New Entrants Steepen Competition In The Fixed Annuities Marketplace
December 4, 2013 by Rich Lane
More new entrants are tapping into the financial potential of the fixed annuities marketplace. As they make inroads into this industry, competition for customers is fiercer than ever.
Advisors must provide educated product recommendations to their customers if they want a secure, long-term client base. The better understanding they have of the annuities marketplace, including the sales process, the purchaser’s needs and the integrity of the carrier, the more likely they will be to outpace their rivals in sales to purchasers.
Protecting the retirement nest egg
More than 79 million baby boomers are close to reaching retirement, according to Pew Research.Not only are they contemplating the right time to transition out of the workforce, but they are considering how to stay afloat during their retirement years.
Although many retirement portfolios have recovered well since 2008, the economic uncertainty likely has altered the way many boomers invest their retirement dollars. For boomers looking to protect their retirement nest eggs, the appeal of fixed annuities is an investment with a guaranteed rate of return. In addition, with many boomers sharing a risk-averse mindset, there is strong growth in the fixed annuities marketplace.
Fixed annuities offer several flexible payout options — all of which feature a guaranteed minimum interest rate that can provide gains from year to year. A deferred annuity enables purchasers to accumulate savings on a tax-deferred basis until it is distributed as a payment stream or a one-time, lump-sum payment. An immediate annuity guarantees periodic distributions, which start right away, for a specified time period or a lifetime.
Many purchasers, especially soon-to-be retirees, are more concerned about the return of the principal balance rather that the return on it. Bond funds or equity-based products do not offer a guarantee of principal. Conversely, fixed annuities have a minimum guarantee — meaning that the principal is guaranteed at a minimum return if maintained for the life of the annuity.
For example, a person retiring with $250,000 in savings may select a conservative investment strategy to protect their income and prevent them from returning to work in the case of an economic downturn. By placing a portion of their savings in a fixed annuity, he or she has a guaranteed income stream that will not be outlived.
Selecting a carrier with integrity
As new carriers find their footing in the fixed annuities marketplace, it is increasingly important that brokers align themselves with a principled carrier. Brokers should seek a carrier that not only sells sound products but adds value to the services they provide and sets them apart from their competition. When selecting a carrier, consider the following: long-term outlook, ratings, how funds are invested and the company’s assets.
– Long-term outlook.Consider carriers with a track record of successful long-range investing for their customers. Many carriers have decades — or even centuries — of experience. The carrier should be available to support the claim and not sell the liability off to another carrier. It is important that carriers are available to pay out benefits to their purchasers in 10, 20 or even 30 years — and that these benefits are accessible to retirees, or their heirs, when they need it the most.
– Ratings.Working with a respected, high-quality carrier can eliminate default risk and ensure there is guaranteed income for purchasers when they need it. To meet purchasers’ needs, brokers should select high-rated carriers with which to work. They can consult well-respected ratings agencies — including A.M. Best, Moody’s and Standard & Poor’s — for additional information.
Remember that strong financial support is the backbone of a fixed annuity. Ratings are an indication of a carrier’s vulnerability to unfavorable economic conditions as well as its ability to meet financial commitments. Financial-strength ratings also impact a company’s investment portfolio, cash flow, and other internal and external factors.
– How funds are invested. To confirm a carrier’s strength and stability, prudent brokers also will need to take a closer look at its financial standing and history. Although every carrier has to make investments to support its annuity responsibilities, investments should be sound and keep an annuity purchaser’s interests in mind. For instance, the carrier should not invest in high-risk assets, and its liabilities should match up with fixed annuities.
– Company’s assets. It is also important to collaborate with a carrier that has shown stability over the long haul — including the recent economic recession. A financially strong carrier is invested in meeting the long-term needs of its policyholders.
To see where a carrier is investing its funds, visit a carrier’s website. A carrier with integrity will publish its investment portfolio and company assets. Publicly traded carriers will make this information available on their website and update it on a regular basis. In contrast, non-publicly traded carriers are not required to make this information available.
Standing out from the competition
As the fixed annuities marketplace grows more crowded with the introduction of new carriers, brokers must differentiate themselves. Remember the psychology of the average fixed annuity purchaser and his or her investment goals. When choosing which carrier to align with, it is important to select a company that will best be able to meet your customers’ needs.
Rich Lane is the director of individual annuity sales and marketing for Standard Insurance Co. He has been in the fixed annuities industry for more than 17 years, with an emphasis on product and distribution development for brokerages, banks and broker/dealers. Rich may be reached at rich.lane@innfeedback.com.