MASTERCLASS: Annuities - April 2020

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  • 01 hr 00 mins 11 secs
Two experts discuss how the Coronavirus pandemic, regulation, and lower interest rates are impacting annuities. They also cover how advisors should be thinking about annuities for diversification, tax benefits and protection for retirees.

  • Adam Lalla, MBA, CFP, CLU, Head of Competitive Intelligence & Advanced Sales at Lincoln Financial Group
  • Steve Donahue, Senior Vice President, Divisional Sales Manager – Annuities at Transamerica Capital, Inc.



Jenna Dagenhart: Welcome to Asset TV, this is your annuities master class. Compared with other assets annuities are known for protecting retirees during downturns and periods of market volatility. Here to discuss diversification, tax benefits and income planning are two expert panelists, Steve Donahue is senior vice president and divisional sales manager annuities at Transamerica Capital and Adam Lalla, head of competitive intelligence and advanced sales at Lincoln Financial Group. Gentlemen, thank you for being here with us.

Steve Donahue: Thanks for having us.

Adam Lalla: Thank you.

Jenna Dagenhart:Yeah, great to have you joining us remotely for this master class. And to set the scene, I want to start with how would you describe annuities to investors and advisors who might not be as familiar with this asset? Adam, do you want to start us off?

Adam Lalla: Sure, I think I would describe it as protection on someone's retirement, whether it be principal protection and capital preservation or protection of their income, of their retirement income flow. One way you could look at it too is the content that Alliance for lifetime asset is called MUG, protecting mortgage, utilities and groceries, those essential things, being able to make sure that that paycheck is coming to their mailbox every month. And that's something they can never outlive.

Jenna Dagenhart: Yeah, how would you define annuity, Steve?

Steve Donahue:Well, I mean, Adam said it really well and in a very simple way. He really hit the word protection a lot in what he was saying. And it's interesting when you kind of talk about today's annuities versus where we were 20 years ago and a lot of the conversations we have let's say with advisors or investors, they often think back to what they may be heard about annuities from a decade ago or 20 years ago and a lot has changed.

Steve Donahue: So when we're talking about today's annuities, Adam was spot on in saying that a lot of the conversation is driven towards the ability to take hard-earned assets, whether that's your IRA assets, qualified assets or personal assets, non-qualified assets, and have the ability to invest them, whether that's in some kind of fixed instrument or a variable instrument, a series of what we call sub-accounts and funds inside the annuity for growth towards income in the near future, income down the road or even just saving for some lump sum goal, typically built off of an essential or discretionary expense. The advisor or the client may be working into their retirement income plan.

Jenna Dagenhart: And annuities aren't one size fits all. What are some creative ways, Adam, that you've seen annuities being used?

Adam Lalla: Yeah, I think annuities, we always talk about the protection and so forth, which obviously is a very big part of what annuities do, is the backbone of what it is. But there are some creative ways people could do it for asset transfers for ways of being in tax-efficient growth and ways of just more efficiently distributing the assets.

Adam Lalla: A great example, one that we do at Lincoln a lot is an idea called the dynasty stretch, and essentially what we're doing is we're taking one of our particular benefits that allows for an exclusionary treatment. What I mean by that is it allows for from day one, a portion of that income that's coming out as principal and a portion of it being gains. And rather than say, this is for one life, what will we look at it is, well, what if we named for example of a granddaughter the annuitant on the contract. So, the driving force of the living benefit of the income is based on say a five-year-old, even though, say, the grandparents are the ones owning the contract.

Adam Lalla: And what happens is, now, the grandparents are getting lifetime income based on a five-year-old. So maybe a smaller check than it would be if it was someone much older, but they're getting that paycheck maybe to supplement a piece of maybe a vacation every year, something of that nature. And then they pass away and now the parents of that granddaughter take over that contract and now they're getting lifetime payments for the rest of their life. And then eventually that parent dies of the original granddaughter who this was written on and now the granddaughter's getting those same lifetime payments that those other two generations were getting based on the life that was originally written on her to begin with and that you can just give me 50, 60, 70 years in the future going over multiple generations providing income guaranteed for life.

Adam Lalla: So that's one way... one other way I would mention is looking at trust as an example. For example, charitable remainder trust idea. Particularly when if we look at the new SECURE Act law that just went to a place where a lot of beneficiaries, non-spousal beneficiaries, might have to take out the entire asset within 10-year period and now maybe having say a charitable remainder trust as the beneficiary. Now, being able to stretch that... that comes with other caveats and lot more in the weeds than obviously I would get to for this particular call. But there are some unique ways we could use annuities for some financial plans for sure.

Jenna Dagenhart: Steve, do you have any thoughts on this topic?

Steve Donahue: Yeah, well I would say it's not as probably as complex as some of those great ideas that Adam brought to the table, but I think in it's... again, it's simplest form and we've touched on retirement income multiple times here. I think the idea of allowing a client to build a personal pension off of the annuity to compliment other guaranteed sources of income or that they may or may not ask for social security or a pension or other guaranteed sources is something we do quite a bit in the work we do with advisors and their clients. And you mentioned something a little bit early in a conversation about it being not one size fits all. We've gotten a lot more creative with, I think the development of product in this business to be able to be very specific in how we're addressing needs of clients.

Steve Donahue: We talked about creativity. We're really trying to address, I think in a lot of cases, not looking and saying we're going to take a certain amount of assets and just put them in the annuity for some kind of unknown level of income down the road, but really look to work with clients on budgeting strategies, looking at what those essential and discretionary expenses are, work through cash flow analysis and then come up with a specific strategy with a specific product set that is designed to address those needs, whether that's again, for income or for some lump-sum savings goal down the road, the strategic side of the businesses has improved quite a bit along with some of the product innovation that we've seen to allow us to get creative, a lot more creative in how we're doing individual case design for clients going forward around specific needs and goals they have.

