EIAs: Setting Client Expectations Is More Important Than Ever.
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Helping your clients set realistic expectations on any ?nancial product, plan or strategy is always critical. But with equity indexed annuities (EIAs), it's more important than ever, given today's environment.
Why? Because these products are hugely popular among clients and producers alike. Sales have exploded due to the demand for safe money strategies following a recent and long bear market.
As you may know, the NASD sent a letter to its member ?rms earlier this year asking them for all the communications they have related to EIAs, including all the material and correspondence used by broker/dealers. Thus, if the NASD is going after possible security violations related to EIAs, it behooves anyone marketing these products to take a step back to re-evaluate how well they understand this complicated product and explain it to their clients.
Complexity Causes Confusion
The basic concept of the EIA is simple. It is a fixed annuity that offers growth potential linked to the performance of a stock index, such as the S&P 500 Index, combined with downside protection and guarantees. However, the structure and design of an EIA can be complex and can vary signi?cantly from product to product and from carrier to carrier. For example, the crediting method is how the EIA calculates the interest credited to the policy. Among the EIA contracts currently offered there are numerous crediting methods.
Some products use an annual reset method that compares the change in the index from the start of the year to the end of year. The return is locked in and the index value is reset for the next year. Others average the index's value on a daily, weekly or monthly basis instead of applying the actual value of the index on a set date.
Another crediting method is point-to-point where the index-linked interest, if any, is based on the difference between the index value at the end of the term and the index value at the start of the term. Interest is added to the annuity at the end of the term, which is typically six or seven years. With the high-water mark crediting method, index-linked interest is determined by looking at the index value at various points during the term, usually the annual contract anniversary date. The interest credited is based on the difference between the highest index value and the index value at the start of the term. As you can imagine, the sheer number of crediting methods could cause many agents to become con-fused. Moreover, each carrier may tend to engender a belief that its crediting method is superior to others.'
In addition to the variety of crediting methods in the marketplace today, EIAs may also have different participation rates, which are the percentage of any index gains that an EIA receives. They may have varying cap rates which limit the maximum interest rate that is credited to the EIA in a contract year or over the term. Plus, there are diverse annuitization options, and some carriers require that clients annualize to receive the bene?ts offered by the EIA.
Increasingly, a new concept called effective participation is being utilized to compare the true participation of an EIA contract. Effective participation measures the actual percentage of the annuity's growth compared to the actual growth of its underlying index over a de?ned time frame. For instance, if the index produced a gain of 21 percent over a one year period, then an EIA with a 100 percent participation rate and a 7 percent cap would generate interest growth of 7 percent. This means that the annuity generated an effective participation rate of 33.3 percent. The fact is, a "100 percent participation rate" can be a misleading term, as can other phrases utilized in the explanation of EIAs.
A Comprehensive Marketing Package Is Key
When you consider all of the various EIA design methods, it's no wonder that the potential for confusion exists. To minimize that potential, an advisor might consider seeking out a comprehensive marketing package that helps their own training efforts while better educating the client about EIAs and how they ?t into a retirement planning strategy. What should be in this package? With the emergence of web-based technologies, advisors now can use the power of multimedia client presentations that are fully compliance approved, and offer compelling and educational content.
Multimedia presentations can do some-thing that static print brochures or Power-Point presentations cannot do when used alone. They use voice, motion, graphics and color to lay out complex content in simple terms and in a persuasive way. For example, in one EIA multimedia presentation used by a large carrier, music, photos and words introduce the very real and sometimes scary retirement savings challenges that have affected so many Americans in recent years, especially those nearing retirement or already retired. It makes a very strong case for considering safe money strategies like the EIA in retirement planning.
While the multimedia presentation is an important part of the marketing package, it should not stand alone. Print materials are still critical. Many clients want to read about the product and may want to take information with them when traveling or when they don't have access to their PCs. The print materials must also be of high quality and follow the content, examples and design of the multimedia piece. For those advisors who are involved in seminar selling, the marketing program should include all the pieces needed to conduct a successful seminar. When this approach is used, all the components of the marketing package can work together seamlessly.
Conclusion
In this day and age of Internet technologies and high quality multimedia capabilities, it makes sense for advisors to enhance their own EIA marketing activities with a comprehensive package that helps educate themselves and their clients while achieving strong sales results. It is especially important to set realistic client expectations about such a complex product and assist them on their road to retirement as well as successful income distribution planning while in retirement.
Reproduced from Broker World September 2005
Used with permission from Insurance Publications
