Advisers have mixed feelings about volatility dampener; 'really restrictive'
In an attempt to buffer its variable annuity clients' accounts from market volatility, Nationwide Mutual Life Insurance Co. expects to launch a program that will shift funds into fixed-income investments when the stock markets dip.
The insurer is eyeing a fall release for the program, said Eric Henderson, senior vice president for individual investments, at Nationwide. “We currently offer strong guarantees, but the dynamic allocation stabilizes your account balance [in times of volatility],” he said. “A steep drop in account balances is unnerving to the client.”
The program is used in conjunction with a living benefit at a number of VA shops, including Prudential Financial Inc. and Transamerica Life Insurance Co.
Mr. Henderson noted that while a volatility dampener does reduce the VA's potential upside, it's a strategy that allows Nationwide to continue offering benefits to clients. The income benefit base of Nationwide's L.inc living benefit grows at a rate of 10% annually for 10 years, or until the annuity holder makes his or her first withdrawal. Last May, the insurer raised its payout rate to 5.25%, from 5%, which Mr. Henderson says likely had a hand in Nationwide's 32% year-over-year increase in VA sales in 2010.
Advisers have had mixed feelings toward dynamic allocation programs, as some insurers will move the money out of the fixed-income investments and others won't. “With some products, once you're in the fixed-income investments, you're done,” said John McCarthy, product manager for annuity solutions at Morningstar Inc.
“That's really restrictive,” said Mitchell Kauffman, a managing director at Kauffman Wealth Services Inc., an affiliate of Raymond James Financial Services Inc. He had had such an experience with Allianz Life Insurance Company of North America's High Five contract, which had a feature that allowed the carrier to shift money from variable accounts into fixed accounts.
“[Allianz] was hoping it would give the conservative investor who needs a living benefit some confidence,” he said. “But the problem is that now that these contracts are nearing maturity, they're mostly invested in the fixed accounts.” Those clients missed on the 2009 market rally, Mr. Kauffman said.
What types of fixed-income investments Nationwide chooses for its dynamic allocation strategy could also be a determining factor in whether advisers will gravitate toward it. For instance, Prudential uses a bond portfolio, while Transamerica moves into a fund that shorts the S&P 500 as a way to protect against wild market movements.
“How does it fare for the client if you're running to shelter in a bond fund, when bonds are losing value because of rising interest rates?” Mr. Kauffman asked. “As advisers, we want to have control over the investments, and we give this up hopefully in exchange for a better living benefit.”
