Episode Transcript
[00:00:00] Hello and welcome everybody to the Annuity Straight Talk podcast. Episode number 211.
[00:00:06] I'm your host, Brian Andersen, founder and creator of AnnuityStraightTalk.com People in the Background, Jeremy Case and Leandra. Very integral into the product that you see. They all help me get the information out there. Appreciate their help and messages. Say thanks to them as well because they're probably the reason that you're here and getting such great service along with my efforts.
[00:00:28] Gonna cover a topic today that is very important. I've done it in the past and I'm doing it under a different title. Sometimes I get these cute ideas for titles. Hey, this would be a cool title. And nobody really gets it. So this one's straight to the point. Volatility Control Indexes on Fixed Index Annuities. Please, like subscribe or comment on any of your favorite podcast platforms or on YouTube. Short share it with your friends, your advisors, your confidants. Anyone you think might be able to use the information or provide a different point of view would be great. And then let me know. I can clarify or strengthen the argument, whatever it is. This one's going to tie hand in hand with what I did last week about bonds.
[00:01:11] Got a lot of good feedback on that very important topic, in my opinion. So let me share my screen. So I've got a visual aid. There's a newsletter on the website, goes out with this video every Saturday. You can jump the gun, get on YouTube or just. I think you subscribe on the website as well. Notifications, and it says right at the top, four minute read. If you want to chat with me about any of your issues, take a look right here, top right corner of any page on annuitystraighttalk.com schedule a call, get on my calendar. Okay. Volatility Controlled Annuity Indexes. If you own an indexed annuity or if you're considering buying one, you gotta listen to all the information here. It's very important.
[00:01:56] Hundreds and hundreds of people have come to me after the fact I bought one.
[00:02:02] They want to know why they're not earning as much as they had been promised.
[00:02:06] Giant numbers projected. The last one of these I did was over two years ago. It was called Crazy Annuity Indexes. Now I've used these for illustration. I've sold some too. But I never did it with outlandish expectations. And I've known how these things work from the beginning. I explain how they work. I don't just say, look at this new guy a couple weeks ago he said, hey, I was told 10 to 12%. And the numbers look good on the illustration.
[00:02:29] And he was averaging about 3% after two years. Didn't really like it. Was wondering what the heck was going on. Now I looked at the contract, I could tell that what he earned in interest was about what he should expect. That's how the contract was built. And the contract was doing okay.
[00:02:44] But he had been promised a whole lot more. It was an income contract based on performance. So 3 to 4, you know, maybe 3% means his income was increased by 5%. That's how they work. I think the annuity is doing just fine. His expectations were out of whack. I'm going to start throwing this disclaimer in here. For the purposes of this letter and this podcast and other similar.
[00:03:06] I am not talking about all agents and financial advisors who sell annuities or otherwise. It stands to reason that I'm mostly hearing from clients of salespeople who don't know what they're doing and don't provide very good service and explanations. The clients of good advisors are getting the answers they need and obviously don't need to seek explanations from other professionals almost all the time. When I do this, I get a couple of guys be like, hey, I don't do that. I know you don't. Not everybody does.
[00:03:36] Clearly. If they're searching online to try to figure out what it's not being explained by the advisors, if they're doing research and they got to get a hold of me to answer a question, then obviously it's probably because they work with a deadbeat. But that doesn't mean it's everybody's a deadbeat. Okay, so these kind of agents, the deadbeat ones, not the good ones. Like you guys listening to this. Of course, and everybody listening. This has a good advisor who's explaining all these things. Right? That's why I have to do it. Just to pat everybody on the back for a great job. No, I'm kidding. But there's a lot of guys out there that aren't working that hard at it. They kind of disappear when this happens. Guy who called me just needed some advice. So he never should have bought the contract with such high expectations. Agent didn't explain it. Property went through the easy, hey, if it looks really good, maybe he'll buy it. I'll make some money. It was a sizable contract.
[00:04:20] Agent went for big sale, sky high expectations. Two years later, doesn't really want to talk to the guy because he's going to have to eat crow. Now I'm not going to criticize anybody because I know exactly how this happens. The agent trusted the wrong person and didn't do his homework. It happens to all of us. My first bad experience came shortly after I started the website. I lost sales because of it. But I never put a consumer in a bad contract.
[00:04:44] There's always somebody else that gives us the idea to sell. That's why true independence is important, because I kind of take what those guys tell me with a grain of salt.
