Fixed index annuities are terrific products. The potential for market-linked returns, coupled with principal protection, form the basis for a powerful set of features and benefits. The market has responded -- sales of FIAs have grown to more than $25 billion per year since their creation in 1995. But long-time producers of FIAs will recall that the product has always had its detractors and that the FIA industry has seen its fair share of bad press. Some of that criticism was deserved, but much of it has been due to fundamental misunderstandings related to how the product works and what it is designed to do. Moreover, the regulatory environment for FIA sales has become increasingly challenging since the NASD's Notice to Members 05-50 in August 2005 (the NASD is now FINRA), which required that member firms put special procedures in place concerning FIA sales, and the Securities and Exchange Commission's recent enactment of Rule 151A, which treats FIAs as securities, rather than as annuity contracts for purposes of securities regulation and producer licensing.
The recent market meltdown and continued market volatility have caused much of the bad press concerning FIAs to melt away. Principal protection is extremely attractive in an environment where the broader market is losing huge percentages of its value. And there is even some reason for optimism on the regulatory front on account of legislative and judicial responses to Rule 151A. Yet FIA sales figures seem to have crested and anecdotal evidence from producers in the field suggests that the market for FIAs is very difficult today. Why is that, do you think?
I want to suggest five reasons to increase FIA sales in the current environment, as producers ought to re-think their view of FIAs, how they fit into a client's financial life, and how they market them.
One size doesn't fit all. When the only tool you have is a hammer, everything looks like a nail. Clients and prospects are becoming more and more aware of the difference between a salesperson and an advisor. If disproportionate numbers of your sales are of one product or even of one type of product, you should re-think your role and your business model. FIAs are excellent products, but the answer to every financial question isn't "index annuity." Producers often speak of FIAs as providing "sleep insurance" in that an FIA owner can sleep soundly on account of the principal protection it offers. The best sleep insurance for producers is to do the right thing for the client every single time in every single circumstance. To do that, the producer will need to possess a broad range of skills and provide a wide range of tools and products. One size doesn't fit all.
- An FIA sale should be a "positive sale." Based on many, many discussions with producers across the country, I'm convinced that most FIA sales have been "negative sales." What I mean by that is the driving force behind the sale was a negative one, most often the fear of principal losses, despite lip service paid to reasonable rates of return. Some prospects responded to that fear by buying principal protection. But FIAs aren't the "next new thing" anymore, and most of these easy sales have already been made. Moreover, prospects who have already experienced losses of as much as 40 percent or more won't likely respond to a negative message. They often think that making a change will lock-in losses and that they need to stay fully exposed to the market to have a chance of accomplishing their financial goals. What an FIA can protect against is an important component of what the product offers, but the focus of your sales approach today should be how the product can be used positively to meet and exceed the prospect's financial goals and objectives. A producer without a great, positive answer to "What can an FIA do for me?" will continue to struggle in today's environment.
- An FIA sale shouldn't be a "return sale." Even though an FIA sale should be a positive sale today, that doesn't mean that it should be a "return sale." If you are suggesting that clients should expect returns in the 6 percent to 8 percent range -- or even higher -- you are setting expectations that will cause you problems down the line. More importantly, actual returns of FIAs over five-year and longer periods doesn't support your claims. An FIA will not often provide the highest return over a given period. It isn't designed to do that. Instead, an FIA will provide a reasonable rate of return and principal protection. Even though FIAs will compare very favorably with market products in difficult market environments -- sure and steady can win the race -- FIAs were designed simply to provide a better return than traditional fixed annuities. The objective here should be balance, balance between potential (reasonable, market linked returns) and protection (the safety of principal).
- An FIA sale shouldn't be a "formula sale." The days are over for those producers who routinely follow a formula, sometimes scripted word for word, to get the appropriate responses from a prospect and then close the sale (if they ever existed). The pervasiveness of media and particularly of the Internet means that prospects are less and less likely to take what a producer says at face value - and that's largely a good thing. In today's world, a producer needs to pitch the formula into the trash and really listen to his clients and prospects. When the producer fully understands what the hopes, dreams and needs are of the people sitting across the table, he or she can then tailor a plan to do what ought to be done for them. Such a plan will typically include foundational assets that require principal protection, and will often include a provision for retirement income and a means to leave a legacy -- all of which can we well-suited for FIAs. I don't mean to suggest that certain types of questions don't deserve consistent answers, that similar objections don't deserve similar responses, or that certain approaches and concepts won't work in a variety of circumstances. Following a formula means pushing prospects toward a particular sale before you've heard anything of substance from them. Better practice means listening and learning so that you can provide your clients what's best for them. In today's environment, prospects are justifiably wary. Accordingly, advisors must listen carefully and take no short-cuts. Don't just follow a formula.
Make your message consistent. Sometimes "hammer" producers only have the one tool, but sometimes they only choose to use one tool. These producers move from next new thing to next new thing. Maybe they once sold a lot of securities or variable annuities, then moved to FIAs, and are now considering moving on to something else. While certain strategies work particularly well in certain situations or with certain types of clients, producers need to be sure their overall approach is a consistent one designed for the long-term financial health and well-being of their clients. As information becomes more and more readily available, clients and prospects are becoming more and more aware of which producers are in it primarily for themselves and which producers primarily want to do what's best for their clients.
Change is a constant in our industry and in our world. All of us involved in providing financial services to clients generally, and FIAs specifically, need to re-think how we market, sell and utilize FIAs both for the benefit of our clients and for the long-term health of our businesses.
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