A client has a long-term investment horizon (20+ years) and is primarily focused on capital appreciation. They are comfortable with moderate to high risk. Which of the following investment recommendations would be LEAST suitable for this client?
- AA diversified portfolio of growth stocks.
- BAn aggressive growth mutual fund.
- CExchange-Traded Funds (ETFs) tracking broad market indexes.
- DA variable annuity with a guaranteed minimum income benefit (GMIB) rider.
Show answer & explanationAnswer & explanation
Correct answer: D. A variable annuity with a guaranteed minimum income benefit (GMIB) rider.
A variable annuity with a GMIB rider is typically designed for individuals seeking income during retirement and some protection against market downturns, often with higher fees and surrender charges. For a client with a 20+ year horizon focused on capital appreciation and comfort with moderate to high risk, the GMIB rider and annuity structure add unnecessary costs and complexity without aligning with their primary objective.
Why the other options are wrong
- A. Growth stocks are generally suitable for long-term capital appreciation and moderate to high risk tolerance.
- B. Aggressive growth funds are designed for capital appreciation and are suitable for clients comfortable with higher risk and a long time horizon.
- C. ETFs tracking broad market indexes can provide long-term capital appreciation and are suitable for various risk tolerances, including moderate to high.
Variable Annuity Suitability
Variable annuities are long-term, tax-deferred investments designed for retirement savings, offering investment options and often income guarantees but with various fees.
- Better suited for retirement income, not pure capital appreciation.
- High fees and surrender charges can erode returns, especially for long-term growth.
- Not ideal for short-term liquidity needs.
Memory trick: Match the product's purpose to the client's goal, or it's a mismatch.