Advisors have an exceptionally challenging job during times of economic instability. They are expected to help their clients navigate the financial market wisely, but unfortunately, the market does not always perform as expected or desired. Clients may become frustrated with losses due to stock downturns or feel as though their money is unsafe in such an unstable environment. In fact, there are still people sitting on the sidelines after the crash of 2008 and now they've missed all the opportunity associated with the recovery of the economy. The real challenge advisors face is determining what clients' investment behavior will be, which can be very difficult to measure.
When the market begins to dip, advisors know average investors may want to pull their investments to protect their assets. Unfortunately, your client will likely tell you otherwise—when speaking to them rationally during a time of gains or stability, they can assure you they will not act emotionally during times of low valuations. However, when performance actually is lower than they'd like, clients often do act on their fear and opt to sell their liquid investments.
To help your clients build a portfolio that deters emotional decision-making and is well-diversified, you might suggest using variable annuities. One of the greatest benefits of variable annuities is the guarantees, which often ease a client's anxieties about market conditions. A negative period may affect them less than an investor who only uses stocks. Also, a client with patience who will give the market a chance to recover can be rewarded well if invested in a variable annuity.
For instance, your client might start with $1 million. Assume the client invests $350,000 in a low-risk bond fund. For purposes of our example, we will assume a 3 percent rate of return. With these assumptions, the client will be able to withdraw approximately $41,000 per year from the $350,000 over a 10-year period of time, until the $350,000 originally invested is completely paid back to the investor. You advise your client to put the remaining $650,000 in a variable annuity. Some companies still guarantee a doubling of the money in 10 years, but they are few and far between. Assuming this to be the case, the $650,000 would double to $1.3 million (for income purposes only) after 10 years, and provide a guaranteed income of 5 percent on the $1.3 million, to the tune of $65,000 per year for life. This is a worst-case scenario, assuming the client doesn't touch their money.