[00:04:54] So the agents aren't the ones that come up with, oh, this is 10, 12%. It's their wholesaler that's telling them that's what it's going to do. And the wholesaler, like, nameless, faceless. You don't see him. He's got no skin in the game. He just makes money if you buy it. How commissions affect annuity sales. Done that a couple of times. Go look at it. My buddy Nate was on there last year because he used to work as one of those guys.
[00:05:15] A lot of unique information on this podcast, to be honest with you, about this industry and how to navigate it. So you make the right call, right? And then somebody out there is going to take this, oh, that's a good topic. And then somebody else is going to run YouTube videos with the same topic and just steal all my stuff. So now, back in 2015, maybe a little bit earlier, insurance companies introduced blended indexes to fixed index annuities, Volatility controlled indexes. They were new and different and most people had never heard of them, yours truly included. Now, the reason it started is because rates were really low back in 2014, 15, 16, and the options on the S&P 500 were expensive. So they had no interest earnings on the annuities. So they couldn't take the interest earnings and buy much of an option on, say, the S&P 500 or the Dow Jones. They had really low cap and participation rates on the standard equity indexes that you guys know and see every day. If they put volatility controls on blended indexes, it creates slower moving index values and more consistent pricing on options.
[00:06:13] An insurance company could put a high cap or participation rate on a blended index. That looks like a really good deal. Participation rates of 100% or much, much more in some cases made consumers feel like they're getting a no risk way of matching market returns. And it couldn't be further from the truth. In the past, guys who say, well, you have a hundred percent on yours. I found an index that's got a 230% participation rate cooler heads prevail. Common sense is king. If it's got a 200% participation rate, that index probably doesn't move very fast.
[00:06:47] You're not getting 200% of what the market does. You're getting 200% of an index. It's not bad. You just have to understand it, understand the conditions that need to exist for that index to do well.
[00:06:57] So we've got to explain risk controlled indexes so that if you're buying one, you know what you're getting into, when to use it, when to not use it. And the sales literature from the insurance companies kind of, it's all real positive. Oh, we limit the volatility so it doesn't drop as far when the market drops. Well, it just also doesn't rise as much when the market rises. It's a very similar idea to limiting volatility using cash and bonds to offset market investments in just a regular investment portfolio, but it's in an index that's tracking for your annuity. So most of these indexes use bonds or Treasuries for the cash component. If you remember what we did last week, that means the fluctuations in the value of those assets will affect the index return over time.
[00:07:38] If the safe side of the index can lose money, then total returns are not just as simple as watching the market.
[00:07:47] You got to worry about interest rates too. So if the market drops in the middle of the year and then climbs back out of it and is positive, that was limited by its risk control mechanism and the cash component that they use to control the risk. And likewise, in some cases the market's down, but the interest rates were in a position inside that index where that index is actually up. It can be a good thing. It's not just bad. You just got to understand it. When volatility in the market is high, the index shifts money to the safe side to limit downside risk and it also limits upside growth.
[00:08:17] The index may keep assets out of a falling market, but in doing so is exposed to fluctuations in interest rates. Because if all the money's in the cash component, the bond or the treasury, then what happens is going to depend on you miss the market, but it's going to depend on changes in rates.
[00:08:34] So now you have two variables that either limit or enhance performance.
[00:08:37] It is the behavior of the bond side that is rarely explained and a lot of time that makes up the largest allocation in the index. I'm going to explain why that's the case. So risk control factors are the final piece of the puzzle. Everybody asks what it means when they say an index name. I made this up. XYZ Equity max risk control 5%.
[00:08:57] So the 5% is a target amount of volatility for the index. Stock exchanges continually calculate the level of volatility present in the market and they express it as a percentage. The Vix is a volatility gauge for the S&P 500 run by the Chicago Board of Exchange. It's the only one I really know about, but it's prevalent in the markets and it allows professional traders to gauge return expectations based on risk in the market.
[00:09:24] So professional traders use it to determine how they're going to participate in equities markets and make their trades. So let's say the Vix is showing a 20% volatility level in the market at a given point in time and you have an index with a 5% volatility volatility target. That means that only one quarter of the index will have exposure to the equity or the stock side. The rest will be sitting on the bond side, which means that your returns will more closely resemble a bond portfolio than a stock portfolio. When you put it all together and do a little thinking, then it starts to make sense. These indexes were all created recently, have no real track record. Doesn't mean they're bad. You just have to understand and most of it is just don't. Oh, if it was created last year and they're giving you 10 years of historic performance, that's not real, that's hypothetically back tested. Yes. They assume the index was operating the past and project hypothetical performance based on that.
