How Indexed Annuities Can Help Prevent Anxiety Among Consumers
February 6, 2010 by John Rafferty
Throughout history, the number three has had universal significance. Its value stems from a number of traditional sayings, such as “the power of three” or “third time’s a charm.” The rhetorical “rule of three” is an important feature of speeches and has often been used by skilled presenters and politicians, with the understanding that people can absorb only three items or key points at a time. Even in children’s literature, we see the power of three in tales of the Three Blind Mice, Three Musketeers, and Three Little Pigs. The combination of three seems to connote a perfect balance.
The power of three can apply to your financial practice, as well. Planning for retirement can be an overwhelming process for clients, given the almost unlimited number of products and myriad asset classes from which to select. One way to simplify the process for clients who are in need of an easy-to-manage accumulation strategy for the long term is to introduce a simple, three-pronged approach where a larger percentage of the client’s assets are in principal-protected products. After all, if the past year has taught producers anything, it’s that this economy has tested people’s appetite for risk.
For those clients looking for financial calm during uncertain economic times, introducing this three-pronged strategy can help them become more confident in the future. The strategy includes:
- Prong one: A low-risk, low-reward product such as a CD, savings account, or traditional fixed annuity
- Prong two: Products with exposure to stocks, such as mutual funds
- Prong three: An indexed annuity that protects principal (if held to contract maturity) while offering the potential to produce more return than the traditional fixed product
This approach to accumulation can help agents keep their clients focused on the future by keeping a reasonable portion of the client’s portfolio in principal-protected products. In turn, this approach may reduce the client’s risk of becoming too polarized in frothy market environments, in which fear or greed may compel them to unravel their balanced portfolio and put too much into one end of the risk/reward spectrum, ultimately jeopardizing growth potential or principal protection.
Prong 1: Low risk, low reward
The anchor of the three-pronged approach is the most conservative portion, and it includes products such as CDs, saving accounts, and traditional fixed annuities. Because they are fixed, the rate of return will be stable and known in advance. These products sit at the bottom of the risk/reward spectrum thanks to the stability and predetermined outcomes they offer.
Prong 2: High risk and high reward
The second part of the strategy is an investment in the stock market through ownership of equity positions in companies, using products such as individual stocks or mutual funds available by investing directly in the market or through such vehicles as 401(k) plans. Although more risky than fixed options, these equity products can offer the potential for significantly higher returns, balanced by a potential loss of principal in poor markets. But with inflation constantly chipping away at purchasing power over the long run, a retirement portfolio should be partially exposed to the stock market and its return potential. Participating in the stock market should be a long-term endeavor; while the market will always ebb and flow over the short term, over time, no other asset class provides better inflation-beating accumulation potential.
Keeping that long-term view will be helped, in part, by the client’s comfort with regard to the remainder of their portfolio, and this is where the third prong — the indexed annuity — can help.
Prong 3: Indexed annuity
Integrating an indexed annuity into an accumulation portfolio can be a productive third prong, offering more upside potential than traditional fixed products and with no risk to principal if held to maturity. In effect, an indexed annuity gives the consumer an opportunity for a modest boost in return, without the added risk.
More importantly, adding an indexed annuity to an accumulation portfolio creates the possibility of “winning by not losing.” Armed with the additional confidence afforded by the principal guarantees, consumers may begin to take a longer-term view of their entire portfolio, and be able to take short-term equity losses in stride.
With so much uncertainty today, consumers are wary of trying anything new when it comes to retirement.
They may retreat to safer and more traditional products while turning their back on higher risk/reward products that are needed to grow their portfolios. Yet simply adding an indexed annuity to the mix may help bridge the gap between too much risk and too little, creating a better balance between traditional fixed products on one hand and equity products on the other.
The theory of investing is pretty simple: Buy low and sell high, and success will follow. In practice, however, consumers tend to buy high and sell low, allowing emotions such as greed and fear to drive their decisions. Allocating assets among traditional fixed products, equity products, and indexed annuity products may allow your clients to better balance risk with reward and be comfortable with their portfolio. With less riding on variable outcomes, this three-pronged strategy can take the emotion out of the process and keep consumers focused on the long term.
John Rafferty is the vice president of annuity marketing for American General Life Companies. He can be reached at john.rafferty@aglife.com.
