Money on the Move, Heading to Annuities

May 17, 2011

By Linda Koco
Contributing Editor, InsuranceNewsNet
May 17, 2011 ­­­-- Recent surveys are sending out mixed signals over whether the trend today is to move money into cash and other safe-money havens or to securities, but some annuity people think there is no question about the answer.

First the mixed signals from mid-May:

·         A Bloomberg survey said that, as of early May, a smaller percentage of U.S. investors were increasing their exposure to stocks (37 percent in early May compared to 57 percent in January). In addition, it found that global investors are holding more cash and reducing investments in commodities.

·         A Reuters poll reported that U.S. investors’ exposure to stocks fell to 51.3 percent in April from 52.6 percent in March, and that global investors are turning to bonds and “safe haven cash.”

·         But an Aberdeen Asset Management Inc., survey said U.S. investment advisors surveyed in March are planning to increase — not decrease -- client exposure to equities during 2011.

The fact that the surveys were conducted at different times may account some of the contradictory findings.

For instance, the Aberdeen survey sampled views in mid-March, when the stock market was moving up and U.S. gas prices had not yet reached $4 a gallon. On the other hand, the Bloomberg survey sampled views in May, when gas and food price jumps were driving news cycles all over the U.S. The first may have fueled optimism about equities; the latter may have doused it.

The populations polled may also account for divergent views. The Aberdeen poll surveyed advisors while the Bloomberg focused on investors, analysts and traders and the Reuters looked at investment houses. Those groups don’t think in lock-step.

Also, the focus of the polls made a difference. The Bloomberg and Reuters polls looked at views of current trends while Aberdeen looked at expectations for 2011.

The annuity story

None of the surveys mentioned annuities, but annuity professionals definitely have some ideas about which way the winds are blowing.

Consumers are absolutely moving more money into fixed product this year, says Brendon Kelly, vice president-annuity operations at Ash Brokerage, Ft. Wayne, Ind.

Ever since 2008, the piece of client portfolios allocated to fixed products has been getting bigger and bigger, he says. In fact, fixed annuity sales at his own firm are up “easily” by 10 percent to 15 percent in the first four months this year, he says.

“I think this will only increase as the baby boomers get closer to retirement. They just don’t have the time to recover from major losses in the stock market, so they want put their money into a product that will get them 3 percent to 5 percent and no downside.”

Most of this year’s annuity sales at Ash have been made to new clients, Kelly says. These clients are moving money out of bank accounts that are paying very low interest rates or out of securities accounts that the clients have already converted to cash due to concern about market volatility, he says.

Roughly 60 percent of the annuity sales are going into indexed annuity products, Kelly says. The other 40 percent are going into traditional fixed annuities.

“Clients want to put their money into indexed annuities to get the upside potential, downside guarantees, and tax deferral the policies annuities offer,” he says.

Two years ago, annuity sales ratio was the other way around—40 percent indexed and 60 percent traditional fixed.

Ash does have contact with advisors who are encouraging certain clients to increase their allocation to equities, Kelly allows. These are dual-licensed advisors who sell securities as well as annuities. “They see the stock market bouncing back and they feel optimistic about the future.”

However, he adds quickly, “the majority of advisors we work with are pessimistic about the chance that the market will rebound. They believe the market will continue to struggle, at least through this year, so they are continuing to recommend fixed products such as annuities, bonds and Treasuries, especially for clients who are close to retirement.”

The variable annuity angle

Variable annuity companies are watching the fixed/equity struggle play out in their own market, and some are responding with new policy designs.

A recent example comes from MetLife. Despite the stock market rebound earlier this year, 75 percent of baby boomers and 88 percent of financial advisors recently polled by the insurer said they remain concerned about market volatility, the company notes.

The worry is that volatility “could compromise their future retirement security,” said Robert E. Sollmann Jr., executive vice president and head of Retirement Products. This has led many people to sit on the sidelines, he said.

In response, MetLife is positioning two new optional VA riders as features that can help VA owners to move back into the market, but with a greater sense of confidence about their retirement account.

The Guaranteed Minimum Income Benefit Max (GMIB Max) rider and the Enhanced Death Benefit Max (EDB Max) rider offer 6 percent compounded growth and 6 percent annual withdrawals of the benefit base, the company says in a rollout announcement. Owners can start and stop withdrawals at any time without losing compounding. And policyowners who elect the riders can invest in one or more of four protected growth strategy portfolios and/or an intermediate government bond portfolio.

The idea is “to help provide clients with more guaranteed income and more consistent returns over time,” the company says.

Going conservative

Kelly, of Ash Brokerage, says he has noticed that fixed annuity buyers tend to be younger today than they were before the market crash. The age range is 55 to 60-plus, whereas the age range used to be mostly people in their 60s.

He thinks the last market downturn has caused people in their mid-50s to consider all forms of conservative allocations — “even money market accounts that are paying only 25 to 50 basis points.”

It’s not about growth for them, he says. Older people would rather see their money earn lower interest rates than see their account values drop 35 percent during another market downturn in the future.

“I can see the value of equity investing for younger people but, for the older baby boomers, they just don’t have any time” left to recover.

About the recent surveys:

·         Bloomberg sampled views of over 1,200 investors, analysts and traders globally and in the U.S. in early May.

·         Reuters surveyed 56 investment houses in the United States, Europe ex-UK, Japan and Britain in April.

·         Aberdeen commissioned Harris Interactive to survey over 800 U.S. advisors from wirehouses, regional brokerage firms, independent wealth management shops and firms in mid-March.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Richard Zaehringer

6/15/2011 5:08:14 PM - Wisconsin

The information written in the paragraph beginning with, "The Guaranteed Minimum Income Benefit Max....", is inaccurate and misinterpreted from the contract language. We as advisors have a fiduciary obligation to explain the facts rather than creating ambiguity.

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