Index Strategies, Crediting, and Allocation | 7 Figure Annuity Sales Podcast | Ep. 291

Welcome back to the Seven Figure Annuity Sales Podcast. It's Caleb north here, rocking solo again. Now, couldn't get Chad on for today's recording, but we've got some good stuff for you that quite frankly is, is entirely within my wheelhouse. These are things that I talk about on a daily, weekly, monthly basis with agents all across the country. So I'm excited to talk today a little bit about index strategy. Okay. And, and we use that term a little bit loosely, right? When you look at FIA product, for example, and you look at the 10 different.

Crediting strategies that they have on there, we call them index strategies. Right. So what I'm talking about today is, is largely indexes themselves, volatility controlled indexes, and then unmanaged or non volatility controlled indexes. I want to talk a little bit about different crediting methods, how those work and kind of what my preferences are and then the way that I approach allocation personally when I'm, when I'm working with agents and we're looking at. And how do we, how do we try to best balance the crediting to cover us if we don't know what the year is going to be? And let's be honest, we don't know what the year is going to be. We don't know if the year is going to be extremely high returning in these different indexes. We don't know if it's going to be a down year. We don't know if it's going to be mediocre. So how do you try to cover all your bases by maybe allocating to a mix of different crediting methods. So before I jump into all that though, I do want to say thank you guys for listening to the podcast. It's, it truly is an honor to have your ear. I know that it's time that you guys take out of your day, maybe while you're driving. There's plenty of other things you could be listening to. So just even the fact that you guys tune in to hear what Chad and I have to say on a weekly basis, it, it means a lot and we don't take it lightly and we want to give you guys the best that we can. But with that, I will say check out the YouTube sometime, okay? Because there's video on the YouTube. Sometimes you can see Chad and I, our interaction together face to face doing that. So that's fun. And then also shameless Plug to the New Retirement Realized Agents Academy Annuity Architects Program. If you haven't checked it out, you need to. It's coming in at the same price point as our old Pro plus membership. It just has way, way, way more content, way more value things that we can't the depths on in a 15 to 20 minute podcast we're able to in the academy. So if you enjoy the podcast content, I can assure you you'll enjoy the Annuity Architects program and all of the great content in there. We've got Chad training in there myself, I actually talk about case design and index strategy, allocation strategy, all that kind of stuff. My boss Josh, our president, he actually talks about building a business and a brand. And then we've got an agent that's partnered with us named Jesse Black who is writing 15, 20 million a year, just himself completely virtually training on the virtual process. So definitely go check out the Annuity Architects program. But that's enough on that. Let's jump in and talk about different indexes. So you guys have probably over the last, oh gosh, handful of years, decade, the onset of the volatility controlled index has entered the paradigm and it's gained a ton of excitement. And when I say the volatility controlled index, I'm not referring to a specific one. I'm talking about the concept in general. These volatility controlled indexes that internally manage and regulate the volatility that that index experiences, okay, they have internal mechanisms of reallocation, rebalancing and exposure so that they can target a specific volatility amount. And 5% is a very, very common volatility target. Okay? Now if you were to contrast that to the S&P 500. The S&P 500 is all equity and it is what you would consider unmanaged, right? There is no internal volatility target. Whereas you look at, let's take one of my favorites, for example, the S&P 500 Daily Risk Control 5. I love that index. I'll share with you real quick why I like that index. I like that index because when you look back on a 10 year back back cast on an illustration, it's not actual backtested, it's real live data. That index has been around for longer than our 10 year. Illustrations are showing the backcast on which means that all those numbers that it's returning are really what that index did in that year with that rate that is currently being applied to it. So I like the index. It tracks very, very well with the S&P 500 as far as positive to negative years. Right? If you, if you were to look at a history of the daily risk control 5 in correlation to the S&P 500. Just looking back on the last 10 years, there have been three years where the S&P 500 was negative for from January to the end of December, right over that one year time. And every single one of those negative years, The S&P 500 daily risk control 5 was also negative. But then every year that The S&P 500 was positive, the daily risk control 5 was positive. And you can't say the same for other volatility controlled indexes. If you look at some, if you were to actually go back and pull back tested data, even on some of these other volatility controlled indexes, you might see certain years that look weird because sometimes they show better returns than the S&P 500 and then worse negatives. But they're supposed to be a volatility controlled index. Sometimes they don't track well with the actual movement of the 500. And of course that's gonna be because of exposure. That's gonna be because of the various asset classes that they have in that index. The way that it reallocates, rebalances and rotates over. If there's, you know, exposure to economic cycles, if it changes as a result of economic cycles, which is pretty common for a lot of them, you know, based on what's going on in, in the economy, they will reallocate rebalance in order to try and achieve that volatility target. But point being, I really like the daily risk control 5. It does a lot of things really, really well. And when you look at that, in Contrast to the 500, it has tracked extremely well. But it's a 5% volatility target. The S&P 500 is not managed. There is no volatility target. It can do whatever the stock prices of those 500 companies does right in in accordance with the weight that they individually carry within the index itself. So there is no upside target, there is no downside target, there is no volatility control mechanisms within the index to achieve that. And the reason that, that's part of the reason that volatility controlled indexes tend to get better prices. And so this is just a point of education. If you look at a participation rate on the S&P 500 right now, you're going to see maybe 50, maybe 60% participation on an annual point to point in the S&P 500. And then you go and you look at the S&P 500 Daily Risk Control 5 to use the same index, for example, and you might have somewhere between 150 and a 200% participation rate, depending on the product, depending on the carrier. Well, if you're a client and you don't understand the way that volatility controlled indexes work, but you understand what a participation rate is, then you would probably look at the opportunity for getting almost double what the index does and think, oh well, that's going to credit better. And again, the reality is not. I actually did a podcast on this concept earlier this year where I was talking about how because volatility controlled indexes are internally managed, just because you have a higher rate on them does not mean that you're setting yourself up for better crediting or higher crediting interest rates. Any kind of higher percentage of credit in the annuity, you could end up with less. And certainly you could have a 1000% participation rate on an index. And if the index does nothing, 1000% of nothing is still nothing. So there is an element of looking beyond the rate that the carrier has on the index and actually looking at the index itself. It's one of my favorite things to do actually in my role is to study indexes. I get a kick out of it. There's so much nuance in technology and all kinds, kinds of new things coming out in these volatility controlled indexes that's super fun to study and you can just simply Google search, right? You, you've got a favorite product out there and you're curious, you know, what is, how's your typical allocation, right? How does that actually look from an index standpoint? Then just start searching the indexes in the product and you can typically find fact sheets, you can find information on launch dates, you can find information on the exposures, the asset classes that they have within the index itself. You can find information on internal fees in the index, you can find information on the volatility target of the index. You can look at all this stuff and even historical data obviously to see how has this index actually performed in live data years and how does that compare to the back tested data. There's actually an index that originally I was actually pretty excited about, pretty high on. And each year that's gone by I've become less and less and less moved and excited by the index. For those of you that are curious, I'll just tell you it happens to be the economic cycle factor rotator index. And for me, the reason that I'm a little bit less excited about it is because when I look at the live data, in contrast to the back tested data, when there is very, very little continuity now this simply could be a happenstance, a a freak of nature, so to speak. Because rules based indexes should show extremely accurately in their back test. If the index is a rules based index, which most of them are, the back test is supposed to be extremely accurate. So it could simply be a freak of just an anomaly, so to speak, where the live data years. Even though the market has been extremely when I say the market, I say The S&P 500 has been extremely productive in recent years.

