Your Annuity Can Do More

Help Risk-Averse Clients Accumulate More

More risk-averse clients, particularly those in their late 50s and early 60s who are approaching or entering retirement, want to protect financial assets for the long haul. But from a tax perspective, the shift into more conservative investment options can be a double-edged sword. Fixed income and dividend yielding stocks, while more stable and predictable, also face a much higher ordinary income tax burden. Likewise, allocating to liquid alternatives and managed volatility options may potentially protect the downside for these clients—but these funds may also come with higher tax implications.

For the risk-averse client who holds a considerable amount of conservative assets and risk-managed funds in a taxable account, employing an asset location strategy with a fee-based Investment-Only VA is an effective way to improve the tax-efficiency of their overall portfolio as part of a more holistic financial plan. Tax-efficient investments, such as long-term buy and hold stocks, equity funds and ETFs, can stay in their taxable brokerage account. But the tax-inefficient assets, such as bonds, dividend yielding stock funds, liquid alternatives and managed volatility funds, should be relocated to a tax-deferred fee-based IOVA. By deferring taxes, clients can increase returns without increasing risk, to let the assets compound and grow—helping them get to their retirement finish line faster.

Safeguard Heirs from the Typical Trust Tax-Drag

It is projected that a great transfer of wealth valued at roughly $30 trillion—almost twice the GDP of the United States—will pass from Baby Boomers to their Gen X and Millennial heirs in the next three decades. An estimated $12 trillion has already changed hands, as Boomers inherited wealth from their parents.

Helping older clients prepare for and live in retirement may also include helping them plan a secure financial future for their heirs. Trusts are a common vehicle used by individuals, especially the high net worth, to leave a financial legacy and transfer wealth to the next generation. But distributions from trusts over $12,500 are taxed at the highest rate, which can negatively impact the trust investment.

Advisors can help clients mitigate this negative impact by locating that trust structure in a low-cost IOVA. This annuity structure allows distributions to be re-invested in a way where they can compound and grow, without the tax-drag that may hinder NIMCRUTs, charitable remainder trusts, and other trust structures. While traditional VAs may not work, due to costs, layers of asset-based fees and limited investment options, fee-based IOVAs are the right fit.

Taxes on trusts are high, but in a flexible fee-based IOVA, clients and their heirs can benefit from a diversified portfolio and compound what is saved on taxes. It also allows clients to control when trusts generate taxable income, thereby accumulating and compounding more savings for future generations. Now, clients can make the most of their transfer of wealth.

The Right Fee-Based Annuity to Meet Clients' Needs

Annuities are long term investments and should be considered carefully, because there can be tax penalties on withdrawals made before age 59½. But even though a certain type of annuity may have been a good fit when it was originally sold to a client, as advisors know all too well, over time clients' needs can change.

If clients are seeking to shelter investment gains from future taxes over a long accumulation period, a simple low-cost fee-based IOVA with more funds and flexible technology to trade and rebalance may be the right solution to maximize the power of tax deferral. If clients are seeking to protect their principal, mitigate the downside or protect retirement income, there are more fee-based annuities being built to meet these needs.

If an annuity is no longer the right fit, advisors can help a client transition from an old annuity to a new one through a tax-free 1035 exchange. Before switching, advisors should fully understand the client's needs and evaluate the loss of any benefits or guarantees, as well as the impact of any surrender fees if they choose to switch too soon.

Your Annuity Can Do More

For a clear majority of current clients—and the growing ranks of younger digital natives poised to be the clients of the future—there is an expectation that financial services should offer them the tech-enabled ease, convenience, choice and value that they already enjoy from consumer giants like Netflix and Amazon. With this innovative new category of fee-based VAs, RIAs and fee-based advisors can give their clients the simplicity, transparency and choice they demand—along with providing an enhanced tech-enabled experience that is transforming how both advisors and investors manage their annuities.

As the industry continues to change, these new fee-based annuities can help advisors do more, to meet their clients' most important investing needs as a part of a comprehensive and holistic financial plan—from minimizing the impact of taxes, to maximizing accumulation potential, to optimizing their financial legacy. And because they are built from the ground up for RIAs and fee-based advisors, these fee-based annuities align with their fiduciary standard—and their clients' best interests—to help create trust, deepen the advisor/investor relationship and keep their practice strong, profitable and poised for future growth.

— Connect with ThinkAdvisor Life/Health on LinkedIn and Twitter.

Craig Hawley is the head of Nationwide Advisory Solutions, the fee-based distribution arm of Nationwide.