Insight: Leveling the Playing Field for IOVAs
Not all investment-only variable annuities are created equal.
Investment-only variable annuities are quickly becoming a popular solution for clients looking for help growing their wealth. Recent tax legislation is resulting in higher taxes for many clients, and they are looking for more tax-efficient solutions.
Not all IOVAs are created equal. Here are some points to consider as you review the growing number of products in the marketplace.
Fees
While the types of fees in IOVAs are generally consistent, how they are assessed may not be. For example, some companies assess the entire annual expense charge on the entire account value.
Others may assess a portion of the charge on the premiums paid. This could lower the amount of money deducted for this charge over time; however, if the account value decreases, the effective fee may be higher.
Investment Platform
The investment platform is a critical component of an IOVA. Building a platform starts with manager research and selection. It's important to understand the experience and credentials of who is conducting the research, whether they have a comprehensive process to screen and evaluate potential managers, and the criteria for replacing managers in the future.
Of additional importance is the breadth and depth of the investment platform. With the constantly changing markets and the impact of market volatility, geopolitical and world events and interest rates, it's important to have a platform that has strategies that can address the many needs of your clients. The strategies should include those from well-known, brand-name asset managers, as well as boutique firms.
Always weigh performance. When reviewing how a fund performs, it's often helpful to look at how it compares to its benchmark. This is often the starting point for how the annuity company evaluates the manager. Sometimes the benchmark may be a commonly known index, such as the Russell 3000. Other times, the benchmark may be customized based on the fund's composition. Another source for performance information is Morningstar.
Additional Benefits
Many IOVAs offer a standard death benefit, usually equal to the contract value on the date of the client's death.
Some, for an additional fee, offer an optional return of purchase payments death benefit, which is generally the greater of the sum of all purchase payments, reduced proportionally by the amount of any withdrawals, or the current account value. This can enable clients to protect their estate and beneficiaries.
Tools
The illustration system is a key tool for IOVAs. It enables you to provide your clients with a personalized report that explains the investment options you've chosen.
It may also include historical performance of the funds, a risk/return analysis and other portfolio statistics, such as beta and standard deviation. In addition, companies may also provide fund performance information on their own websites, or in printed materials.
The competitive landscape continues to evolve, and more companies are entering the IOVA market. The reputation and financial strength of the annuity company are critical components in the decision-making process for you and your clients. They speak to the company's commitment to the business, and long-term sustainability.
(Best's Review contributor Jill Perlin is vice president of investment management sales support and marketing at Prudential Annuities. She can be reached at jill.perlin@prudential.com)
