Several recent surveys indicate that consumer and investor confidence is wobbling. The magnitude is not dramatic, but worry is definitely in the air...
By Linda Koco
At the time of this writing, the Dow was down to near 12,600 — a drop from a little above 12,950 just five days ago. By the time readers see this report, the Dow could be back up again, or down further.
It’s that uncertainty, along with ongoing unease about the overall economy, that makes safety-minded consumers nervous, say annuity experts.
For that reason, marketers are encouraging advisors to position the fixed indexed annuity as a product that gives consumers the predictability for which they are yearning. An example — from Genworth -- will follow. Some thoughts on this from a Genworth executive follow. But first, to what extend are consumers expressing such nervousness?
Worry is in the air
Several recent surveys indicate that consumer and investor confidence is wobbling. The magnitude is not dramatic, but worry is definitely in the air.
For example, in June, the closely followed Consumer Confidence Index from the Conference Board fell to 62 in June. The New York researcher said this is down from 64.4 in May (a month that had also seen a decline from the previous month).
The June decline is the fourth consecutive moderate decline in the Index, said Lynn Franco, director of economic indicators in announcing the results. “Consumers were somewhat more positive about current conditions, but slightly more pessimistic about the short-term outlook.”
Some surveys focus only on investor sentiment, and they are detecting dips in confidence, too. For example, early this month, John Hancock Financial Services surveyed among more than 1,000 investors with household incomes of at least $75,000 and assets of $100,000. The Boston company’s Investor Sentiment Index fell to 19 in second quarter 2012, down from 21 in first quarter.
Hancock attributed the decline to “less optimistic views on equities.”
Significantly, perhaps, the firm also noted that investors mentioned their biggest personal financial concerns were the decrease in the value of their investments and their ability to save enough retirement.
What about high net worth investors with $1 million or more in investable assets? A survey of 500 of these investors, done in late January and early February by Charles Schwab Advisor Services, found that they have only limited optimism about the stock market in. Only 29 percent indicated that they were feeling bullish about the market, the San Francisco company says.
The largest perceived barrier? Fifty-seven percent of the investors answered a “low return on investments,” and 37 percent, “market losses,” says Schwab. Not surprisingly, over one-third (37 percent) said their desire for investment advice during the past four years had increased.
The role of the fixed indexed annuity
Eric Taylor, national sales manager for Genworth, thinks advisors should be aware of the broad consumer mood when working with clients. That may help with considering whether a fixed indexed annuity would be appropriate.
As part of the assessment, he recommends exploring overall client goals for not only the portfolio but also for lifestyle.
It is likely that many will look not only at their invested assets but even at things such as the decline in housing values that has come in the wake of the last recession. “That decline affects the consumer’s feelings of wellbeing — the client’s mindset regarding their overall financial situation,” he says.
The mindset of the client is what the advisor needs to address, he stresses. So, look at which of the available products will best align with the client’s risk/reward characteristics. “Ask if the client willing to give away some downside risk in order to have more modest growth potential and less volatility?”
If stability is what the client is seeking, the fixed indexed annuity should definitely be considered, he contends.
He believes that many consumers will be interested in talking about options that offer stability. In fact, he believes the recent sales results for fixed indexed annuities have demonstrated that the shift in mindset toward more stability has already occurred.
“The fixed indexed annuities are the only annuities showing a substantial shift in growth, as compared to variable annuities and traditional fixed annuities,” he points out.
[Note: First quarter indexed annuity sales reached $8.1 billion -- up 14 percent compared to first quarter 2011, according to estimates from LIMRA. AnnuitySpecs.com reported similar results — first quarter sales of $8 billion in 2012, up by more than 13 percent from first quarter last year. Meanwhile, variable annuities saw a 7 percent sales decline in first quarter, and fixed rate deferred annuity sales were down 28 percent, according to LIMRA. For more details, see Why Indexed Annuities Keep Charging Ahead.]
In the face of volatility and uncertainty, consumers are asking, “What alternatives do I have, and where can I go?” Taylor continues.
Compare to variable annuities
Some dual-licensed advisors are considering using variable annuities with guaranteed living benefit options (such as guaranteed withdrawal benefits) to inject more predictability into the portfolio, Taylor allows. Others are considering bonds or bond mutual funds for the same reason. But in each case, the client’s account value will still be exposed to potential ups and downs.
Where variable annuities are concerned, the income guarantee will assure a fixed income at retirement, he concedes. But he says it won’t prevent the policy’s subaccounts from changing in value in response to market conditions. “Even though the clients have guaranteed income potential, it does little to sooth them if they get a statement showing a reduction in principal.”
The psychology needs to be considered in evaluating this, he stressed. “Ask, will a decline in the account value of the variable annuity make the client feel more constrained or less comfortable?”
Another problem with recommending a variable annuity for stability-minded clients is that clients can “wreck the guarantee.” This could happen if the client makes policy changes that go against provisions that are required to keep the guarantee in force. A client might make excess withdrawals, for example, or change their subaccount allocation in ways that the provisions don’t allow.
Guaranteed lifetime benefits are important to customers who want certainty, Taylor allows. But advisors should not overlook that a number of fixed indexed annuities have the features, too.
So a point to bring up with clients is, “if you can have a similar income guarantee in either a variable annuity or a fixed indexed annuity, what is more important to you? The stability of the principal or greater growth potential but with an opportunity for loss in account value?”
The advisor needs to educate clients about these factors, Taylor insists. Some clients may not be aware of the issues involved.
Bond funds and other alternatives
In order to provide greater stability in the overall portfolio, some advisors recommend bond funds, Taylor points out. The idea is that will help diversify the portfolio by introducing another asset class.
However, bond fund ownership means the client will take on interest rate risk, he says. That happens because when interest rates rise, bond prices fall. Given that interest rates are now about as low as they are likely to go, he says, the likelihood is that rates will rise in the coming years. In that case, the customer will be seeing a decline in value of the bond account. That’s not what stability-minded clients want to have happen.
He maintains that the fixed indexed annuity can take the place of a bond fund or portfolio. “It offers long-term capital preservation with less volatility. And even if interest rates rise, this will not impact the value of the principal.”
Advisors are also looking into placing clients in so-called alternative investments-- real estate holdings, hedge funds, commodities and the like—to diversify the holdings and gain the advantage of holding assets that are not correlated with the stock market. In fact, Jackson National Life, Lansing, Mich., just reported that over 90 percent of 2,000 financial advisors that it surveyed recently are planning to increase use of alternative asset classes over the next year.
Taylor suggests that advisors might look into positioning the fixed indexed annuity as an alternate asset class. That is, the product can function as an alternative to variable annuities, stocks, mutual funds, and bonds. “Use it as hedge against rising interest rates and volatile markets,” he suggests.
Think of the fixed indexed annuity as a way to create a new asset class for safe accumulation, Taylor concludes. The reason: it is an asset class that offers stability of principal without the interest rate risk of bond, and the products offer guaranteed income options as well.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.
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