The problem seemed insoluble. Jim needed some of the monthly retirement income his annuity provided but not all of it. And he needed a large sum of cash, fast. It wasn't poor financial planning; life changed for Jim in a way he could not anticipate. In this case it was Jim's son, Nathan, who had started a custom car shop. Business was booming, but Nathan needed some gray hair on the sales floor, someone he could absolutely trust, and a little bit of growth capital.
Jim was perfect for the job but could not seem to get the numbers to work. Years earlier, before his wife died, his advisor, Susan, helped him select an annuity that would offer monthly payments of $7,865 guaranteed for 20 years or the rest of his life for a premium of $1.2 million. With the salary Nathan could offer him, Jim didn't need the full monthly payment. At the same time, the upfront annuity premium sapped almost all of his liquid investments, making it difficult to fund an equity investment in his son's business. Jim felt handcuffed by his annuity.
Susan crafted an alternative for her client in the emerging secondary market for annuities, and she deftly solved all of Jim's challenges. In the ensuing transaction, Jim sold five years worth of partial annuity payments – $2,713 of his $7,865 monthly payment – for a lump sum of $137,000, about what his son needed to finance new capital equipment purchases.
During this 60-month period, Jim would receive $5,152 a month from the annuity, and after the five-year period was up, Jim would again receive the full $7,865 monthly payment for the remainder of his life.
Jim hoped the new venture would work out and that he wouldn't need the full payment, but knowing it was there gave him enormous peace of mind.
He later told Susan, "You gave me so much more than access to cash. Knowing that the income I might need will be there in five years allows me to work smart instead of scared, and in the long run, that's going to make all the difference in the world."
And it made a big difference to Susan, too. The status she achieved in Jim's eyes as a result of the solution she developed resulted in a steady stream of referrals from Jim's friends who also had "annuity issues."
This real-life situation typifies the benefits individual investors, as well as the advisors who serve them, can realize from the emerging secondary market for annuities. While it's not the New York Stock Exchange, some specialty finance firms are fulfilling the role of a market specialist and buying annuity contracts from individuals through their agents, brokers and financial advisors.
A guiding principle in finance suggests that all market participants realize benefits when a secondary market emerges. As illustrated above and in countless other scenarios, a secondary market gives consumers more choices. Meanwhile, insurance companies will sell more annuities because liquidity increases the pool of investors for whom an annuity investment is appropriate.
But for advisors, a myriad of benefits exists, ranging from developing new commission streams to prospecting to cultivating stronger relationships within their existing book of business. Realizing these benefits in large measure depends on how this opportunity is positioned in consumers' minds and how it is marketed by insurance and financial advisors. James may have responded positively to an advertisement that addressed one of the central conflicts investors have with annuities: the lack of flexibility. An ad with the following copy could resonate with annuity owners: Feeling handcuffed by your annuities? With an annuity purchase program, you can finally sell your annuities for cash.
Other tactics are already helping advisors help clients find liquidity options for their annuities.
Wealth transfer market
There comes a time in many clients' lives when their attention turns from generating investment income to transferring wealth to their children and grandchildren. The old saying, "You don't want to die with an annuity," is crass but nonetheless offers an important point of view. The tax treatment of annuities upon death vis-? -vis the heirs is draconian compared to the alternatives of passing on stocks, bonds and mutual funds. Specifically, the former potentially results in an immediate tax bill due to the increase in the heirs' ordinary income. The latter approaches enable heirs to enjoy tax-deferred investing at a stepped-up cost basis across two generations with the prospect of generating substantial wealth from their inheritance.
By marketing alternatives for annuities, advisors can sell into the wealth transfer market in two ways. First, there are opportunities to prospect for new clients in the over-60 market. These are individuals for whom the thought of wealth transfer is just beginning to emerge.
These prospects also may be on the other side of financing higher education for their children, and they are close enough to retirement that the picture is becoming clearer about what assets they will need in their lifetime vs. assets that they can pass along to future generations. For prospects such as these, the following positioning will likely strike a chord: You can't take your annuities with you. But you don't want to leave them behind either. Annuities are great investments for stable, secure income but not for passing wealth on to heirs and beneficiaries. With an annuity purchase program, you can sell your annuities for cash and consider alternatives to bridge the generation gap.
Whether for prospects or existing clients, marketing a wealth transfer solution can have far reaching implications for your practice's success. This is because once a plan is set in motion to place assets into the hands of the next generation, the next most obvious need becomes competent financial advice for heirs. Advisors who position themselves as the architects of efficient wealth transfer are the most likely candidates for this new business. And the opportunity to generate substantial sums under management and increase product sales is more than likely.
