Understanding Client Risk Tolerance When Selling Annuities | 7FAS Podcast | Ep. 247
A conversational podcast episode (Chad Owen and Sam) about how to assess client risk tolerance when recommending annuities. They argue that asking clients whether they are willing to lose all, some, or none of their money is more revealing than numerical scales, and emphasize that the "purpose of the money" (often guaranteed lifetime income) and client needs should generally trump stated risk-desire. The hosts discuss how protected annuity products and income riders address downside risk, and offer practical sales guidance (fact-finding, sifting clients, setting realistic expectations).
Chapters
So understanding client risk tolerance. I think sometimes agents misunderstand, kind of navigating risk tolerance and figuring out what risk tolerance is. They'll ask questions like, what is your risk tolerance? Which is setting themselves up on a.
Scale of 1 to 10. Give me your risk tolerance. Right? 5. No. Yeah. I like the way I ask it better.
Well, I agree. How do you ask it?
Are you willing to lose all of your money, some of your money or none of your money?
Right.
I mean. And it always gets a chuckle. And then they go, well, duh, I don't want to lose any of my money. And I'm like, then why do you have everything at risk?
Yeah, yeah. Ultimately, risk tolerance is their willingness to lose value in those accounts.
And you know what risk tolerance is? Like, you know, I think about risk tolerance, okay? So I'm trying to get into woodworking, and I love woodworking, but, you know, I'm making this bowl, and I got this hand sander, okay? And this is attached to this. This machine. Then it has this little cable, and then it has, like, a drill bit kind of thing that spins really, really fast. And so I think my risk tolerance is, I can wear shorts and slippers. That's my risk tolerance. My wife's risk tolerance is, you should be wearing leather chaps. Well, that's a whole nother topic. But no, you shouldn't. And wear boots. So. So you're safe. So my risk tolerance allows me to actually start grinding the bowl out. I can feel what's going on. Then it misses the bowl and hits my leg four times. So if you look right now on my knee, I have sand marks where I sanded my skin. But my risk tolerance was like, that's totally fine. My wife's is totally different. So when you ask risk tolerance as far as finances go, the guys are often more willing to say, I'm a little more risky. But if you use the term, are you willing to lose all, some, or none of your money? The risk tolerance isn't even a factor anymore. It's, I don't want to lose money.
Right. And it's an interesting concept because when you ask them the scale question, Right. On a scale of 1 to 10, what's your risk tolerance? Are you very aggressive, moderately aggressive, totally conservative? Right. Agents will use these different types of terms. The problem is that clients are preconditioned to be okay with some risk.
Yeah. Well, because the broker goes, well, I'm a 6040 risk person. I'm a 70, 30 risk person. What the heck does that mean?
Right.
70% stocks, 30% bonds. Guess what? You're all still at risk, so.
Right.
Yeah, that's a good point.
And to be fair, when we talk about risk, what we're talking about is loose loss. Loose loss. Loss in an account. Value not on the radio. Yeah, it's true. Loss in an account. Well. And they can't see my face on the radio, so. And that's really all I got going for me. This voice is just pretty nasally most of the time.
Just Texas allergies in any given day.
Cigarette is this time of year. Yeah. But most of the time, they'll say that they're precon or preconditioned to say that they're, you know, willing to have some kind of loss. But when we talk about risk, what we're literally defining is the willingness to lose some of that account value as a result of a volatility. Volatility, Right. Losses in some kind of market cause the value of whatever asset they're holding to actually decrease. And obviously, we use products that. That prevent. Prevent that. Protect from that. Tried to combine prevent and protect.
Okay, so I'm taking over from here because this guy can't speak a complete sentence. What's going on here?
I haven't had my afternoon coffee.
Oh, that's it. And so when we go into that, that is where the purpose of the money comes in. Because, you know, especially when you look at what the market's doing right now with the crazy volatility. And I think two weeks now, we're going into our third week now where the market. Well, I know we've had two weeks where the market was down and people just are getting real skittish again. We had this kind of comfort level, and now they're getting nervous again. But the number one thing is always purpose of the money. That's number one at all times. So the purpose of the money when we're helping most retirees is income for life. Okay, that's most. Now, we can debate this all day long, but when you look at study after study after study, the number one concern people have is running out of income. So when you look at that and you once again, study after study talks about that, that is the number one purpose. Now, do we have people that have their income completely taken care of and they don't need to worry about it? Yes. But remember, you always have to look at how much money disappears once one of the spouses passes away. You know, pension, social, Social Security. But we go back to purpose. So obviously we're going to talk about how to find the purpose, right?
