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When equity index annuities first came out, many were just too complex for Thomas Stratton to consider selling.
"Some EIAs are still too complex," says Stratton, who is the marketing director of Financial Independence Systems, a Dania, Fla. broker-dealer.
Yet, sell EIAs he does. So do an increasing number of other producers. Fixed index annuity sales hit a record $4.9 billion for the first six months of 2002, according to figures just out from The Advantage Group, Maryland Heights, Mo. (see story on page 5), and similar growth is expected for the second half. Average premium is $36,807.
These numbers have some producers scratching their heads. The EIA market is still relatively small, they note, citing Advantage Groups finding that only 36 insurers are currently selling the fixed version of the product. And the product still does not have a high profile in the public eye, they say. "So, who is buying EIAs and why?"
More to the point, they are asking: "Should I start offering EIAs? Will my clients benefit from them? And how should I position them?"
"Clients today no longer tell me they want return on their money," Stratton says of his own decision to work with EIAs. "They want return of their money." When he noticed the changing mood, he reviewed EIAs and found some can be the right product for certain clients.
Fixed income clients are increasingly comfortable with EIAs because of the minimum interest rate guarantee, he explains, especially when they compare the guaranteed rate to todays "very low" current returns on bonds and bank certificates of deposit.
On the other hand, he says, equity investors who have lost money in the stock market downturn like the EIAs ability to provide exposure to equities (via linking excess interest credits to gains in an equity index) while still preserving principal.
The EIAs long-term returns may be lower than what is possible in a soaring stock market, Stratton allows, "but to many equity clients, the trade-off is worthwhile It gives them a way to start restoring what they lost in the market downturn."
Many securities clients put off moving into fixed annuities and also into fixed EIAs, until it was too late, contends Katrina Savage, vice president of Alliance Financial Group, a Flint, Mich. agency offering securities and insurance. They thought the EIA returns were "too low," she recalls.
By contrast, she says she liked EIAs as soon as they came out in the mid-1990s. "They are a perfect blend of guarantees and equity market performance."
Some of Savages clients did end up buying EIAs in the later 1990s, but she says it took the stock market crash to convince others.
When some of the holdbacks first saw the double-digit returns their friends were getting on EIAs, "they told me it was too good to be true," Savage recalls. But word got out, she says, "and then it was Katie bar the door."
Starting in 2000, Savage says, clients moved over to EIAs "in droves." Roughly 70% of the EIA buyers pulled money out of mutual funds held inside of IRAs, because they figured it was long-term money anyway, she adds.
"They love the guarantee of principal, and they love the fact that the EIAs I sell offer a choice of strategies," Savage says. (Note: "Multi-strategy" EIAs offer various buckets, each linking to gains in a different index. Some have a fixed interest bucket, as well. Typically, clients can move money between the buckets.)
One planner, who also is an accountant and investment rep, suggests EIAs look more attractive today than previously because "they remove the clients assets from the field of battle."
For investors who lost a lot of money in the stock market, "EIAs put an end to the bleeding," explains Jeffrey Adelstone, president of Adelstone Financial Services Inc., Tucson, Ariz.
"A lot of our clients think its too good to be true," says Adelstone, echoing the experiences reported by Savage. "But when I show them the terms of the contract, the guarantee, and the financial strength of the company (I use A-rated companies, at the very least), they listen."
If a company rating drops to a B, he says he does not automatically recommend moving the money. "A B is still an investment grade rating," he explains. But he does check the reserve ratios of the company to see what is going on. "If they are okay, the downgrade should not be a problem."
He says his accounting background helps with these assessments, but adds that any advisor can do the same. "Contact the insurance company directly," he suggests, "or ask the rating firm to send a copy of the rating report. Or, if its a stock company, get the insurers annual financial report from the Securities and Exchange Commission.