That particular volatility controlled index is not, I will say, volatility controlled indexes tend to be a little bit slower to respond to economic activity and movements, whereas equity heavy indexes like the 500 tend to be a little bit more responsive, a little bit faster. And again, because there are no varying exposures to other asset classes whose movements are inherently a little bit more stifled to target a specific volatility, they have much larger upswings and downswings. When you look at the S&P 500, the Dow, the NASDAQ, et cetera. So just things to consider. But for me, that's a huge piece to consider. When I'm recommending to an agent a particular allocation mix, I want to know how has the index itself performed? And my argument for it is if you look at an actual index performance, take the rates out of it, take the 0% floors out of it, you look at just the index. If you don't like what that index looks like in itself, then you probably shouldn't allocate to it. Even with 0% floor and potentially great participation rates. If you like the way that an index looks in and of itself, now all of a sudden you apply a 0% floor looks better. Now you start to apply, potentially a greater participation rate looks even better. So one that's just something to consider is if you don't like the way the index looks in and of itself, it's probably not going to be one that you want to allocate to. And if you can get behind the way that index looks in past performance in and of itself, now all of a sudden you've got something that is probably worth allocating to, even if the rate isn't as good. Okay, so I'll create an example for you. If I have index A that I don't like the historical look of the actual index itself, but it has a 200% participation rate, and then I've got index B, when I look at the history of the actual index returns themselves, I really, really like it. Well, that index B might have 125, 150% participation rate. But I would be more inclined to allocate to that index with a lower rate because I like the way that index itself is actually performed. Even if the back test on the illustration shows index A historically returning and I'm using air quotes, for those of you that are on the podcast and can't see me, I'm using air quotes. But for even if index A has historically returned more. Right. I, I, I'm just not moved by an index that on an illustration has, you know, you look at the best 10 years, worst 10 years, last 10 years, if over the last 10 years it shows that it's done, you know, an annualized return of 8%. I'm not more moved by that than an index that has shown over the last 10 years a 6% annualized return. If I like the look of the actual performance of the index that has that lower return more than I like the actual look of index that has returned more. So I'm not sure, I hope that that's making sense. But to go back index A, index B, if index a has an 8% annualized, you know, return over the last 10 years and index B is only at 5, but I like the look of index B way, way better from an, again an actual index perspective, I would be more inclined to actually allocate to that index than I would index A, even though index A is showing a slightly higher annualized return over the last 10 years. And again goes back to the same argument that if you don't like the way the index looks in itself, you probably don't want to allocate to it.

