Equity Growth and Asset Protection

For investors, the last twenty years have been something of a roller coaster.

The dot-com bubble, 9/11, the financial crisis, and now the recession associated with the COVID-19 pandemic have roiled stock markets enough to make any investor apprehensive about the consequences of the next big crisis — whatever it is and whenever it comes.

That concern is even more acute for people near retirement, who, after a lifetime of work, want a reasonable measure of assurance that their accumulated assets will last for the remainder of their lives, and, possibly, leave an estate to pass on to their heirs or a cause close to their hearts.

How financial professionals can help clients navigate this uncertain and complex path, though, can be a challenge.

If you have already been helping clients with annuities, you know that annuities can play an important role in helping clients balance the need for asset growth with the need to protect asset value.

If you are new to the use of annuities in retirement income planning, here’s a look at strategies that can help clients protect what they have accumulated, while still helping them address the possibility that their savings will lose value to inflation or face depletion.

What to Do in the Face of Uncertainty

So, how do you help your clients think about retirement in the face of uncertainty?

No two retirement goals are the same, but most people have similar priorities: Preservation of wealth, regular income, and keeping up with inflation.

This strategy has traditionally meant a combination of high-quality fixed income, an allocation towards equities, some cash, and other assets like real estate or precious metals.

But equity markets, as we’ve seen, can be too volatile to rely on completely going forward. The other primary traditional retirement asset — fixed income — is unsatisfying for a different reason: Yields on the safest assets, like 10-year U.S. Treasury bonds, have been at historic lows for years, and there’s little reason to think that will change soon. Even high-yield or “junk” bonds are offering historically small risk-adjusted returns.

Plus, most retirees want some asset growth, whether for a better lifestyle, to save for unexpected emergencies, or leave an estate to heirs. This combination of uncertain markets and low yields means advisors need a new playbook when talking to clients.

The “Protected Equity” Strategy

The good news is there are a lot more options today than even a few years ago.

The rulebook hasn’t changed completely — you should still talk to clients about a balanced asset allocation that may include stocks, bonds, real estate and other investments — but the emphasis might need to be less on diversification for its own sake, and more on downside protection that still allows for exposure to equity growth potential.

A “protected equity” strategy in particular isn’t new but is especially relevant to our current uncertain economic climate.

A protected equity strategy aims to split the difference between risk and security, leaving just enough market exposure to participate in equity growth, but also having enough hedges in place to make sure any losses are well-cushioned, and that clients can be sure they won’t lose their invested assets even in the worst-performing markets.

A core part of protected equity is a product long ignored in retirement portfolios: insurance. This rethinking of insurance (and more specifically annuities) in retirement is, frankly, overdue, as the right insurance product can help stabilize a portfolio in the face of volatile markets while still offering room for asset growth.

Think of insurance as an asset class of its own, with a place in every portfolio. And, within insurance itself, there are several options that can play a role in a balanced and diversified portfolio, including protected equity, guaranteed income, and tax protection. I’d argue that you can’t serve the best interest of your client as we head into 2021 if you’re not talking about insurance.

There are a number of relevant insurance products to help with a “protected equity” strategy, and attractively priced annuities from insurance companies with strong balance sheets are one way to achieve one or a few client goals depending on the specific type of product.

Certain types of annuities or life insurance products can provide one or more of the following:

  • Asset Appreciation Potential: Clients still have exposure to equity, either through indexes or actively managed funds.
  • Downside Protection: Coverage of up to as much as 30% declines in equities.
  • Guaranteed Lifetime Income: Clients can assume a basic standard of living to cover essential expenses.
  • Family Protection: Family members will be guaranteed an inheritance and a measure of financial security.

Is a protected equity the right strategy for your client? The answer, of course, is “it depends.” Ask your client about what standard of living they hope to maintain, how long they need their wealth to last, and how much they may hope to leave behind. Factor in their current age, how soon they plan to retire, and their overall risk tolerance. It’s also a financial professional’s responsibility to put clients first, and no one should concentrate all investments into a single strategy.

The best financial professionals take each client scenario and develop a clear, well-thought financial plan. By changing the conversations around insurance as an asset class and seriously considering its role as a part of a retirement plan, you can help your clients live a safe, secure, and prosperous retirement.


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