[00:10:16] It's not worth the paper it's printed on because I could back test a thousand dollars to last week and have a million bucks now, probably find something that went up in the past. And if I had a time machine, knowing that you have an often limited exposure to stocks and a forced bond allocation, you need to know how both of those perform in the past to take a guess as to whether economic conditions will repeat themselves in the future. It is a strategic play. If you expect a lot of volatility in rates to drop, then those are good indexes to be in because they're gonna have mostly bonds that are going to increase in value with the interest rates dropping. That's where it happens again. It's just another piece and another thing to use. It's not anything to say, oh, I'm never doing that. Some companies are now running illustrations that go back 15 years for hypothetical numbers.
[00:11:01] What did we have during that time? We had high Volatility, meaning those indexes weren't exposed to equities a whole lot. The stock market exploded, so people can assume big returns, but we had consistently falling interest rates. We had it from 2001 all the way through 2016. It ticked up in 2018, stayed level 19, early 20, then they dropped a ton, and then in 22 they shot back up, rose through 24, and they've kind of stayed more or less stable since then. Those movements in the interest rate markets are largely going to determine how those risk control indexes do or in, you know, in a lot of ways they will. Now, if you're looking at an illustration that was run 15 years ago, started in 2010, some of those numbers are going to look real good. And it's more because of the bonds and the equities.
[00:11:52] If those conditions don't repeat, then you're going to have yields, you're not going to have yields anywhere close to what was projected on the illustration.
[00:11:59] For the past three years, we've had more or less steady rates, high volatility and a good stock market. High volatility means very little of these indexes allocated to the stock side. And flat rates means that the bond side didn't do a whole lot either. So the index is spelled flat and everyone that bought with high expectations based on what happened in 2008 or 2010, like, where did that happen? Okay, well, we need to be able to explain it, and that's why we do this.
[00:12:21] If an index didn't perform, then we just. We need to know why.
[00:12:25] I got burned with one last year on the Nasdaq. And NASDAQ dropped in March and April last year by a lot. And then it climbed back. Well, the risk control index climbed back to about level, didn't return much even though the Nasdaq was up 8 or 9% at the time on the year. I'm not saying to avoid these altogether. They're good to have as a part of it. But do not bank on having 10 straight years of incredible performance.
[00:12:49] In most cases, an S&P 500 allocation will do just fine for you. And understanding the conditions required for success using it when the outlook is promising will give you a better chance of that. Ideal conditions would be low, the average volatility in the stock market and static or slightly falling interest rates. If you have a sharp drop in interest rates and you might see big yields that happened in the COVID crash we had some of these indexes were up 15% when the S P was down 30. It was pretty Cool. That's when interest rates dropped to near zero for in a short period of time. And a lot of the volatility controlled indexes increased in value substantially.
[00:13:23] Now you know how that happened and then you got to wonder how likely is that to happen again? It might happen again, but it's short time. I mean you're going to get one year of that. That's going to be good. A lot of the available blended indexes use a 5% volatility target.
[00:13:36] You're going to see the rates, like the participation rates and stuff are going to stay static because they're pretty consistent pricing options. There's not a lot of volatility in the index. Some of them use volatility targets up to 12%. I just saw one that uses a 15% volatility target. I think average on the Vix is 1012, maybe 15%. So if you got a 12% volatility target on an average volatility level in those markets, you might have near equity based returns and then you got a participation rate on it. But on the 12% where there's a lot of movement, you're getting a 50, 60, 70% participation rate. On the 5% volatility target, you're getting 120, 150%. Now the lower volatility indexes like the 5% should be used for conservative projections. And yes, you can have a big year here or there. Don't expect it happen 10 years in a row like some of the illustrations suggest.
[00:14:26] Do your homework and ask difficult questions of any salesman you meet. This should be required of anybody looking at buying an index annuity. If the advisor trying to push you into a product gets defensive, then you probably need to go work with someone else. And that happens quite a bit.
[00:14:41] How could you challenge me? I am a fiduciary. Maybe I'll cover that one again next week. Got one ready for you. We got to talk about fiduciaries again. You want straight talk, no BS solutions to your problems, answers about how these things really work and full disclosure. That's what I'm here to do. Get on the calendar, top right corner of any page on annuitystraighttalk.com this has been episode number 211, volatility controlled annuity indexes.
[00:15:07] Important topic. Just laid it all out for you guys. Thank you guys so much for joining me. Look forward to seeing you again next week. For episode number 212, we're going to keep rolling here in 2026. Love to see you here. Thank you so much for everything. And I can't wait till next week. I'll be here and I'll see you then. Have a great day. Okay, bye.