Jenna Dagenhart: And I think a big question right now for a lot of people is why annuities and why now? I mean with this global health crisis, with the coronavirus pandemic, markets are in a panic. The economy is going way down, and a lot of people are reevaluating their approach after this record bull market is now coming to a close. Do you want to start us off Adam?

Adam Lalla: Yeah, it's funny, this question, why now? Like there's some special time to buy these products. And the analogy I can make, when is the best time to buy flood insurance? When is the best time to buy homeowners' insurance? When is the best time to buy your car insurance? If you could tell me when that event, that loss is going to happen, I can tell you the best time to buy it. Obviously, we don't know when that's going to be so I would humbly say I think that there is no necessarily right time is the time that you need that protection, that's when it's most critical.

Adam Lalla: We could look back before all this crisis and say, would it been best to protect them because now Steve did a great job talking about specific planning for retirement income, supplementing and creating your own type of pension, could it have been a good idea to lock in those gains when they were at all-time highs? That could be a great time, but also looking forward now and saying interest rates are really low because of what's been going on. The market is extremely volatile and if my sequence of return taking lifetime income could play a role there, I might... there's a very good chance I could run out of money so now is also a good time.

Adam Lalla: So I don't know if there's necessarily one good time per se, it's just, again, we don't know when loss is going to happen, we cannot predict the market. We can't predict where interest rates are going to go, we can't predict where the stock market's going to go. I think anytime where we need to protect a portion of the assets and... is a good time, to be candid.

Steve Donahue: Yeah and just to piggyback off of what Adam is saying here, I agree. I mean that would be the answer to my question of... because we get asked this a lot from advisors and from clients is when is the best time to purchase an annuity. And the most direct answer I can give is if you feel like it's now, it's now. Because when you kind of look under the hood at some of the features and how they work in various markets, the protection that we're often talking about is they're in up markets and down markets. So, a lot of investors and advisors when they're working with clients have or are often trying to time the entrance into the investment with whether it's the fear of missing or the fear of missing out on the run.

Steve Donahue: But if you look at the underlying structure and mechanism itself, any investment that comes in at inception is protected immediately. So, if you happened to invest and the market, were to turn down further from the start of the contract. And Adam was talking about sequence of returns, as that sequence of returns turns down kind of at the inception of the contract, you're protected from the start. However, if you bought this for protection in the fear of the downturn and the market cooperates and you've set yourself up with let's say a blended portfolio that performs.

Steve Donahue: We have features built into the living benefits in the contract that do allow for lock-ins of those gains over time, every company may be a little bit different in how frequently they do that. But you then get to participate in the markets, achieve those gains that you want and lock those in. So, if your fear then is that as I'm earning money, those fall back, well those are protected in locking as well. So, protection is there immediately, and protection is there over time to lock in those gains. So, if you feel, as Adam was saying before, the time is now to get in and you see the value in paying for that protection now, it's a good time to do it.

Jenna Dagenhart: And Steve, what would you tell customers, looking at other products who ask, "Why shouldn't I just do a mutual fund?"

Steve Donahue: Well, it comes back to I think what we were talking about before, it's not a one size fits all approach. We've talked to hundreds and thousands of advisors that have moved towards this goals-based wealth planning approach. So, I think one of the concerns that advisors and clients when we hear or talk about the word annuity is that it comes with this one size fits all approach to it. And that's simply not the case, my response, in all candidness, to any advisor or client would be, I don't know that you should pick just annuity over a mutual fund or a mutual fund over an annuity, let's kind of step back and look at what your goals are, what your plan is. And then look at the merits of each one of those investments on their own and how maybe they are best married together to achieve the goals you need.

Steve Donahue: Each one of those investments is going to bring some pros and some cons to the table that typically when married together mitigate a lot of those potential concerns and then add pros on either side of that. So if I'm looking at a mutual fund with maybe some of the tax efficiency or some of the cost efficiency that come with... it can be with some of those for the diversification that you can get in some mutual funds might be able to provide some more upside opportunity than annuities can, annuities can provide protection that mutual funds can't. So, I think you've got to look at both and how they both fit together in a client's portfolio to help accomplish the ultimate goal of retirement income or asset protection longer term.

Jenna Dagenhart: Adam, how about you?

Adam Lalla: Yeah, I think Steve is spot-on on this. It's funny, it reminds me of an actual continuing education course I created called annuities as an asset class. I'd rather see... and I think Steve hit this perfectly, it's not necessarily one over another, it's how do they complement each other in overall portfolio. I think Steve, you'd probably agree, we don't suggest that you put all your money in annuity versus a mutual fund. It's about being able to utilize the assets in the most efficient way possible in some circumstances. So, it's funny, this is insurance on your retirement. So, when you think about insurance, a lot of folks say, "Well, it wasn't really worth it unless my account value went to zero, unless there was an actual loss."

Adam Lalla: So think about your car insurance for a second. I mean, do we feel like we... there's just absolutely no value, nothing we get out of it unless we actually wreck our car and have to make the claim. I would say probably not because think about what your car insurance actually allows you to do. Your car insurance allows you to use your car with ease and with the insurance that if God forbid, I did get an accident, I'm covered, I know I'm going to be okay. So it allows me to feel secure that I could go drive to the store, I could bring my kids to the school, I could do what I need to do without worrying about being bankrupt because if I hit something or hit an expensive car or cause a lot of damage that I'm going to be bankrupt from it. So, I think that's what it is.