So when I look at risk tolerance, right, and we're talking about discussing risk tolerance, the effects that it has on the selection of annuities, I think some agents would ask the question, what's your risk tolerance? They would say, oh, I'm moderate. And then they would start thinking, okay, well, maybe a variable annuity would be the right fit, right? And it's like if you ask the question the right way, if you ask it the right way and I say the right way, I'm saying, I have never heard an agent ask the risk tolerance question better than, are you willing to lose some of your money, all of your money, or none of your money? Because it gets to the heart of what risk tolerance is all about. It's not, what do I think that I need to be willing to lose? It's what am I actually willing to lose? So when you do the scale thing, like we've talked about already, you're positioning yourself to get a response from a client that's based on the notion that they should be okay with some kind of risk to loss in that account as a result of volatility. Because they're often taught you have to risk money to make money, and that's not true. It's just a transfer of the risk. So when we look at fixed, indexed, fixed annuities, any kind of protected product like that, that isn't subject to market volatility or the downside of it, at least it's literally just a transfer of the risk. It's just shifting that over in exchange for the portion of the gain so you can make money with.
And I think about it too. It also helps me sift through clients. If I have a guy who's 70 years old and said, well, I'm willing to risk all my money, well, then I'm not the guy to help them, right? And there's been times in the middle of an appointment where I actually said, you know, hey, it's actually, I'm sorry, not in the middle. It'd be towards the beginning. I'm like, are you willing to lose all, none or some of your money? And they go, well, you know, I'm fine with risk. I've done it my entire life. You know, if I lose some, it's okay. I said, okay, what's some? 50%. Yeah. If I lost 50%. Sir, do you realize right now, if you lost 50% of your money, your income, you would not be able to have enough to live off of right now, Right? I Mean, I'm blunt like that. And they're going, well, why do you say that? I could pull out 4%. Okay, you have a million dollars. You pull out 4%, you're pulling out 40,000 a year. You lose 50%. You are not pulling out 4% of a million.
Right.
Because now you'd be pulling out 8% of 500,000. That is not doable. You'll run out of money so quick if you do it that way. Unless you had some crazy, you know, alien come down and manipulate the market. Wait, we already have that going on right now.
But anyway, there's like two conspiracies in one there.
Yeah, there's a lot of conspiracies going. We got. We got manipulation going to the market for sure. That's not a conspiracy, man. There is no way you can tell me stocks, bonds, mutual funds, commodities. Well, let's see. So we go back to 2022. Stocks, bonds, mutual funds, commodities, and real estate were all beat by cash.
Right.
Tell me there's not market manipulation.
Right.
You know, tell me how our congresspeople can beat the market by 30 and 40%.
Yeah. When you're. When your government officials are some of the best stock pickers.
Yeah. I mean, come on. You can't tell me there's not market manipulation. You can't tell me there's things that we don't even know about. I mean, it's funny. There's this one series I was watching on tv, and it's like the Pandemic. This series was filmed three years before the pandemic ever happened. And on this series, they had a terrorist attack and they had a pandemic, and it was exactly the same what we just went through. Everything shut down, and I'm going, wait a second. Come on. You know, chalk it up to happen. And I'm not, you know, conspiracy theorists. I'm just. Right.
But, you know, we go into the facts of.
Purpose defines action. And if the purpose is a peace of mind, then you have to have an action that allows that to happen.
Right. I would add on, too. Right. That the risk tolerance that a client has, their willingness to lose some of their money or all of their money or none of their money, that is not a. It's not partial to their needs. Right, right. So that's a desire question. The needs question is a whole separate.
Piece of the puzzle. Yeah.
And. And when you do a good fact finder and you actually recognize what the needs are, there's a point in certain instances where the risk tolerance almost becomes A mute point, a secondary point to the need that they have. A need for income, guaranteed for life is not a respecter of somebody that has a moderate risk tolerance. It's I have a need for guaranteed lifetime income. That's a baseline need. This other thing is a desire. So the need trumps the desire. And that's the importance of taking it that next step further into actually doing good fact finding and looking at the numbers.
You know, it's funny, I've known many people over the years who have health issues and they continue to live a lifestyle that hinders those health issues. It continues to influence why their body performs a certain way. And you give these guys, I'm eating fried food, fried food. I'm eating bacon, which favorites the will of God, but, well, it can't be the will of God because he doesn't like pork. Well, maybe he does now because everything's clean, but that's a whole nother thing. Wow, there's a tangent. We went down processing all this process, but when we look at that and we, we have that reality when they have a heart attack, so many people get in better shape. They were before they ever had the heart attack. They start to exercise, they watch what they're eating. And there's that wake up call when you're anywhere from 55 to 70 years old and you have a big drop in the market. You just had a financial heart attack. Sure. And you start to see that go, you've got to get things fixed. Because you continue to live the lifestyle of complete risk the entire time, you will suffer the consequences of it. And it will affect your income.
