Index Allocations In The Current Rate Environment | 7 Figure Annuity Sales Podcast | Ep. 238

On this week's episode, we're going to talk about nothing.

On this week's episode.

John, you cannot use stuff like that against me.

John, you have. You have free game on any content.

This is the tail trying to tell the dog what to do anyway.

Have you ever seen the dog chase its tail? That's a good point.

That's a whacked out dog. Okay, on this week's episode, we're going to talk about how to use index allocations in the current market environment.

Hello, everyone. This is Chad Owen, the annuity sales coach. Here's my sidekick, Boy Wonder. Wait, we can't use Boy Wonder because if you would have watched the YouTube channel, you would find out Boy Wonder was actually what Meg called Hercules and that I do not look like Meg. Just to be clear.

Even though I do look like Hercules.

Really? Where?

Anyway. Got my shirt on.

With the three chest hairs. Wow, that got a little personal. Not good.

Can't have people taking pictures of my three chest hairs.

Anyway. Okay, so let's talk about something important.

Yeah.

Called index allocation. What's he gonna do with the three chest hair thing?

Not good. Don't give him ammo. Seriously, if y' all are just listening to podcast, you ought to go to the YouTube channel and watch it.

There's some like, ring the bell and then laugh. Grab your popcorn and watch.

That's right.

Okay, we.

We talked about last week. Rates are still really, really good. Fixed account rates are strong in FIAs. Myga rates are still strong. We've still got high pars, We've still got high caps, We've still got low spreads. So things are looking right. I will share, like just from an index allocation perspective. And I'm. I'm going to get your thoughts on this in a second, Chad, but I.

Appreciate you doing that.

Absolutely. I'm liking the fixed account rates for one year again. If the presumptions that the market's going to be down for a second straight year in a row, which I'm kind of in that boat. I not an economist, but I'm thinking.

It will be not believe it. So. Hasn't tanked yet. I've talked to a lot of really super smart people, people way smarter than me when it comes to the economic side of things. And they're shaking their head, too.

Yeah.

I mean, when you see top economists that. That have gotten it right before, I'm not talking doom and gloomers. They're always screaming the market's falling. So I don't like those guys. I like the people that have statistical facts based off of logic and numbers, not emotional or politically swayed by what's going on. And so the people I follow, they can't even come up with an answer what's going on.

Right.

Which if they can't and I can't, which I'm not in their league in that arena. But then what do you think the client's going through right now? I mean, it's insane to be close or at or nearing or in retirement and have spending money, another $2 billion spent like it's nothing, like it's water. And you know, you got people out there that have paid into Social Security for decades. You have people that pay taxes for decades.

Right.

And they're, they've been planning on, they've been paying their 401k, their IRAs plus planning for retirement. And then we got this stupid inflation thing going crazy. I mean it would be tough to be a retiree right now or planning retirement. It'd be so tough. That's why we gotta have that empathetic type concern. Because I'm telling you.

I hope and pray that my clients know how much I'm actually truly concerned about making sure they have a very successful retirement and they're not stressed. Because I've seen what stress does to people during retirement and it's not pretty.

Right, Right. So yeah, I mean next week we're going to talk about income riders and why you shouldn't be afraid of the fee. And we're going to make a case for income riders. And one of the things we talk about in that next week is going to be all about fear and guaranteed income, creating peace of mind and longevity. Anyways, to give you guys a little sneak peek to next week. But yeah, I mean, like I said, the rates are still good. I'm really loving par rates on volume control strategies right now. I'm liking cash caps on non vol strategies. And I'm a personally, unless the spread is like 0%, I'm, I'm avoiding spreads because spreads, the way they work is it's the insurance company kind of taking the cream off the top. The first, you know, however much percent that spread is. And I'm looking at the current market and the volatility of it and I'm thinking, man, if there's positive movement at all from an annual point to point, it's not probably going to be much. And if there's a spread on there, it can really cut into what you actually credit.

It can. And remember, the insurance company obviously doesn't keep that Money there. From the standpoint of if the index makes 10% and you have a 4% spread, they don't get to keep the 4%. That's really important to know because I've had agents say, well the insurance company just keeps the first 4%. I'm like, oh my gosh, how are you selling annuities when they're, yeah, that's not how that works.

They're outsourcing the pricing to counterparties and all kinds of stuff. We go into a whole big long thing on, on the way that they price and who's actually taking on the risk when they buy into options and things. But do that one the way, the easiest way to understand a spread is that if you have a 2% spread and the index strategy credits 4%, well, the first two that credits the client doesn't get while the client doesn't know about counterparties and all the other moving pieces and agencies, nor should you really.

Ever go into that.

So it's just easier to explain.

