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Tapping Into Annuities

Get on the fast track to building a profitable practice.

By Dave Willis

With Baby Boomers hitting retirement at breakneck speed, the business case for annuities has never been stronger. Here is a quick look at some of the annuities available today and helpful hints for selling them.

Annuities also respond to growing consumer concerns about risk.

In recent years, sales of annuities have grown at a rapid clip as advisors have turned to them in increasing numbers to help their clients deal with a variety of financial challenges. As these clients approach what is more often than not a lengthy retirement, many are looking for an income stream that will not only last as long as they do but will offer performance and security as well. Here are some of the reasons why annuities are in great demand today and a few of the strategies top advisors are using to sell them.

The new annuities
Stephen Yoder, CLU, ChFC, principal and vice president of finance for the Hummel Group, a multiline insurance agency with offices in Orrville and Berlin, Ohio, says variable annuities (VAs) have improved dramatically since their introduction. “When I first began to look at them in the mid-’80s, you had maybe six, eight or 10 sub-accounts to choose from,” he says. “You were pretty limited. And there were none of the riders you have now. You basically got your principal back if you died.”

Yoder, Ohio National’s top annuity producer in 2005 and a member of NAIFA-Wayne Holmes, took a fresh look at annuities several years ago in light of the market downturn, and what he found was a product that was undergoing some rapid and drastic positive change. This new breed of annuities, he says, addresses many concerns, including income guarantees, capital growth and diversification. “With today’s annuities, you can literally invest in mutual fund subaccounts and get market returns, yet have the protection you and your clients really want,” he says. “They’re very attractive.”

Gary Adkins, CSA, senior vice president and chief marketing officer for The Annuity Store, based in Sacramento, Calif., believes annuities that are available in 2006 deliver several benefits advisors can and should offer their clients. “There are the traditional advantages with the equity-indexed annuities, for example,” he says. “The money inside the policy is free from taxation until you take it out. The tax-deferral features, along with the liquidity features, are very important.” Many annuities offer systematic withdrawals of interest and principal, Adkins adds, most waive the surrender charge in case of nursing-home confinement and offer a terminal-illness benefit.

The power of choice
In northern Wisconsin, Oconto Falls-based Erv Tomalak, CFS, doesn’t push riders or annuities on his prospects or clients. He simply offers them as choices, and they generally sell themselves. “We use a lot of these annuities as a way of giving people options,” he says. His belief is that people need to understand and recognize all of their options so they can make the best possible choice. “Using variable annuities, we show people different riders they can use as retirement vehicles to protect their principal, for instance,” he adds. “If someone is retiring and has a 401(k) plan, and he likes the potential of the market but does not like the risk, he might choose a guaranteed minimum-income benefit rider or annual step-up riders. By doing so, he can have the guaranteed income, plus the potential market gain.”

The safety factor
Tomalak, a financial planner with Community Financial Services and a member of NAIFA-Northeastern Wisconsin, likes to position annuities as a safety net. “When you really look at it, people insure their homes, they insure their cars and now they have the option—if they want—of insuring their money,” he says. “That wasn’t always the case. Twenty years ago, people probably never thought of insuring their investments.”

The tax factor
It’s not just the ability to insure investments that’s appealing. Robert Grey, chief investment strategist and portfolio manager for Denver Money Manager, based in Colorado, says the tax status of VAs—income is not taxed until distribution—is a big plus. “Most attractive to me as an independent advisor is what I describe as just simple tax deferral,” says Grey, who offers portfolio-management services to retail and institutional clients, including other money managers, broker-dealers and independent advisors.

The key to selling annuities, Tomalak says, is educating prospective buyers.

James Brown, CFP, RHU, president of J.M. Brown & Associates in Tulsa, Okla., used this facet as a selling point recently. “A couple just had a $200,000 inheritance and they also inherited a farm, which is leased out,” he says. “They don’t need the money now, so they put it into an annuity, and we’re managing the account for them so any income they receive won’t create havoc with their tax return. Both of the individuals have good earnings, and why would they throw away money to taxes when they can defer and do some compounding over time?”

Like Brown, Jerry Minton, president of Alpha Investment Management, a portfolio-management firm based in Cincinnati, also manages investments within annuities. The two of them, along with Grey, use a low-cost product from Jefferson National Life Insurance Co. as the bucket, if you will, where the investment funds reside. “We do our trading inside the annuity, which means there are no 1099s and no short-term capital gains or losses reported to the IRS,” Minton says.

His clients include independent agents, advisors and others who need their clients’ money managed but don’t necessarily have the resources to do it themselves. “The average advisor is not really a money manager,” Minton says. “An advisor thinks strategically. We think tactically.”

Growth and security
According to Brown, an Oklahoma AIFA member, annuities offer an ideal combination of growth and security—something that is especially important as the population ages. A recent U.S. Census Bureau study notes that by 2050, there will be more than a million Americans age 100 or older. “I tell people that if they get to age 60 and are married, there’s a 40 percent chance that one of them will reach age 95. That really gets people’s attention,” he says. Such life expectancies bring with them a greater need for growth and security.

Minimizing risk
Annuities also respond to growing consumer concerns about risk. “The nice thing about annuities is you don’t have to ask what a person’s risk tolerance is,” says The Annuity Store’s Gary Adkins. “You know their money is safe. They won’t lose their principal, and interest rates are locked in each year. If they’re in an equity-indexed annuity, the gain also is locked in each year on most products. So not only can you not lose your principal, you can’t lose your growth as well.”

