How to help clients understand buffers and floors

One of the biggest challenges financial professionals face is helping clients navigate market volatility. It’s an inevitable factor in investing, with potential to have dramatic impact on investor confidence and financial outcomes for clients.

During times of economic uncertainty and turbulence, it’s hard to overestimate the importance of protection. That’s where risk management tools like buffers and floors can help clients mitigate exposure to market downsides.

Buffers and floors are rather sophisticated features within certain types of annuity products, such as registered index linked annuities, or RILAs. But they can take a little extra explanation for clients to fully understand how they work. That’s why it’s important to explain them clearly, so clients can feel comfortable in their investment decisions.

In this article, we’ll help you articulate the benefits and mechanics of buffers and floors in a way that’s easy to understand, and that enhances clients’ understanding and confidence.

Simplifying buffers and floors for client conversations

Understanding and explaining the technical aspects and details of buffers and floors can be daunting. Here’s how to break it down in the simplest way possible:

Start by defining the terms

A RILA is a type of annuity that can offer growth potential based on the performance of a stock market index, with a level of protection against market downturns — and that protection can come in the form of buffers and/or floors. To explain them, it can be helpful to start with a couple of basic analogies: 

  • A buffer can be compared to a shock absorber, softening a portion of potential market losses up to a specified limit
  • A floor could be thought of as similar to a safety net that prevents a financial vehicle’s value from falling below a predetermined level, regardless of market performance

Explain the operational mechanics

The next challenge is describing how buffers and floors function within an annuity.

Here’s a way to explain how a buffer helps protect against a certain percentage of loss within a RILA: Let’s assume a client purchases a hypothetical RILA with a 10% buffer, and the market to which the RILA’s growth is linked falls by 20%. With the buffer in place, the client’s loss is effectively limited to 10%.

A floor works a little differently by establishing a lower limit on how far the value of the annuity can fall, even when markets perform poorly. For example, if a RILA has a floor set to 75%, that’s the protected principal value. So if a client purchases an annuity valued at $100,000, the floor protects their investment from falling below $75,000 — even if the market takes a big hit.

It’s important to note that the measure of protection provided by floors and buffers can vary widely between annuity products. Some may offer a higher buffer percentage or a higher floor, but there’s often a trade-off, such as lower potential returns.

Show clients the value of buffers and floors

The stabilizing effects of buffers and floors benefit both conservative investors focused on preserving their capital, as well as investors who want to participate in potential market gains while having some level of protection. Financial professionals who become adept at demonstrating these benefits can help clients make more informed decisions and feel more confident in their investment strategies.

For more conservative financial clients who may be concerned about preserving retirement savings during a downturn, you might highlight how buffers and floors align with their goal of safeguarding their principal.

Wary clients who want to participate in market growth but are anxious about downside risk may benefit from learning how buffers and floors can help balance protection and growth potential. By maintaining some level of market exposure, these clients can still benefit from market gains, while buffers and floors can help mitigate losses during downturns.

Help clients understand the balance between risk and reward

As tools that can help clients mitigate risk, buffers and floors can come with the trade-off of limiting upside potential — and no strategy can completely eliminate risk or guarantee a return. Buffers and floors have their place as part of a broader investment strategy aimed at managing risk, enhancing resilience in clients’ portfolios, and helping clients stay confidently invested over the long term.

Ultimately, communicating the value of buffers and floors lies in understanding each client’s unique financial goals and level of risk tolerance. By tailoring your explanations and examples to their specific situations, you can show clients how these tools can help them achieve their goals with a level of protection that suits their situation.

Learn more about RILAs

When you’re ready to explore RILAs and their potential to help your clients navigate volatility, take the next step. TruStage™ offers RILA solutions that were created to address a wide range of client goals and concerns.

Your dedicated TruStage team is ready to discuss how RILAs can fit into your clients’ portfolios, answer your questions, and help you with information and sales support.

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