I mean I use that analogy all the time. Be careful how much information you inundate the client with because you do not want to overwhelm them. And now I'm not saying don't explain it in a way they can understand. Absolutely do that. But man, if you think about before every flight that the captain didn't, you didn't have the seatbelt thing, you didn't have the life jacket thing, you didn't have the oxygen max thing, the client, excuse me, the pilot came out and for the first three hours explained how the physics behind why a plane flies and why we do this and why we do that. And you're just going to be saying I really could have been at my vacation right now. So it's just important that we know and we help them understand that the basics of how the annuity works and a very, very firm understanding of English, not financial lease and that way they feel comfortable with what they're doing.

Yeah, I, I want to hear your thoughts on this, Chad, but I would personally take caps on the S&P 500 right now versus spreads on any volume control strategy.

Spreads. Yes, but I'd probably take participation rates over caps.

I would too. And that's why like in my terminology, I said, I, you know, I'm loving par rates on volume control strategies. I'm loving the, you know, know, annual one year fixed rates in most products and I'm liking caps. It's like I, I, if there's an alternative option, I would probably take it. But considering what the S&P 500 managed to do. Granted, you're talking about all kinds of pumping money into the economy in 2020, but after a major fall, it's like if there happens to be any kind of positive movement from. And again, you got to consider it's not January 1st to January 1st for every single client, it's when's that policy issued to the anniversary date. Right.

I wonder if I've ever had a policy issue on January 1st.

Right.

Yeah. I mean that's.

So we could, we're here, we are in March. It's like, what's, what's the market going to do between now and next? You know, March of 2024? We don't know. But my argument being that if there's any kind of positive movement in these strategies, I personally don't think it's going to be major. Right. Returns, it's going to probably be marginal, small, positive returns, if it's positive at all.

And this is why using a participation rate cap or spread in my opinion is not a great idea right now. I think I'd be using the fixed account. I, I'm telling all my clients, fixed account. And you know, and then always I say right around month 11 to month 12, you're going to get an index allocation statement or your actual statement. That's when you call me and we see if we're going to reallocate into other indices. So yeah, I'm doing fixed rate for pretty much everything right now.

Okay. Is there. And this was a thought that I had when I was thinking because I imagined asking you that are you still all in the fixed account? And the follow up question to that is, should rates fall, is there a threshold that the fixed account could get down to that you would stop allocating to it and you would start allocating.

What the market is doing. I mean, it wouldn't be that simple of a question like fixed rate gets.

Down to 2% and your par rates are down at.

100.

But what's the market itself doing? You know, I mean, if the market's still being horrific, then of course I would do the fixed rate still just to just cover. It would all depend on what, what the market's doing. I mean, I have clients right now because, you know, some of those indexed annuities with income riders, there's not a lot of movement in the indices.

Right.

But I tell them your fixed rates, 1%, your rider fee was 0.85. You might as well at least get a little something. But they're still getting the really good income. Because I tell people all the time, when you have the indexed annuity, back in the day, man, some of those things had a 12% bonus, 8% roll up rate. And I would just tell them, sure, you are getting a higher income account value. The teeter totter is way over here on income because the death benefit, 10 to 15, 20 years, it's gone.

Yeah.

But your income will never out. You'll never be able to outlive that. And I've had people tell me, oh, why did you do those? Those were horrible. No, at the be, at the time, those were phenomenal. I would still take a 12% bonus right now with an 8% compounded roll up rate if it was the right circumstance for the client. Because that's why you have to ask them, is a plan for living or plan for dying. In other words, what's more important, do you want income while you're live? You want to pass more onto errors. Now I used to hear way more common, I don't care what passes on to the errors. And that still happens vast majority of time. Which I think is sad, but that is a very common statement. But I do also hear clients saying, you know what? But I do want to leave a little something. Sure. For them when I leave.

So trying to have some kind of good strategies, try to protect that death benefit as best you can.

Yeah.

Which, and so for me, on that whole question of fixed account rate versus, you know, participation rates, cap spreads, are we using indices or just the fixed rate? It's like to me there's almost a threshold where 2% is not that much more than zero, but 100% of a significant return is a lot more than two. So it's like the cost benefit.

Yeah, it would be a total situational type decision.

That's interesting. Well, if we end up in that situation, we'll do another podcast.

Once again, if I think the market's getting hammered and we have a 2% fixed interest rate.

Right.

But I think the market just is diving, then yeah, the 2% still better than zero. I mean, you've heard the saying zero is the hero. So if zero is the hero, what is 2%? Sure, it's better. So it's all situational. I mean there are so many. And that's. People do ask me that quite often. How do you make the decisions you do. And what would you do if this happens? And I'm like, it's never if this happens. It's if this, if this, if that, if this. I mean it's Multiple things at once that start to cause uncertainty. For example, stocks, bonds, mutual funds, commodities and real estate all being beat by Cash in 2022. As a general consensus. That's a big concern since that next to never happens.

