Three conversations every advisor should have with their clients

by Kurt Auleta
Mr. Auleta is Head of Western Sales for Security Benefit. Visit www.securitybenefit.com.Considering the Precedent, Looking Back at 2022
While 2023 has brought some hope around moderating inflation numbers and the potential for the Federal Reserve easing its rate hikes, economic uncertainty remains. 2022 ended with a double dip: stocks were down near bear market levels (the S&P 500 Index was down -18.11%) and bonds were down nearly as much (the Bloomberg Aggregate Bond Index was down -13.01%).
The Fed raised rates seven times last year, to combat the highest inflation in 40 years, which in turn led to an inverted yield curve. 2-year yields finished at 4.41%, well above 10-year yields at 3.88%. As an inverted curve has historically been a harbinger of a recession, this added to the ongoing volatility and uncertainty in the markets.
Yield % Comparison: January 2022 vs December 2022 | |||||||||||||
Date | 1 Mo | 2 Mo | 3 Mo | 4 Mo | 6 Mo | 1 Yr | 2 Yr | 3 Yr | 5 Yr | 7 Yr | 10 Yr | 20 Yr | 30 Yr |
01/03/2022 | 0.05 | 0.06 | 0.08 | N/A | 0.22 | 0.40 | 0.78 | 1.04 | 1.37 | 1.55 | 1.63 | 2.05 | 2.01 |
12/30/2022 | 4.12 | 4.41 | 4.42 | 4.69 | 4.76 | 4.73 | 4.41 | 4.22 | 3.99 | 3.96 | 3.88 | 4.14 | 3.97 |
2023 is likely to be more of the same but in reverse, with high rates persisting until the Fed pivots, possibly in the face of a recession. Inflation though will not be the only factor, as earnings declines have not been factored into prices. A stifled economy may also lead to defaults becoming an issue.
Retirees especially are suffering, as stocks are down, and bonds still don’t yield enough. Advisors are faced with multiple challenges in keeping clients invested in the markets to meet long term goals, while protecting portfolios from the downside, both for stocks and bonds.
How can advisors take advantage of volatility, protect against loss, and still capture yield? Here are three key considerations financial advisors can bring to their clients amid these potential conditions.
Stay Invested
While the volatility many are experiencing can increase the appeal of pulling out of the market, financial advisors should remind clients that it is important to stay invested. Fixed index annuities (FIAs) give clients potential accumulation in the form of interest credits linked to the performance of stock market indices. But there is no downside market risk.
Lock in High Interest Rates While They’re Here
Although rising rates have continued to batter the markets, for those focusing on yields and downside protection, multi-year guaranteed annuities (MYGAs) have the ability to lock in the recent high rates, while also providing predictable accumulation. Once the Fed pivots, and rates turn downward, 5-year and 7-year MYGAs will become more popular.
And for advisors who may be re-evaluating bonds in client portfolios, options like FIAs and MYGAs can deliver a range of benefits along with interest potential. Today’s economic conditions are far different from past events leading to rate increases, so the retirement products you consider should allow for a more sophisticated, non-correlated approach to managing volatility.
Protect Your Client’s Portfolio, While Managing Their Expectations
Financial advisors have been managing difficult market conditions but should also look to managing client expectations of performance over time. The movement of equity and fixed income markets are not as reliable as they were in the past. The recent bull market may have changed client impressions, such that COVID market upheaval and the double dip performance in 2022 came as a shock. Packaged products like annuities, variable annuities (VAs), buffered investments, and other alternatives, can help restore confidence. They feature upside potential, and some come with no downside risk.
Additionally, consider shopping around for products outside of just one familiar provider. Delivering new product mix ideas from varying providers may better suit your clients’ new short term/long term investment needs. Laddering assets by different levels of need, with different product sets, can cover an array of client plans—splitting money between FIAs and VAs, plus a traditional equity position for growth potential, will help diversify risk across a portfolio.
Maintaining Momentum in 2023
The market gyrations many experienced through COVID have made many risk adverse clients reconsider their product mixes. It is crucial that advisors meet with clients to re-prioritize and re-position portfolios and evaluate both traditional and alternative product options. Redeploying some assets into FIAs, fixed annuities like MYGAs, VAs and other alternatives can be an effective way to help get clients ahead of economic uncertainty in the next 6, 12, and 18-month timeframe.
About Security Benefit
Security Benefit Corporation (“Security Benefit”), through its subsidiary Security Benefit Life Insurance Company (SBL), a Kansas-based insurance company that has been in business for more than 131 years, is a leader in the U.S. retirement market. Security Benefit together with its affiliates offers products in a full range of retirement markets and wealth segments for employers and individuals and held $45.9 billion in assets under management as of June 30, 2022. Security Benefit, an Eldridge business, continues its mission of helping Americans To and Through Retirement®. Learn more at SecurityBenefit.com and follow us on LinkedIn, Facebook or Twitter.
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