If you have ever browsed a book on psychology you may have run across something called locus of control. Having an internal locus means one feels he is in control of what happens in his life, and having an external locus means feeling that what happens is due more to chance, the influence of others or fate. Even though it has become a pop psych term, it is real. People do have an external or internal locus of control, and this greatly affects their decisions—including financial ones. Two recent studies on these loci have implications for annuities.
Whether your locus is external or internal has nothing to do with age, net worth or education. It is just the way you are. And one type of locus is not better or worse than the other. An external locus may cause you to wear a seatbelt because no matter how good a driver you are you know bad luck could cause an accident, but an internal locus could cause you not to wear a seatbelt because you know your driving skills will save you from a collision. However, that same external locus might result in you not saving in an IRA because you feel the financial markets are all rigged against the small saver, while an internal locus will make you an aggressive saver because you know you are in charge of your financial destiny.
People who believe they are in control (internal locus) do tend to save much more than people with an external locus, and they tend to have a much higher net worth, even after adjusting for the increased savings rate. Here’s why: Since people with an internal locus feel they are in control, they are much more likely to invest in riskier assets—because they feel they can control the risk—and these riskier assets provide the potential for higher returns over time. By contrast, those with an external locus tend toward more conservative instruments.
What this means in the fixed annuity world is that an individual with an external locus is a stronger annuity prospect because he is less likely to feel he can do a better job of managing risk and returns than he can get from an annuity. Consider the retirement concern of running out of money before death. An internal locus of control gives a person confidence that by self-managing the assets, any calamities can be outwitted (thus negating the need for a life income annuity). An external locus gives a person a feeling of being at the mercy of the financial tides. Therefore, the guarantee of a fixed annuity income is a lifeboat that offers protection from the storms of fate.
How do you determine whether the prospective annuity buyer has an external or internal locus? There are written tests designed to identify one’s locus, but having the client take a personality test before the appointment might meet with some resistance. Instead, you may want to mix in some locus of control-related questions during the appointment, such as “Do you feel you are in control over where you will wind up, financially, in your retirement?” and “When it comes to your financial future, do you sometimes feel like you are getting pushed around by outside events?” What you’re trying to hear are statements indicating that the person believes he is in control or that the person believes luck and happenstance play a major role. If the person indicates that he feels overwhelmed or overpowered, or that life is a roll of the dice, the use of an annuity may help restore his balance and sense of control.
Resources:
Locus of Control and Savings: www.rwi-essen.de/media/content/pages/publikationen/ruhr-economicpapers/REP_13_455.pdf
Locus of Control and Investment in Risky Assets: pub.maastrichtuniversity.nl/dfd67f13-ca9e-42c0-8171-211488cbc938
