How Annuities Can Help Your Clients Become Truly Diversified

In this article, we’ll look at what “true” diversification means and how annuities can help protect clients against being under-diversified, by providing a guaranteed income in retirement.

The theory of diversification can be simply summed up as “diversify the portfolio and mitigate the risk.” While diversification does not ensure a profit or protect against loss, advisors often use this principle as the foundation of their clients’ portfolios.

In the event of an economic downturn, such as the crash of 2008, a client’s portfolio can be greatly impacted should their asset allocation strategy lean more toward equities. Retirees who are under-diversified may find the value of their nest egg shrinking at exactly the same time they need to access their money to cover day-to-day expenses.

Research shows that investors tend to be under-diversified. Even if investors understand the value of diversification, many in practice have less diversity in their portfolios than they think they have.¹ This in turn means they are likely to be over invested in a specific asset class or type, leading to potentially greater negative exposure should these investments perform poorly.

A common approach among pre-retirees is to try and lower their market risk by minimizing their exposure to equities, rather than maintaining a balanced portfolio with a diversity of assets that offer moderate growth and moderate risk.²

An annuity can help clients mitigate against two major retirement risks:

• market volatility, specifically through the purchase of  annuities not exposed to the markets, or offering insurance-based guarantees, and
• the risk of outliving their savings.
  
  

Portfolio durability
Portfolio durability is particularly important for clients whose age, health, or other personal circumstances mean they do not have sufficient time to recover from losses to their retirement portfolio through growth alone. About five years before and after people retire is when clients have the most to lose if the market takes a downturn, and should they experience losses, this is also the period when it will be most difficult to recover.

Clients whose retirement incomes depend on the stability of the market may, in the event of a downturn, find themselves needing to cash in investments to meet their day-to-day expenses, thereby undermining the long-term durability of their portfolio.

By contrast, clients who diversified their retirement with an annuity portfolio using product diversification strategies such as a annuities, are likely to be in a better position to weather downturn³ and leave their investments untouched or minimize their withdrawal amounts until the market recovers.

A product allocation strategy that combines the benefits and risks of various products and investments in clients’ portfolios may be the best way to help them clients sustain their retirement income and manage risks.

Guaranteed income for life
Americans are living longer than ever before, and those retiring today can look forward to a retirement that may, in some cases, last 30 years or longer.⁴ For this reason, it is becoming more and more difficult for clients to figure out how much they need to save to make sure they don’t outlive their money.

An annuity can diversify your clients’ portfolios against this risk by providing them with a guaranteed income stream that lasts for as long as they live.

The guaranteed income from an annuity can help give your clients' portfolios greater durability and diversify them against significant risks, such as the impact of market volatility and the risk of outliving their savings.

It is important to regularly reassess your clients’ needs, with the aim of ensuring they still have the most suitable income and retirement strategies in place. Their priorities are likely to change as they approach retirement, and this may affect how their portfolio should be diversified as it relates to their specific income needs.

To further education your clients on diversification, read more on The Added Value of Product Diversification in a Portfolio.