How to address your client’s annuity concerns

By Ayo Mseka

Although annuities are currently experiencing record sales and can play a major role in helping consumers secure their financial future, financial professionals may still face objections when trying to sell them to clients and prospects. Some say they are difficult to understand, carry high fees, and are subject to market volatility. We spoke to several MDRT members to find out how they handled such concerns.

“Annuities can be complicated; so, advisors need to be able to break it down for their clients into understandable concepts,” said Irene Stolte, financial adviser at Horizon Wealth Strategies.

“There are several annuities that are available in the marketplace – variable, fixed and indexed. Fixed annuities are the simplest as they have no fees and earn a fixed interest rate. We equate this to owning a CD. The biggest difference is that they are tax deferred until you withdraw.”

Indexed annuities are relatively new to the market, Stolte added. These are tied to the performance of an index but are not invested in the market. “So, your annuity could be tied to the performance of the S&P 500, and if it ends the policy year in the positive, you earn a fixed interest rate, and if it is negative, you earn nothing and lose nothing. There is typically no fee for this annuity either,” she said.

Variable annuities have both a mortality and an expense fee, which guarantees a death benefit to the beneficiary, as well as the underlying cost of the investments you choose, Stolte added. While these can have higher fees, they often come with additional riders that you can add, such as a Guaranteed Minimum Income Benefit. For an additional rider cost, a client can guarantee a future income at a start date of their choosing.

Understanding your clients

It is important for financial professionals to understand their clients, their retirement goals, and their income needs, Stolte noted. As they try to understand them, they should ask them questions such as:

What is important about money to you?
Is having a guaranteed income in retirement important to you?
What guaranteed income will you have in retirement other than Social Security? Do you have any pensions?

Financial professionals should also review the annuity options that are available to their clients or prospects and lead with what is important to them, Stolte added. Language is important, she stressed.

The financial professional can say to his client: “Because you said that having a guaranteed income was a high priority for you, we recommend you invest in the variable annuity with the guaranteed minimum-income benefit. This will allow you to grow your investment, and when you retire, turn it into an income stream that you cannot outlive.”

If the client is very conservative and risk averse, the indexed annuity is a good option, Stolte added. It will allow them to participate in the upside of the market, but they are not subject to market volatility. This is a great option for those who are conservative, as well as for people who are close to retirement who do not need to take on additional risk but are looking for the potential of higher returns.

Be transparent about fees

“Understanding your client and being transparent about fees is important,” Stolte said. “Review your clients’ investments twice a year, and perhaps quarterly for the first year, so they understand the fees, returns and allocations, and how this benefits their plan for retirement so that they see the value in what you have recommended. Always remind them of the benefits they are receiving and what they said was important to them. All investments have fees at various levels. Fees always seem to be a topic when you first meet potential clients, but after they see the value you provide as their advisor, and ongoing discussions of their progress towards their retirement goals, they do not seem to discuss or bring up fees, going forward.”

Dealing with fixed annuities

Brandon Heckert, financial advisor, and partner at FSM Wealth, said that in a rising interest-rate environment similar to what has been experienced over the past two years, fixed-rate products have become more attractive to investors, specifically fixed annuities. “When you add on the increased market volatility, we have found that fixed annuities have been a favorable safe haven for retirement assets. Many of the fixed annuities that we are seeing are getting rates better than what CDs are offering. In addition, the annuity contracts can provide the ability to lock that rate in for 3, 5, or 7 years.”

Dealing with the surrender period

The most common hesitation that Heckert sees in recommending annuities would be tied to the surrender period of holding the contract. The surrender period is the time frame in which an investor cannot access the funds inside the annuity without paying a penalty fee, he explained. “If we plan with the client’s best interest in mind and build out our recommendation to take into consideration their entire portfolio, the surrender period should not be a concern,” Heckert said.

Many contracts also offer a penalty-free withdrawal amount of around 10% during the surrender period, which helps with accessibility to funds.

In addition to the impressive, fixed rates that these annuities are offering, the lifetime-income payouts offered for these contracts is just as impressive, Heckert said. “In a time when outliving your assets has become a real concern for clients, consistent streams of income provided by an annuity contract can help ease some of the fears around outliving their assets. As financial planners, we do not lead the discussion with a product in mind, but how we can help better the client’s financial situation. From there we determine which product is in the client’s best interest.”

The many options of today’s annuities

Jennifer Mann, vice president with Lenox Advisors, said that when she gets objections from clients or prospects, she usually tells them that they need to have an open mind, because today’s annuities are very different from annuities back in the day. There are tons of options that have no fee or little fee. There are great options that help limit downside risk and can be a great addition to the portfolio. In fact, she added, there have been many recent studies showing that having annuities increases your chance of success in retirement.

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected].

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected].