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Investors not applauding Genworth sale to China Oceanwide

Posted on October 27, 2016 by -

China Oceanwide Holdings Group Co., Ltd., a Chinese company, has agreed to buy all of the outstanding shares of Genworth Financial for about $2.7 billion, or $5.43 per share, according to a release this week. The acquisition will be completed through Asia Pacific Global Capital Co. Ltd., a China Oceanwide’s investment platform.

Genworth shares sold for as much as $36 in mid-2007 and for less than $1 in early 2009, at the post-crash market bottom. The share price recovered to over $18 by May 2014 but fell steadily to as little as $1.70 last February.

Shareholders, who have been stewing for months over Genworth’s debt load, reacted to the deal by selling Genworth stock. The share price fell almost 4%, to $4.26, in early trading on October 27.

Beijing-based China Oceanwide is a privately held, family-owned holding company founded by Lu Zhiqiang. It has operations in financial services, energy, culture and media, and real estate assets globally, including the U.S., with about 10,000 employees.

The transaction is subject to approval by Genworth’s stockholders as well as other closing conditions, including the receipt of required regulatory approvals.

China Oceanwide will also give Genworth $600 million to settle debt maturing in 2018, on or before its maturity, and provide $525 million of cash to the U.S. life insurance businesses. This contribution is in addition to $175 million of cash previously committed by Genworth Holdings, Inc. to the U.S. life insurance businesses.

Separately, Genworth also announced preliminary charges unrelated to this transaction of $535 million to $625 million after-tax associated with long term care insurance (LTC) claim reserves and taxes.

The announcement of those intended charges, along with the acquisition by China Oceanwide as well as Genworth’s risky concentration in the uncertain long-term care insurance market, caused A.M. Best to downgrade several of Genworth’s ratings and place the company and its subsidiaries under review with “negative implications.”

Genworth needed to restructure its U.S. life insurance businesses by “unstacking” Genworth Life and Annuity Insurance Company (GLAIC) from under Genworth Life Insurance Company (GLIC) and to address its 2018 debt maturity. The $1.1 billion infusion from China Oceanwide will help it do that, the release said.   

A Genworth spokesperson shed light on what “unstacking” means in this context. “Separating GLAIC from GLIC is one of the steps Genworth is taking to isolate the LTC downside risk that is pressuring its holding company and subsidiary ratings.  It also will allow any future dividends from the Life and Annuity company to be paid directly to the holding company, which currently is impeded by the legal entity organization,” she told RIJ.

A.M. Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” from “bbb+” and affirmed the Financial Strength Rating (FSR) of B++ (Good) of Genworth Life and Annuity Insurance Company. A.M. Best also downgraded the FSR to B (Fair) from B++ (Good) and the Long-Term ICRs to “bb+” from “bbb” of Genworth Life Insurance Company and Genworth Life Insurance Company of New York. Additionally, A.M. Best downgraded the Long-Term ICRs to “bb-” from “bb+” of Genworth Financial, Inc. and Genworth Holdings, Inc., as well as their existing Long-Term Issue Credit Ratings by two notches. A.M. Best has placed all Credit Ratings under review with negative implications.

In another development, a Louisiana law firm is investigating the Genworth sale on behalf of its shareholders to determine if the China Oceanwide’s $5.43 per share offer undervalues the company or not. The firm, Kahn Swick & Foti, includes former Louisiana attorney general Charles C. Foti, Jr.

Genworth, once part of GE Capital, would be a standalone subsidiary of China Oceanwide. Genworth’s day-to-day operations are not expected to change. Its senior management team will continue to lead the business from its Richmond, Va., headquarters. The insurer will maintain its existing businesses, including its MI businesses in Australia and Canada.

“Genworth will also continue to focus on its key operational priorities, most notably executing its multi-year LTC rate action plan, which is essential to stabilizing the financial position of the legacy LTC business. China Oceanwide has no current intention or future obligation to contribute additional capital to support Genworth’s legacy LTC business,” the release said.

The transaction, which both companies’ boards have approved, is expected to close by the middle of 2017, subject to approval by Genworth’s stockholders and closing conditions, including regulatory approvals. Goldman, Sachs & Co. and Lazard are advising Genworth. Citi and Willis Capital Markets & Advisory are advising China Oceanwide.    

