It’s not a stock … it’s not a bond

The market and investors always follow external events, and at this point in time we’re experiencing a roster of factors that run the gamut. The historic bull run is on a trajectory fueled by corporate tax reform, regulatory changes and trade policy shifts. Influences that are simultaneously tempering and rocking the market include rising interest rates, political tensions and a changing social climate. Given these aspects, the market volatility in late 2018 is not a big surprise.

Investors have been enjoying the economic expansion and taking nice gains these past few years. As a consequence, there may be a lot of risk building up. As the equity components in an investor’s portfolio grow, they can become overweighted if the portfolio isn’t rebalanced regularly.

Baby boomers approaching retirement face real concerns about taking income from a portfolio whose time horizon has shifted from accumulation toward distribution.

Let’s take a look at the annuity marketplace in the last 15-plus years.

Historical patterns

• 1995 — Indexed annuities introduced, offering accumulation with downside protection.

• 1995-2000 — A major bull market run drives products and investors to focus on accumulation.

• 2000-2002 — A major market correction; indexed annuities gain strong traction due to downside protection and income guarantee options for variable annuities begin to accelerate.

• 2002-2007 — Growth and accumulation products again become a key focus as the market recovers and interest rates continue to decline.

• 2007-2008 — Market correction; baby boomers approach retirement.

• 2009 — Indexed annuity sales shift to guaranteed income riders offering accumulation, principal guarantees and lifetime income guarantees.

• 2012-2016 — Indexed annuities (now commonly known as fixed indexed annuities, or FIAs) begin to take hold in banks, followed by broker-dealers, with the focus on accumulation.

• 2016 — The first boomers turn 70.

• 2017 — DOL fiduciary proposal causes a pause in the market; FIA sales drop 8% across all channels, independent agents retain the largest share (58%) and banks continue to gain share (18%); sales of FIAs and VAs without income guarantees exceed those with guarantees for the first time in many years.

• 2009-2018 — The second-longest bull run in history. FIA sales continue to grow and distribution continues to broaden.

A look ahead

• 2019 and beyond comes with lots of uncertainty on global political and economic fronts.

Where’s an investor to go?

Should we continue to ride out the market and hope it goes on forever? Many experts have already suggested that equity markets are headed for a correction. The current turbulence has clients concerned about how to protect their savings, especially as retirement looms closer.

What advisers need to know now

FIAs are not stocks and they’re not bonds — they’re an insured asset class that lies in between. With FIAs, we can plan for security of principal, growth opportunity and the guarantees associated with insurance products.

Other FIA features include tax deferral, giving clients more control when they declare tax obligations. A guaranteed death benefit with designated beneficiary election can allow for the bypassing of probate. Finally, annuities are one of the only vehicles that do not count toward provisional income calculations while in deferral, which may help reduce taxes on a client’s Social Security benefits.

There are factors that should be considered with FIAs. They are designed for long-term planning and typically assess charges for excess withdrawals within a defined surrender period. Many offer a guaranteed lifetime income benefit for a fee.

Will clients trade off an annual fee for the guaranteed protection? Some will. American private-sector workers with pensions have dropped from 88% to near 33%, and the fear of outliving income is a top concern for retirees today.

Clients also should understand the FIA’s crediting strategies, and that while their annuity’s value will grow with the market, the upside may be limited by an applied rate. While options that seize 100% of the market’s gains exist, they also can leave a client exposed to losses. Eliminating the downside is critical enough that many clients are willing to forgo some of the opportunities for the security of a 0% floor.

(More: Providing incentives for annuities within retirement plans)​

Mark Fitzgerald is national sales manager at Saybrus Partners, a life insurance and annuity consultancy for financial advisers.