We live in an accumulation nation, where most Americans want more of just about everything: more monthly data on our smartphones, more upgrades when buying a car and more vacation time to spend with family and friends. Why would our clients’ mindset be any different when planning for a secure financial future?
This is where accumulation-based annuities (ABAs) might be a good fit in your client’s financial portfolio. Typically, most advisors think of annuity products for their ability to generate income in retirement. Although this is certainly a valuable feature, individuals also need help growing their nest egg, considering almost half of working Americans have less than $50,000 saved for retirement, according to the Voya Retire Ready Index.
What’s even more telling is that “financial security” often does not rise to the top of everyone’s list of priorities. According to Voya’s recent consumer survey, 45 percent of Americans chose their smartphones, cars or vacations over financial security when asked which item they would be least willing to give up.
With this backdrop in mind, it’s clear Americans need solutions that can help them grow their retirement assets and build a secure financial future — without having to sacrifice the items that matter to them most along the way. And with sales for accumulation-based annuities jumping more than 65 percent between 2012 and 2016, according to LIMRA data, it appears more individuals are turning to the growth potential and protection these products can offer.
Here are some ways ABAs can help your clients get more out of their financial portfolio.
What are ABAs, and how do they stack up to other products?
Accumulation-based annuities are designed to help clients grow their assets. It might sound simplistic, but considering the low-interest-rate environment we’ve been enduring, clients are looking for products that offer them better returns. For example, the 10-year Treasury rate has fluctuated up and down in recent years — even hitting 1.37 percent in July 2015, the lowest rate since 1900. Clients who had money invested in certificates of deposit or money market accounts gained only modest returns.
ABAs offer individuals another option —
one that can keep their assets safe while providing them greater upside growth potential. Therefore, it’s not surprising ABA sales have increased from $59.3 billion in 2012 to $99 billion in 2016, according to LIMRA data.
Another reason for this jump is the way ABAs differ compared with annuity products used for income. For starters, ABAs tend to have a shorter surrender period. Typical annuities with an income rider option have a surrender period lasting 10 years or longer, while the range for most ABAs is between five and eight years. For clients looking to avoid a surrender charge altogether, this is becoming more common with accumulation-focused investment-only variable annuities (IOVAs). However, it is important to point out that longer surrender periods typically translate into stronger growth potential.
The varying level of risk your clients are comfortable taking is also a major factor when determining how these products stack up. For example, if you look at fixed indexed annuity ABAs compared with investment-only variable annuity ABAs, the earning potential of an IOVA can be greater because your client’s premium is invested directly in the market.
Plus, there is no cap rate to curtail potential growth, which is a common feature of many fixed indexed annuities. Yet with an IOVA, the trade-off for higher growth potential is the possibility of losing money if the market declines. If your client is looking for 100 percent principal protection, then a fixed or fixed indexed annuity could be the solution.
Is there a market segment that’s a particularly good fit for ABAs?
ABAs have become a favorite among independent producers, broker/dealers and banks. One reason for their popularity in the bank channel, in particular, is the high correlation of fixed and fixed indexed annuities to other conservative investment solutions that are typically sold by banks, such as CDs, market-linked CDs and money market accounts. For advisors working in the bank channel, being able to offer an alternative (such as a fixed indexed annuity ABA) that offers greater earning potential and still provides principal protection makes for a compelling sales story.
ABAs have evolved to meet the needs of both conservative and aggressive clients while also helping address short-term and long-term financial goals. As a result, advisors working in the independent producer and broker/dealer channels have been able to use ABAs in a wide range of circumstances.
Who is the ideal client for an ABA?
The design of ABAs has evolved over the years to become more dynamic than the traditional fixed annuity. As result, these products can be ideal for a wide variety of clients. For example:
If a client is looking to earn a fixed rate over the course of five or seven years, then something as simple as a fixed annuity focused on accumulation could be a good option.
If a client is worried about unexpected dips in the market but also wants more growth potential than just a fixed rate, then a fixed indexed annuity focused on accumulation might be a great solution. Your client will enjoy the benefit of principal protection, and there’s an opportunity for more growth by linking to several index strategies.
Perhaps you have a client who is an aggressive investor. This person also could have maxed out their qualified contribution plans, such as their 401(k) or individual retirement account, and could now be looking for a nonqualified solution to put some significant money away for the next 15 years. An IOVA focused on accumulation is something they might want to consider. These products provide an array of investment options, most have a low-cost structure and, in some cases, might not have a surrender schedule.
If a client is really focused on growing their assets, but also likes the option of taking income down the road, then a multi-functional ABA could meet their needs. More carriers are designing these types of ABAs to provide strong growth potential, but also to have a mandatory income rider built into the annuity product. This gives the client flexibility to take income in the future if their situation happens to change. These types of multifunctional ABAs are becoming increasingly popular for clients who want to have their cake and eat it too.
What approach should an advisor take to selling an ABA?
It’s vital for every advisor first to understand their client’s financial goals. This advice might seem basic, but it sets the foundation for the entire conversation. With that being said, when it comes time to present an ABA to clients, it’s always helpful to provide multiple solutions, educate clients on the differences between the options you present and try to keep the dialogue as simple as possible. Here’s an example of one potential scenario:
An advisor speaks with a client and learns during the conversation that the client wants tax-deferred growth, wants to stay pretty conservative and hopes to earn around 4 percent annual growth on average. After digging a little more, the client also indicates they want complete market protection and they don’t want their money tied up for any longer than seven years. Based on this information, several FIAs focused on accumulation potentially could meet their criteria. Because of the various products, durations and strategies available, a good next step is for the advisor to present their client with a few option.
For example, the advisor first could present a seven-year FIA using the Standard & Poor’s 500 index annual point-to-point strategy, which has averaged slightly more than 4 percent in the past seven years. As a second option, the advisor could show the client a six-year FIA using a more aggressive index strategy that also has averaged slightly more than 4 percent during this time period. As a next step, the advisor should explain the benefits and trade-offs of each option.
For example, the seven-year FIA meets the client’s financial objectives and uses the most common and popular index strategy, the S&P 500 annual point-to-point strategy. The downside is that the client’s money is tied up for a longer period of time compared with the six-year FIA product. But the more aggressive index strategy means there’s a higher risk of not getting the 4 percent annual returns the client hopes to obtain. The client now feels empowered to make an informed decision, which could translate into a long-term relationship — the ultimate goal of any advisor.
ABAs — like many financial products — come in multiple flavors, each offering slightly different features to help meet your client’s financial goals. And having this flexibility is definitely a plus, especially in our accumulation nation.
Next to wanting more of just about everything, Americans value the freedom to make their own decisions above all. By providing your clients with another option to help grow their retirement nest egg, you’re not only helping them build a secure financial future, but also doing it in a way they will appreciate.
Carolyn Johnson is CEO of annuities and individual life, Voya Financial. Carolyn may be contacted at [email protected]