personally, those are the only annuities I would touch.”
The VA Wrapper As Volatility Hedge
Still, some market participants suggest that holding international securities within a VA wrapper can actually be a safer way to go. “Advisors and investors are wary about the long upward trend in the [U.S.] market,” says Kyle Shores, chief investment officer at Botsford Financial Group in Frisco, Texas. “Many believe the most growth potential left in the market is going to be in mainly non-U.S. based investments. However, because they are wary about how much longer this market can last, they are using the variable annuity to hedge.”
The thinking works like this, he says: If the market continues rising, international investments might be the biggest winners. But in the event of a downturn, international indexes will likely fall at least as much as their domestic counterparts. Since VAs limit the upside potential but also cushion against the downside risk, they work as a hedge against volatility.
“So do your international investing where your future income is not affected by the whims of the market,” he explains, adding that this allows stakeholders to “take risk and potentially be rewarded on the upside but protects what is really important: the income in a market correction.”
Diversification, An Old Idea
While that may be true, Michael Rosenberg, a registered financial consultant and managing director at Diversified Investment Strategies in Livingston, N.J., insists that basic diversification principles still apply. “The same diversification rules would apply within a VA as would apply outside a VA,” he says. Rosenberg typically diversifies his clients’ portfolios with some international exposure, “though the percentage of international is less the older a client is,” he says.
What is risky, he stresses, is not diversifying. “If you just own international alone, yes, [that would be] risky.” He notes that just slightly more than half of the world’s equity market is based in the U.S. “So by not diversifying through international exposure, you are losing exposure to almost half the [total] equity market.”
For advisors, then, the basic portfolio-building rules are as applicable to VAs as other investments. “Even though a client is in a VA, you still want to manage the investments to perform,” notes Rosenberg. “Thus, most advisors need to adhere to an approach that a diversified portfolio will provide lower volatility. … Though a specific asset might have a higher rate of return over time, the portfolio with lower volatility will have greater growth over time.”
Buffering Standard Deviations