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How Advisors Educate Clients on Annuities, Life Insurance

October 1, 2015

Client surveys confirm that baby boomers continue to prioritize principal protection and the potential to improve net after-tax returns when discussing their retirement-income portfolio. Accordingly, the preponderance of our educational efforts focuses on the following themes:

  • Helping clients understand the benefits of insurance-backed guarantees in hedging many risks of retirement that include market volatility, longevity/mortality and financial repression. History has shown that these risks can have a deleterious impact on a portfolio, especially in an environment when the existence of income-generating investments, such as traditional employer-sponsored pension plans, is diminishing.
  • Highlighting the tax-efficient aspects of insurance-based solutions as an effective estate-planning tool in improving income sustainability, transition of legacy assets and ensuring efficient distribution of a business. Each of these is magnified in an environment of rising taxes and low interest rates.
  • Maintaining consistent communication about these services, to ensure clients are aware of them, through awareness campaigns, special events hosted by our field annuity-planning specialists and partnerships with insurance companies. Just as important as the theme is the messaging that is associated with it.

The cornerstone to creating an efficient suitability process starts at the initial due-diligence phase. We seek to ensure that issuing-party credit quality and platform and reputational risks are commensurate to the clients’ profile, prior to its offering.

This diligence includes a thorough review conducted by our dedicated analyst team, overseen by a formal independent committee structure. In addition to initial carrier review, the firm utilizes internal and external resources to continuously monitor the insurer’s financial condition and product offerings. This process has been lauded by many of our peers and insurance-company partners as being best in class and is viewed as a true competitive advantage.

Once equipped with that research, our advisors can source the inventory to assist the client in selecting an appropriate product structure, investments and optional rider guarantees to meet individual client needs. In order to ensure proper levels of advisor education, the team sets a coordinated course of action that includes effective training, education and appropriate levels of disclosure to provide as much transparency as possible.

As it relates to annuities and insurance, late last year our team collaborated with our Global Investment Committee to conduct a deep dive on the annuity product line. This white paper sought to identify the benefits of annuities in an era of “financial repression,” otherwise known as the era in which central banks have pumped liquidity into the markets and artificially tempered interest rates. Additionally, it both confirmed the value proposition of annuities and included a first-of-its-kind “optimization framework” that assists advisors in targeting an allocation toward an annuity solution.

As a conduit to this and other forms of investment research, the firm also leveraged our idea-recommendation tool, the “Insights Engine.” The tool uses a sophisticated matching algorithm to ensure that investment ideas are distributed to only the most applicable situations.

As product innovation and flexibility have evolved, so has product complexity. As such, products get reviewed not only at the onset but also on a periodic basis. We are especially cautious of the use of complex strategies targeting senior clients, and of fees or surrender charges that may exceed periods of 10 years. We are also wary of lower-rated issuers that attempt to grow market share by offering more-robust guarantees. Unfortunately, if it sounds too good to be true, it generally is.

Morgan Stanley believes in a holistic and diversified approach to retirement-income planning that in some instances will include a sleeve including annuities and insurance products. As academic research continues to suggest — when constructing a portfolio, guaranteed-income investments are ideally used in offsetting certain non-discretionary expenses (food, shelter and health care) while permitting the remainder of the portfolio to be allocated to higher beta, less-liquid investments. Additionally, these solutions have provided behavioral finance benefits, as the insurance “safety net” allows for less emotionally charged buying and selling when volatility permeates the markets.

More recently, annuities and insurance have been integrated into the firm’s Advisory Group to help ease the integration of these varying solutions. This change will undoubtedly better assist financial advisors to address their clients’ needs in filtering through the myriad of solutions. Additionally, removal of the silos will further facilitate our ability to help ensure that advice is outcome oriented.