Morningstar Advisor - Summer 2007 - (Page 25)

a variable annuity is appropriate for clients. This tool is a pre-sale analysis checklist that helps match customers with products. The profile, based on Rule 2821, is used by distributors to assist in capturing relevant information about customers who purchase variable annuities. The profile is intended to assist both the selling distributor and the insurer in fulfilling their respective obligations under state insurance laws, regarding the suitability of the annuity purchases. The profile checklist, which is used in conjunction with NAVA’s proposed “Straight Through Processing Standards” (STP), will help financial advisors’ pre-sale analysis by electronically comparing products and suitability. STP is not currently in operation. It is an initiative backed by variable annuity industry that has established a comprehensive set of standards for doing annuity business electronically. NAVA’s goal is to have STP in operation by the end of 2007, pending approval of all 50 state insurance departments. Currently, STP has been accepted in 11 states. Variable annuity product wholesalers also play an important role in sales. They are trained to discuss the product features and the types of investors who are appropriate for their products. Extra efforts are needed to explain an insurer’s product line and where it fits into an individual’s financial plan. Wholesalers must make sure advisors understand they must match up benefits with needs. New Products, New Challenges and death benefits as reasons to put an annuity in a qualified plan or an IRA. The guaranteed lifetime benefit payouts are structured to meet IRS minimum distribution rules for retirement savings accounts. Scott Sanderson, vice president of strategic relationships at The Hartford, a top seller of variable annuities, suggests that financial advisors consider a client’s cash-flow needs during retirement and properly construct a retirement income portfolio that may include a variable annuity and other investments. “The focus of variable annuities is changing,” he says. “The guaranteed income for life benefit is in the wheel house of every broker and consumer. But they (financial advisors) have to look at the total package of what the product offers regarding investment performance, tax deferral, and death benefits.” Meanwhile, Thomas Grzymala, president of Forensic Analytics, LLC, of Keswick, Va., an expert securities witness, encourages advisors to get in writing that their clients understand how a guaranteed lifetime minimum withdrawal benefits works. The client can get a 5% guaranteed payout rate for life, based on the principal investment, no matter how the investments perform. However, if the client must cash out the annuity, he or she could lose money if the markets have underperformed. “If we have another stock market crash like 2000 to 2002, people who cash out their annuities will say they thought their principal was guaranteed, no matter what the broker told them. They (financial advisors) have to do some retirement analysis and get documentation that the clients understand that they could still lose money,” he says. NASD chairman and CEO Mary L. Schapiro has discussed several touchy areas regarding VAs in some of her speeches at NASD security conferences over the past couple of years. New and innovative variable annuity products many not be suitable for everyone, she says. Living Benefits Are Nice, but Use Them Suitably 1 Divide retirement investments when recommending a variable annuity with a guaranteed lifetime minimum withdrawal benefit. Target investments to provide clients with the maximum amount of income and growth after retirement savings is rolled into an IRA from a defined contribution plan. Make certain retirees have a guaranteed source of income to cover basic expenses, such as food, clothing, housing, medical, and other expenses. That often can mean taking full advantage of a variable annuity’s guaranteed lifetime minimum withdrawal benefit, or annuitizing the contract for lifetime income. Besides basic expenses, make sure your client has a source of money for lifestyle expenses, such as travel, entertainment, and maintaining a comfortable living situation. 2 3 4 Example If a client has $5,000 per month in basic expenses and gets $4,000 per month from a pension and Social Security, there is a $1,000 monthly gap. To cover the gap, the advisor can put $100,000 in an immediate annuity that will pay the client about $1,000 per month, hypothetically, depending upon the age of the individual. Or the advisor can put $250,000 into a variable annuity with a guaranteed lifetime minimum withdrawal benefit of 5% annually. Additional income to meet other needs can be funded with tax-free municipal bonds and dividend-paying stocks or stock funds. In a rollover IRA, clients can invest in bonds or bond funds and stock funds that generate a lot of short-term capital gains, which otherwise are taxed as ordinary income. Suitability, however, is a moving target because insurers are developing new products that guarantee principal while assets are invested in stock and bond mutual funds. One such product that can play a role in a client’s retirement income portfolio is a variable annuity with guaranteed lifetime minimum withdrawal benefits. A survey by NAVA revealed that more than 60% of consumer respondents cite living benefits, guaranteed lifetime payout options, MorningstarAdvisor.com 25 http://www.morningstaradvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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