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An interview with Matt DiGangi, Head of Annuity Distribution at MassMutual Strategic Distributors
In 2022, the bond market turned in its worst performance in more than two decades.[1] For investors upset by losses in what they considered to be the safe, conservative portion of their portfolio, adding insult to injury were the potential taxes they had to pay on the interest income they received. Recently, WealthManagement.com sat down with Matthew DiGangi, Head of Annuity Distribution at MassMutual Strategic Distributors, to discuss how advisors are responding to the new fixed-income environment and what they are doing to help clients. His comments below are edited for space and clarity.
How are the advisors you speak with meeting the challenge of the current bond market’s volatility?
Most investors don’t really understand that bond prices vary inversely with interest rates. Advisors can explain how that works, but the truth is that most investors, until now, have only experienced an unusually long bull market in fixed-income investments. Unless you lived through the 1970s as an investor, you would have no first-hand knowledge of what happens when interest rates rise for an extended period. Last year, investors saw how steadily rising interest rates affect bond prices, and they weren’t happy. To address investor concerns, and as a substitute for a portion of a fixed-income allocation, many advisors are turning to what is often an overlooked solution that offers tax advantages and stability: a deferred fixed annuity.
How does a fixed annuity work?
In exchange for a sum of after-tax cash dollars, the annuity purchaser receives a guaranteed fixed return over three to ten years. Currently, a three-year fixed annuity yields over 4%. Because the annuity contract is an insurance policy, those returns grow tax-free. Taxes are due only when the money is withdrawn. And on top of that there is a death benefit if the annuity has a balance at the time of death.
What do you say to advisors who might shy away from a fixed annuity because they feel they are not insurance experts?
Many advisors steer clear of “annuities” because there are many types of annuities and variations within each type. Annuities can provide very attractive benefits, but some are complex. A fixed annuity, however, is one of the most straightforward types of annuities there are. Clients usually understand their appeal very quickly, and advisors need not be an insurance specialist to explain the product to clients.
Which clients are most receptive to the features of a fixed annuity?
Traditionally, the product has been most appealing to investors in the 55-to-70 age range. In fact, pre-retirees and retirees have been the prime market for fixed annuities for so long that advisors often believe that younger investors would not be interested in them. However, the results of several surveys[2] we conducted recently show that 45-to-49-year-olds are quite interested in fixed annuities as a fixed-income alternative. Advisors typically estimate that only 4% of those in that age group would be highly interested in fixed annuities, but our research shows that 37% are highly interested and 58% already own one. Advisors often don’t believe the interest is real until they bring up the subject and find that many younger investors like the idea of building wealth in a tax-advantaged way that is not correlated to market performance.
How much of an allocation to a fixed annuity is typical among the advisors you speak with?
Of course, any specific allocation depends on the needs, objectives, financial position and risk tolerance of the investor the advisor is helping. But if an investor has some Treasuries or municipal bonds in their portfolio, whether in the form of individual bonds or a bond fund, a fixed annuity could be an alternative to some of those investments. An allocation of between 20% and 30% of the fixed-income portion of the total portfolio is a range that many advisors use when suggesting a fixed annuity.
Any takeaways?
For investors, regardless of age, who have an ample cushion of liquid funds to meet unexpected expenses, a fixed annuity can be a welcome addition to the fixed income portion of their portfolio. It’s a product that is easy to understand and offers competitive, guaranteed returns that are tax-advantaged. Many investors don’t know what the benefits of fixed annuities are and would likely find a quick overview from their advisor helpful.
Learn More:
- Dive deeper into Why Clients Need Fixed Annuities in their Investment Portfolios
- Visit MMSD.Massmutual.com or call us at 1-866-481-2343
- For more thought leadership, follow MMSD on LinkedIn
[1] Source: https://www.morningstar.com/articles/1131213/just-how-bad-was-2022s-stock-and-bond-market-performance]
[2] 2022 MassMutual Fixed Annuity survey
MM202602-304214
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MassMutual has engaged WealthVest to provide wholesaling services. WealthVest is not a subsidiary of MassMutual and wholesalers are not MassMutual employees. Annuity products are issued by Massachusetts Mutual Life Insurance company (MassMutual) and C.M. Life Insurance company. C.M. Life Insurance company, Enfield, CT 06082, is non-admitted in New York and is a subsidiary of MassMutual, Springfield, MA 01111-0001.