Adam Lalla: When we look at an annuity as part of an asset as a part of the piece of the portfolio, particularly when it's focused on retirement income for a second. It allows my other managed money, my mutual fund portfolios to do what they're supposed to do, grow, and grow for the future while this portion allows me to take income that's uninterrupted that I can never outlive. And that's where I think the annuity comes into play. And it's funny, there was a study put out by BlackRock called building retirement confidence and they actually did a study in this. He said, "Well, putting 30% overall portfolio into an annuity, what would that look like? And in this study on average clients set $261,000 more lifetime income out in the overall portfolio at 30% in the variable annuity with the guaranteed lifetime income versus the million dollars, not... with no money into the annuity.

Adam Lalla: Now obviously there was some cost to that, there's costs to having insurance. And on average the client had... the clients averaged $72,000 less to the beneficiary. So now those people had money left over, they didn't actually run the account value to zero but it allowed them to leverage the portfolio in such a way to maximize the income and allow it to take less pressure on the overall mutual fund and managed money portfolio to grow and grow a lot to the point where it made a lot of sense to have at least a piece of the assets into the annuity.

Steve Donahue: Jenna just... Adam touched on something there and he talks about investor behavior. I think there's a statistic we, in our side of the business, we kind of rest on a lot when we look at the idea of protection, confidence, security. A lot of what we're talking about here is built around the client staying on plan. When you look at the Dalbar survey, they often compare the average investors' performance in mutual funds relative to different indices. So, through 2018, I don't have the most recent number, I think the most recent posting was 2018 for Dalbar was that the average investor experience over a 20-year period was 1.9%. Whereas the S&P was at 5.3% blended portfolio, 60% S&P and 40% Barclay's, USAG was about 200 basis points higher than the average investor mutual fund experience.

Steve Donahue: So whichever the protection feature we look at here, whether that's guaranteed income for life, or that's principle protection or legacy planning, which Adam talked to a little bit earlier. Through some of the death benefit features on the annuity, it's going to give them, which is what a lot of investors are looking for right now, the confidence and conviction and security to stay on plan. The results are often the end results of their own individual performance in trying to kind of get out and getting or time or let their behavior drives drive the activity in their account, which oftentimes negatively works against them.

Adam Lalla: If I may add one other thing to it, that's a great point Steve, LIMRA just has done a lot of studies by having a piece of that not only allows the clients to stay on plan as you said perfectly. They feel more satisfied with the advice they're getting from their financial planner, when there's a piece knowing that that's set-in stone and they can never outlive it, they feel more comfortable and they feel more satisfied. Just like my car analogy, knowing that I have car insurance, makes me feel comfortable. If I didn't have that, I would almost never use my car. I would go 20 miles an hour down the road, terrified that I'm going to hit something. But because I have insurance, it allows me a little more freedom to feel a little more secure to use the asset the way I should, and I think we're talking the same thing here, you're allowing the clients to stick to the plan, but they feel more comfortable sticking to that plan, knowing that there's guarantees in place, right?

Jenna Dagenhart: Yeah, I mean, I think that's a really interesting point about satisfaction and building off of that, how do annuities alleviate some of the pressure on portfolios to perform?

Steve Donahue: I think, and Adam touched on this a few times a little bit, but I think when we go back to, even that personal pension conversation we had where we look at budgeting for clients and looking at how we handle both their essential expenses, the expenses we need to make sure are paid every month when they move into retirement along with her discretionary expenses. I think we need to make sure that we're looking at the entire portfolio and annuities as a piece of that entire portfolio. And what each of those investments do in trying to build the portfolio the most efficient way possible. There's no question that when you look at the benefits that come with annuities, it does in most cases come with an increased cost over some of the other investments that advisors may work with inside that portfolio with their advisors.

Steve Donahue: So there's efficiency that comes in the accumulating assets for the longer term in fee-based accounts or managed accounts or any ETFs or other choices that advisors tend to work with, and we want to make sure that that efficiency builds into the portfolio. So in a lot of cases when you have just that one asset working to try and drive that level of income and having to work to try and drive to offset those withdrawals year after year through up-movements in the market and down-movements in the markets, that puts a lot of pressure on that portfolio. When you can look at, as we briefly touched on before, so maybe segmenting out some of those specific essential needs and addressing some of those guarantee features that the annuity provides both in growth rate and income for life on the back end, you can really back into the goals in an efficient way by kind of offsetting those specific essential needs with just what's needed to go inside the annuity to allow the rest of the portfolio to move into those other more efficient accumulation assets to drive portfolio values higher for the longer term.

Steve Donahue: So that's the kind of things that we think about when we're doing case planning with this but with clients, is not just how do we get more into the annuity, but it certainly how does the annuity complement the other investments that we've talked about before? What's the most efficient way to accomplish the goals? And can you use tools like annuities to do that with those essential expenses in a really strategic way?

Jenna Dagenhart: Yeah, and you raise a great point there. I mean, Adam, how should advisors be thinking about annuities as for diversification? You've both raised the point that it doesn't have to be all or nothing with annuities.

Adam Lalla: Yeah, I mean you could look at it in three different buckets. One we already... we discussed was income planning. We're having a piece that to drive the income, therefore allowing my mutual funds and other assets to grow or take less pressure off of them by market fluctuations because I'm taking less out of those assets because the annuities providing them the bulk of the income, that's one, we already talked about that.

Adam Lalla: But I would think also for tax efficiency too, if you think about a well-diversified portfolio for a minute and we all, most of us have our securities license and we understand modern portfolio theory being well-diversified makes a lot of sense. Owning some stocks and bonds and owning stocks or may be some international, some emerging markets, small, mid-size, all these different things. But we know that not all of these asset classes are created equal when it comes to tax efficiency.