So I think that horse is pretty much dead. But I do want to talk about crediting methods a little bit as well. And I want to talk about caps, participation rates. Spreads aren't quite as common, but there's some new stuff out there with the performance triggers that I think are really, really pretty cool and definitely have a place. The way that I think of crediting methods is not that one is inherently better in all environments, but that there will be one better in particular environments. What do I mean by that? Take the S&P 500, for example. A good cap rate on The S&P 500 right now is around 10%. Obviously there are some more, there are some less, but let's just say 10. And in a product that has a 10% cap, that options budget is probably able to afford the carrier about a 50% participation rate if the index does.

4% positive. And I've got a 50% participation rate, I get 2, the index does 4% positive and I got a 10% cap, I get all 4. So in that particular scenario that year, the cap was way better than the par rate. On the flip side, if I've got a in, you know, the S&P 500, it goes on an absolute tear for 30% over the course of a year. If I've got a 50% participation rate, I'm crediting 15. But if I've got a 10% cap, then I'm capped at 10. So the upside potential is way greater on a par rate. The benefit of a cap comes in those years where the index actually credits lower than that cap because it's effectively like having a 100% participation rate at that point. Right? Because you're not hitting that cap. So from those, those two different types of crediting methods.

One is not better than the other. They both have their place and depending on what the index actually does, one will be better than the other. But we don't know what the year is going to look like. So if I'm looking at a product and all I've got is caps and participation rates, then I personally really like a 50, 50 allocation if both rates are good, if you're not, and most of the time you're going to see relatively proportionate rates based on the volatility of the index. What I mean by that is if a carrier has a 2% options budget, that 2% options budget is going to be able to afford.

Whatever the rate is on a cap and the proportionate equivalent of that is whatever the par rate is. So there's some pretty good continuity between the index strategies within a product. They're, they're going to get the same option budget in essence.

But I will say too that I do think volume, expected volume into a strategy can have some kind of impact on that. And we've talked about that in a recent podcast as well. But point being, those really bullish years, it just market goes on a tear, your par rates are definitely going to be better. Those lower producing years, your caps are going to be better. And now we have these, these crediting methods like performance triggers. And Lincoln national actually just. I'm sorry, Lincoln Financial. Wow, golly. Lincoln Financial just came out with a new type of trigger. I've never seen it before called a dual trigger. And they still have a performance trigger. Well, what I found was interesting was they put a performance trigger on a volatility controlled index, managed to a 10% volatility target and a performance trigger. For those of you that don't know, basically if the index is 0 or positive, any amount it credits the trigger rate. So the way that I think about it is if you end up, if you end up north of the trigger rate, it's as if the trigger rate is the cap. If you're under the trigger rate, you still credit the trigger rate. So it's like the trigger rate is a, is a over a 100%.