© 2016 RIJ Publishing LLC. All rights reserved.

High stock valuations reduce insider-buying, buybacks: TrimTabs

Posted on October 27, 2016 by -

The purchase by corporate executives of their own firms’ stock—aka “insider buying”—dropped to just $110 million in the first three weeks of October through Friday, according to TrimTabs’ review of Form 4 filings with the Securities and Exchange Commission.  

“The best-informed market participants seem unenthusiastic about U.S. stocks at current prices,” said David Santschi, CEO at TrimTabs Investment Research. “Insider buying is running at the slowest pace for October in the past five years.”

“The pullback in buying by both insiders and companies isn’t an encouraging sign for U.S. equities,” Santschi added.  “Corporate America seems to be battening down the hatches.” TrimTabs Asset Management, a sister company, offers funds that pick stocks on the basis of their liquidity, or the supply and demand for their shares, rather than their fundamental value.

In a research note, TrimTabs explained that the weakness in buying is not just seasonal.  On the first 15 trading days of October, insider buying was $390 million in 2012, $360 million in 2013, $540 million in 2014, and $260 million in 2015.

Share repurchasing programs have also slowed. Stock buyback announcements fell to a nine-quarter low of $115 billion in the third quarter of 2016, and would have been much lower without Microsoft’s single $40 billion buyback. Buybacks have totaled just $8.2 billion in October, as of Friday, October 21.

© 2016 RIJ Publishing LLC. All rights reserved.

TIAA survey shows popularity of closed-end funds

Posted on October 27, 2016 by -

Closed-end funds can bolster the income of people who are in or near retirement and help offset today’s low-interest rate environment, according to 85% of financial advisors surveyed recently by Nuveen, a unit of TIAA Global Asset Management.

Two-thirds of advisors surveyed now use closed-end funds compared with just over half (51%) in 2013, Nuveen found in September. They do so to increase income (58%) and to diversify income (53%)  

Nearly two-thirds (62%) of advisors recommend increasing closed-end fund allocation at retirement to diversify income. About one-third recommend using closed-end funds to take advantage of modest amounts of leverage and to boost returns without changing the risk composition of an investor’s portfolio.

Clients in or near retirement are extremely concerned about protecting principal (73%) and covering health-care costs (72%), about three-quarters of advisors told Nuveen. About two-thirds of advisors said that closed-end funds can increase cash flow and are appropriate for long-term investors.

Dubick & Associates conducted the survey for Nuveen last April using a sample of 326 advisors from the Discovery Database. Advisors were employed by wirehouses, regional broker/dealers, independent broker/dealers, registered investment advisors, banks and insurance companies.  

© 2016 RIJ Publishing LLC. All rights reserved.

A Word to the Wise Advisor

Posted on October 21, 2016 by -

In a financial world that’s shifting from commissions to fee-based compensation, how will advisory firms deal with the fact that most clients don’t like the word “fees”?

As broker-dealers scramble to adapt to the Department of Labor’s new fiduciary rule over the next six months, one challenge will be to teach thousands of advisors how to explain the effect of the new rule on, among other things, fees—a topic that increasingly concerns investors.

“There will be more conversations about fees,” Invesco Consulting’s Gary DeMoss of told hundreds of mainly sell-side executives at the Money Management Institute’s 2016 Fall Solutions conference in Boston this week. “It’s an awkward conversation to have, but your clients will want to hear it from you first.

“You must explain the ‘what’ of DOL, the ‘why’ of DOL, and how it will impact them. Make it about them and how it’s beneficial for them,” DeMoss said. He drew a ripple of laughter from the audience when he warned them not to say, “I must put now put your interests ahead of mine. Bummer.”

The MMI membership consists of asset managers, broker-dealers, TAMPs (turnkey asset management programs), and technology and solutions providers. The audience at the conference was mainly sales and marketing executives and others on the product and distribution platform side of the investment business. 

Laughter was not abundant at the conference. Manufacturers and distributors of mutual funds face significant disruption by the DOL rule, as the brokerage industry shifts toward the sale of institutional share-class funds, index funds and exchange-traded funds by fee-based advisors.