Adam Lalla: For example, I can own an index that could be very tax efficient because I don't want to pay any non-qualified account speaking about this now. If I hold this for a period of time, I don't actually pay the tax until I sell it. And then when I do sell it could be long term capital gains. But in a well-diversified portfolio like bonds and alternative strategies, market neutral positions, it can be a lot of different assets that can be good diversifiers I mean, think of how volatile the markets being right now having market neutral positions or uncorrelated positions to the market could be a very good diversifier.

Adam Lalla: But a lot of those asset classes can be very tax-efficient, having you think about asset places and again, focusing a lot in the non-qualified space. Having some of those more inefficient classes inside an annuity wrapper couldn't make a ton of sense. Now I have the tax deferral of annuity. And rather than say I'm going to keep all my diversification scenarios the same, whether it be qualified or non-qualified, no, let's think about let's think strategically in place my more inefficient classes, asset class type of products or securities that I want in those more tax-deferred vehicles in the more efficient asset classes may be in something like an index account or manage money that's not going to spin off a lot of taxes year over year.

Adam Lalla: And obviously the tax bracket, all these things come into play and that's where the financial planning com comes into part of it. And lastly is the legacy planning. A little bit of that too, where does this make sense if someone is not insurable for life insurance is wanting to pass something to here's more efficiently. If you think about irrevocable trust as an example, where those can spin off, the highest marginal tax bracket is at a very, very low threshold. So, having an annuity where that's growing tax-deferred again can make a lot of sense.

Jenna Dagenhart: Any thoughts from you Steve, about diversification?

Steve Donahue: Yeah, and I would take it just maybe just a layer above that. And Adam did a great job talking about it from a kind of a tax benefit and kind of asset management diversification piece of looking at adding efficiency through the annuity portfolio. But I think you can take a step back from the idea of product allocation too and what's happened both in the asset management space. We're kind of seeing this now happen quite a bit in the annuity space so we can better identify, and address investor needs more specifically based on current market conditions.

Steve Donahue: And I think if you look back, I said, if you went back to what annuities were 10-20 years ago, they were tax-deferred investments that often protected from a legacy perspective and that was about it. And they did provide income with not as much flexibility. And that moved through and evolved through more of an income planning vehicle. And it's now since evolved to an income planning and principal protection vehicle, but the markets around that have caused the annuity to kind of come to the forefront and certain areas to provide benefits that some of these markets maybe we're providing 15-20 years ago that maybe aren't today. And I'll point to the fixed income market from that kind of perceived safe money outlet for a lot of investors.

Steve Donahue: If you went back to 1984, 1985, a five-year CD, and you walk into the bank and get a five-year CD for almost 12%. If you looked at nursing home confinement costs, they practically matched that number. So, we talk about managing those essential expenses. You could walk into a bank with a $100,000 and pretty much have your nursing home confinement cost paid for, with that one CD every year and know that that's there for five years. Obviously, the interest rate environment has changed pretty dramatically to where that utility of a CD in that regard isn't there. Nursing home and healthcare costs have risen, interest rates are significantly lower.

Steve Donahue: So we're looking at... both you've seen this on the asset... excuse me, asset management side where you're trying to drive returns through different sectors and aspects of the marketplace, and it's wintered itself into some creative ways of doing that. We've also seen that on the annuity side where advisors are starting to embrace annuities in a broader, along with some of that, the kind of broadening of the product allocation they're doing on the asset management side. The same thing on the annuity side, using that as an alternative to some of the perceived safe investment options that can't or don't have the same firepower that they did even 10 years ago back then. If you look at the interest rates in 2007, for example, 2008 again, you could walk into the bank and get a five year CD anywhere between 4 1/2% to 5 1/2%, not the same thing now, so where there's volatility in fixed income or even in pure fixed investments, the stability of the annuity at some of the rates that they're at has... offer a lot of advantages to advisors that are looking to broaden out their product allocation.

Adam Lalla: Yeah, and I think Steve, this is awesomely the rise of structured products too, buffered annuities as well. Because when you think about you're really looking for yield in this type of environment that even fixed index annuities where the yields are pretty low right now and other CD savings as you said, this is a way of providing maybe something to the next level where maybe you're not 100% downside protected, but even the high level of protection, whether it be 10, the first 10, 20, 30% we'll have a floor where the insurance... you're on the hook, the client's on the hook for the first say 10% of the loss and insurance company takes the rest.

Adam Lalla: But these types of products are allowing for more yield. So, you'd mentioned like when CDs used to be 12%, I have some gray hair, so I remember when those rates were around there. And now when they're looking for yield in this type of environment these products have a higher, what they call a cap reach, which is the most the client can earn. But it doesn't mainly provide 100% downside protection, but it can protect them significantly on a downturn and give them the yields that they're hopefully looking for. So again, you think about that diversification in a very specific need for a specific client, I think that's why you've seen such a rise of these types of products in this environment.

Jenna Dagenhart: Yeah, Adam, do you mind elaborating a little bit more on how index variable annuities offer downside protection?

Adam Lalla: Sure, so there's two fundamental ways that usually these things work. In a lot of cases the insurance companies will cover the first loss if you want to look at it that way. Where say the markets, they'll say, "We'll cover 10% of the first loss or 20% or 30% of the first loss." So, what that essentially means is, let's say the market's down like unfortunately a year like this year where the market's down, say 20% or so, just use the 20% is an easy number. And they had purchased this product with a 10% what they call buffer, that's usually a common term. That means the insurance company took the first 10% of a loss and in above that 10% the client would recognize that loss.

Adam Lalla: And it's usually between one-year anniversary date to another, a point to point, 2 points in time, whether it be one year, three years, or five or six years depending on the product. And essentially what it's doing is they're taking some of that loss off the table where the client wouldn't be 100% protected, but it's going to protect them from that loss. Now there are other ways of doing it where they say, well, insurance company will cover the tail risk so to speak. So where now the markets are not only use that same 20%, the client takes the first 10%. Thinking of that like an insurance deductible, like your car deductible. I keep using car insurance for some reason on this call.

