Index Allocation in 2024 | 7 Figure Annuity Sales Podcast | Ep. 284

Are you racking your brain trying to figure out how to credit set up index strategies and all these kinds of things? Well, good news for you. Over the long term, most index strategies are going to average pretty comparably to each other. Welcome back to the seven Figure Annuity Sales podcast. I'm Caleb north and again this week, yes, Chad, like I said last week is in the middle of a big move. So it is me solo again today, but again talking about something that is quite frankly kind of right up my my alley, right in my wheelhouse of things that I'm dealing with every single day, working with agents on the case design side. And listen, if you got a great marketing organization and you simply want to get another set of eyes and thoughts on your case design, let me know, reach out to me. I'm more than happy to give you thoughts. If you're not very pleased with the way your IMO supports you, certainly reach out to me. We can have a conversation about what it would look like to work with retirement realize, but we're talking inde allocation in 2024. Okay. And this is one of those areas. I get questions all the times, all the time from agents about Caleb. How should I allocate in this product? What's the best index in this one? What's the best strategy here? And listen, I said at the beginning, I'll say it again. Over the long term, most indexes are going to credit approximately similar. Of course they're not going to be exact and there will be one that credits better than others and there will be one that is the worst that. I mean anytime you have a list of things and you're basing it numerically, there's always going to be one that's at the top and one that's at the bottom. But the spread between the top and the bottom in most cases, again over the long term, I'm not talking individual years here, I'm talking about policy existence. 10, 14, 20, 30 years. If you're dealing with some really long term planning, some income type strategies and whatnot, you're going to see the indexes of any given product perform approximately similar. And there's a reason that that's the case. The reason is because the option cost is often determined and it's greatly impacted. The cost of the option itself is greatly impacted by the implied volatility of that index. Okay? So the greater swings it has the potential of having, the more expensive it's going to be. And generally speaking, the carrier is going to have the same budget in the product for any of the strategies. So let's say they have a 2% budget. Well, the 2% budget is going to buy options on these different indexes and strategies in relation to, to each other's implied volatility. So the greater the potential for swings, the more expensive that is, the lower the rates are going to be on that strategy because that's what the budget can afford to purchase. That's just the reality of it. Well, if you have an index that has a 5% volatility target, there are internal mechanisms stifling the ups and the downs of that index. The implied volatility is not going to be equal to the S P500. So you're going to see way better rates on that volatility controlled it. When I say better rates, I'm saying higher rates. You're going to see greater participation rates, you're going to see higher caps. You'll see lower spreads on those volatility controlled indexes than you will on something that's unmanaged or non volatility controlled like the S P500. And it's literally just an equation. It's, it's math. Both strategies have the same budget going into purchasing them. So if your overall index performance is likely to be impacted by the implied volatility of that index, but you're getting lower rates on the ones that have the greatest swings and higher rates on the ones that have the lower swings over time, you're going to end up averaging pretty stinking close within these different strategies. So I say that to say don't hurt yourself and don't, don't make it a daunting task. And this big scary thing for your clients when you're trying to figure out the index allocation, it's a little bit, in my opinion, it's a little bit more weighty when you're dealing with, you know, annual crediting, one year, point to point, two year, point to point, annual reset, two year reset, these types of things. Because you're not in that moment thinking about the next 15 years. You're in that moment thinking about what are we going to credit over the next year. Okay. And I understand that. That's the reality of it. I'm going to share with you guys some things to look for in 2024 that I think will position you to have some really great crediting in your policies. Assuming, you know, market cooperates with those things. Obviously if the market goes down and these indexes are negative, then assuming you don't have a fee on the strategy, zero is your hero type type story there? But we'll talk about some strategies here, we'll talk about some things to look for, but the first one that I want to say is just be weary, okay? Be skeptical of brand new index strategies that come out in these products that are launched in partnership between the insurance company and the index provider.

I don't think that any insurer out there has any kind of ill intent. But I can tell you that mathematically, monetarily, it doesn't necessarily.

Make financial.

It doesn't make things financially wonderful for an insurer to have massive crediting. So I'm not sitting here saying that they're going to try and create strategies that look really good in backtest, but then have internal mechanisms that stifle performance in the future. I'm simply saying just be skeptical, be weary. Understand how that index functions. What are the behind the scenes, what are the asset classes within it? How is it rebalancing all these types of things? Understand the function of the index. I, I can tell you historically, the less complicated an index is in its performance or in its design and it's the way that it's made they seem to perform better. It's just, I mean you look at The S&P 500, you're talking about an equity index. It's like all equities. Well, look at what it's done. Now granted there's nothing in there to try and limit. There's no volatility control mechanisms in there to try to stifle the upside or the downside. They're not targeting a specific volatility amount. So I guess you could chalk it up to say that maybe that's perhaps why. If that's the case, then I think it could beg the question of okay, well how much should we be allocating then to volatility controlled indexes in general? Historically, if you can have really, really strong rates on the S&P 500, you're going to be really hard pressed to beat that strategy in anything else. If you've got double digit cap rates and you've got, you know, 50 plus percent par rates on the 500, you're going to be pretty hard pressed to beat that strategy. If those rates can hold over the long term, volatility controlled indexes, because of the way they rebalance and reallocate and there's different asset classes involved, they tend to take, it seems they tend to take a little bit longer to respond to economic conditions, cycles, movement than those indexes like the S P500.