Simultaneously, it is shifting away from the actively managed funds that for years have produced commissions for advisors and provide revenue-sharing dollars for broker-dealers. Broker-dealers are also expected to vastly reduce the number of fund offerings on their shelves.  

In a separate presentation at the conference, A.T. Kearney predicted that the U.S. financial services industry will lose about 6.7% of its $300 billion in revenues over the next five years—much of which will come at the expense of the wealth management businesses of the four so-called wirehouses: UBS, Wells Fargo, Bank of America/Merrill Lynch and Morgan Stanley.   

As one broker-dealer executive put it, “For the last several years, advisors have been moving money out of higher cost shares into institutional shares that pay less or no revenue sharing.  The move to ETFs is doing the same thing.  The DOL rule will only accelerate that. I think everyone agrees that eventually revenue sharing will go away—at least in its current form.  The question for each firm is how will they transition to this.”

Part of that transition will involve training advisors to explain the changes to clients, most of whom don’t know how much they’re currently paying in fees. The explanation may include the news that the client is being moved from commission-based compensation to fee-based or to an automated digital advice platform.

To help companies solve this communication problem, Invesco Consulting hired Maslansky + Partners, a firm once associated with political-linguistic guru Frank Luntz. The firm studies how people understand specific words and messages. It pioneered “Live Instant Response Dial” focus groups, where participants indicate their reactions to a speech that’s in progress.

“There will be more conversations about fees and we need to be doing it the right way,” DeMoss said. It’s essential, he said, for the advisor to know exactly what and how each client is paying for services; otherwise, the advisor will look bad. Firms that try to avoid talking about the DOL are making a mistake, he added: “Anything unexplained or unexpected will be a problem down the road. Don’t leave anything out there for clients to find out about on their own.”

The word “fees” is itself problematic. During Invesco focus groups, people were asked to name the word they liked least: fees, charges, costs or commissions. “Costs” and “charges” were neutral words, with only 6% and 15% of people objecting to them, respectively. “Commissions” was liked least by 26%, but 53% of the group members liked “fees” the least. 

There was some question about whether most clients know what “fee-based” compensation means. DeMoss believes that clients know that it means a percentage of assets under management and that “fee-based” never includes commissions. [“Fee-based” advisors do accept commissions, if properly licensed, according to Yahoo finance.

In Maslansky focus groups, people were also asked which type of account sounded most appealing to them. The overall answer was “flat-fee” accounts, with a 44% share of the vote. “Fee-based” came in second at 35%, followed by “advisory” accounts and “level-fee” accounts. There was a question whether clients believed that flat-fee believed that it meant a fixed dollar amount or a fixed percentage of assets.

Focus group participants were also asked which would bother them more—news that they would incur “unexpected fees” or that their portfolios had “underperformed.” By a roughly two-to-one margin, respondents said they would rather hear about underperformance than new fees. When asked whether they would rather have 8% returns and a non-attentive advisor or 6% returns and an attentive advisor, 69% chose the latter.

Going forward, advisors will need to be upbeat without raising client expectations too high. “Talk about the benefits of the DOL rule and then talk about what it is. Make it all about the client and how it will help them.” Advisors should make a habit of using the word “you” and not the word “I,” DeMoss said.

“Fear-based selling is out,” he told the audience. “So are pretty models, impressive mansions and superlatives about performance potential. Blaming the government doesn’t work. Clients don’t want to hear bashing.” Above all, simplify the process, no matter how difficult that may be. “It’s easy to make investing look hard,” he added. “It’s hard to make investing look easy.”

© 2016 RIJ Publishing LLC. All rights reserved.

Could your job vanish after November 8? Here’s a remedy

Posted on October 21, 2016 by -

Where risk appears, insurance follows. Great American Insurance Group, recognizing the possibility for economic chaos after an election whose outcome one candidate has not promised to accept, is offering supplemental unemployment insurance to executives who think their jobs may soon vanish.

The product is called IncomeAssure.

“As we enter the final stretch of the presidential campaign, economists are increasingly alarmed that the economy may suffer a massive post-Election Day hangover that could impact jobs and income,” said a Great American press release.