Adam Lalla: You think about your car insurance where you have a deductible either $500,000 that comes out of your pocket and any damage above that you pay or the insurance company pays, that would... what they call floor. Some clients prefer that, that gives a little more protection in a very catastrophic event. So, if the market's down 20, 30, 40%, the client's only going to experience a 10%, a finite 10% loss, worst case.

Jenna Dagenhart: This brings me to another thought, Adam, is there a concern for advisors about the financial strength of the companies that you're working with?

Adam Lalla: Well, yeah, naturally so. I noticed leading the competitive intelligence team, we certainly hear... we get a lot of requests from our wholesalers asking about different companies and asking about when they're in competitive situations. And what's been coming up more often has been the financial strength of the companies. And I think it's important to understand that all these companies, including Transamerica, including us, Lincoln, including all the major companies that are out there today have been through this before. And we've learned from these things before.

Adam Lalla: If you think about our assets under management back in, say 2008, the last crisis we've been through, 178 billion versus 275 billion today, our statutory capital is nearly double where it was in 2008. So not only did these companies learn from that but we've been through this before, this is something that insurance companies prepare for and people should be aware that we actually create pieces. We actually created a piece called crisis to confidence and it basically is helping advisors understand we've been through this before, stay the course, understand that when markets recover, they tend to recover big. And if you miss out on that, that could be a significant loss to your portfolio going forward.

Jenna Dagenhart: Steve?

Steve Donahue: Yeah, I think Adam hit the nail on the head with that one, I think rightly so. And as he said, we saw this in 2007, 2008, 2009. We started in the business in '97, we saw the questions arise in 2000, 2001, 2002 as well about the solvency of the insurance company that's there. We've certainly worked through those times and have all have strong balance sheets to make sure that we can weather the storm if you're talking about protection features on contracts. And that's what a client is looking to pay for as they're looking to invest towards income or they're going to want to know that that guarantee is going to be there for them if and when they need that, especially when they're going through volatile time.

Steve Donahue: So when you're looking at things like longevity of the companies, as I was talking about a lot of the broker-dealers that we distribute our products through are going to vet those companies to make sure that they're working with and distributing the products of those companies that have seen this, have been through this and have the appropriate... the ratings and risk-based capital ratios to meet the solvency needs of any investor and advisor that's distributing product or representing their product to their clients.

Jenna Dagenhart: And Steve, you've lived through some big market events, I know you mentioned the financial crisis. How has this shaped your perspective on annuities?

Steve Donahue: It's interesting to the industry itself and also to kind of the utility, the products itself, it's changed a little bit. I've definitely seen the need having gone through that. We talked a little bit before about how it's supported investor behavior and driven a positive investor behavior to weather the storm. I mean, case in point, my mother-in-law, my father in law and my father all own variable annuities all of which are not with companies I've ever worked for before. So, it's... saying, trying to find the right product for the... to address the right need for the individual client.

Steve Donahue: In each of those scenarios and they've all had those... owned those contracts pre 2007-2008, the conversation changes pretty dramatically as you start to weather... as you start to go through those rocky points. You can point to the statement on those... you can still point to the values and the statement referencing the guarantees, it makes them feel easier about staying in and moving forward. And as I've said before, staying on plan. It's also been interesting to see how that the product development has evolved through those changes and needs start to arise or new needs start to arise for a certain demographic that's hitting that point when those maybe downturns or challenging times set in.

Steve Donahue: So as I was talking about before, pre 2007... pre 1999, 2000, 2001, I think a lot of investors were using this as, on a variable annuity side specifically, tax-preferred investment with protection for beneficiaries. Once we went through that downturn, the tech bubble and 9/11, I think there was a lot of consideration and ask from the public for protection for themselves to actually use the asset. So, as they're investing and looking to build legacy planning, it was nice to have protection for a beneficiary, it would be nice to have that protection in place for themselves if they were ultimately using this in their IRA for long-term retirement income.

Steve Donahue: So those features evolved in this business moving to income benefits and guaranteed minimum withdrawal benefits really through 1997-1998. Those gained popularity through that time. And as Adam touched on before is we can move through some of the volatility that we saw through the election around 2015 and 2016, the business itself got a little more creative moving and kind of splintering off to more specific and I think more flexible investments, not just on the income side but looking at principal section through a buffer and structure products. Those have gained tremendous popularity as well as an increasing utility of fixed index annuities. That became more flexible both on the investment and index side that they were working with cost liquidity.

Steve Donahue: So it's nice to see, as you kind of walk through this, that the industry is really responsive to the needs of the advisor and their clients at the time to bring new solutions to the table, as that particular demographic or those that are looking forward, maybe bring new needs to the table. But going through each one of those scenarios, on a personal note I was able to witness firsthand through family members the ease and calm and security it gave them to stay in the market to stay on plan. And ultimately as the market turned, they were rewarded with tremendous gains for the next five, six, seven, eight years following those downturns.

Jenna Dagenhart: Yeah, and then Adam, I mean, building off of that, what kind of trends are you seeing in annuity product design and innovation?

Adam Lalla: Yeah, just to echo Steve for a moment. I mean, I had a very similar experience. I was a financial advisor for the first 10 years of my career and I actually had a client or a family friends, I'm still good friends with them, thank me for using annuity because unfortunately they were bought right in that unfortunate time in 2007-2008 and saw the market take a significant dip and now yet another dip. There, unfortunately, that account will run to zero, but that lifetime payment will not, it's going to continue on until both of them pass on.

