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FIAs Balance the Interest Rate/Bond Yield Seesaw

The carriers you work with are likely committed to developing products that help you attract new clients. But they also strive to provide you with tools that will help you keep the clients you already have.

Consider the case of fixed indexed annuities, which may provide the boost clients need to increase their earning potential and protect their principal.

Let’s look at why fixed indexed annuities may be beneficial to your client’s retirement plan. When interest rates rise, the share prices of long-term bond funds fall, meaning bond fund investments can be risky in a rising interest rate environment. In a 2014 survey conducted by The American College, 61 percent of retiree respondents didn’t understand this inverse relationship between interest rates and bond fund values.

To help clients understand the correlation between rising interest rates and bond prices, think of a seesaw. When interest rates rise, the value of outstanding bonds falls because the interest they pay is less than what investors could receive on a new bond. This could cause the value of a fixed income portfolio to decrease. Fixed indexed annuities can help avoid the negative impact of rising interest rates because they credit interest that is based, in part, on the performance of a market index. Additionally, fixed indexed annuities offer tax-deferred growth, annual penalty-free withdrawals, the opportunity to receive lifetime income, and principal protection.

While bonds may be risky in a rising interest rate environment, equity investments can be risky for individuals with a shorter investment horizon, such as those who are nearing retirement. Equity markets are near all-time highs, but as history has shown us, when long-run bull markets end, the decline can be pretty dramatic. The average bull market lasts around five years, so now may be the time to talk about moving some gains into a lower-risk option. A fixed indexed annuity allows your clients to continue to participate in market growth, while protecting from market declines.

Adding fixed indexed annuities to your offering of financial solutions can be an effective way to retain existing clients and grow your customer base, which will increase your revenue. Your clients trust you and are looking for your recommendations to maximize their retirement income. Expanding your portfolio of products and services will demonstrate your commitment to addressing your clients’ wants and needs more comprehensively.


Why Client Retention Is Key

To understand why offering FIAs can help with client retention — and why client retention is so important — take a look at today’s busy world. We jump from task to task and are constantly looking for ways to streamline, simplify and synergize. From what's in your local supermarket to the technology you have right in your home, today’s consumers want bundled solutions. Who doesn’t want to keep things simple, right?

Think about what’s located within a grocery store. There’s often a coffee shop, a florist, a bank, sometimes even a doctor’s office. Now think about your local telecommunications provider. They probably offer solutions for television viewing, home security, wireless internet, landlines and mobile phones. These businesses have figured out that customer satisfaction increases, as do loyalty rates, when they can offer quality service and one-stop shopping.

Banks and other financial institutions have mastered the art of the one-stop shop for decades. The more products they make available or the greater percentage of the customer’s wallet they keep in-house, the better the likelihood that the customer relationship remains intact. Inherent in retention metrics are lower costs, better revenue earning opportunities and more engaged customers.

In their book, Human Sigma, Gallup researchers John Fleming and Jim Asplund state that “engaged customers generate 1.7 times more revenue than normal customers, while having engaged employees and engaged customers returns a revenue gain of 3.4 times the norm.”  Further, research shows that it costs nearly seven times as much to acquire a new customer as it does to retain an existing one.

If you’re still not convinced that retaining clients is worth so much, allow me to share Frederick Reichheld’s research. His results show that increasing customer retention rates by just 5 percent increases profits anywhere from 25 to 95 percent. You can’t argue with statistics like that.

So, what does this mean to you? Quite simply, it means that in order to continue moving your business forward, client retention is just as important as client acquisition. Client retention requires increasing the array of products and services you sell. With the advent of the Department of Labor fiduciary rule, that road to retention could be even more critical to your practice. Although the DOL rule is meant to simplify the retirement savings journey for clients, it has created additional considerations for those who provide products and services in the retirement marketplace.


How the DOL Rule Changes Our Businesses

One thing that should always be top of mind, DOL rule or no, is considering whether you are able to offer the comprehensive products and services that best serve your clients. This requires a significant effort of both education and coordination, but your diligence is the key to greater business success.

Because the DOL rule is a sea change, every retirement industry participant is re-evaluating product solutions and how they are delivered. Like death and taxes, change is one of the certainties of life. But the way we respond to change is the linchpin of reaching new customers, as well as increasing satisfaction for our existing customers. A deliberative and thoughtful response may help us better reach the potential customers that we aren’t reaching today.

If increasing the array of product solutions is the goal, you need both access and the ability to offer tools and services that address consumers’ evolving wants, needs and expectations. What are your goals to get there? Will you learn new technology? Will you secure new licenses and credentials? Take on new product lines? What about bundling your current offerings? Is it time to expand into commission and advisory insurance products? Now is the time to ask your clients how they want to work with you moving forward. Because I assure you, if you’re not asking them about the relationship structure that aligns with their goals, someone else is!


Joe Maringer is national sales vice president for annuities with Great American Insurance Group. Joe may be contacted at [email protected]

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