“Given the intense dislike each side feels for the opposing candidate, it’s highly doubtful we can look forward to much ‘comfort level’ regardless of who is elected — which is why workers are wasting no time signing up for IncomeAssure.”

The product combines with state unemployment benefits to provide policyholders with up to 50% of their former weekly salary should they become involuntarily unemployed. People who are unexpectedly laid off quickly discover that state unemployment insurance alone won’t cover mortgage payments, tuition, medical bills, or most household expenses, the release said.

“Rather than a state benefit that can be capped at $300 a week,” said David Sterling of Sterling Risk, the Woodbury, NY, insurance brokerage that is administering IncomeAssure, “IncomeAssure covers salaries up to $250,000 a year. It allows policyholders to maintain their current lifestyle and pay their bills while unemployed, regardless of which candidate wins the election.”

© 2016 RIJ Publishing LLC. All rights reserved.

Passive equity funds still gaining assets: Morningstar

Posted on October 21, 2016 by -

Active U.S. equity funds continued to lose assets in September, with an estimated $23.6 billion in net outflow. That was slightly less painful than August’s negative $25.4 billion flow, according to Morningstar’s monthly flow report on U.S. mutual funds and exchange-traded funds, or ETFs.

What active funds lost, passive funds largely gained. U.S. equity attracted steady flows on the passive side, with an estimated inflow of $19.3 billion in September, up from August’s $16.4 billion. Net flow for mutual funds is based on the change in assets not explained by the performance of the fund and net flow for ETFs is based on the change in shares outstanding.

Highlights from Morningstar’s report about U.S. asset flows in September:

  • Flows into passive international equity funds slowed to $2.1 billion in September from $6.4 billion in August, a trend driven by falling flows into emerging-markets in recent months.
  • Taxable-bond funds continued their undisputed rule as the category group with the highest inflows in September, with active funds receiving $10.4 billion and passive funds $12.9 billion.
  • The MSCI Emerging Markets Index posted a 1.3% return in September. Flows into emerging-markets funds remained positive, but much lower than in July and August.
  • The top Morningstar category remains unchanged from August: intermediate-term bond. However, intermediate-term bond was joined by the short and ultra-short bond categories on the list of top inflows.
  • The bottom five categories were also little changed from last month, with large growth, world allocation, and Europe stock sustaining the largest outflows. WisdomTree Europe Hedged Equity and its Deutsche counterpart, Deutsche X-trackers MSCI Europe Hedged Equity, continued to suffer outflows.
  • In September, all top 10 providers except Vanguard and State Street, which are known as passive specialists, experienced outflows on the active side.
  • Vanguard continues to be the top passive provider in September with nearly $21.0 billion in inflows. State Street fell to fourth place behind Vanguard, iShares, and Fidelity, with $1.5 billion in inflows.
  • Fidelity continued to receive inflows to its passive products after lowering fees three months ago. However, the company still experienced a $3.4 billion outflow on the active side.
  • Prudential Total Return Bond, an intermediate-term bond fund that carries  a Morningstar Analyst rating of Bronze, emerged as the top-flowing active fund.
  • After garnering an $11.1 billion inflow in July, SPY attracted $600 million in August, which reflects the general trend away from the U.S. market. September’s $1.2 billion outflow could mean that active managers reallocated to other asset classes after temporarily placing assets in SPY.

© 2016 RIJ Publishing LLC. All rights reserved.

Trump, Buffett, and how the wealthy are taxed

Posted on October 20, 2016 by -

The individual income tax has never taxed the very wealthy much. Donald Trump may have claimed huge losses starting in the early 1990s, but, like other rich investors, he wouldn’t have paid much tax regardless. Despite paying some tax, Warren Buffett’s release of his 2015 tax return affirms that conclusion.

There are two major reasons: first, paying individual income taxes on capital income is largely discretionary, since investors don’t pay tax on their gains until they sell an asset. Second, taxpayers can easily leverage capital gains and other tax preferences by borrowing, deducting expenses, and taking losses at higher ordinary rates while their income is taxed at lower rates. Such tax arbitrage is, in part, what Trump did.