Adam Lalla: So I think the original question was what my thoughts, so my thoughts have always been the value's always been there, but I think Steve had a great point, the evolution of these things have become very specific to a very specific need where you typically would see companies offer one type of annuity with one type of rider maybe. Where it doesn't always fit a lot of different needs for a lot of different clients where now things are becoming much more nuanced and well-diversified. Whether it be, as Steve pointed already, maybe it's a structured product to protect principle or to try to get some gains. Maybe it's 100% downside protection with a fixed index and use that as maybe a fixed alternative to the fixed income portion of my portfolio. Maybe it's looking at lifetime income. Supplementing my retirement.

Adam Lalla: And whether it's... and Steve, you mentioned this in the beginning whether it be for immediate income, more immediate income or someone who's waiting to take income maybe 5-10 years down the road and there's products that are designed more specifically for that need versus the ones that are more specific to a more immediate income need. And this way the financial planner with their client can hone in on exactly what they need and meet that need specifically custom-tailored for them. And that's where I think we've seen a lot of evolution.

Jenna Dagenhart: The right product for the right person.

Adam Lalla: Exactly.

Steve Donahue: Yeah, and I think technology is going to play a big role in where we go with product going forward. I think Adam is 100% correct in that. The tailor ability of product going forward is going to see some tremendous change. I know that there's a lot of insurance companies investing millions of dollars into new platforms to help design product and build experience with client that is really tailored to the individual. We often talk about that 10,000 baby boomers that are retiring every single day. The reality is that those 10,000 baby boomers is very different from one another.

Steve Donahue: And they're going to look for and need something different out of the individual retirement income or principal protection product that's out there in the marketplace. And the industry, while it has evolved tremendously and continues to bring more creative solutions to the market, there has been to some extent an offering that is everybody gets this now. So it is, as a particular day to maybe offering a 5% guaranteed income for the rest of your life, a 6% income, a certain amount of principle protection, whatever it may be.

Steve Donahue: I think what you can do through the improvements of technology, which will lend itself to creativity and building product will allow that client to have an experience with their individual product to be much more tailored. So, if we're talking about guaranteed growth towards a benefit base for driving income, what do you need and what are you willing to pay for that versus saying, here's what it is and here's what it costs. How much income do you need today? How much do you need five years from now? Does that change? Can it change? And do you have a mechanism to change that? That's going to change as well. And in terms of investing, how much risk are you willing to take in investing and what kind of costs comes with that?

Steve Donahue: So like I said, I think the industry's done a great job in putting really tremendous product out in the market considering the low-interest rate environment. I think the next step in this is the tailor ability of those solutions to very specific client needs a one by one basis.

Jenna Dagenhart: And Steve, you bring up technology, which brings me into my next point. We can't ignore the elephant in the room here, it's a virtual environment now. What are you doing to help people given this new virtual environment?

Steve Donahue: Yeah, it's a great question. I think everybody expects to be in this new normal of the virtual world for a little while. And I think you kind of, again, step back and kind of look at the source of that. So, it's not just providing platform for being able to reach to clients, but it's the enhanced communication and resourcefulness that I think the organizations need to bring to clients right now. I genuinely think that this is going to probably change the industry quite a bit as we kind of get a little more comfortable and settled into the world of virtual meetings and virtual conversations.

Steve Donahue: But I know that from the standpoint of Transamerica, we're doing a lot to be able to reach out to clients right now through the virtual world that may be in the form of a web meeting where we can get face to face with some of the content and intellect, the leaders of intellectual capital at the firm in-house, for example, we have an advanced markets team with various attorneys that can work on some of those... work on tax situations and case studies. We also have a health director as part of our wealth and health branding initiative, Dr. Bill Lloyd, who I know has been doing every day, a virtual meeting with advisors to keep them up to date on COVID-19. Look at that from the medical perspective and also give some insights into the financial side of that as well.

Steve Donahue: Tom Wald, who's our chief investment officer with Transamerica asset management, has been doing the same thing; been very vocal in through conference calls and in through virtual meetings making sure that our investors and our distribution team members and our advisors are in the know with what our perspective is on the markets, providing commentary through email as well. So we're trying to, in this environment over-communicate where we can with tact, of course, understanding that everybody, I think, is trying to do the same thing, but making sure that our clients are the advisors and producers that we work with on a daily basis as well as our own internal team members that are having those conversations with those advisors are well educated on what's going on.

Steve Donahue: We talk a lot about kind of comfort and confidence and security. I think a lot of that comes with that communication. And then beyond that it's also making sure that we're letting them all know about the resources that we behind them. Like I said, we have a great advanced markets team that can talk through this environment, both from a wealth and health perspective as well as working on various elements of the business that might be presenting themselves. Whether that's SECURE Act, Reg BI, CARES Act things like that, that the questions are coming up through this environment that still need to be answered, I can do that.

Steve Donahue: And then we partner with a firm called Luntz Global, Frank Luntz who's a well-known pollster often seen around the campaigns. He's the gentleman with the dial and a focus group that says what they think about that. He has built a whole platform for us on how to communicate most appropriately with clients so that they receive information the right way, looking for positive messages and it's really important in a time like this where we start looking and making sure advisors know that resources like that are available to them because not just communicating, but communicating the right ways at a premium right now for the industry, quite frankly.

Jenna Dagenhart: Really difficult to overcommunicate right now. And Adam, turning to you, what kind of value-add services do you have for advisors in this new virtue environment that we are living in?

Adam Lalla: Yeah, extremely similar to what Steve said. In fact, the event sales team forwarded it to me. So, they are doing exactly what Steve is talking about. A lot of stuff on what's going on today is SECURE Act, CARES Act, just other unique ways of looking at annuities as a financial planning resource. And again, I think it's important to understand too in a tactful way too, right? We were talking to of people's situations as well. One thing we've done to make a step further we're actually offering continuing education courses virtually as well. So we're even... in fact I'm hosting several or facilitating several myself next week and then several members in our team they are going to either talk about the competitive landscape or give the event sales ideas and commentary just like Steve was talking about virtually year offer continuing education credits as well.

