Investing in Variable Annuities in light of the Department of Labor Ruling (DOL)

Posted By on Jun 13, 2016|0 comments


Disclosure: For investment professional use only. This is not intended as investment advice, but rather to provide an opinion by a financial professional to other financial professionals about a type of investment product.

Earlier this year, the Department of Labor (DOL) issued a final rule requiring new fiduciary responsibilities for advisors who manage 401(k) plans and individual retirement accounts (IRAs). When it comes to the best interest of clients, undoubtedly one of the leading financial items being sold by advisors today are variable annuities. While there are many benefits this retirement vehicle offers, variable annuities can be difficult to decipher. It is therefore critical to understand the multitude of options that accompany variable annuities in order to know what is best for your client.

Creating Profit from Projections

Getting the most out of a variable annuity requires extensive research in order to understand exactly what is in store. The guarantees from variable annuities are favorable compared to what the S&P 500 has provided over the last 14 years. In recent years, the stock market has fluctuated in both directions, yet the S&P 500 has only returned a total of 34.8% since September of 1999 to March of 2016. Put simply, this is a 2% return each year. With numbers like these, it is no wonder variable annuities with guarantees of 5% and 6% returns are selling well.

You may be wondering why not everyone is jumping in? When I was 22 and beginning my position as a research analyst at the Gartner Group, a broker for Northwest Mutual came to my office and delivered a pitch on buying life insurance. At the time, I had no concerns and certainly no beneficiaries that I needed to take care of. I couldn’t imagine what I would need life insurance for. I told her I would look at the numbers.

As any analyst would, I dove into the numbers and calculated what the expected returns would be versus investing. I compared the outlook I had for investing against the idea of putting my money in the Northwest Mutual policy. I concluded that the policy would not begin generating money for three years and at the time, I had a host of solid investments that were significantly undervalued. Even after taking into account the tax benefits I would receive with the life insurance policy, it was evident that the cost outweighed the returns and therefore, I took a pass. Looking back, I am pleased with my decision, as my investments in Gartner Group, Coca-Cola, Dairy Queen and Gen Re far surpassed the S&P 500 and certainly the life insurance policy.

Comparing Variable Annuities

In order to provide your clients with a better understanding about what’s currently on the market, we have reviewed three of the most popular and successful variable annuities: AXA Equitable Retirement Cornerstone℠, Allianz Vision℠ with Income Protector, and Vanguard®. The advantages for each differ, but they all guarantee a certain level of return for investment. We’ve examined each one thoroughly and have accessed the benefits of riders that guarantee income or growth. With our report on each variable annuity comes a series of recommendations that are based on each market scenario including when the market is overvalued as well as undervalued. To learn more about each annuity, contact us today.

Looking Ahead

In order to make decisions that are in the best interest of your clients, you must first understand what they want and need. As a financial advisor, having the capability to sell does not necessarily help the client. Before offering any investment opportunities, ask yourself, “Does my client want to grow the initial investment or gain greater yearly income?” Second, as a financial planner, you need to decide whether the market is closer to being under or over its initial value. These simple steps will help you and your client select a variable annuity or benefit that is right for them.

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