Throughout history, the number three has had universal significance. Its value stems from a number of traditional sayings, such as “the power of three” or “third time’s a charm.” The rhetorical “rule of three” is an important feature of speeches and has often been used by skilled presenters and politicians, with the understanding that people can absorb only three items or key points at a time. Even in children’s literature, we see the power of three in tales of the Three Blind Mice, Three Musketeers, and Three Little Pigs. The combination of three seems to connote a perfect balance.
The power of three can apply to your financial practice, as well. Planning for retirement can be an overwhelming process for clients, given the almost unlimited number of products and myriad asset classes from which to select. One way to simplify the process for clients who are in need of an easy-to-manage accumulation strategy for the long term is to introduce a simple, three-pronged approach where a larger percentage of the client’s assets are in principal-protected products. After all, if the past year has taught producers anything, it’s that this economy has tested people’s appetite for risk.
For those clients looking for financial calm during uncertain economic times, introducing this three-pronged strategy can help them become more confident in the future. The strategy includes:
- Prong one: A low-risk, low-reward product such as a CD, savings account, or traditional fixed annuity
- Prong two: Products with exposure to stocks, such as mutual funds
- Prong three: An indexed annuity that protects principal (if held to contract maturity) while offering the potential to produce more return than the traditional fixed product
This approach to accumulation can help agents keep their clients focused on the future by keeping a reasonable portion of the client’s portfolio in principal-protected products. In turn, this approach may reduce the client’s risk of becoming too polarized in frothy market environments, in which fear or greed may compel them to unravel their balanced portfolio and put too much into one end of the risk/reward spectrum, ultimately jeopardizing growth potential or principal protection.
Prong 1: Low risk, low reward
The anchor of the three-pronged approach is the most conservative portion, and it includes products such as CDs, saving accounts, and traditional fixed annuities. Because they are fixed, the rate of return will be stable and known in advance. These products sit at the bottom of the risk/reward spectrum thanks to the stability and predetermined outcomes they offer.
Prong 2: High risk and high reward
The second part of the strategy is an investment in the stock market through ownership of equity positions in companies, using products such as individual stocks or mutual funds available by investing directly in the market or through such vehicles as 401(k) plans. Although more risky than fixed options, these equity products can offer the potential for significantly higher returns, balanced by a potential loss of principal in poor markets. But with inflation constantly chipping away at purchasing power over the long run, a retirement portfolio should be partially exposed to the stock market and its return potential. Participating in the stock market should be a long-term endeavor; while the market will always ebb and flow over the short term, over time, no other asset class provides better inflation-beating accumulation potential.
Keeping that long-term view will be helped, in part, by the client’s comfort with regard to the remainder of their portfolio, and this is where the third prong — the indexed annuity — can help.
Prong 3: Indexed annuity
Integrating an indexed annuity into an accumulation portfolio can be a productive third prong, offering more upside potential than traditional fixed products and with no risk to principal if held to maturity. In effect, an indexed annuity gives the consumer an opportunity for a modest boost in return, without the added risk.
More importantly, adding an indexed annuity to an accumulation portfolio creates the possibility of “winning by not losing.” Armed with the additional confidence afforded by the principal guarantees, consumers may begin to take a longer-term view of their entire portfolio, and be able to take short-term equity losses in stride.
With so much uncertainty today, consumers are wary of trying anything new when it comes to retirement.
They may retreat to safer and more traditional products while turning their back on higher risk/reward products that are needed to grow their portfolios. Yet simply adding an indexed annuity to the mix may help bridge the gap between too much risk and too little, creating a better balance between traditional fixed products on one hand and equity products on the other.
The theory of investing is pretty simple: Buy low and sell high, and success will follow. In practice, however, consumers tend to buy high and sell low, allowing emotions such as greed and fear to drive their decisions. Allocating assets among traditional fixed products, equity products, and indexed annuity products may allow your clients to better balance risk with reward and be comfortable with their portfolio. With less riding on variable outcomes, this three-pronged strategy can take the emotion out of the process and keep consumers focused on the long term.
John Rafferty is the vice president of annuity marketing for American General Life Companies. He can be reached at john.rafferty@aglife.com.
