New FIA Index Outperforms Both Athene and Nationwide Indexes
To sign up for the detailed information on the new Morgan Stanley (MS) investment index discussed in this newsletter, click on the following link:
Over the last few years more and more “proprietary” investment indexes have been introduced in the FIA (Fixed Indexed Annuity) space. The question is why and how does the NEW MS index compare to others in the marketplace.
Why all these new proprietary indexes? My opinion is that companies are trying to provide something with more potential upside than the S&P 500 index, and something that is more difficult to compare when looking at competing products. Proprietary products can also create confusion for the advisor and for the consumer (which I think is the goal for many companies).
How does the just released NEW MS index work? The design is fairly simple (which is good). The asset mix used to drive returns is a mix of:
-Equity (S&P, DAX, NIKKEI)
-Rates (5-year U.S. and German treasuries, and 10-year Japanese treasuries)
-Commodities (Oil, Gold, Soybeans)
The above mix is attempting to take advantage of negative or low correlation across multiple regions and asset classes. The portfolio balances volatility contributions to ensure risk diversification. The goal is to take advantage of uptrends across asset classes and mitigate downtrends. The strategy can go risk off (moving money into low risk assets) while trying to target a 5% long-term volatility over time. (I will discuss and explain “volatility controls” in FIAs in an upcoming newsletter).
Terms of the product using this index:
-90% participation of the new MS index returns
Are the above terms any good? The best way to give an answer to that question is to compare the MS index to other indexes used in the FIA space.
Let me first tell you what the MS index would have returned over the last 10 years in an FIA. The index would have had an annual ROR of 6.72%. 90% of that = 6.05%.
So the actual account value would have grown on average 6.05% per year. That’s really good in a low interest rate environment where the annual point-to-point caps on FIAs are less than 6% (a 6% cap would yield an average ROR of 4.2% over the same time frame).
The following are a few popular FIAs that use propriety indexes:
–Athene BCA 10 Shiller Barclays Cape 10-Year Annualized Return= 10.06%. Actual Interest Earned after Crediting Method Applied= (65% of 10.06%) minus 1.50% annual fee = 5.04%
–Athene BCA 10 Merrill RPM 10-Year Annualized Return= 5.12%. Actual Interest Earned after Crediting Method Applied= (135% of 5.12%) minus 1.50% annual fee = 5.41%
–Nationwide New Heights 9 JP Morgan Mozaic II 10-Year Annualized Return= 5.21%. Actual Interest Earned after Crediting Method Applied= (110% of 5.21%) = 5.73%
So, a simple comparison shows that the new MS index would have generated the highest internal ROR over time. The only one that comes close is the Nationwide product. But the ROR is only half the story.
2008 down market? Many agents like to focus on how some of these proprietary indices would perform in down markets. If you wondered which of the indexes would have performance best in 2008, it’s the MS Index. The index generated a return of 9.71%.
Two- and three-year point-to-point crediting strategies-is it better to have a one year point-to-point crediting strategy, or a two- or three-year point-to-point? A one-year point-to-point is much better. Why? Because the gains are locked in annually. Two- and three-year strategies are very dangerous. The gains from the prior year(s) could be totally wiped out the week before the product locks in the gains.
The FIA with the MS investment index is an annual point-to-point product.
-The Athene BCA Schiller Cape is a two-year point-to-point product.
–Athene BCA Merrill RPM is a two-year point-to-point product.
–Nationwide New Heights JP Morgan Mozaic II is a three-year point-to-point product.
Fees-this newsletter is not about income rider annuities that can be added to some FIAs. It’s about how well proprietary FIA indexes can grow the “actual account value” in an FIA. Why do FIAs charge fees? Simple. A fee is needed to make the FIA profitable for the company offering it.
What are the fees on the FIA that offers the new MS investment index? Zero! (unless an income rider is added).
I’ll give you a few better than that; the FIA that has the new MS index is a 7-year surrender charge product. All of the other aforementioned are 10-year surrender charge products. Also, the FIA that has the MS index is also a flexible premium product (client can pay in new premiums in future years).
Summary-if you are an advisor looking for an FIA with an investment index that is not the S&P, the MS index is the one that would have generated the best returns over the last ten years. The product that offers the MS index is a seven-year surrender product with no annual fee (or spread) and it’s a flexible premium product.
If you are using or thinking of using an FIA with a proprietary index, you should learn about the NEW MS product so you can make an informed decision as to whether the product is one you should be offering to your clients (especially in light of the DOL fiduciary rule which really mandates that advisors selling FIAs learn more).
Roccy DeFrancesco, JD
144 Grand Blvd
Benton Harbor, MI 49022