How to sell FIAs in any market
November 2, 2011 by Karlan Tucker
By Karlan Tucker
Tucker Advisory Group
In a diversified portfolio, you get some of the up and some of the down. In the FIA world, you get some of the up and none of the down. To enjoy a successful career in selling fixed indexed annuities, you have to be able to sell them in a variety of economic conditions: high interest rates and low, inflation and deflation, a rising stock market and a falling one, as well as good real estate markets and bad ones. You also have to sell in economic times that are creating either fear or greed in people’s responses.
If you are depending on an outside force that you have no control over, such as a falling stock market or high interest rates, to help you make your case for the FIA, then your career will be a rollercoaster of successes and failures.
A single sale can be very profitable for both the client and the advisor, so it’s well worth it to figure out how to be successful in all economic conditions. When I sold my first indexed annuity in 1997, the market was rising dramatically and I had no bonuses or income riders to offer. I also only had the S&P 500 and a fixed account for choices.
Still, the chassis the FIA is built on and the idea of having an account that offered “safety and opportunity on the same dollar at the same time” were winners back then and they still are today.
The FIA has no rival in its combined ability to ensure safety, offer opportunity for growth that is automatically captured annually, and give income that adjusts for inflation and lasts a lifetime. It surpasses variable annuities, target-dated mutual funds, laddered bonds and dividend-paying stocks.
I have a saying: “Moderate returns that never experience a loss and grow tax free will outperform a volatile market over time.”
I tell people that if you want to be a winner for a month or two, or even a year or two, then the stock market may be the place for you — but if you want to be a winner for the rest of your life, then you have to take a look at what I’m offering.
To never lose principal or previously credited gains to the volatility of the market is phenomenal. This is especially true in light of the fact that buy-and-hold no longer works (if it ever did).
The Lost Decade™ actually happened and, despite Warren Buffett being quoted in Reader’s Digest in January 2000 saying, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes,” it turns out that according to a recent Oppenheimer study, Buffett should have said, “If you aren’t willing to own a stock for 20 years, don’t even think about owning it for 20 minutes!” This increase in years is because the Oppenheimer study revealed that in order to be certain someone would never lose money in the stock market, based on what has actually happened over the past 20 years, they would have to be able to buy and hold for 20 years to be assured they still have what they put in 20 years earlier.
We live in an imperfect world. In a diversified portfolio, you get some of the up and some of the down. In the FIA world, you get some of the up and none of the down. If I’m going to live in imperfection, I like my world better.
Many studies done by Dalbar, J. P. Morgan and others indicate year after year that the typical diversified portfolio of the average investor receives about one-third of the S&P 500 annually. Recent studies by the above firms indicate the S&P 500 has averaged between 7.7 percent and 8.2 percent for the past 20 years. One-third of this return would then yield about 2.5 percent annually.
Let’s use this information to help us compete in today’s low interest rate environment. The rates offered inside an FIA are determined by the yield on the insurance company’s general account and the cost of options. Low yields and expensive options today have led to low participation rates and caps as well as fixed account yields.
But I need to ask you a question: Who are we competing against and why might a person buy an FIA? Are we competing against last month’s FIA rates? No, the public doesn’t track the rates.
Are we competing against other FIAs? Not really, since most people you show these products to have not looked at them with anyone else.
We are competing with safe money returns from other products like bank CDs, savings accounts, money market yields and government bonds; and, a little lower on the safety scale, we may also compete with corporate or municipal bonds.
Although the FIA was never built to compete with the stock market, it has done admirably well in an increasingly volatile world. Studies done in the past 2-5 years by Jack Marrion and the Wharton School of Business have shown that FIAs, with yields in the 6 percent to 8 percent range, have even competed with the returns of the S&P 500. When interest rates are high, the rates inside FIAs increase over time; and when volatility drops, the rates also can increase because the price of options drops. When the stock market is rising, FIAs rise with it. This is a good reason to buy an FIA because when the market eventually stops rising, your clients get to keep their credited gain. When the market falls, the FIA protects your clients’ principal and credited gains, resulting in a 0 percent return, so in a falling market it is good to buy an FIA. Also, the annual reset feature means that as soon as the market goes back up, your clients are making money from the bottom, not having to wait until it recovers to previous levels like they would in a mutual fund or stock. Regardless of the economy, who wouldn’t want an account that protects principal, captures gains annually on autopilot without the owner having to sell anything, captures gains without triggering a taxable event, and credits the gains without the owner having to make an emotional, timed decision at the top – which nobody can do anyway?
When the market is up, they’re in, and when it’s down, they’re out.
These vehicles also offer income riders that will grow by up to 7 percent for up to 20 years to create an income account for the purpose of generating lifetime income. If clients ever hope to retire, which by definition means they no longer are working for a paycheck, then they will need systematic, guaranteed income from somewhere.
That somewhere is no better served then from an account that also guarantees a 6 percent withdrawal rate when they start income in their 70s. Wall Street recommends to not take more than 4 percent so as to not run out of money; however, a recent study by Wade D. Pfau, Ph.D., an associate professor at the National Graduate Institute for Policy Studies in Tokyo, Japan, shows that you can’t take more than 1.8 percent if you don’t want to run out of funds before you run out of life.
Everyone you see needs income from somewhere. Offer them a guaranteed 6 percent payout on an ever-increasing account, and you are unbeatable. Where else can your clients get increasing income on a decreasing asset that doesn’t require market timing?
And, if you want to put icing on the cake, wrap it in a Roth and then generate tax-free income for life for your clients and yourself. You do own an FIA, right? You won’t come across with credibility and self-confidence if you don’t have some of your own money in one. Buy one and watch your income and success rise dramatically. Trust me, it works – I own many.
I wish you great selling.