Tim Beauregard, CFP® RVP-South

While bonds have traditionally provided a source of stability for portfolios, acting with little or no correlation with volatile stocks, they may be less effective going forward. Fixed-rate bond prices generally drop as rates rise, which has exposed clients to loss of principal and poor total returns.

As recently as 2018, the last time the Federal Reserve raised rates, the Bloomberg U.S. Aggregate Bond Index turned negative. With inflation at a level not seen in 40 years, we saw Federal Reserve increase rates. And if history repeats itself, bond funds will continue to see the same negative returns.

FIAs can be a solution that fits a wide range of end-user needs. Of course, in no case would 100% of a portfolio be right for a fixed index annuity, but a decision to move some percentage of client assets into an FIA could prove beneficial to clients now and down the road.

A traditional 60/40 portfolio, with 60% in stocks and 40% in bonds, has been a common asset allocation for decades. There are several ways in which advisors can use FIAs in rethinking the 60/40 rule.

For example, an advisor working with a relatively aggressive investor could substitute an FIA for bonds or bond funds as a portion of the conservative part of their portfolio (part of the 40%). This would give them greater accumulation potential, as interest is pegged to a stock index and not interest rates. Meanwhile, an advisor working with clients who already are retired or who have a lower risk tolerance can use an FIA to replace or reduce exposure to more aggressive investments out on the risk spectrum that have most likely accumulated substantially over the past few years. This can help bring their portfolio back to an overall equity to fixed income ratio in line with their risk tolerance (back to 60/40 or 50/50, or even 40/60 for those already in retirement who have a shorter time horizon).

The advantage is that a client can have a portfolio with a higher weight on fixed income/conservative investments and keep some upside potential with FIA returns that are pegged to a market index. This could be a beneficial approach for those who don’t want to take the risk of a pure stock fund but still want some accumulation potential that is related to how equities perform. For the advisor short term fixed index annuities offer trail commission options up to 1% per year keeping AUM revenue intact while rebalancing the client.

In summary, fixed and fixed index annuities can be a smart option for advisors to make available in their practice, especially when considering: The interest rate environment and outlook and the stock market environment (volatility has increased recently).