Adam Lalla: One other thing we did with virtual is, we mainly felt as always, they give the math and behind these products sometimes, they understand, we talked about this earlier about a piece of the portfolios annuities as an asset class. We have some virtual tools that we're really proud of right now that one that we just launched it actually shows a protected asset versus a non-protected asset.

Adam Lalla: And you basically put in your own hypothetical scenarios of what the markets has done, maybe a scenario of your fixed income portion and you putting your own fee structure. And essentially, it's agnostic tool, and it says what would my outcomes be in this protected asset with it say a 10% downside protection or a 20% downside protection versus not protected? And showing advisers mechanically, not only mechanically how it works, but showing them the value that this brings so they're able to do that virtually. Even the virtual tools we have in our... for our specific products as well. That one is more product agnostic. It just kind of shows hypothetical scenarios but then showing our actual products work where the financial advisers can manipulate that return or manipulate the accounts that they want to show and again helping them make those decisions and help them with their financial planning process.

Steve Donahue: And Jenna, one other affecting component to this is the operational side of it as well. I think the industry is making a tremendous, very quick adaptation to this world from an operational side. I mean, let's not forget that we're having... we're doing this meeting here virtually. Our wholesalers and with their advisers and advisers where their clients are having meetings virtually, our home office staff and everybody processing business is doing all of that virtually and from home as well. So I think one of the things that we talked about in terms of just the annuity business and the strides that we're making in terms of, as Adam was talking about, making sure that the work that's being done with advisers to position these top products is part of a plan to have... allow the adviser to have this conversation with client is happening every day with our sales staff and we're working with advisers to have those really efficient conversations with their clients. But the supporting of that business is all happening virtually as well.

Steve Donahue: So the industry itself is, I think, doing a great job in a very short period of time of trying to adapt their world all in an effort to help the adviser and the client take advantage of these products and services in a quick period of time that they were used to doing face to face through paper all the time, doing this in electronic format. So, I think over... really in the next few weeks, you're going to see a pretty dramatic shift in how business is being done electronically and a lot more efficiently. Maybe a hand being forced by the situation we're in, but I think everybody's going to welcome that. So, the virtual world really touches on a different side of it and the operational side of it is going to see some tremendous impact as well, to the positive I think, when all's said and done.

Jenna Dagenhart:And you both have brought up a regulation. So, digging deeper into that, what kind of impact do you think that the SECURE Act and Reg BI will have on annuities and what impact are they already having on annuities?

Adam Lalla: I think Pandora's Box has already been open a lot from the department of labor ruling that almost happened but... where the insurance companies are already preparing themselves for some strict regulations of how these things going to be utilized. And I think, as I said Pandora's Box has been opened that, I think, has evolved to the Reg BI that you're talking about and I think part of it... I think it's been more positive than negative where now we really are looking at these in a way that are the most suitable for the most... for the right client, for the right reasons.

Adam Lalla: And a lot of the broker dealers alongside working with insurance companies and investment companies have done a great job of helping navigate through that to make sure that these things are being sold and in a way that's appropriate for the client, that makes sense for the client and it also led to a lot of innovation that Steve was talking about earlier and I was talking about earlier that very specific product, very specific need for a client. And then he, Steve, he talked about the tools as well. It also evolved into the type of software’s and tools to help mitigate that situation, understand it and help make the right decisions as well.

Adam Lalla: So the SECURE Act, some folks see that as an opportunity. Our team is a little more tempered on that. We as far as the opportunity for our annuities with the SECURE Act. I think the structured products, the index variable annuities that we talked about earlier certainly might have a play when it comes to the that, particularly for those clients who we know we've got to be out in 10, right? By the 10th year the money has to come up for those non-sponsored beneficiaries for most situations. Knowing the money's got to come out, you might want some downside protection as the money's coming out and that's where maybe a fixing the index meter or index variable really might make sense and that certainly could be an opportunity for us as well.

Steve Donahue: Yeah, to Adam's point, I'd say we certainly welcome I think the idea of best interest, doing what's right and right for the client, putting them first over the interest of everybody else. And to Adam's point, I think this really has accelerated... excuse me, accelerated the drive of the product manufacturers to bring these solutions to maybe areas of the business they haven't been for. I think that if you look at kind of the fee-based role and a fee-based adviser, variable annuities or income planning through annuities hasn't necessarily been the biggest part of that world, hasn't been a big product selection point to that. A lot of that to do with statement reporting and really the planning and infrastructure between the carrier and the adviser themselves and a lot of that was pushed forward through DOL and Reg BI.

Steve Donahue: So I think we're going to start to see that these products and services through and a planning approach that we can bring with annuities is going to start to reach some new audiences. So, we're excited about that. In terms of SECURE Act, I think we're tempered as well. We're trying to kind of feel out the Act a little bit more and see where there may be an opportunity to bring some of these solutions to new markets, does it open us up to potentially look at partnering with 401(k) providers to bring protective benefits into those kinds of products versus having to kind of pull the qualified asset from the 401(k) and out to the IRA to in order to get that? But is there a way that we can start to reach some of those investors a little bit sooner in the earlier stages of income planning and maybe where we are today? So, it'll be exciting to see I think, like I said, I think we're going to have to feel this out a little bit more but we're excited about the opportunity to reach new markets over the next 5-10 years.

Jenna Dagenhart: And bringing things kind of full circle here, I know we talked about the Coronavirus pandemic at the beginning of the conversation and going back to that, I mean, how do lifetime paychecks, Adam, and income planning help people weather a storm like the one that we're experiencing right now with this health crisis?

