June 14, 2011
By Linda Koco
Contributing Editor, AnnuityNews.com
May 31, 2011 -- Many industry sources put the average single premium for fixed annuities in the $40,000-to-$60,000 range and variable annuities a little over $100,000. Does that mean the products aren’t drawing many millionaires?
Not according to Danny Fisher, president of The Fisher Agency, a Dallas firm that specializes in fixed annuity sales. “I have lots of millionaire clients,” he says.
“If the amount of interest they can earn in fixed annuity is more than they can earn from bank certificates of deposit, savings and loans, Treasury bills and bonds, why wouldn’t they buy fixed annuities?”
He cites the example of a couple who are clients of his. They have more than $3 million in net worth and no children. “This couple has more than 50 annuities, spread between 10 to 15 companies,” Fisher says.
The couple spread out their annuity purchases to different carriers in order to maximize safety, he says.
“Their whole goal is to leave the maximum they can to charity — specifically, for scholarships to young Catholic students.”
Another millionaire couple is socking money away in fixed annuities, Fisher says. “They plan to live on that in retirement, and they don’t want to be a burden to their kids.”
Still another client has close to $3 million. This client absolutely refuses to put money in the stock market, Fisher says. “He doesn’t want any of his money to be at risk. He would rather see it get a 4 percent gain than a minus 4 percent loss or worse.”
Millionaires do still invest
Not all millionaires feel that way, of course. New data out from Spectrem Group indicates that 47 percent of millionaires it polled that say they like being actively involved in the day-to-day management of their investments.
However, that percentage represents a “substantial decline” from the 65 percent who felt that way in 2010 and 69 percent in 2009, Spectrum says.
Spectrem defines millionaire as someone with a net worth of $1 million to $5 million, not including primary residence (NIPR). The 2011 survey included 1,484 households in this range.
A similar decline shows up among the ultra-high net worth, who have a net worth of $5 million to $25 million, NIPR. According to Spectrem, just 50 percent want an active investing role, down from 63 percent in 2010 and 67 percent in 2009. This survey polled 649 such households.
What’s more, the number of millionaires who say they do not want to give up actively investing is also falling. According to Spectrem, this percentage is down to 45 percent this year from 64 percent in 2009. Ultra-high net worth investors are showing less interest here as well.
“Wealthy Americans may simply be experiencing investor fatigue, prompting them to pull back and allow their advisors to take the lead in managing their assets,” Spectrem Group President George H. Walper Jr. said when the report was released.
Some annuity professionals think shifts of this nature may be signaling something else as well — that wealthy Americans are losing their stomach for investing and may now be more receptive to safer options, such as fixed annuities or variable annuities with guaranteed living benefits.
The millionaires that John Eikenberry has been seeing are doing something just like that. “They are interested in consolidating their accounts and giving up control over at least a portion of their portfolio,” says the president of Eikenberry Retirement Planning, Sidney, Ohio.
They want a trusted advisor to help them do that, he adds.
“In many cases, when they come to me, they are tired of doing it by themselves. Active management is tedious and involves daily attention. They make mistakes doing it by themselves, too.”
Many millionaires are not interested in giving up control of the whole portfolio, Eikenberry stresses. But they do want to give up control of some of it — 20 or 25 percent, for instance.
When that is the case, he says he often recommends taking a “blended approach” to the assets the client no longer wants to control.
This blending typically entails using indexed annuities for the part of the portfolio that is to go on auto pilot and a fee-based managed money account for the remainder. “We are always careful to keep some liquidity for immediate needs,” adds Eikenberry.
The average indexed annuity value his firm sees in such cases is $150,000, he says.
Eikenberry cautions that the blended approach is not something for advisors to use if they only have an insurance license. To provide advice on securities, they also need to be securities licensed. Eikenberry holds a Series 65 as well as an insurance license and is subject to the fiduciary standard.
The role of annuity education
Many millionaires don’t know anything about annuities, or they may have read somewhere that annuities are bad, Eikenberry says. That is the case even for those who work in financial areas other than insurance.
When that is the case, he says he educates them on how annuities work. He points out that the client won’t lose money and that there are many tax advantages for wealthy people who use the product.
“Once they hear how the products work, they change their minds,” he says.
Millionaires especially like the upside potential that comes from linking the policy’s credited interest to an index, and the fact that they don’t have to worry about managing this part of the portfolio, he says. They also like that they can control how they receive the money as income, that they can take penalty-free withdrawals, and that the annuities pay a death benefit.
Many indexed annuities today offer guaranteed living benefit (GLB) riders, Eikenberry adds. Millionaires like those features, too, he says.
Sometimes he sells variable annuities to millionaire clients, also with GLBs attached. But he says he doesn’t recommend these as often as he does indexed annuities, due to the VA’s higher product fees, which can run from 1.5 percent to 2 percent a year. “I have a problem with those expenses and my clients do, too.”
The blended approach works well for millionaires who are satisfied with modest gains, of perhaps 5 percent to 7 percent a year, and who don’t want to suffer a loss of, say, 20 percent to 45 percent in any one year, he says.
What about the surrender charges?
The argument that millionaires won’t tolerate annuity surrender charges is inaccurate, according to both Fisher and Eikenberry.
Fisher says that millionaires he works with generally buy traditional fixed annuities with a three- or five-year rate guarantee, or occasionally a seven-year guarantee, he says. The surrender charges track with the stated guarantee period. They know this, but they don’t intend to use the money anytime soon, Fisher says.
And, if they need money quickly, “they usually have other, more liquid options for that.”
Eikenberry typically recommends indexed annuities with 10-year surrender charges for his wealthy clients. This is long-term money, he explains, and the managed money approach means the client still has plenty of liquidity.
If a millionaire client is comparing annuities with bank CDs, Fisher adds, the surrender charge is a non-issue, because CDs charge penalties for early withdrawal, too.
The no-FDIC issue
Some millionaires are concerned that annuities are not FDIC-insured, allows Eikenberry.
In that case, he discusses how CDs and comparisons. First, he points out that although CDs are FDIC-insured, they pay very low interest rates, and the client’s tax bracket will likely wipe out any gains the CD does yield. Then he compares it to a structured DC product and then to an indexed annuity.
Many times, the millionaire ends opting for the annuity, he says.
Fisher notes that annuities do have protection from the state guaranty funds should the insurance carrier become impaired. State regulations prohibit advisors from bringing that up with clients, “but if they ask me about it, I can answer,” he says.
For millionaires, that can be an important issue. So can the fact that many states have been increasing the maximum liability per annuity claim to $250,000 or more, from the previous $100,000.
In Texas, where Fisher works, the state guaranty fund maximum will rise to $250,000 per annuitant per company in September.
The increase will likely affect how much money millionaires decide put into an annuity, Fisher says. With the current maximum of $100,000, most clients have been refusing to put more than $100,000 into an annuity at one company, he says. “That has left me scrambling to find other companies for the rest of the money.”
But with the higher limit, if the millionaire likes a particular annuity company, the person will likely put more money into an annuity offered by that company. “That will give them greater sense of relief that their money will be safe.”
Spectrum estimates that the U.S. millionaire population is 8.4 million people.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.
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