Selling FIAs For ‘The Safe Side’ Of The Retirement Portfolio

By Linda Koco
AnnuityNews

The time has long gone when financial advisors would leave the room if fixed annuities were part of the presentation, according to an executive at Raymond James Insurance Group.

Today, advisors not only stay and listen but they are also selling index annuities, said Johnna Chewning during a panel discussion at the annual Retirement Industry Conference in Arlington, Va. The meeting was co-sponsored by LIMRA-LOMA Secure Retirement Institute and Society of Actuaries.

Back in 2006-2007, financial advisors would complain that index annuities were horrible, illegal, too complicated and had high fees, recalled Chewning, who is vice president-fixed annuity sales in the St. Petersburg, Fla., office of Raymond James. But the firm responded by providing a lot of education and support all to advisors over the country.

The result, she said, is that index annuities are now Raymond James’ fastest growing annuity line. In fact, she said, all types of fixed annuities account for about 40 percent of the firm’s revenues, even as variable annuity sales have declined.

On the safe side

“Our main focus today is on the flexibility of the product and on positioning it on the safe side of the portfolio for fixed income,” she said.

Many marketers and wholesalers in the industry position index annuities as policies that are in the middle between equities and fixed income, Chewning noted. They focus on how the policies provide upside potential with protection on the downside.

 “That is not Raymond James’ message,” she said. Her firm has been “very, very critical about this,” she said. “We don’t want any of our partners to position index annuities as something in the middle.”

Instead, “we position them as an alternative to traditional fixed income products,” in particular as an alternative to traditional fixed annuities.

Some advisors still try to compare the index annuity to an equity alternative, Chewning conceded. However, she said, “We keep saying ‘no, it’s for this (safe) solution and for this part (fixed) of the portfolio.’” In addition, the firm has been showing advisors that, in view of the design of the index annuity, “this is a great opportunity, especially in this environment.”

As a result, she said, “I think this is playing more right now with our advisors.”

As part of the focus on fixed annuities, the firm highlights index annuity design features that address safety and consistency. These include 100 percent principal protection, no interest rate risk, liquidity with 10 percent penalty-free withdrawals, and a declining contingent deferred sales charge, among others.

Chewning indicated that the yield for index annuities in the five- to eight-year space “is actually a little better than for corporate A-rated bonds in the five- to eight- year space.” As a result, “a lot of bond advisors are now picking up index annuities for this part of the laddered portfolio,” she said.

Compare to traditional fixed annuities

Her firm especially likes index annuity features that increase the probability that the client will get a higher return than on a traditional fixed annuity. One example she cited is the annual reset indexing method. (This resets the account value annually to reflect the addition of any index-linked interest that may have been credited for that year.)

Back-testing this model showed that the gains from the index annuity should average about 1 percent to 1.3 percent higher than gains in a traditional fixed annuity, she said.

Chewning voiced surprise at index annuity brochures that emphasize how the index annuities can’t lose money in the market.  “Why?” she wondered. “The traditional fixed annuity brochures don’t say that. They say the traditional products offer 100 percent principal protection,” as do indexed annuities.

She said her firm’s position is that “the index annuity combines an index with annual reset and the ability to buy low and not have to recover back to a high water mark.”

This combination of features is what gives the client a higher probability of return than a person can get in a traditional fixed annuity or other safe instruments, she said.

The Raymond James message is not “buy to protect on the downside,” Chewning stressed.  “We position it as ’buy to get a higher rate of return than other instruments in that part of the portfolio.’”

Staying flexible in messaging is important, she added. For instance, in years past and depending on economic and product developments, marketers have positioned index annuities against equities, variable annuities, and bank certificates of deposit.

Now, due to the prolonged low interest rate environment, Raymond James talks about using the products for retirement income, she said. The firm discusses it as one of the  “cash flow annuities”—a product that “uses the least amount of portfolio money to create retirement income when the client needs it.”

In today’s market, index annuities give the client the principal protection that clients want, provide the cash flow they need, and use the least amount of dollars to do that, she said.

Other index annuity preferences

• “We are fearful of uncapped index annuities,” Chewning said. That’s because Raymond James prefers to set expectations for clients.
• Chewning said her firm likes to see the contingent deferred sales charge in the products at 9 percent and then decline by 1 percent a year thereafter. There is nothing wrong with starting at 10 percent, she noted, but the firm prefers to avoid the round number. That said, the firm gives clients a choice of surrender charge periods.
• The firm will levelize the commission to no more than 5 percent up front and then put the rest into trailers.
• The firm likes the annual point-to-point crediting method because, according to Chewning, it is a consistent approach that helps with setting client expectations.

AnnuityNews Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].