Now that the days of generous variable annuities are behind them, some advisers are finding ways to fit the revamped, slimmed-down versions into clients' portfolios.
The latest incarnations of variable annuities are attempting to balance advisers' desires with insurers' imperative to reduce risk and tamp down hedging costs. After designing living-benefit sweeteners in the early 2000s, the carriers were stretched to meet their obligations after the 2008 market crash.
“Equilibrium with the new variable annuities is something between what advisers want and what manufacturers want: the flexibility to do what you want within a rigid structure,” said Moshe Milevsky, an associate professor of finance at York University in Toronto. “Eventually, that will happen.”
Limited investment choices are based mostly on index funds or asset allocation models and dual-account structures, which divide the income and investment portions of the annuity. The changes are receiving a chilly reception from some advisers, and a curious glance from others, who have found a new way to use them.
“We're almost using them as a special asset class,” said Moss J. Kaufman, president of Network Capital Services Inc., which manages $150 million in assets. “You're managing risk and supporting future income goals, so we're using these new variable annuities and applying the tools to different situations, but it allows us to be a little more opportunistic.”
Clients who don't already own a variable annuity could still benefit from an income guarantee even if it's not as rich as its predecessors', but for advisers such as Mr. Kaufman who aren't very excited about the new investment limitations, it helps to split up variable annuity dollars among several providers and products. Some might offer an attractive death benefit, while another might allow more leeway with investment choices.
“We might use three or four companies if a client has $300,000 that should be in a variable annuity,” he said. “We're not entirely rejecting the packaged-investment choices, and we're not demanding entirely that we make a selection from the various managers and funds they have in this.”
In the new-product arena, there's simplicity through a baked-in withdrawal benefit and a low-cost variable annuity product, such as
MetLife Inc.'s Growth and Guaranteed Income variable annuity or John Hancock Financial Services Inc.'s AnnuityNote. The drawbacks are the investment choices: The former uses a fund-of-funds portfolio to target a mix of 60% equities, 35% fixed income and 5% money market; the latter offers a balanced fund based on five indexes, plus a bond fund.
Others go for a dual-account structure, giving more freedom on the investment side of the annuity, while cordoning off the income component.
Axa Equitable Life Insurance Co.'s Retirement Cornerstone provides more than 90 investment portfolio choices, but it also provides a guaranteed-income-benefit option that invests in asset allocation and index portfolios.
Meanwhile, The Hartford Financial Services Group Inc.'s Personal Retirement Manager gives clients more than 50 investment options, while the income component — the Personal Pension Account — remains separate from the growth component and can be funded independently.
TRANSFERRING GAINS
William C. Schumann, an adviser with Schumann Financial, which has $200 million under assets, has been using the Hartford product to allow clients to invest a portion of assets while shuffling off some gains into the income side. “We'll accumulate in the investment account and move gains or the dollar amounts as the client gets closer to taking her distribution,” Mr. Schumann said.
But clients wouldn't necessarily go all-in. “If you have $1.4 million in assets, we might put $390,000 into the investment side of this product, $10,000 into the income side,” Mr. Schumann added.
Companies' success in the new variable annuity arena will depend on their ability to provide advisers with multiple investment choices or significant equity exposure — as well as the ability to package the annuity with other investment and insurance offerings.
“A rich living benefit can sell itself, but for something slimmed down, you need to tell advisers how it fits together,” Mr. Milevsky said. “Make sure you have a mutual fund, an attractive single-premium immediate annuity and other products so that it's constructed in a way that makes sense to the client.”
Failing that, advisers will likely compile a suite of products on their own to help play a supporting role to the variable annuity, Mr. Milevsky noted.
Product allocation and guidance on existing variable annuities will be the way of the future when it comes to carriers' approaching advisers.
“One thing that won't work is to just come out with a slim version of a variable annuity that's more costly and that doesn't have the benefits,” Mr. Milevsky said. “Advisers need good recommendations on how to proceed with variable annuities: Stop building new weapons and tell us what to do with the ones we have.”
E-mail Darla Mercado at [email protected].
