The Annuity Market is Gathering Steam

Ryan Pinney serves as the vice president of brokerage sales for Pinney Insurance Center, a national brokerage general agency that provides insurance, investment and financial planning advice combined with proprietary tools to assist agents and financial advisors. Ryan is a three-time MDRT Top of the Table qualifier. He currently serves as the local president of NAIFA Northern California, as a member of the MDRT Member Communications Committee and as a member of NAIFA California's Social Media Task Force.

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Alan Schuh of Alan Schuh & Associates LLC, in Weston, Fla., has been helping individuals and business owners preserve their assets, increase their income and reduce income taxes for more than 23 years. As host of Safe Money Radio, he enjoys helping people protect their retirement money. His firm's mission is to teach clients powerful, safe-money strategies and focuses on IRA/401(k) rollovers, retirement/income planning and capital transfer strategies.

Kirk Wilkerson of Forest City, N.C., is a registered representative and investment advisor representative who offers securities and investment advisory services through AXA Advisors LLC. Kirk is a 9-year Million Dollar Round Table member with six Court of the Table and one Top of the Table distinctions. His practice is dedicated to helping individuals and businesses build their financial futures.

2012 looks good

Charles K. Hirsch, CLU: Many experts are predicting that, once the sales are totaled, 2011 will have been a very solid year for annuities. In your view, what do you expect 2012 to hold for annuity sales, and why?

Ryan Pinney : I expect to see more of the same and think three factors will have a major impact in 2012. The first is a continuing trend of market volatility — here at home, as well as with the uncertainty in Europe and parts of Asia — causing many investors to remain bearish. The second is the political uncertainty faced in an election year and because of party infighting over important issues like reducing the debt, tax reform, Medicare and Social Security reform, and jobs creation. The third is an aging boomer population that is becoming more risk averse as they approach retirement and their demand for safety and guarantees increases.

A lan Schuh: I expect 2012 to be as good as, if not better than, 2011. Boomers have seen their savings decline or go sideways since 1998. Most realize they don't have enough saved for retirement, and they are looking for a steady income that somewhat mirrors what their parents received from pensions, which they don't have access to, for the most part. Annuities with lifetime income riders should become one of the top vehicles for the "decumulation" phase of retirement for all but the wealthiest Americans.

Kirk Wilkerson: I think annuities will continue to resonate for many people and sales will continue to grow. Products available today offer optional benefits not available in the past. In addition to traditional variable annuities with living benefit riders, newer VA products can also help protect against market volatility and interest rate risk. And while interest rates everywhere are low, it seems fixed annuity rates continue to be a viable alternative.

Where VAs work best

Hirsch: Final variable annuity sales figures for 2011 are projected to be up significantly over 2010. Are variable annuities a significant part of your own sales portfolio? If so, where are the best opportunities for these products, and why? If you don't sell variable annuities, why not?

Schuh: I don't sell variable annuities because I don't have a securities license.

Wilkerson: Depending on the clients' needs, we will include variable annuities as options to consider when planning for retirement. Products today offer such flexible choices in how a client wants to structure their contract. We are able to help the client tailor their account to fit their needs and desires. That degree of control has not always been available in our industry.

Pinney: While I don't use or recommend VAs regularly, I think we will continue to see an increase in their sales over the next few years as investors become more comfortable with or accepting of current market conditions. However, I think the sales of VAs will continue to lag behind the indexed annuity marketplace, which has soared over the same time period that VAs have faltered. The main reason for this shift in the market seems to stem from a desire for reduced costs structure over those associated with VAs, as well as increased safety provided by income riders and living benefits, like long-term care options associated with a fixed or indexed product. When asked, many of our clients would prefer a product that doesn't decrease in value with market losses, even if they have to sacrifice some of the potential gains the market may offer. In addition, these same clients don't believe the current market and interest-rate environment can offset the 2% to 4% annual cost of a VA with similar income guarantees. I tend to agree. The one bright spot I see for VAs is with younger clients who have a much longer investment horizon and expect to need substantial cash accumulation and growth over the coming decades to offset increased cost of living and long-term care needs.

Indexed annuities: A worthwhile product?

Hirsch: A discussion of variable annuities always brings to mind indexed annuities. What are your thoughts on indexed annuity products? Can you talk a bit about where you see the best opportunities for indexed annuities, and what kinds of prospects typically benefit most from them?

Wilkerson : Equity indexed annuities have been plagued by controversy, and we don't offer them to our clients. There are a number of differences between EIAs and VAs, including features, limitations and fees, as well as how the products are regulated and the licensing requirements of those who sell them.

VAs are securities governed by the SEC and sold by prospectus. The individuals who sell them must hold certain registrations from the Financial Industry Regulatory Authority (FINRA). We have chosen not to use EIAs because of these differences. We think we can achieve the same goals and protections for our clients by educating them about other choices they have. It's the client's money; they should know exactly how a product works and is regulated. Transparency is the key.

Pinney: I like indexed products and see a lot of potential for them when they fit. Indexed products will be used extensively with clients in their late 50s all the way into their early and mid-80s.The indexed marketplace is very diverse, and different products allow for a wide range of uses, from 401(k) alternatives to creating a guaranteed future income stream. The goal with indexed products, or any annuity for that matter, is to ensure you fully understand the client's financial objectives. Suitability has become a major focus in the annuity industry and for good reason. Advisors who sell without the proper understanding of product features, surrender changes and rider fees can do a lot of damage.

Schuh: Index annuities account for about 90% of my annual revenue and have been since they became available for sale in 1995. For the risk-averse client, FIAs nicely round out a well-diversified portfolio. The prime age group for index annuities with lifetime income riders seems to be about 10 years prior to their desired retirement age. When clients are given an opportunity to double their account balances for income purposes, without subjecting themselves to market risk, they become hopeful that we can help them make up for the fact that they realize they haven't accumulated enough savings to maintain the lifestyle in retirement.

