The Real Benefits of Market History Knowledge

Commentary January 09, 2012 at 08:38 AM
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My first encounter with an FMO and their pitch on index annuities was many years ago. My main recollection was a guy literally screaming the word "evil" from the back of a large room, every time the phrase variable annuity was mentioned. And, with the tumultuous behavior of the stock market as evidenced by the S&P 500 index, it's no wonder that many insurance product salespeople would side with the scary screaming man in the audience. And since then (almost 10 years ago), index annuities have had a wonderfully rewarding run for clients and for the agents.

But staying abreast with information and trends as times change is one key to you and your practices' continued success. While index annuities have been profitable products for almost everyone (investor client, agent and marketing organization included), the next 10 years in our industry likely won't look like the previous 10 years. Why not? Primarily because the yield on 10-year Treasuries have declined from a once lofty 5.5 percent to a dismal 2 percent (or less), with no indication they will rise for at least a couple more years, (according to Ben Bernanke's testimony).

The other truth that is often forgotten or overlooked is that the actual "real" total return of the S&P 500 index going back to September 1998 through September 2011 has averaged nearly 3.5 percent annually*. So, while a hypothetical $100,000 investment into the S&P 500 index grew to only approximately $108,000 without dividends reinvested, the actual return explodes to nearly a whopping $145,000 once the dividends are added back in the equation. Many index annuities with annual resets did beat the famous index during the period referenced, but unless interest rates increase (and very soon), it will be much tougher for an index annuity's repeat performance of "outperformance."

What's the point of this rambling? The trends in the investment industry and the evolving expectations of your clients and prospects are changing. Going forward, zero may not be your hero. Surveys are already beginning to show that baby boomers would likely accept the paltry return of a bank certificate of deposit versus tying up their dollars in seven- to 12-year index annuities. How do you win these boomers back even before you lose them? 

I suggest by discussing alternative ideas and investments that have more upside potential but with "crash and burn protection riders," also known as guaranteed minimum income and/or withdrawal benefits. Or take peek into managed-money strategies, such as dollar-cost averaging or calendar effect modeling. Even if you decide not to obtain your securities or registered investment advisor license, it is important that you become familiar with alternatives and what your competitors are offering. Most importantly, at least recognize a shift in the tide of consumer and investor sentiment and be prepared.

*Copyright © 2011 Standard & Poor's, a subsidiary of The McGraw-Hill Companies, Inc. The S&P 500® has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. The index has over US$ 4.83 trillion benchmarked, with index assets comprising approximately US$ 1.1 trillion of this total. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75 percent coverage of U.S. equities.

Ham note: As a registered financial professional, I do not offer financial or securities advice over the Internet or comment on posts. Any investment plan in securities may neither assure a profit nor protect against loss in declining markets. Past performance is not indicative of future results. You should be aware of the real risk of loss in following any strategy or investment discussed on this website. Before acting on information on this website, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment and tax advisor.

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