It will, absolutely. I'm curious, when you ask clients, are you willing to lose all of your money, some of your money or none of your money? If somebody were to say, I'm willing to lose some or I'm willing to lose it all, do you ever come back and ask them just flat out if you didn't have to?
Yes, I did. So, yeah, somebody will say, well, I want to lose a little bit because, you know, you need to risk money to make money and I need big returns. I said, well, but what if there's a way to where you can get some returns but you'll never have losses again? Well, of course I'd be interested in that.
Sure.
So, yes, that is a conversation.
Yeah. Yeah, that's good. Well, the good point, or maybe the overarching theme here, is that obviously risk tolerance is important to understand in each individual client. You want to know kind of where their mind is at regarding their willingness to lose value in those accounts as a result of volatility. But you can position things in a way to where you get to the heart of what they're trying to accomplish. And when you actually do a good fact finding and you find the purpose of the money, that's going to be a greater driver into what you actually end up positioning than just their risk tolerance. For sure, both are necessary, but one is based on need and the other is based on desire. And the need should always trump the desire for sure.
I mean, I can desire right now. I wish I was a billionaire.
Yeah, yeah.
I mean, yeah, the need is I just want to make sure our family lives well and we're able to give to who we want to give to.
Right.
And we're able to have a lifestyle we would desire. But I mean, today I was just looking at a ranch, 250 acres. I'd like to write a check for that right now. That's my desire. That is not my need yet. But it will be. Especially when they said they had access to your on the property.
The filet mignon of the woods.
Oh, man. Yes, I definitely want to do that.
It's good stuff.
But yeah, I can't stress it enough. We have to understand there's a lot of things like I had somebody that told me they go, I want something that doesn't have risk. I want income for life, but I want really, I want all the gains. I'm like, yeah, you know what? Unicorns would be pretty cool, but they're not a reality. They're not going to happen. And so we have to set people in a place, you know, and it's not disrespectful or dishonorable. And we want to make sure that we gently say that. Now. There are some times I've had to be very blunt because, you know, I'm not going to waste my time for someone who has unrealistic expectations. I just won't. I mean, if you're going to sit there and tell me you mean, I just last week he's like, I've made 18% over the past 10 years and I've had no losses whatsoever. I said, that's bull. I said, there's no way. Because you had 2018, you had 2022, you would have lost something right now. Could have you average 18%? Absolutely. I mean, if I would have bought Facebook or Google or Apple or. I mean, I'm sure and I don't know for sure the numbers, but there are definitely some Big stocks out there that have done phenomenal the past 10 years until they don't.
Right.
You know, and you look at these large swings that these institutions have, these large financial institutions, such as the Googles, the apples, you know, they've done great. But look what's happened to the NASDAQ recently. You know, it's gotten hammered. So when you're figuring out the purpose of the money is to make sure I don't outlive it. This is why I'll debate people all day long about the importance of income riders. Income riders, you know, because it still boggles me the number of people that don't put income riders. When there's an income need.
Right.
When there's not an income need, don't do it. I mean, you guys know this. I don't get paid any different whether there's an income. Right or not.
Right.
Well, I actually beg to differ. You say I do get paid less because if I'm doing an income rider, there will never be a replacement five or 10 years down the road.
Right? Because it's a lifetime.
It's a lifetime. I literally cut off any future commissions from that. But I did what's best for the client, and I gave them the best peace of mind. And those are also people that continually refer to me.
Right.
People to me.
So. Yeah, well, yeah. And you go back to even the Roman era and the idea of anua and the purpose of what the product was originally created for and what it's always been designed for is income. It's been designed to be an income product. And now we have annuities that are classified as such because they can be annuitized, but they don't have to be for any long period of time. Right. The. The. The maturity date is kicked way into the future for the purpose of these growth and accumulation type plays and whatnot. And that's all fine and good, but when you get to the root of what the product was designed for, originally it was income. And the income rider, to me is just a better adapted version of annuitization.
Well, I think, you know, what they did in the Roman days is they would get close to retirement and they'll go, we're gonna pay you an annuity for the rest of your life. We have one last mission for you. We're trying out these new wood swords, and we want you to go to the front line and go rush those guys with all the. They're dead. I knew what he's done. That's what they. I bet you that's what happened.
They might have maybe.
Okay, so I think we're done, right?
Yeah.
Beat this horse to death. But it goes back to what I've been saying. Purpose of the money. It's more important than anything else. So I hope this helps you. You have a great day. And as always, happy selling Sam.
