RILAs or VAs? Understanding risk and needs can help you serve your clients better.

In “The Psychology of Money”, Morgan Housel writes “Investing is not the study of finance. It’s the study of how people behave with money.”?

The potential in this concept is worth a reframe for most financial professionals. While fact finding should guide us to the appropriate solution, we frequently find (and research proves) that greater analysis should go toward understanding a client’s behavior, attitudes and emotions surrounding finances.

While personal experiences make up a small part of what’s happened in the world, they make up a large part of how a person thinks the world works. Consider how differently conversations about risk tolerance can go. Someone who experienced long-term unemployment during the Great Recession may be more cautious about risk. In contrast, someone who continued working may not be as anxious.

Experiences help drive the type of retirement savings products developed.

Consider the variable annuity (VA), fixed indexed annuity (FIA) and the registered index-linked annuity (RILA).

• VAs were originally introduced as an alternative to fixed annuities. Buyers wanted the chance to benefit from rising markets by investing in a menu of mutual funds. While higher returns were possible, the buyer was also exposed to market risk which could result in loss. As markets fluctuated, consumers began to desire more protection form market loss.
• FIAs were introduced in response to buyers’ preference for more security. These index-linked products offered some of the growth potential of VAs but with a guarantee that 100% of principal was protected from loss due to market downturns.
• Next came a demand for a product that could offer more of the growth potential of VAs, but with a level of protection similar to FIAs. The result was the RILA. Like a FIA, RILAs allow for stronger growth because interest credits are earned based in part on movement in a stock market index. And unlike a variable annuity, RILAs have features that provide a measure of protection in case of loss.

It’s important to know the individual’s annuity “comfort zone” when it comes to tolerance for risk.

This can be worthwhile to remember when trying to understand a client’s point of view. Asking questions, digging deeper into retirement goals and expectations is key. Using a risk tolerance tool can help both you and your clients come to a better understanding of how they feel.

It may also be worthwhile to check any biases you may have in recommending actions and seeing your preferences and experiences creep in. Having a proven sales approach is essential, but it’s also important to always keep your options open for new opportunities.

Are you positioned to offer these solutions?

While each annuity has a purpose and matching client type, they may not be available for all financial professionals to sell. Both VAs and RILAs require securities licensing. If you’re not currently licensed, it may be worthwhile to weigh the options of becoming licensed. While an investment in time and effort, it may be worth it for the additional opportunities for you, your firm and your clients.

?No matter what solutions you may share with your clients, having a proper understanding of their needs and risk tolerance, as well as their thoughts and behaviors toward finances are vital to strong client relationships and outcomes.