So that's why I say if you can have really high rates on the S P 500, high caps, high par rates, low spreads, you're probably going to be positioned better than in the percentage equivalent in a volatility controlled index, right? So for example, if the option budget at an insurer in a particular product allows for them to purchase a 10% cap on the S&P 500 and simultaneously that option budget allows for them to purchase a 170% participation rate in a volatility controlled index that has a 5% volatility target over the long term. If those rates were to hold, on paper, 170 looks better than a 10% cap over the long term. Personally, I would be more excited about a 10% cap holding over a decade's period than 170% participation rate. Personally, I've run the numbers, I've looked at things. Yes, I understand people try and place this. It's almost like this absolute statement around caps. Why would you want to cap your, your growth? Why would you want a ceiling? The reality is there is no index allocation strategy that isn't limited in some capacity. If you're getting more than 100% participation rate in an index strategy, I guarantee you that index has internal mechanisms to stifle the upside and stifle the downside. It's volatility controlled. You will never get 100% participation and none of the losses in an index that doesn't have internal mechanisms to stifle that volatility. That's just the reality. So agents that say, oh, why would you use a cap? Why would you want your gains to be capped? They're always capped regardless of the strategy you use. It's just one particular limiting factor is called a cap and another limiting factor is called a participation rate. And it just so happens that budgetarily and mathematically volatility controlled indexes can afford these budgets that these insurance companies have can afford to purchase more than 100% of what that volatility controlled index does because it's internally controlled. They don't need an external mechanism in the form of a participation rate or a cap or a spread or whatever to limit that index crediting. It's internally limited. So regardless of the strategy, you say you got 170% participation, you do, but understand that that's 170% participation of a limited thing. So bear that in mind. There is always, there is always ceiling, there is always limitation, even if on paper numerically it seems like there's not. So be wary of Those brand new indexes that come out as a result of carriers working with the index providers. Again, I think that carriers want to create product they, that sells. They want to create indexes that get allocation. If they can't get enough allocation in an index, they're, they're not likely to keep that index in their products. They need these indexes to be allocated to. But they're trying to create things that can gain market share in a product. Right. So they're trying to create momentum around the product by using these new indexes the way they're created, the way they're designed, which back tested look fantastic.

Are they designed, are they designed to have internal rules? Right. A lot of these indexes are rules based indices. Are they designed to have these internal rules and mechanisms and controls and asset classes and exposures and rebalancing that over the last 10 years would have performed really, really well? Perhaps. Does that mean that they're going to perform well in the next 10 years? No, not necessarily. So I just say be weary of those. Like I said already, if the s and P500 caps are double digits, if you got get PAR rates over 50%, it is a really tough strategy to beat over the long term. And yes, I understand that there are indexes in these products that have three times that kind of participation rate and are quote unquote uncapped. Reference 2 minutes ago in this podcast, if, if you want to hear about the idea of quote unquote uncapped and even insurers call them uncapped strategies and it's because they are in a sense, it's just where that limitation is coming from is not a cap rate. It's in the index itself.

Over the course of 2024, as I've just gotten done.

Exposing participation rates and making an advocate, an advocation I guess you could say, for double digit caps on the 500 in 2024. I've said it already on podcast this year, I think we're going to see rates continue to fall. The Fed has already announced that they're going to be dropping federal funds rate. The target range on the federal funds rate has already been reduced. We still have the same effective rate, but.

That'S coming down. When that does, rates are going to fall. Treasuries have done pretty much nothing but fall since the end of October. Our annuity rates, as many of you have already seen, are coming down. I think they're going to continue to do that over the course of 2024. And I think that we could by the end of 2024 get to rates more like what we recall seeing in 2022, 2021, 2020, where we're talking about, you know, five to.