Yeah.

And now you're still seeing real estate prices dropping and you're seeing. You know, I just, I think this may be another year where stocks, bonds, mutual funds, commodities and real estate will be by cash.

Interesting.

Which that doesn't. I mean, I wonder what the stats are. I heard when that happened in 2018, but it didn't include real estate. I heard that that was the first time that's actually happened to that magnitude, and that was only the market falling by 4.7%. So I would be interested to hear, and if you have comments and leave them in the YouTube comments, if you could, if you have any idea on that. But I think if we had two years in a row when just five years ago we had the first one, that four from what I understand happened, that could tell you once again, diversification isn't all it's cracked up to be.

Well, oh man, we could get on.

That's a whole. Let's not go down.

We have a podcast on it about the myth of diversification, and I recommend you check it out. It's. It's one that Chad and I are both very passionate about. I will say, you know, as far as market returns and historical patterns and things like that, There have been four times since the S&P 500 has been around where it's had more than two consecutive years of negative returns and only one in the modern era, and that was 2000 to 2003.

You're talking about the stock market falling for three years.

Yeah. S&P 500 specifically falling for three years or more in a row. And so we're looking at this now. I personally, I would be kind of surprised, honestly, if it was a multiple year, but it got inflated big time. I mean, you look about 2020 to 2022, the amount of inflation that took place in the market. And I'm not talking about the inflation rate on the dollar.

Major, major investors saying the stock market's 15 to 30% overinflated.

Who knows how long that's going to be?

Shows. And you start to look at all these different factors that come into play, you're like going, wow. Yeah, I can see what they're talking about.

One, just regarding index allocations, again, one of the strategies that I've. I've talked with agents about as of late, especially when Dealing with income riders. Where we're going to talk about that next week and why the fee shouldn't scare you. But realistically, the fee is the biggest objection that I ever hear to the concept.

I'm just going to add this right now. Remember. Oh, I don't like the fee and the income rider dummy. You just put a fee on the index strategy a lot of times.

Anyway, that's a whole nother thing. We'll talk about that next week.

Let's just practically assume no fees on strategies. Call it a 1% fee on the income rider. Generally that's being calculated on the benefit base deducted from the account value. Most times there are exceptions. There are, there are product exceptions. Products we like that are exceptions to that rule.

But we'll cover that next week.

We're going to cover that next week. But as far as allocations go, let's say you have a, call it a 4.5% fixed rate. 4% fixed rate and you've got a 1% fee. About 25 to 30% of your funds into the fixed account would.

Do the math, but it would cover that fee. Are you, and I know you're doing all in the fixed account. But hypothetically, if somebody were to want to use index strategies and not the fixed account in totality, would you still leverage a portion of funds in the fixed account to cover the fee and then the rest of that into strategy so that at least you're still not going to be moving backward due to the fee?

Possibly.

So there's something to consider.

I mean, if that's enough to move you by my riveting confident statement there, I don't know, I just, when I look at it and I'm, I'm, I don't see any way this market could be higher in a year. I just don't. And when I have a 4% fixed rate in a one year strategy, why wouldn't I?

Well, and I'm looking at it going, really, the fall started January 1st of 2022. I mean you look at the charts, that's when it started, the downtrend. And so with each passing month we become a year and a half.

Well, we just had three weeks in a row with a fall.

And who knows, maybe this next week. We're not through the full week yet, but we'll see.

Well, I guess what I'm saying is by the time let's say we get to June this year, a year from June will be two and a half years removed from the initial decline of this market.

I think this is going to be a longer slide.

You think it's a three year.

Again, it's a longer slide. There's just some things we're doing from an economic standpoint and I do have some very smart people in my life and people I follow that there's. Unless it's manipulated, which it already has been manipulated. That's just a fact. That's why diversification doesn't work. But that's a whole nother story. And then we have things like inflation, we have things like interest rates. We have all sorts of issues that are going right now. We have spending that's out of control. We have people, baby boomers that are getting older. I mean, I'm not a doom and gloomer by any means. I believe everything is going to be cyclical and it's going to go up and it's going to go down. It's going to go up, it's going to go down. But that being said, I think right now the fixed rate is the best way to go.

Fair enough. To be fair, one last thing. On illustrations, you're allocating on applications to fixed account, but on illustrations, you're showing strategies because long term, that's a better picture of what to expect.

It is. But I'm also picking a good strategy and a not good strategy when it comes to indices to have a realistic number.

Fair enough.

Okay. Hope this helps you. You have a great day. And of course, happy selling.