Yoder finds this to be a strong selling point, particularly for clients who’ve been through market ups and downs. “Back in 1982, annuity interest rates were 15 percent,” he says. “Fixed annuities were like a CD in the bank; you could get a good guaranteed rate. As interest rates declined, the stock market became more attractive. And many of us who were in fixed annuities gravitated to mutual funds and other more complicated and risk-oriented investments.”

Selling Points
  • Educate prospects.
  • Offer choices.
  • Review their overall financial status before a sale.
  • Be willing to customize.

All of that began to change when the tech bubble burst and 2000 came and went. “All of a sudden, we were in a serious downturn. And many of us began to realize we really still want guarantees,” he says. That evolution, he believes, has made annuities more sellable. “We can offer the mutual-fund environment, where we can make money for clients, but still have some guarantees we can wrap around them inside the VA to the extent they want to,” he adds. Yoder often finds himself packaging riders that offer guarantees for both death and income.

Tomalak believes this convergence, coupled with the breadth of product and rider choices, makes annuities worthy of consideration in a lot of cases. “It’s important to offer clients choices,” he says. “If you offer someone two or three ideas, he will pick one. If you just offer one, his only options are yes or no. With annuities, you can provide enough choices to make the sale.” And the products are easy to customize.

Sales ideas
According to Tomalak, the key to selling annuities is educating prospective buyers. “We educate our clients not only so that they can make proper choices, but also so that they understand what exactly is out there in the marketplace,” he says. Only then can they truly determine what’s best for them. Tomalak follows the Golden Rule in these situations: Do to others as you’d like them to do to you. “We’d rather give them the options and let them choose where they want to go,” he says. But that choice is best made in the context of guidance offered by an advisor, he believes.

Asking questions
Yoder, who not only sells annuities, but also is responsible for training staff to handle client calls, believes such customization is important. “One of the things that have kept me in business is the idea that everyone’s financial situation is a little different from that of the next guy,” he says. “So I want to know what their fiscal fitness is, just the same way a physician would be interested in their physical fitness. To do that means I have to ask a lot of questions.”

The tax-deferral features, along with the liquidity features, are very important.

The questions he asks, which also work for folks in his office and other advisors, probe whether the client gets IRS refunds, what his income level is, what expenses he has and what type of debt load he carries. What Yoder wants to know before he even gets into the sale of a product is whether the prospect has adequate cash reserves for emergency use, in checking or savings accounts, and if he has intermediate use of emergency dollars, perhaps in CDs. If he does not have any of those things in place, he is not looking to making a sale right away. He wants to get that set up with the client over the year so that he can begin to feel comfortable with his short-term needs. “VAs are a longer-term sale. You don’t want to put the money in and then a year later, have to pull it all out again because the owner would face surrender charges,” he adds.

So part of the process in working with mentorees, Yoder explains, is teaching them to take a good look, and be concerned about a prospect’s overall financial status. “If you don’t,” he tells them, “you’re just going to become like any other package salesman. Then it’s simply your product against their product, and you’re not really doing anyone a service, except just lining your own pockets.”

Yoder notes that keeping this issue front and center offers some benefits to the advisor, but more so to clients. By getting them to put their financial houses in order, clients are psychologically more inclined to benefit from annuities. Recent memories of the bottom falling out of the market drive increased stress over financial matters, and investing in particular. Yoder says this fear shows up regularly.

“I have many, many clients who, over the years, have said to me, ‘You’re putting me into mutual funds and here I am; I’m exposed to volatility in the marketplace,’” he says. But they’re conflicted. “They say they like the market,” Yoder adds, “and especially from 1995 to 2000, many of my clients did quite well. Some doubled or tripled their money within a five- or six-year period just by investing in large growth companies in the U.S.”

But they all have the same worry: “What happens if, in the year I’m set to retire, the market collapses again and my money is down?” Sure enough, in the early 2000s, the market took a serious downturn and a lot of people who were very aggressive, and who forgot some of the investment basics, lost money—a lot of money. “If they were on an income stream, their income streams lessened,” Yoder notes. “Or if they were not on an income stream, their values went down significantly, and they’re just now getting back to where they had been five or six years ago.”

Such volatility can delay retirement or, at the least, bring on enough stress to make retirement much less enjoyable than anticipated. “You can avoid all of that entirely with a VA.” Yoder says. “And you can still benefit from the mutual funds inside the contract. It’s a dynamic and dramatic improvement from even 10 years ago.”

Selling the zero
Adkins, who helps advisors decide how to incorporate annuities into a financial plan, says that when the market is up, all annuities look good. When they’re down, everybody gets a zero on their statement.

As part of his work, Adkins gets regular feedback from advisors he’s worked with. Sometimes it’s positive feedback; sometimes, it’s not. “I got a phone call a couple of years ago from a broker who was selling one of our equity-indexed annuities,” he says. “He called and said, ‘I used your line, Gary, about the potential for double-digit returns. And she got all excited and bought the annuity from me. But then she got her annual statement, and for that year, her return was zero. I got a big chewing out, Gary. Now what am I supposed to do?’”

Adkins told the broker to call the client back and find out where the money had been before, and figure out what would have happened with her investment where it was: “I said to him, ‘If it wasn’t in an equity-indexed annuity, it had to be somewhere. See where it was, and how it would have performed.’”

According to Adkins, the broker called him back a few days later. As it turns out, the client’s money had been in mutual funds, and she would have lost $160,000 if she’d left it there. “Zero is pretty attractive compared to that,” he notes. “I told the broker to make sure she pays for his dinner.”

What advisors need to do, Adkins says, is to learn how to sell the zero. “Most of this money is being moved from the market, and if the market goes down, do you want a negative or do you want a zero?” he asks.

Dave Willis is a New-Hampshire-based freelance writer and regular contributor to Advisor Today.

 


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