Page 19 - Investment Advisor October 2022

taxable stocks will have an 87% return. far higher than a buffered annuity with age these products provide value by
At the fifth percentile, a buffered a 53% return at the 90th percentile and managing option trading and providing
RILA has a -8% return and stocks a -26% a 66% return at the 95th percentile. guarantees that insulate a client from vol-
return. At any return below the 25th per- For an investor who wants to get rid atility swings that could increase option
centile, the buffered annuity provides a of any possibility that they will have to prices. Option-protected portfolio strate-
higher return than stocks and the differ- cut back significantly on spending if gies aren’t new, but the outcomes they
ence increases toward the tail, resulting they get unlucky with their stock invest- produce appear to be increasingly popu-
in significant downside protection. ments over the next five years while lar among investors nearing retirement.
Another interesting protection annu- giving up only the more extreme upside This shouldn’t be surprising since
ity that performed well in our analyses is outcomes if they get unlucky might find many retirees base their decisions about
a variable annuity with a so-called guar- the GMAB product more attractive than when to retire on the lifestyle they can
anteed minimum accumulation benefit an unprotected stock investment. generate from the investments they
(GMAB). The product used in our analy- Another advantage of holding nonqual- hold today. A negative return shock
sis offers a true five-year floor of -10%, ified assets in products that use financial can result in a delayed retirement, or
resulting in a lower extreme downside options to tailor an investment portfolio an unacceptable drop in lifestyle that
than a buffered annuity. GMABs also pro- in an annuity wrapper is the ability to could have been eliminated by cutting
vide more modest protection than RILAs defer short-term gains until after a work- off some upside.
against smaller downside outcomes with er has retired. This is particularly valu-
a -10% return at the 10th percentile and a able when a worker is in a significantly Michael Finke is a professor and Frank M.
1% return at the 25th percentile. lower tax bracket after retirement. Engle Chair of Economic Security at the
The upside of a GMAB, however, was The insurance companies who man- American College of Financial Services.

INDEPENDENT ADVISORS AND CONSUMERS AGREE

Specialized Expertise

is Needed Most

SERVICE CLIENTS WANT OF INDEPENDENT ADVISORS HAVE
IS RETIREMENT INCOME FUTURE EDUCATION GOALS
PLANNING. 1 FOCUSED ON THIS TOPIC. 2

Access your specialized RIA Profitability Plan
VISIT
TheAmericanCollege.edu/RIA-Success

1 The American College of Financial Services O. Alfred Granum Center for Financial Security. 2022 Consumer Survey. January 2022.
2 The American College of Financial Services. 2022 RIA Growth and Specialized Knowledge Survey. May 2022.

OCTOBER 2022 INVESTMENT ADVISOR 17