It’s been a year since Covid-19 was declared a global
pandemic. Stock markets have recovered, and the outlook for 2021 is looking up,
especially as the vaccine rollout ramps up and the economy begins to open up.
Job gains in March are expected to be the largest since October, and
manufacturing is expected to continue climbing according to the Institute for
Supply Management.
But the economy is nowhere close to pre-pandemic levels.
We’ve seen how Covid-19’s impact is creating winners and losers, re-shaping the
workplace and everything from commercial real estate to retail shopping. And
we’re not out of the woods yet. It likely will take some time before we
understand the true impact of the pandemic and move into whatever becomes the
new normal.
Managing The Emotional And Financial Impact
According to the Nationwide Retirement Institute’s sixth
annual Advisor Authority study of more than 2,500 advisors, financial
professionals and individual investors, 85% of investors said they could do all
the right things to manage their finances, and still be blindsided by outside
events. Likewise, 70% said the pandemic has had an impact on their financial
decision making. Investor optimism plummeted 19 percentage points last year,
with only 36% of investors having an optimistic outlook in 2020 compared to 55%
in 2019.
If there is a silver lining, it’s that more investors are
turning to advisors and financial professionals to get the help they need. In
fact, the number of investors who said they have an advisor or financial professional
increased 16 percentage points, to 67% in 2020 from 51% in 2016. Investors said
the number-one reason for working with an advisor was to feel more confident in
their financial future. And when markets are volatile, they said the most
important benefit of an advisor was to help them protect assets against market
risk.
Protecting Against Market Risk
In 2020, investors said their number-one financial concern
was portfolio losses related to the pandemic, with protecting assets a close
second. At the same time, Advisor Authority revealed that only 64% of investors
had a strategy in place to protect their assets against market risk, compared
to 91% of all advisors and financial professionals. Clearly, investors could
use your help.
To protect assets against market risk, diversification
remained the foundation for both investors and financial professionals,
according to Advisor Authority. In addition, our study showed that advisors and
financial professionals were two to three times as likely as investors to use a
diverse range of risk management solutions—including hedging strategies (42% vs
16%), liquid alternatives (39% vs 23%) and smart beta ETFs (32% vs 10%). While important, diversification and other
risk management solutions do not assure a profit and do not guarantee against
loss in a declining market.
The adoption of annuities was also on the rise, especially
among younger investors. Nearly three-fourths of Millennial investors (70%) and
Gen X investors (71%), compared to just under half of Boomers (49%) said they
would feel more secure if a portion of their portfolio was invested in an
annuity to help protect against market risk. Roughly two-thirds of Millennials
and Gen Xers said they would choose an annuity in the next 12 months to help
protect against market risk as part of a holistic financial plan.
Balancing Growth And Protection
A diverse range of annuities can help clients with different
risk profiles balance between growth potential and downside protection. For
moderate to aggressive clients, able to take on more risk in exchange for more
upside potential, Registered Index-Linked Annuities (RILAs) allow them to
benefit from stock market growth, based on the performance underlying indices,
such as the S&P 500, NASDAQ 100 or hybrid indices. This is combined with
different degrees of protection against market risk through a buffer or a
floor.
If your client’s concern is losses from ongoing volatility,
RILAs with a buffer can protect against losses within a specific range—but can
leave a client exposed, should markets fall below that range. To protect
against substantial losses if downturns go lower for longer, RILAs with a floor
offer a clearly defined level of protection—and absorb any losses below that
floor. Some RILAs, such as Nationwide’s Defined Protection Annuity, provide a
floor to limit losses, with the ongoing flexibility to dial that defined level
of protection and risk up or down, as a client’s risk tolerance changes over
time.
For your conservative to moderate clients, fixed indexed annuities
(FIAs) may be a good fit, especially in today’s persistent low rate
environment. Research indicates that FIAs may be suitable as a bond substitute,
for greater diversification, to help de-risk portfolios and to mitigate
longevity risk (Source: Roger Ibbotson, “Fixed Indexed Annuities: Consider the
Alternative.” March 2018). FIAs can offer upside potential linked to the
performance of an underlying index—and also guarantee principal protection, for
risk-averse clients concerned about losing their initial investment or credited
earnings when volatility is rising or when there is a sharp market downturn.
Note that all guarantees are subject to the insurer’s claims-paying ability.
Taking On The Retirement Income Challenge
Just as tax-deferred and tax-free compounded growth are part
of the foundation of accumulating for retirement, the 4% rule has been a
cornerstone of retirement income planning for decades. But with ongoing
volatility, interest rates hovering near 30-year lows, and the complexities
caused by the pandemic, clients today face difficult choices. Many are forced
to reduce withdrawals, take on riskier assets or increase the chance of
depleting their portfolio and outliving their savings.
In fact, nearly three-fourths of investors (72%) said the
pandemic has had a negative impact on how long they could live off their
retirement savings. More than one quarter (26%) said it’s likely they would
need to delay taking retirement income for the next 12 months and more than
one-quarter (26%) also said they would need to reduce the amount of their
retirement income withdrawals for the next 12 months.
Protecting Against Outliving Savings
According to Advisor Authority, nearly three-fourths of
Millennial investors (72%) and nearly two-thirds of Gen X investors (65%), said
they would feel more secure if a portion of their portfolio was invested in an
annuity to help protect against outliving their retirement savings. When a
predictable source of income is guaranteed by an annuity in one part of the
portfolio, this not only helps protects against longevity risk, it also frees
up assets in another part of the portfolio to invest for growth potential,
inflation protection and to leave a greater legacy.
Recent analysis also suggests that allocations to variable annuities
with Guaranteed Lifetime Withdrawal Benefits (GLWBs) can create more income
with less risk than through systematic withdrawals alone, reducing the risk of
portfolio depletion (Source: Goldman Sachs Asset Management, “Extending the
Retirement Runway.” November 2020). In fact, according to Advisor Authority,
84% of advisors and financial professionals say that the use of an annuity with
an income guarantee is important for supporting a sustainable withdrawal rate.
Many of the advisors and financial professionals we work with have adopted a
new approach to the 4% rule by using a VA with a GLWB to provide a guaranteed
withdrawal rate for life, in some cases including up to 100% equity exposure for
greater income growth potential and protection from market downturns.
Have A Plan—And Stick To It
Despite the current financial pressures, it’s important to
help your clients understand that decisions made today can affect their
financial future. As you guide your clients through the year ahead, and the
recovery continues to unfold, there’s bound to be challenges. For the best
chance of success, clients will need your help to develop a holistic financial
plan. And many will need your help to stick to it.
Creating a plan and a well-diversified portfolio, structured
to help protect assets against declining markets, ongoing volatility and record
low interest rates, is crucial no matter the stage of their financial
lifecycle—accumulation, retirement income or legacy planning. During these
uncertain times, you can help clients keep their emotions in check and stay
focused on their long-term goals. As Advisor Authority shows, 93% of investors
say that having a financial plan helps them feel in control, even if they can’t
plan for everything.
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