MVA for whose rainy day?
Although annuity MVAs are a positive for both the insurance company and saver through allowing sticky money to stay invested by the company to produce a profit and return, they can be a big surprise when interest rates start rising and a client surrenders a contract only to find a surrender charge along with the dreaded MVA.
Despite all the much more serious clamor about the Veterans Administration (VA) and its mishandling of claims and services for the last several years, there is another VA that may cause many annuity savers stuck in low-yielding contracts to have a particularly rainy day if rates rise. The annuity industry has not had a negative market value adjustment (MVA) in over 30 years, but it is not something to ignore as some other industry pundits have expressed.
Any advisor who sweated rapid rising rates out as 10-year Treasury notes hit 15 percent in the early 1980s can attest to the impact of a value adjustment to an annuity. After starting the early 1970s off in low single digits, older calendar annuity clients will remember the hit they took at the time of surrender of their low-yielding contract. It was a financial blow comparable to a whack by Tony Soprano.
There is another VA that consumers should be aware of, too, as interest rates remain close to all-time lows. This one can be financially devastating, as well. One of the reasons I have recently been allocating more safe and secure money to personal pension-like alternatives such as annuities and structured CDs has to do with the stage of the economic cycle we are in. I am reminded of the humorous adage that the problem with investment bank balance sheets is that on the left side, nothing is right, and on the right side, nothing is left. That adage may apply to the Federal Reserve’s $4 trillion balance sheet, as well.
With interest rates historically higher 95 percent of the time, according to AXA-Equitable, it’s no surprise that advisors and money managers are stretching hard for yield, as indicated by the inflows into junk bond funds in 2014, according to Lipper Analytical. In addition, advisors are doing the same, and consumers should beware. Recently, an agent in California was accused of misleading prospects by selling fixed indexed annuities with a surrender charge greater than the existing charges the client was facing. The agent faces up to 36 felony counts, as lucrative up-front bonuses were allegedly used to entice prospects into transferring contracts.
Certainly 36 sales of the same of anything using deception is not beneficial to anyone but the advisor, and it is a prime reason why consumers should seek an advisor who is required by state, federal and industry mandates to act in the very best interest of the client. This standard is returned to a “fiduciary.” It is one reason why a consumer should ask if the advisor is given any incentive to sell a product. I believe this is a conflict of interest for a pharmaceutical wholesaler and field marketing organizations (FMOs).
So, what’s next on the radar of regulators for a consumer to be aware of? As I mentioned earlier, interest rates have been lower 95 percent of the time. Advisors and consumers should be aware of the MVA provision in the fixed annuity contract. Although annuity MVAs are a positive for both the insurance company and saver through allowing sticky money to stay invested by the company to produce a profit and return, they can be a big surprise when interest rates start rising and a client surrenders a contract only to find a surrender charge along with the dreaded MVA. If interest rates rise after you have purchased an annuity, then your MVAs are negative and your surrender charges will increase. If rates fall, however, surrender charges may disappear. With the average surrender period at nearly seven years for annuities, a consumer should ask two simple questions: Will I need the money over the surrender period, and what is my outlook for rates if I do need the money? Very few annuities do not have MVAs, but it will pay huge dividends to ask your advisor about them.
There seems to be a consensus out there that rates under the “new normal” and “new natural” will remain low for quite some time. After 34 years in this business, we try to run from the consensus, recognizing that it may have a tiny flaw. History has taught us that tiny flaws in central bank policies can devastate hopes, dreams and economies worldwide.