With another rate increase from the Federal Reserve and midterm elections taking place in November, market volatility remains high. With many clients concerned about their long-term financial planning goals, advisors may want to consider mixing additional product options within their portfolios to protect against today’s rising rates.
Annuities offer tax deferral and principal protection which can help combat the challenges posed by this economic environment. And floating rate annuities in particular have been designed to accommodate rapid interest rate changes.
Earlier this year, the market headed toward a correction dropping 20% and meeting the traditional definition of a bear market. It came back part way during the summer, but ongoing inflation at a 40-year high, and the anticipation leading up to midterm elections, have caused additional market volatility.
Hawkish comments by Federal Reserve Chair Jerome Powell at the central bank’s Jackson Hole symposium in late August, made it clear the Fed is focused on fighting inflation and getting it back to the 2% level. This meant “some pain” for households from continued rate increases and the shrinking of the Fed’s balance sheet “for some time” to cool the economy. The challenge will be in not pushing it into a recession that would bring even more challenges.
And falling stock prices are another important ingredient of market volatility. Increased inflation can cause stock prices to fluctuate as different segments react to price changes.
The floating rate option
So, with inflation, falling stock prices, falling bond prices, and ongoing uncertainty around corporate earnings and when Fed policy will change, what does this mean for clients considering shifting their longer-term strategies to make the most of this macroeconomic climate?
Well-structured products designed to weather the storm with principal floors could be a great option. Floating rate annuities, a bond alternative, provide contract holders with protection from losing principal while automatically adjusting annually to increasing rates. The products offer a guarantee period base rate, plus a floating rate tied to a reference rate, like the 3-Month CME Term SOFR, which is added to the guarantee period base rate each year on the contract anniversary. Floating rates typically follow the trajectory of short-term interest rates, which the Fed is currently busy raising.
To take advantage of changes in interest rates during the next five or seven years, a floating rate annuity could be a good complement to other portfolio holdings, plus they grow tax deferred.
A bond alternative
Typically as rates rise, most bond values fall. Rising rates in the future could result in low or even negative returns for bond funds. If advisors tie a portion of client assets in this “safe asset class,” not only will they lose money on the investment, but they will also miss out on the opportunity to create wealth. Instead, placing client funds in a non-correlated asset like a floating rate annuity can protect principal from market volatility while allowing it to grow even in a rising rate environment. And waiting for rates to rise before deciding to commit funds may not be the best course of action as market conditions can move quickly.
Staying on track
Certainly, those who stay the course in the market will reap its benefits in the long-term but hedging a portion of a portfolio with annuities can bolster client confidence in achieving long-term retirement goals.
Financial advisors do their best to diversify and properly distinguish between their clients long-term and short-term goals and have managed expectations well despite conditions like the pandemic, the evolving crisis in Ukraine, supply chain woes and rolling inflation that continue to rock the markets.
Adjusting client portfolios in today’s fast-moving, volatile market can be a tricky battle between managing their ambitions while pushing for longer-term strategies that can make the most of the rising rate environment. Most bonds will experience setbacks, and for many advisors who may be re-evaluating them in their portfolios, options like fixed rate or floating rate annuities can deliver a range of benefits along with interest potential.
Financial advisors and their clients have had a host of issues to discuss amid a volatile market and rising rates. With the midterm elections on tap, further volatility is expected. Assessing clients’ current goals and establishing a strategy aimed at helping achieve them during the turmoil is key. To make a real difference, advisors must help clients in considering allocating funds to vehicles that allow give them new ways to counter the impact of inflation and take advantage of rising rates and may deliver better long-term yields.
Kurt Auleta is head of Western Division Sales at Security Benefit. He may be contacted at [email protected].