In the 1890s, caramel was the candy of choice in America. Charles Hershey, however, had a vision that chocolate could capture the taste buds of America. The rest of the Hershey candy story is history. The same holds true of Fixed Index Annuities (FIAs). Despite a year in which this emerging savings tool was challenged by a stellar stock market, regulatory challenges and an inverted yield curve, FIAs still provide a viable alternative to laddered CDs, bonds, bond funds and even the fixed component of a Variable Annuity (VA) asset allocation model.

In the 1980s-‘90s, the fixed annuity and variable annuity were captains of industry until interest rates began plummeting in the late ‘90s and the equity markets collapsed in the early 2000s. During these two periods, sales of FIAs, which were inappropriately called Equity Indexed Annuities at the time, took off.

Much of the perception about FIAs comes from advisors who inappropriately positioned FIAs as an equity substitute. These advisors’ actions have drawn the scrutiny of regulators who correctly sensed 1035 activity from variable products and individual securities that some advisors may not be licensed to sell. As Bob McDonald, founder of Life USA, Allianz’s predecessor company in the United States, has observed – the FIA was designed as a hybrid alternative for savers and not investors. If utilized correctly for savers, the FIA can be a powerful supplement to a number of fixed products that include laddered Municipal Bonds and Government Obligations as well as CDs.

As a young wholesaler at Nuveen, a tax free unit trust provider, I watched financial advisors in the early ‘80s lock their clients into fabulous double-digit tax free rates on 20-year duration trusts, only to see most if not all of their bonds in the trusts get called away in the next 20 years. Clients were forced to reinvest their proceeds at substantially lower rates and pay capital gains taxes. Since many of the bonds had call provisions at prices much lower than the market value of the bonds in the trust at the time, clients could not even reap the full value of the bonds.

Government backed securities present a similar dilemma for the advisor because as interest rates fall, homeowners refinance their mortgages and principal is returned to the saver at lower rates with increasing amounts of principal returned to be reinvested at lower rates.

A FIA laddered portfolio can be set up to provide a steady stream of tax advantaged guaranteed payments and still be sensitive to the client’s lifestyle changes, dynamic interest rates and economic outlooks.

The following chart demonstrates some of the advantages of a laddered bond portfolio compared to a laddered FIA portfolio using 5, 7, and 9-year walk-away products with no forced annuitization.

Plus, FIAs are not the inflexible tax vehicle they once were. Living benefits can be turned on and off as needed to cater to the changing needs of retirees. In addition, FIAs provide the potential of a more secure stream of income because of the certainty of the IRS-imposed exclusion ratio. For example, depending on the annuitization option chosen a saver has the certainty of knowing how much of their income is taxable and how much is a return of capital or basis.

With the bond market at the end of a 30-year bull market run and rates close to 40-year lows, inflation is rearing its ugly face. How many of your clients can face the potential of capital losses from a laddered bond portfolio, even if it is AAA-rated or government backed?

With today’s volatile markets, savers and investors have two choices in the amusement park of multiple retirement options: the roller coaster and the merry-go-round. Both get your clients back to the starting point, but the merry-go-round is much more consistent with a known downside and less emotional heartaches for retirees with a shorter time frame for recovery.