Guarantees serve as major selling point

Hirsch: Many annuity producers and marketers believe that it's the guarantees offered by annuities that are driving the surge in annuity sales right now. For you and your own sales efforts, do you find that to be the case? If so, how do you help your prospects understand what these guarantees mean to them? If the guarantees are not a focus for you, can you share what is?

Pinney: The guarantees are definitely part of it, but I think those who only promote the guarantees miss out on a lot of additional features annuities have that can benefit their clients. Living benefits and long-term care riders are the newest additions that need to be fully understood and thoroughly discussed with clients and prospects. Additionally, the low fee structure for these riders needs to be weighed, especially when comparing variable products or other investment options. Finally, the flexibility annuities can offer is a huge and often overlooked discussion point.

I personally like to ladder or stack products with various benefits and interest or surrender periods to maximize my client's options. For example, one VA with no riders and a long-term growth strategy to keep fees down and maximize growth, a second indexed product with an income rider to minimize volatility, and a third indexed annuity with a long-term care and death benefit option. Implementing something like this allows the various accounts to be maximized and only used when appropriate. It also lets the client have access to more of his or her total account value, without penalty, through penalty-free withdrawals.

Schuh: I believe that the guarantees offered by annuities are the only reason I recommend them, and the principal reason clients purchase them. The differentiating factor between life insurance agents and stockbrokers is the guarantees of no market losses and lifetime income without annuitization. Many clients are disappointed at the results of their equity investments for the last decade plus and are very concerned about the safety of their assets in the future. Most people I meet have lost money in the last 10 years in both their investments and their real estate holdings. What we offer in terms of guarantees and peace of mind is priceless.

Helping clients understand the benefits to placing some of their assets in fixed annuities is relatively easy if you are passionate about helping people secure their financial futures. Also, you should own what you are selling; your conviction will come through in your sales presentations.

Wilkerson: Guarantees are, in my opinion and experience, a significant draw to VAs. With unemployment numbers where they are and with traditional pensions benefits continuing to decline, having the ability to guarantee a stream of income is important to clients. Of course, any guarantee is only as strong as the company backing those guarantees. Therefore, we have chosen to only work with companies we feel are strong enough to weather current and future volatility and economic instability storms ahead. Producers need to take the time to look at a company's balance sheet and liquidity ratios because that indicates the strength behind those guarantees. Being a former educator, I strive very hard to make sure my clients completely understand all the ins and outs and cost of their products. It's their money, they deserve to know. I want them to know as much as I do about these products and how to make the products work for them.

Major opportunities in aging boomers, volatile economy

H irsch : As you look at the trends in the annuity market, where do you see the biggest opportunities, and what are you doing to position yourself to take advantage of those opportunities?

Schuh: Based on my daily interaction with clients and prospects, the greatest opportunities for life agents are in working with the boomers ages 50 to 65. These people have seen most of their assets decline in value during the past decade, and most of them are not adequately prepared financially to retire. In addition, other than government employees, most people will retire without a traditional pension to rely on. All they will have are their 401(k)s, IRAs and personal savings, and as we all know, many people have not saved enough money.

The advent of the GMWB — that is, the guaranteed minimum withdrawal benefit — riders on annuities has really changed the landscape for life insurance agents. We now have the ability to help people dramatically improve the income gap they have created due to inadequate savings, without them having to gamble with their retirement assets. I've been in the business for 23 years, and I've never been more confident that we have the right solutions at the right time to help people.

If you see enough prospects, you will be successful. You must conduct yourself as a business owner and invest heavily in your business. The return on investment from marketing — through seminars, radio shows and direct mail — is incredible. I don't know of any other business that has the profit margins we do. You will never achieve your potential if you think and act like a salesperson.

Wilkerson: Again, guarantees are significant. We have an aging population in America. Many older Americans are anxious about what may lie ahead. Many have been forced to retire early, while others are forced to go back to work to make ends meet. We financial professionals are stewards of people's financial lives and retirement plans. We have a moral responsibility to make sure we have done everything to guide our clients through the myriad decisions and products associated with retirement. To that end, I have earned a Certificate of Retirement Planning from the Wharton School of The University of Pennsylvania for completing the AXA Equitable At Retirement program at Wharton. I believe staying on top of all aspects of retirement, from product changes to legislative changes, is vital if we are to serve the common good for our clients and, inevitably, our society.

Pinney: To me, the low interest rate environment for CDs and the market volatility associated with stocks, bonds and mutual funds have really created the perfect opportunity to promote and sell annuities. Simply discussing these factors and the benefits annuities offer has led to a continued and growing stream of annuity sales.

Growth, innovation ahead

Hirsch: Any further thoughts?

Wilkerson: Annuities are continuously evolving, which is why I discourage both advisors and clients from acting on outdated perceptions. For instance, just in the past couple of years, fast-changing market and economic conditions have spawned new products designed to address interest rate and market volatility risks to retirement savings. Although it takes time and commitment, it's important to keep your eyes and ears open to product innovations and new strategies.

Schuh: Some agents are worried that stockbrokers are going to be selling fixed index annuities. That's the best thing that can happen to our industry. FIAs have been bad-mouthed in the media and by regulators since their inception in 1995. They tried to bury us with 151A and failed, so since they couldn't beat us, they decided to join us. Soon we'll start to see positive press about FIAs, so there will be more consumer awareness, which will help all of us in the long run.

The next 20 years or so will bring us unprecedented opportunities as 10,000 boomers retire every day. If that doesn't make you jump out of bed early, then maybe you should find a new line of work!