HOW IS YOUR BUSINESS IN THE MIDST OF THE PANDEMIC
March 2020 began a vicious market decline that saw portfolio values collapse. On March 23rd the Dow hit a low of 18,213.65*. This was not the first market correction that occurred this century. The first few years of the early 2000’s were marred by the losses of the Dot-com bubble bursting, and fast forward to 2008, we saw the housing bubble burst and the beginning of the “Great Recession.” While, markets have greatly recovered this year, the tumultuous nature of the first few months greatly depleted investors savings.
Additionally, clients tend to underperform the indices they intend to track.
While underperforming the market is never anything investors want to do, it is something that is constantly plaguing investor’s portfolios. According to DALBAR inc**, the average investor underperforms the market nearly year over year, especially during downturns.
The factors DALBAR attributes to why investors are constantly mistiming the market include,
Herding: Copying the behavior of others, even if the outcomes may be undesirable.
Narrowing Framing: Making decisions without considering all the different implications.
Anchoring: Looking back at past experiences, even though the situation may be different.
Mental Accounting: Taking unnecessary risks, while simultaneously avoiding rational risks.
Mistiming the market is a large factor in investment success that remains relevant during today’s market volatility. Timing risk can be mitigated by adding fixed index annuities to your retirement portfolio.
By adding FIAs to a portfolio one can both mitigate timing risk and reduce fees, since accumulation only FIAs do not carry any fees. Let’s look at allocating a hypothetical portfolio of $1,000,000 that’s allocated to 60% equities and 40% bonds. Well assume a 1% annual fee or $10,000 per year. By simply allocating 15% or $150,000 to an FIA, the investor saves $1,500 annually while insulating their portfolio from interest rate risk, investor behavior risk, and market risk, while achieving positive market growth during up year or protecting from downturns in negative years. In addition, this adds additional revenue for the advisor while not leaving more assets on the table exposed to losses and thus decreasing fee based revenue.
If the market goes up, the FIA’s account value grows by a portion of the market gains based off of the contract’s specific crediting method. This allows the annuity to take advantage of compounding interest year over year.
If the market goes down, the FIA’s account value remains steady and does not take a loss. This allows the fixed index annuity account value to remain level during declines at the next annual point to point interest crediting date.
A hypothetical portfolio after allocating to an FIA.
For more on how to integrate FIAs into your portfolio, download our whitepaper Fixed Index Annuities in an Optimized Portfolio.
If you are a financial professional and want to learn more on how to master your next virtual client meeting, check out our series on virtual selling.
Ready to add safety and security for both you and your clients? Reach out to our wholesalers today:
*Maggie Fitzgerald Pippa Stevens, “Stock Market Live Thursday: Dow Drops Nearly 7%, Fear Gauge Spikes, Back to Bear Market?,” CNBC (CNBC, June 11, 2020), https://www.cnbc.com/2020/06/11/stock-market-today-live.html.
** “Quantitative Analysis of Investor Behavior, 2019,” DALBAR, Inc, www.dalbar.com.
The annual reset allows for any interest credited on each contract anniversary to be “locked-in” and it can never be taken away due to market decreases. The interest credited is added to the accumulation value of your contract, which then becomes the guaranteed Accumulation Value “floor” that will be included in the calculation of the interest that is credited going forward, subject to any withdrawals and applicable rider fees.
Although an external index may affect your interest credited, the contract does not directly participate in any equity investments. You are not buying shares of any stock or index. The index value does not include the dividends paid on the equity investments underlying any equity index. These dividends are not reflected in the interest credited to your contract.
Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company and do not apply to the performance of the index, which will fluctuate with market conditions. Annuities are designed to meet long-term needs of retirement income. Annuity contracts typically require money being left in the annuity for a specified period of time, usually referred to as the surrender charge period. If you fully surrender your annuity contract at any time, guaranteed payments provided for in the contract and/or any rider will typically no longer be in force, and you will receive your contract’s cash surrender value. Before purchasing an annuity, read and understand the disclosure document for the early withdrawal charge schedule. The purchase of an annuity is an important financial decision. Talk to your financial professional to learn more about the risks and benefits of annuities.
KEY TERM
FIXED INDEX ANNUITY (FIA):
A fixed index annuity (FIA) is a tax-deferred, long-term retirement savings vehicle issued by an insurance company. FIAs are designed to meet long-term needs for retirement income. While product and feature availability may vary by insurance carrier and state, in general, FIAs provide guarantees of premiums (backed by the financial strength and claims-paying ability of the issuing company), credited interest (subject to surrender charges), and a death benefit for beneficiaries. Any distributions may be subject to ordinary income taxes and if taken prior to age 591/2, an additional 10% federal tax. Early withdrawals may result in loss of the premium and credited interest due to surrender charges.
• Not FDIC insured • May lose value • No bank or credit union guarantee • Not a deposit • Not insured by any federal government agency or NCUA/NCUSIF