Income Planning

Can Buffer Annuities Ease Your Equity Headaches?

Shielding clients with protection-based market participation

by Alan Assner

Mr. Assner is AVP, Solutions Development for Brighthouse Financial. Connect with him by e-mail:

Stock market fluctuations are top of mind for U.S. investors. Among pre-retirees and retirees aged 50+, 67 percent believe we’ll experience a market crash within the next five to 10 years, and 65 percent say they are expecting market volatility.

This is even higher than those who are worried about incurring health issues and expenses in that time period, according to a 2017 study by Brighthouse Financial and the WSJ Custom Studios.

It is no coincidence, then, that products designed to add a level of financial security in an uncertain time are gaining steam and piquing interest. For financial advisors, crafting an effective financial plan and recommending strategic investments is the culmination of learning about a client’s needs, goals and resources. When it’s time to suggest products to achieve the plan’s goals, however, advisors need to know the market.

A holistic plan includes accumulation, and annuities can play a major role in helping to achieve this objective. The annuity industry is continuously rolling out new products. Some have been launched amid regulatory changes – for example, additional fee-based versions to accommodate the Department of Labor’s Fiduciary Rule. Other product updates reflect factors such as the soaring cost of long-term care and health care overall. Further, consumer concerns tied to the stock market and rising expenses have shifted the types of investment products clients find appealing.

One product that has become increasingly popular is the indexed annuity, which yields returns on a client’s investments based on a specific equity-based index such as the S&P 500, with some protection against market declines.

Within the indexed annuity category, buffer annuities have raised interest among savvy investors. In addition to the level of protection that indexed annuities offer, buffer annuities may offer the potential for higher returns, while diversifying their equity exposure via index tracking. Advisors should note that with the potential for higher returns comes a greater risk for loss. Because of this, buffer annuities, per their name, provide clients with the “buffer” of a degree of downside protection.
As the number of choices and universe of annuities continues to expand, it is important for advisors to understand and be able to effectively communicate how this type of annuity can allow clients’ retirement savings to accumulate over time.

How we got here

It is human nature to seek a sense of financial security during uncertain times. In 1929, the stock market crash made annuities a popular option for people seeking this security, and in 2008, following a more recent market collapse, many clients turned to indexed annuities for the added level of security they bring.

After the most recent spike in interest around indexed annuities, sales tapered off but are again on the rise, spurred by factors such as market uncertainty and the delay of the DOL Fiduciary Rule. Already in 2Q 2017, indexed annuity sales were up 15 percent from the previous quarter, though down 8 percent so far this year, when compared with 2016 YTD, according to LIMRA.

While the desire for more stability is nothing new for investors, the products that can offer a level of security have changed significantly in recent years. Buffer annuities, for example, have grown in terms of consumer awareness and interest just within the past year. According to LIMRA, buffer annuity sales more than doubled in 2016 from the previous year. Part of the appeal is that these products use a portion of a client’s assets to take advantage of market opportunities, with the assurance of a level of downside protection that other investments may not provide. In the unpredictable endeavor of investing, these products are designed to add some stability.

As recent years have shown, the greater the uncertainty, the more appealing that clients may find annuities that can offer downside protection. With that said, market volatility is not the only factor that makes these products prove valuable to clients. Overall, equities are an important piece to have in your client’s portfolio. They offer the opportunity for your client’s retirement assets to potentially grow, up to a predefined limit, and accumulate over time.

The average investor has underperformed the broader market by 5.4 percent over the past 20 years because they often sell at the first sign of bad news, according to a 2017 J.P. Morgan study of average investor performance since 1997. Accumulation-based annuities can help them better protect their investments by avoiding making emotionally-driven decisions based on the news of the day.

Protection-based market participation

To achieve financial security, clients sometimes must keep pursuing returns despite frequently volatile or under-performing markets. It might be easier to have consistent investment performance when a portfolio includes strategies that are designed to provide some protection and stability.

Clients are becoming increasingly risk-averse. They understand they can’t protect everything, but they also don’t want to risk everything. Buffer annuities provide an opportunity to do some of both. Clients may like the ability to take advantage of market growth, but they want the assurance of a level of downside protection that other investment options may not provide. It can be reassuring to know that, should a client’s selected index dip by 14 percent, for example, if they have a built-in protection of 10 percent, their losses will only be 4 percent.

Already in 2Q 2017, indexed annuity sales were up 15 percent from the previous quarter, though down 8 percent so far this year, when compared with 2016 YTD, according to LIMR

Once a client decides a buffer annuity may be right for their portfolio, there are a few steps that advisors can walk them through when presenting this type of annuity as an option:

  • Clearly communicate the potential risk and return
  • With the potential for high returns also comes the potential for loss. Clients should understand that investing in equities has ups and downs. But with that comes the opportunity for retirement assets to grow. The level of protection is built in to cover a portion of the assets against unforeseen losses, but there is still the risk for substantial loss. Clients who cannot handle the potential loss may want to consider a different type of vehicle for growing their retirement income.
  • Decide what assets the client wants to protect
  • The investment a client puts into a buffer annuity will not only benefit from a level of protection, but can also take advantage of potential growth opportunities over the length of the term.
  • Choose the option that fits their goals
  • Buffer annuities have options for things such as term length, the index being tracked and their level of protection, allowing clients to choose the options that align with their investment goals. At the end of the term, clients generally may continue to keep the investment allocation the same or adjust it to meet their changing needs.
  • Consider the cost of their overall investment portfolio
  • It is helpful to consider a growth strategy that won’t add to the overall investment portfolio fees. Clients may be interested to know that many buffer annuities have no annual fees. This is because the annuity provider realizes earnings directly through the assets deposited. However, clients need to know that there may be withdrawal charges in the early years of a contract along with other terms for keeping the contract in force. This and other information can be found in the prospectus, which should be reviewed carefully with the client.

As with any financial product, annuities have their pros and cons. When it comes to retirement income planning, advisors should consider the environment of uncertainty and the products that will help grow and protect their clients’ assets, while adding an extra layer of security.

Regardless of how you choose to discuss buffer annuities with clients, it is important to note that, while accumulating assets up to a predefined limit, buffer annuities do not eliminate the downside risk; they simply help protect a client’s investments from it. ◊



This document is designed to provide introductory and general information only. As such, it does not provide comprehensive information on the topic described herein nor does it provide an exhaustive list of the various considerations related to planning for retirement.
The material on this website should not be interpreted as a recommendation or as fiduciary investment advice by Brighthouse Life Insurance Company, Brighthouse Life Insurance Company of New York or Brighthouse Securities, LLC (Collectively “Brighthouse Financial”). Brighthouse Financial and its design are service marks of Brighthouse Financial, Inc. or its affiliates.