Bank Investment Consultant
Annuities are evolving quickly, and some bank consultants are finding it challenging to keep up with the changes.
"There are so many annuities out there that if you don't focus on a few, you'll be confused as an adviser, and that's bad for the client," said Patrick Varney, a Raymond James adviser at Bank of Colorado in Windsor.
Mr. Varney has narrowed his recommendations to AIG and ING annuities. But it took him four or five months working with an AIG wholesaler before he felt comfortable enough to recommend its products.
And the tinkering is constant.
This year ING raised the minimum guarantee of its Life Pay product. Genworth tweaked its Lifetime Income Plus 2007 annuity, which pays 5% simple interest every year up to age 70. And AIG Sun America Market Lock for Life Plus now applies a bonus for not withdrawing assets even if a policyholder has started doing so.
Sound complicated? It is, yet annuities continue to gain ground with pre-retirees panicked by the thought of outliving their assets. In the vacuum left by disappearing defined-benefit pensions, annuity premiums, which totaled $291 billion in 2005, are projected to hit $390 billion by 2011, according to the research firm Celent.
Meanwhile, tight competition between providers is making annuities cheaper and more comprehensive. When they're done right, says Dan Bay, a Raymond James adviser at Tri Counties Bank in Chico, Calif., "withdrawal benefits make them more like defined-benefit pension plans." The harder part is explaining how ever-evolving annuities work to clients.
To begin a discussion about annuities, John Harline, a national sales manager of the financial institutions division at ING Wholesaler Group, suggests asking clients how they want to plan for their second retirement. "Naturally, the client asks, 'What second retirement?' " he said. "The adviser replies that a second retirement is when you reach your life expectancy and you're still breathing! The adviser asks how prepared clients will be when they plan their assets to last until they're 75 and then they turn 76."
Delving into an annuity's details takes time and patience.
Dana Mancini, a Boston wholesaler for Sun Life, has been introducing advisers to a new feature on the insurer's Masters variable annuity called Income on Demand.
The contract, aimed at people 55 and older, puts the income a client doesn't withdraw into a pot, creating a "rainy day" lump sum for future use. The feature costs 65 basis points for a single policy, 85 for joint.
"Every new feature has some complexity and there are always people who won't understand it," Ms. Mancini said. "I start with what the adviser is selling now and explain that this works the same ? but they also have access to a lump sum they can use as they like."
Her advice: Keep it simple.
Some advisers offer too much information about how features work and then have to backpedal when the client gets confused. Ms. Mancini said advisers need to focus on finding products that fit a client's needs and then answer questions about mechanics.
Annuities have lots of moving parts, and advisers have to narrow down the riders to suit a client in terms of the annuity's costs and in terms of a client's financial plan.
Last year Raymond James flexed its institutional muscle to force insurers to reduce the costs of their annuities. Mr. Bay created a spreadsheet of annuity costs for different providers and narrowed it down to what he considered the most cost-effective: Transamerica and Jackson National.
Two years ago, Sloan Thompson, a Wachovia adviser in Savannah, Ga., sold an ING Golden Select Premium Plus variable annuity, which has lots of bells and whistles. It pays new policyholders a one-time, 5% bonus on the principal as long as the client holds the annuity for the full 10-year term. The annuity also has a 7% annual guarantee, so if the market is flat or underperforms, the policyholder still gets a 7% return compounded annually.
A quarterly ratchet locks in the best performance above 7% when the market is doing well. In a worst-case scenario, at a guaranteed 7% growth compounded over 10 years, assets will double.
Mr. Thompson's client invested $300,000 in the policy. Over the three years he owned the contract, his investment has grown 55%, or an average of 18% a year. And while markets have been disappointing lately, the portfolio's market value is now $444,300. The 7% guarantee means the account will be worth at least $466,305 by yearend.
Mr. Varney sold an AIG SunAmerica Seasons annuity with a living benefit called Market Lock for Life Plus to a client who is almost 60; his wife is 57. The client retired three years ago from a full-time job and never rolled over his $500,000 401(k). The client has been working part-time to supplement his income in the meantime, but plans to fully retire in the next six to 12 months.
The client's main concern was that he and his wife would outlive their assets and his assets might need to last more than 30 years.
Mr. Varney's client put half of his assets in the annuity: The Market Lock for Life Plus Two living benefit, which covers the wife in the event of the husband's death, is 0.9%. The annuity has limitations. Advisers don't have much discretion in how funds are invested.
Then there's the 6% guarantee paid as simple interest. Simple interest normally gives Mr. Varney pause for a client with a longer time horizon, but since the client wants to retire soon, it didn't matter.
Annuities are designed to provide retirement income after a period of time, up to 10 years, which means the most suitable clients tend to be in their mid-50s. Every adviser has complicated choices when recommending an annuity, but since bank brokerage clients typically have assets of $300,000 to $500,000, variable annuities in their financial plans guarantee an income that weathers all markets. That gives advisers an opportunity to be more aggressive with other investments.
Ultimately, "you have to look at the benefits of annuities," Mr. Thompson said. "For clients who lost money in 2002 and 2003 without a variable annuity in their portfolio, I ask them whether they would pay a few percent to have locked in the gains they made in 1999. Most then understand that the charges are well worth it."
