REACHING THE RETIREMENT INCOME MARKET
INCOME MARKET
Rod Halvorson

Rod Halvorson is Senior Vice President, Financial Institutions Channel for Symetra Financial, a company with a half-century of experience in providing retirement plans, employees benefits, annuities, and life insurance through independent distributors nationwide.
 
 

ONE OF TODAY'S hottest topics among bank insurance and investment programs is retirement income. A recent survey from the Bank Insurance and Securities Association and Symetra Financial¹ found that 74% of bank representatives expect retirement income will be "highly important" to their future financial planning business. Institutions everywhere are drafting and redrafting strategies to help clients who are at or near retirement to effectively convert their savings into dependable income that can last as long as they do.

With total retirement assets in the United States now topping $16 trillion, according to the Investment Company Institute,² there is little wonder why bank programs across the country are vying to secure a larger piece of the retirement income pie.

Bank representatives are well positioned

The good news is that banks are well positioned to capture a broader segment of the retirement income market. Other channels—independent financial planners, for example—often focus on a smaller niche market of highly affluent individuals. Banks, however, typically cater to a different, yet larger crowd: the middle/mass-affluent market segment.

Importantly, there is a larger number of prospective clients within the middle/mass-affluent segment (individuals with anywhere from $50,000 to $500,000 in investable assets) than there is within the high-net-worth segment ($500,000 and above in investable assets). In fact, the middle/mass-affluent market is the most significant potential client pool in the retirement income arena. While half of financial planners focus on clients with more than $1 million in investable assets, 8 in 10 bank representatives identify clients with $250,000 to $500,000 in investable assets as prospective clients, according to BISA data.³

With the bank insurance and investment world now gravitating toward this market, the '$16 trillion question' becomes: What is going to help bank representatives capture more retirement income business? I expect the answer lies in simple products and easy-to-use financial strategies.

The case for simplicity

There's no shortage of creative products emerging from the financial services industry. Yet sometimes, creativity comes at the expense of what is truly practical for many clients, particularly when it comes to annuities.

Rather than loading annuities with riders and other features that seem to assure the client at the outset, yet later burden their contract with unnecessary cost, maybe we need to make things simpler.

It is important to not lose sight of one of the fundamental virtues of annuities: They are the only financial product available that can guarantee steady payments as long as the client lives. That straightforward and powerful concept should resonate among skittish investors who are increasingly concerned about market volatility.

Regrettably though, annuities, with all their different permutations, have taken on a stigma of complexity in recent years. To counteract this perception, bank representatives and carriers alike should deliver on the underlying benefits annuities are meant to provide—benefits such as lifetime income. Rather than loading annuities with riders and other features that seem to assure the client at the outset, yet later burden their contract with unnecessary cost, maybe we need to make things simpler.

Clients can relate to the value of an annuity's underlying guarantee, which represents peace of mind they might not be able to buy elsewhere. The client's perception can quickly change, however, when faced with a litany of contract terms, interest rate resets, surrender periods, costly riders, confusing subaccount options, or other restrictions. The client then begins to equate the annuity with complexity. Complexity translates to cost and hassle, when what clients really want is a straightforward way to ensure they can make their savings last during retirement.

In the future, clients are apt to take their retirement income business to those banks that offer dependability, transparency, and simplicity in their financial products. For the bank representative, providing these three things starts with finding an annuity provider that is committed to delivering on the fundamental value of these products and making retirement income planning easier.

Three keys to the retirement income market

So, what can bank representatives do to keep things simple for the client and ultimately drive more retirement income business? Here are some basic principles to keep in mind.

Recognize your clientele.

Bank clients tend to be different than those that walk into a financial planner's office. Compared with those investors, bank clientele may not require the same type of sophisticated financial planning to meet their retirement income goals.

Consider a value-priced variable annuity and check that the products's total costs are below the industry average, which according to NAVA 2007 data was running about 2.35 percent, not including riders.

Therein lies the importance of understanding your clients' investment objectives and risk appetite. In many cases, bank clients probably have the best chance of meeting their goals when they have the growth potential of a well-diversified, equity-based portfolio, as well as lower-cost investment choices and reliable income payments over time.

Use clear-cut products that enhance returns.

On the annuities side, bank representatives should seek out carriers that offer straightforward products. For variable annuities (VA), that means finding streamlined products with premier investment options from recognized investment managers, such as Vanguard or Fidelity. Many VAs also come with expensive guarantees or riders. Instead, consider a value-priced VA and check that the product's total costs are below the industry average, which according to NAVA 2007 data was running about 2.35 percent, not including riders.⁴

To illustrate, a VA with fees and expenses that are just 70 basis points lower than the industry average could potentially yield the client approximately $125,000 more for retirement. This example assumes a $250,000 initial annuity purchase in 1987, with allocations in two identical portfolios, and tracks the returns of the S&P 500 over a 20-year period ending January 1, 2007.

This example assumes a $250,00 initial purchase in 1987, with allcoations in two identical portfolios, and tracks the returns of the S&P 500 over a 20-year period ending January 1, 2007.

In addition, one of the most confusing and frustrating things for a client is when they feel their institution is playing 'interest rate roulette' with their money. So, when it comes to fixed annuities, look for products with predictable annual interest rate resets, and work with a carrier that has a respectable renewal rate history. The Symetra Custom 7 Fixed Annuity commits that, throughout the annuity's surrender period, the renewal interest rate will never be more than 50 basis points below the first-year base rate at time of issue, no matter how far market rates drop. This helps the client avoid the pitfall of seeing a renewal rate reset to a contract minimum that is well below the going market rate.

Understand what you sell.

Notwithstanding new FINRA suitability standards coming on line later this year, clients are already skeptical about whether annuities are the right fit for them. This begs the question: If bank representatives, themselves, are struggling to stay on top of the latest annuity variations, how confused do you think the client is when presented with these options?

Unfortunately, 90 percent of respondents to the BISA-Symetra survey indicated they do not have dedicated retirement income support resources available to them at their institution. For the 10 percent who did indicate the availability of such support, fully 79 percent make use of this important resource.⁵

Check whether the annuity provider included in your bank's program offers their representatives robust training and support resources. If they don't, find a carrier that does, and put this kind of expertise to work for you. Solid product knowledge is essential to success in such a complex investment environment.

Building programs to attract and retain a greater share of retirement assets is now crucial for banks. Yet, creating a program that is both actionable and effective also requires the right kind of partners. Banks cannot do it alone and will need help if they want to be successful in the retirement income market.

Bank representatives should take a good look at the help they are getting and be sure they have a partner that is focused on making it easier for their clients to prepare for the next phase in retirement planning.

¹ "Bank Representatives' Attitudes and Perceptions about the Retirement Income Market," BISA-DSG Network-Symetra Financial, February 2007.
² "U.S. Retirement Assets Hit $16.6 Trillion in First Quarter," Investment Company Institute, October 18, 2007.
³ "Bank Representatives' Attitudes and Perceptions about the Retirement Income Market," BISA-DSG Network-Symetra Financial, Feb. 2007.
⁴ 2007 Annuity Fact Book, National Association of Variable Annuities, 2007.
⁵ "Bank Representatives' Attitudes and Perceptions about the Retirement Income Market," BISA-DSG Network-Symetra Financial, February 2007.