Caps on the 500 and you're talking about, you know, a good volatility controlled index rate, par rate being, you know, 100 to 110, maybe 120% like in a kind of a crazy scenario, I think we could get back to that type of situation. And if we do, I think that logically participation rates might come back as kind of the, the king of the allocation world. Like I said, over the last year I've been real big on the double digit caps on the 500. But we get those caps back down to mid single digits and the idea of a participation rate, it looks a lot better. You're gonna obviously have some years where zero, you're gonna have some years that are really low again, volatility controlled. And then you're gonna have those years where you have a big giant credit because it's north of 100% participation rate. And that volatility controlled index happened to go wild. And that's okay, but I think that's something to be on the lookout for. I'm not going to sit here and tell you that in every product you sell you should only use par rates if we get down to mid single digit caps. But something to be aware of, something to look at. And then guys obviously look at the history, look, when was this index launched? What has it actually done? Over the last however many years it's been around, we've had so much economic.

Like just change in the last even eight years, you go from 2018 to 2024, you think about what we've had. 2018 was a negative year, good year. 2019 we had Covid 2020 massive fall and then a miraculous recovery. And you speculate on why that happened. 2021, positive, 2022 pretty massive, negative, 2023 back to positive again, almost 20 something percent. And then here we are in the beginning of 2024. So if you've got an index that was, you know, built eight years ago, you can look through those different economic periods and see how did they actually perform over that time period. And again, when you're looking at annual returns of an index, you're typically looking January to December. So you sell a client a policy in June and it's a one year point to point what they see numerically in their returns is going to be vastly different than what you see for that particular index. That's showing You January to December. That's just the reality of it is what it is. Nothing we can do about it. But you can see how those indexes performed over that time period. And I like to look at that stuff. I think that's super impactful, important to see. What do we expect an index to actually do? Should we end up in a situation like we did in 2020, 2020 or 2018 or 2022, and then how long did it take it to actually recover? Right? I mean, you look at the S&P 500, and in the same year of the 2020 drop we recovered, there were a ton of volatility controlled indexes that in that same year were egregiously negative, even though the S and p came back 20%.

That's the nature of the game. So know what you're using, know what you have available. And if I, I like to tell agents, if you're going to allocate to an index, you need to like the historical track record of that index, aside from the rates, take the rates out of the equation, the rates in the product. Do you like the index itself? And I'm going to just make a shameless plug here. In the Retirement Realized Agents Academy, I actually have an entire like module where I'm talking about index allocation strategy. And I actually go into different economic cycles, right? Expansion, retraction, all these different types of economic environments and then what types of asset classes tend to perform better historically in those economic cycles. So that then you can look at these indexes that you have available. You can see, oh, this index is heavy fixed income, or this index is heavy commodities, this index is heavy equities. And you know, based on the current economic cycle that we're in at the time that you're selling the policy, you know, oh, this is kind of where we're at. So over the next, you know, 365 days, if we were to maintain this similar economic cycle, I would expect this index to do pretty well with this rate because it's exposed to these things. So if you want to get that, it's in Retirement Realized Agents Academy. And for those of you that are thinking, whoa, hold up, Caleb, those of you that are in the academy or have been in the academy, you're thinking, there is nothing like that in the academy. I have some big news for you. There is and it's because we have completely relaunched and restructured Retirement Realized Agents Academy. What we've had in the Retirement Realized Agents Academy over the last three years is about 15 to 20% of what we have in the academy now, we have redone Chad's the Retirement Realized Annuity Sales System with Chad, Josh Delgado, our executive vice president and myself. Deep dive industry annuities, products, types of products, case design indexes, all these marketing leads. We've got an entire area dedicated to virtual that we've had the pleasure of partnering with an agent that is crushing it in the virtual world. He came here to Texas, recorded a ton of content for the virtual sales process and trains on that specifically as the academy is completely overhauled and it is unlike anything the industry has ever seen. I'm biased to it obviously, because I've got dozens and dozens and dozens of hours into this thing. But I've talked with some agents that have been a part of training historically themselves, are new and experienced and they are ranting and raving about what this academy is doing. It's going to revolutionize the way that agents approach annuity sales in 2024 and the years beyond. So if you want to get plugged into the Retirement Realized Agents Academy, go online, get signed up, it's fantastic. Reach out to me, I'll tell you that. Reach out to me. I'll give you a personal walkthrough if you reach out to me and you tell me that you know you found it, you're getting signed up as a result of the podcast. I'll personally get on the phone with you, get on a zoom with you and walk you through how to use the platform and as great a capacity as you can, show you where everything's at, show you where all the documents are, show you where all the different training pieces are, where our forum, our community, our little place you can ask questions and interact with other agents is, and I'll give you a full walkthrough. So anyways, my shameless plug to the new and improved, completely overhauled and industry changing Retirement Realized Agents Academy signing off here on this podcast today. But thank you as always for listening to the seven Figure Annuity Sales. Happy selling.

Sam.