Managing Volatility

The Ups And Downs Of Income Planning

Fundamental strategies for what your your clients may face in 2024

by Steve Scanlon

Mr. Scanlon is Head of Individual Retirement, Equitable.

While financial guidance may have been relatively straightforward in the years of steady returns and rock bottom interest rates, market volatility has become our new normal—and 2024 is no exception. Many young financial advisors are scrambling to provide sound advice amid rising interest rates and rollercoaster markets—headwinds they may not have had to navigate thus far in their careers.

To prepare for the coming year, less experienced advisors must adjust their approach, focusing not only on market upsides but on helping clients manage downside risks. Here are five ways they can help their clients seek to protect portfolios heading into 2024—and help them secure a long-lasting financial future.

1. Go Beyond Fixed-Income Securities

Our minds tend to turn to the “safest” options, like fixed-income securities—investments that grant fixed periodic interest payments and principals at maturity—when the market is volatile. But should today’s inflationary environment persist into next year, these aren’t necessarily the safest investments, as returns must outpace the decline in purchasing power to be valuable.

For example, certain fixed-income investments, such as bonds, experience price drops when inflation is on the rise. Even payouts from fixed annuities, which offer substantial rates of return, experienced a drop in purchasing power in 2022 when the U.S inflation rate peaked at 9.1%. That’s not necessarily a safe investment.

2. Explore The Ever-Expanding Range Of Annuities On Offer

Annuity carriers used to deliver one product that did all things for all people, providing death benefits, living benefits, access to a broad swath of funds and more. But today, annuities vary substantially, and can include built-in inflation hedges, caps, buffers, and other levels of partial downside protection.

Familiarize yourself with all of them, paying close attention to annuities with segment options aimed at helping clients offset market troughs.

The reason? When it comes to investing, no one wants to sacrifice the upside potential of the market, and no one wants to lose their hard-earned cash. Some structured annuities address both of these instincts simultaneously. Registered index-linked annuities (RILAs), for instance, allow investors to reap returns from the stock market while providing a cushion against some losses. To illustrate: a buffer of -15% would mean that the insurance company absorbs the first 15% of losses, rather than the client.* If this sounds like an attractive proposition to you, you’re not alone: annuity sales have risen 11% year over year, driven by unprecedented demand for RILAs.

certain fixed-income investments, such as bonds, experience price drops when inflation is on the rise. Even payouts from fixed annuities, which offer substantial rates of return, experienced a drop in purchasing power in 2022 when the U.S inflation rate peaked at 9.1%...

3. Pay Attention To Sharpe Ratios

Any financial advisor who truly believes in their strategy understands that it hinges on carefully measured risk. Yet, it’s not just a matter of faith; quantifying these risks mathematically is imperative for achieving sustained success in 2024.

To limit risk while realizing the potential for high returns, it’s essential to employ mathematical tools like the Sharpe ratio. When faced with multiple investment options offering similar returns, the one with the highest Sharpe ratio stands out as the choice best worth considering. Once again, structured annuities tend to come out ahead here, offering the potential for greater returns, superior Sharpe ratios and high upside potential.

4. Pursue “The Efficient Frontier”

A concept developed by Nobel Laureate Harry Markowitz in 1952, “the efficient frontier” refers to an investment portfolio that garners the highest expected return at a predetermined level of risk. When plotted on a graph, the efficient frontier is a bullet-shaped hyperbola: portfolios that fall to the right of the hyperbola take on an inordinate amount of risk for their expected returns, whereas those that fall below it do not provide enough returns given the level of risk involved.

In a high inflationary environment, the efficient frontier may resemble a minimum variance portfolio—a set of investments that is highly diversified across different industries and funds. But it’s important to note that there is no single efficient frontier for every client; it is largely contingent on the number of assets already held, the sectors those assets are based in, and the client’s tolerance for risk.

Don’t Operate On Unknowns

The unpredictable economic landscape has spurred a lot of speculative conversations between investors, advisors and others. For the last two years, economists believed a recession was all but inevitable, for instance; now, many of them are doubling back on their predictions.

All of this is to say: You should base your financial counsel on what you know, rather than what you believe—even if your conjectures are backed up by market analysts and algorithms. If you can recommend an investment vehicle that guarantees a certain return along with some level of downside protection, that’s more valuable to your clients than suggesting a product that performs well only if X or Y occurs.

Instead, stick to the fundamentals listed above and stay the course into 2024. You’ll be able to help your clients who seek to safeguard portfolios and ensure they live out their retirement years stress-free.




* This hypothetical example is not indicative of any particular registered index-linked annuity or any other investment or financial product.