Published by Taylor Financial Group
The new Fiduciary Rule has already begun to significantly impact the financial services industry and will only continue to do so going forward. The area of annuity design and sales is no exception. Because of these changes, Barron’s recently wrote an article about how the annuity market is changing and how the new Fiduciary Rule is benefiting investors. Barron’s reports that annuity companies have created new solutions that provide greater cost transparency, lower fees, and shorter surrender periods.
What are Annuities?
It is important to remember that annuities are not the right option for everyone, but rather work for specific people in specific situations. Depending on the type of annuity, investors can hedge against longevity risks (as an annuity can pay for your life), create a stream of income (similar to a pension), or even create a vehicle for additional tax-deferred savings. With the market fully valued by most standards and the bull market going on its 8th year, some investors may be considering a more defensive option for their portfolio. We thought it would be helpful to take a look at some of the prominent changes in the annuity markets as well as review existing and new annuity options.
How are Annuities Changing?
One of the biggest changes that has started to take place in the annuity market is the introduction of more fee-based products. These annuities charge a smaller annual fee than commission-based products, but come with an annual asset-based fee that is paid to the advisor. The fee-based product was introduced to accommodate the incredibly popular fee-based advisory model, which can help lower the potential for conflicts of interest between the client and the advisor. However, fee-based annuity products only make sense in certain scenarios. For example, if the advisor is providing on-going advice and maintains a relationship with the client, then an annual fee makes more sense than a commission. But, for someone who is only interested in a one-time transaction, an ongoing advisory fee may not make sense. According to the Barron’s article, fee-based products only make up a small percentage of annuity sales, but could have significant growth in the future.
Another new trend in the annuity market is the introduction of “buffer” annuities or “indexed variable” annuities. With the U.S. markets near all-time highs, some investors are looking for ways to protect from down-side risk, but still want to participate in the upside in case the bull market continues. Buffer annuities allow investors to track the returns of indices such as the S&P 500, MSCI Emerging Markets, or Nasdaq 100, while protecting by limiting downside risk. However, investors should remember that while these annuities do provide downside protection, they also limit the potential upside of the investment. For individuals who are more concerned with protecting their exposure to investment loss rather than maximizing returns, these buffer annuities could potentially be a viable solution.
As stated before, an annuity is not a good option for everyone. However, in the right circumstance, annuities can serve as a beneficial portion of a client’s financial plan, particularly where the client is concerned with longevity risks or is nervous about the market.
If you have any questions about an existing annuity product that you own or want to learn more about whether an annuity makes sense for you, please contact us. We are happy to assist you.
Barron’s, The 50 Best Annuities: Guaranteed Income for Life, June 24, 2017
Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features, and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an index annuity for its features, costs, risks and how the variables are calculated.
There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59 ½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the financial strength of the underlying insurance company. Investment sub-account values will fluctuate with changes in market conditions.
Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing. An investment in a variable annuity involves investment risk, including possible loss of principal. Variable annuities are designed for long-term investing. The contract, when redeemed, may be worth more or less than the total amount invested. Variable annuities are subject to insurance-related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying sub-accounts. The prospectus contains this and other information about the variable annuity. Contact Taylor Financial Group by mail at 795 Franklin Avenue, Bldg. C, Suite 202, Franklin Lakes, NJ 07417 or by telephone at 201-891-1130 to obtain a prospectus, which should be read carefully before investing or sending money.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
No strategy assures success or protects against loss. Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal.
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