Fixed indexed annuities: facts, perceptions and the mainstream media
By Lou Aarons
Delaware Valley Financial Group
FIAs provide principal protection, guaranteed future income and long-term growth potential based on stock market performance. Set the expectations properly and your clients won’t be disappointed.
I must start with full disclosure. From 1998 until 2002, I served as the Chief Compliance Officer of a regional broker-dealer. Those were the early days of fixed indexed annuities, and I was a front-line soldier of the securities industry being trained and required to train others about the seemingly complex annuities that the securities industry felt should be considered regulated security products. With 240 active registered representatives to oversee, there were enough who were selling FIAs that it was clear I needed to understand them inside and out. My education turned out to be career changing.
I came to understand many things about the products and the way they were sold. First, the products were complex, but no more so than the mutual funds, REITs and variable annuities that seemed to be in everyone’s portfolio. There was a wide assortment of product features with surrender periods ranging from five years to 20 years, myriad interest crediting methods and a variety of small details like penalty-free liquidity, death benefit calculations and guaranteed minimum interest rates. Again, they could be confusing but not any more than the mainstream mutual funds and variable annuities. The products needed to be sold properly and the agents selling them needed to be properly trained. The insurance industry has come a long way since then.
FIAs are now very innovative, with features and optional riders that are targeted to reach specific retirement goals. When used properly, they can guarantee results many years down the road. No more hoping to be able to take a certain amount of income at retirement. Product riders will guarantee it. No more delayed retirement because of an ill-timed market correction. Guarantees can be very important to someone planning for retirement. FIAs can provide them.
Unfortunately, many misconceptions still exist, and they are reinforced by media outlets who don’t understand anything beyond “traditional” investments and Internet searches that reveal outdated information. Quality education goes a long way towards eliminating your client’s misconceptions, such as:
Complexity – A wise mentor of mine once said, “When you buy a car, you don’t want to know how the engine works, you want to know that it does work and that you have a warranty in case it breaks.” These products are not stock market alternatives and shouldn’t be sold as such. Don’t avoid disclosing caps and spreads, but don’t get hung up on the minutiae either. FIAs provide principal protection, guaranteed future income and long-term growth potential based on stock market performance. Set the expectations properly and your clients won’t be disappointed. Commissions – According to Annuityspecs.com, the average indexed annuity commission in 2011 was 6.5 percent. That’s certainly not out of line when compared to mutual fund A-share sales charge of 5.75 percent or the average variable annuity commission that is between 5 percent and 7 percent. My point is, FIAs do not pay an egregiously high commission despite a mainstream press that claims otherwise. Also, trail based commissions are available from most companies, and they are very comparable to mutual fund trail based commissions and managed account fees. And, the commissions do not come directly from client funds.
Internal fees – Exclusive of optional riders and add-ons, there are no internal fees in FIAs. That’s the truth.
Riders – The riders available on these products vary so greatly that it requires extensive education by advisors. Don’t simply rely on your primary carrier’s wholesaler. He or she can educate you on their product, but not in comparison to others. If you can’t get the information independently, drop me a note. I’ll get you detailed comparative information so you can recommend the best rider to meet your client’s goals.
Caps – Yes, there are limits to the interest credits you can earn in a FIA. That is the trade-off for a guarantee of no negative performance in a bad market. Learn the different options and how they react to different market conditions. That way, you can properly set your clients’ expectations. Earning 4 percent when they expect 4 percent is much different than earning 6 percent when they are expecting 10 percent. Be honest with yourself regarding what FIAs can earn in this interest rate environment and you won’t unwittingly mislead your clients.
Surrender periods – It seems as if all the focus with annuities falls on the surrender charges. FIA surrender periods range from five years to 16 years. Premium bonuses range from 0 percent to 12 percent. Most bonuses apply to the account value, some only to the income rider base. Different clients have different needs and tolerances. Annual 10 percent free availability is pretty much standard. Some FIAs have a return of premium rider included. Most accelerate free withdrawals or eliminate penalties completely for terminal illness or confinement. Almost all waive penalties upon death. If you’re old school and predominately sell one product, now is the time to get out of that rut. Fit the product to your client, not the other way around. It can save a great deal of heartache down the road.
Like any financial tool, when used properly, FIAs are very effective but when used improperly, they can be a major problem. Be honest and direct when selling the product. The proper product is there to solve your client’s need. Once you dispel the myths and allow your client to clearly see why they benefit, they’ll buy. Be prepared to battle misinformation if your client insists on self-directed research through the Internet and mainstream media. The truth is on your side if you use it properly.