This ongoing nightmare of low interest rates has unfortunately fostered the creative selling tendencies and line-blurring that too often leaves the consumer with a deferred annuity they don’t understand or need. Even though indexed annuities were designed to compete with CDs, not the stock market (yes this is true!), a lot of consumers still want a straight fixed-rate or CD-type of return and not the complexity of an indexed option or variable annuity strategy. Most baby boomer customers are not investment savvy, and don’t feel comfortable with complicated products like indexed or variable annuities. Agents might not think they are complicated, but the vast majority of people do. What they want and yearn for are the good old days of solid fixed-rate guarantees.
The magic number 3
Just recently, the five-year MYGA reached an annual guaranteed rate of 3 percent. This is a significant rate-level “tipping point” in my opinion, and should start attracting both agents and clients back to the MYGA fixed-rate strategy. The other reason that the five-year number is important is that most “rate experts” advise against locking up your money for more than five years under the proverbial current yield curve argument.
Whether this five-year lock-in premise is right or wrong, it is a common time-frame theme in the financial world, and influences a lot of consumer buying decisions. Let’s hope that the 5/3 combo is a sign for future MYGA rates to increase and for this customer-friendly strategy to emerge as a viable allocation choice once again.
“Yellen” for rates to move up
It looks like a done deal that Janet Yellen will replace Ben Bernanke as the next chairman of the Federal Reserve. Early indicators point to the real possibility of Ms. Yellen continuing the practices of “Big Ben” and keeping rates as flat as possible for the foreseeable future. Because her main competitor for the job (Larry Summers) lost the public relations battle early in the process, Ms. Yellen seems to be a rational and imminent choice for a very tough job. Time will tell what her true intentions are, and the next presidential election should be the ultimate indicator of where our interest-rate future lies. Can you say Hillary?
I always find it perplexing when most people immediately sum up the current low interest rate environment by saying, “Interest rates have to go up.” That’s a pretty cavalier and baseless statement, and nothing more than a dart throw into the political abyss. Japan has gone decades with low or flat interest rates, and there is no “tick data” or past history on the planet to predict the ramifications of Bernanke’s policy of printing $80 billion a month and then immediately buying it back. It’s an understatement to say that we are in unchartered fixed-rate waters, so anyone’s guess is as good as the next one.
Low comp realities
As the recent telephone company ad campaign with the man sitting around a table of kids says, “More is better.” Just a heads up ‑ he’s not talking about annuity agent commissions. Unfortunately, this “more is better” mentality should not apply to choosing the right annuity for a client and the corresponding commissions that product pays. MYGAs obviously don’t pay anywhere near the level of compensation as a long-term indexed or variable annuity, but that should not deter anyone from recommending this simplistic and efficient fixed-rate solution if it’s appropriate and suitable.
When a client or prospect indicates that they want a guaranteed fixed-rate solution, then it’s imperative that you give them what they ask for. Trying to “fit” an indexed annuity into an obvious MYGA solution is a recipe for future complaint disaster, and never justifies the revenue received. Square annuity pegs never fit into round annuity holes.
I always advise clients that if your time frame is two years or less, then you need to place your money in a money market-type of account or a very short-term CD. If the client’s time frame is more than two years, then a MYGA (aka: fixed-rate annuity) might be an appropriate solution because the rates are typically higher than a CD and you have the ability for the interest to compound as well.
Even though I do have a handful of clients that chose to lock in rates past five years, it’s important to make sure that they understand current yield curve projections and the possibility of missing a rate move because the money is tied up with surrender charges. Some people are OK with that and only feel comfortable with a fixed rate strategy. However, most people I talk with fall into the five-year-and-in thought.
So for those of us that have been yearning for the MYGA monster to return, the recent sighting has been confirmed by reliable sources, and a few annuity carriers. That’s good news for all fixed-rate fans, and I hope that the MYGA monster stays above water for the foreseeable future.
For more from Stan Haithcock, see: