Volatility Control Indices have become the new buzzwords in the fixed indexed product world. According to recent data from Wink, Inc.’s AnnuitySpecs tool, there are 78 indexing options that include volatility control. We get overwhelmed on a daily basis with back-casting and other statistics stating how well these various indices would have returned in the past. So, is the concept of volatility control an enhancement to this great product or another confusing variant?
First, a quick primer on volatility control. The simplest way to think about volatility control is to view it as an allocation strategy between the underlying index; which can be an index such as the S&P, Dow, Russell, et cetera; and a fixed account. Each volatility control index option has a stated target level of volatility for the index. This target determines the amount of the index’s fund that is allocated to the underlying index versus cash. The higher actual volatility is, the more of the fund that is moved into cash, the lower volatility is, the less that is in cash.
Volatility, which is a measure of how the market feels about the level of uncertainty in the future, is the driver of these strategies. VIX, which is the primary measure most often cited, recently spiked. When that occurs, a larger part of these particular strategies’ funds is moved to cash. And we all know what cash is earning these days – not much.
The concept is to protect the value of the funds in the index when the markets are very topsy-turvy. However, remember that the FIA already has some type of reset mechanism that protects the downside. Given that FIAs already have downside protection, do you really need another layer of protection? I think this is an excellent question. The volatility control index likens itself to being a belt and suspenders approach to FIAs.
There are a myriad of strategies out there, and none of us is able to predict the future with complete accuracy, so it is difficult to know which of the strategies available are the correct ones to use. I believe the focus of the sale should be more about choosing the right carrier and/or product rather than crediting strategies. Work with a carrier with renewal rate integrity and transparency. Don’t become the “stock picker” of FIA’s crediting strategies! I advise clients to allocate to a few basic crediting strategies and stick with it.
The insurance industry is really good at taking a wonderful concept, such as indexed annuities, and making it much more complicated. Fixed indexed annuities (FIAs) are one of the most powerful financial products in all of the whole financial industry. FIAs protect principal, provide growth opportunities with downside protection, and offer retirement income that cannot be outlived! If you want to cut through the hype and get down to real value for your clients, call us at Davis Life & Annuity. We have over 35 years of experience doing the right thing every day!
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