Adam Lalla: I mean, I think it's staying the course, right? And in most cases, sticking to the plan that you've put in place. I mean, that's why you bought these products to begin with are to in these types of events. And it's sticking with the plan and not panicking. It's easy, even myself included, I mean sometimes you try to say, "Uh, try and pull some money out 401(k) put it in a fixed rate" It's the absolute... And 99% of time my humble opinion, the worst thing you could do is try at a time because we just simply don't know. It's just sticking to plan, sticking to what you did with your financial adviser, knowing that that's going to continue to come, knowing that the companies are well-capitalized and well-prepared for these events and you don't worry.

Steve Donahue: Yeah, and I just... I recall the conversation with my mother-in-law I had probably three weeks ago before we all went to self-quarantine in our houses. But where we were once again reviewing her statement and we did kind of a match between what the income payout was on her variable annuity relative to what her current needs are. And we just kind of readdressed some of those needs and complimented the pension, well, the teacher's pension that she gets and social security, and she felt confident about where she was and was okay to manage the rest of her world around what's happening knowing that, like I said, her essential expenses are covered, we can move forward whether it is. If there are some losses that we need to take, we're okay in doing that knowing that the kind of core of what I need to do to keep moving forward every day is taken care of.

Jenna Dagenhart: Yeah, and I mean, building off of that, Steve, do you think that people are sleeping better at night right now if they have annuities given everything that's going on?

Steve Donahue: I would say... I'd have to say yes. And again, case in point, I look at my only family members and we have those conversations and I receive the feedback I get from them about where they are and how that plays into what they're doing. I certainly think those with a comprehensive financial plan where annuities are part of that picture are sleeping better than those that may be trying to do it themselves. They are asking themselves a lot of questions and bringing some uncertainty to that. Again, that back in the beginning of where this is the idea that you can sleep well at night, stick to the plan and move forward towards your future goals and allow this to play itself out with a peace of mind that you're protected and doing so was what it was all about.

Adam Lalla: And Jenna, I would say you don't even have to take our word for it. There's a lot of industry leaders that have done studies on this. There's LIMRA in particular who's right in our backyard here in Hartford County, they can show you that people are satisfied. We tend to stick with their plans and they like the advice they're getting from them. They feel more secure about the advice they're getting as well. There's a lot of studies that show... that back up exactly what Steve and I are talking about.

Steve Donahue: And anecdotally we've talk to advisers who have them a part of their business. The conversations they have with clients at times like these when they can point to and say some of the protection features that are on their statements relative to where maybe some of their portfolio values are. It leads to a different... maybe an easier conversation with those clients than maybe some of those clients that don't have the same level of protection inside some of their assets.

Jenna Dagenhart: So Adam, any final thoughts from you about how annuity has help protect retirees from losses?

Adam Lalla: Yeah, I would say it's an overall piece of it. I look at as overall piece of the pie. It's allowing number one, to make sure that all your essentials are covered. If you remember the beginning of the MUG, the mortgage, utilities, groceries, those types of things, those essential things, having a lifetime income paycheck knows... you know that at least those things are being covered, that's one part of it. If it's asset protection, knowing that if the market takes a significant loss, like we just seen have a products like the structured index, variable annuity type products that protect on that downside, that means there's less years for you to recover, to get back to where you were.

Adam Lalla: Oh, but I see as the overall piece of the pie allowing your other assets that do what you need to do, allow you to do the things you want to do and knowing you could do it comfortably, know that you could take that vacation every year, you could pay your mortgage, you can do the things and stick to the financial plan. I talked about this earlier with the car insurance analogy. The reason you have a car insurance is not just to protect you from a loss, but also allows you to use the car the way you should be using it. Because without it, I would be too scared to take it out of my darn driveway. By allowing... by having these types of protection or a portion of my assets being protected allows me to work comfortably and confident with the portfolios and the plans that you put together.

Jenna Dagenhart: And in closing, Steve, any final thoughts on what's next on the horizon for annuities?

Steve Donahue: Yeah, and I think we've touched on some of this before. I mean, I'm excited to see where technology and the tailor ability of products go moving forward. I think it's an ever increasing and working marketplace for us. I think it's gotten extremely competitive over the past 5-10 years if not longer than that. And I think both that competition investment in technology is really going to allow us to bring tailored, focused, very strategic solutions to today's and tomorrow's retirees.

Jenna Dagenhart: Adam, where do you think we're headed?

Adam Lalla: Yeah, I think Steve is spot on and I think that it's going to be more integrated with technology. We see that already happening. We've seen even some other insurance carriers purchasing some FinTech type company. So, I think integration that financial planning saw cleared, is going to be key. And I think even just greater and greater tailored customization with these products. And Steve, you mentioned the SECURE Act too about having asset protection in a retirement plan. I could definitely see that as a frontier that will grow. And the other one is for advisory type financial for IRA type advisers. We see that growing significantly year over year. We have even a dedicated channel to the advisory marketplace. I could see that certainly growing as a lot of financial advisers shift to a more fee base type of financial practice. I think annuities will start to evolve and adapt to that. They already have, but you're going to see more and more of them.

Jenna Dagenhart: Well, gentlemen, thank you so much for your time and your insights and for joining us remotely for this master class.

Adam Lalla: Thank you.

Jenna Dagenhart: Yeah, great to have you, and thank you for watching this Annuities Master Class. I was joined by Steve Donahue, Senior Vice President and Divisional Sales Manager annuities at Transamerica Capital and Adam Lalla, head of Competitive Intelligence and Advanced sales at Lincoln Financial Group. I'm Jenna Dagenhart with Asset TV.