To be fair, some, like Buffett, live modestly relative to their means and still contribute most of what they earn to society through charity. Some pay hefty property and estate taxes and bear high regulatory burdens. And salaried professionals and others with high incomes from work, whether wealthy or not, may pay fairly high tax rates on their labor income. Still, there are many ways for the wealthy to avoid reporting high net income produced by their wealth.

The phenomenon is not new. In studies over 30 years ago, I concluded that only about one-third of net income from wealth or capital was reported on individual tax returns. Taxpayers are much more likely to report (and deduct) their expenses than their positive income. In related studies, I and others found that rich taxpayers reported 3% or less of their wealth as taxable income each year.

But your favorite billionaire did not get that way by earning low single-digit returns to his wealth. Buffett’s 2015 adjusted gross income (of $11.6 million) would be around one-fiftieth of one percent of his wealth, which in recent years has been estimated to be near to $65 billion. Yet, over the past five complete calendar years, Buffett’s main investment, Berkshire Hathaway, has returned an average of over 10% annually.

The wealthy effectively avoid paying taxes on those high returns either by never selling assets and thus never recognizing capital gains, deferring income long enough that the effective tax rate is much lower, or by timing asset sales so they offset losses, as Trump likely has been doing to use up his losses from 1995.

When you die, the accrued but unrealized gains generated over your lifetime are passed to your heirs completely untaxed, though estate tax can be paid by those who, unlike Buffett, don’t give most away to charity.

“Tax arbitrage,” the second technique, is simple in concept though complex in practice. It allows an investor to leverage special tax subsidies just as she’d arbitrage up any investment—in this case, to yield multiple tax breaks. If you buy a $10 million building with $1 million of your own money and borrow the other $9 million, you’d get 10 times the tax breaks of a person who puts up $1 million but, because she doesn’t borrow, buys only a $1 million building.

The law limits the extent to which most people can use deductions and losses from one investment to offset income from other efforts, but “active” investors are exempt from most of those restrictions. In real estate it is quite common for the active individual or partner to use the interest, depreciation, and other expenses from a new investment to generate net negative taxable income to offset positive income generated by other, often older, investments.

The main trick is simply to let enough income from all the investments accrue as capital gains. For example, take a set of properties that generate $1 million in rents and $500,000 in unrealized appreciation. If expenses are $1,200,000, net economic income would be $300,000 ($1,000,000 plus $500,000 minus $1,200,000); but net taxable income would be a negative $200,000 ($1,000,000 minus $1,200,000) since the unrealized appreciation is not taxable income.

Real estate owners enjoy other tax benefits as well. They can sell a property without declaring the capital gain by swapping the asset for another piece of real estate—a practice known as a “like-kind” exchange. Often, when a property exchanges hands it ends up being depreciated more than once.

At the end of the day, tweaks to the individual income tax system, including higher tax rates, are unlikely to increase dramatically the taxes paid by the very wealthy. Instead, policymakers need to think more broadly about how estate, property, corporate, and individual income taxes fit together and how to reduce the use of tax arbitrage to game the system.

The Government We Deserve is a periodic column on public policy by Eugene Steuerle. A former deputy assistant secretary of the Treasury, he is an Institute fellow and the Richard B. Fisher Chair at the nonpartisan Urban Institute.

 

Anecdotal Evidence: Football and Financial Ads

Posted on October 20, 2016 by -

It’s football season so I’m catching a few games on TV, which means seeing commercials for financial service providers. E*Trade’s re-“tire”-ment story was the funniest of the lot. A bearded man in a cardigan, slightly resembling Julius Irving and palming a goblet of red wine, addresses the camera from his wood-paneled study, where full-size automobile tires are mounted trophy-style on the walls.

In the space of 15 seconds, he creates about eight or 10 puns using the word “tire” before recommending E*Trade as a retirement partner. If you’re not prepared for it, and you like puns—which E*Trade’s target audience may or may not—it’s unexpectedly funny. That spot was paired with a similar one in which a tailor puns on the word “vest,” as in in-“vest”-ment. There’s also a Benedict Arnold spot that exploits the word “trade” (as in traitor).

For absurdity, these spots almost match GEICO’s recent Marco Polo ad, in which the “real” 14th century Marco Polo wades into a backyard swimming pool and, speaking in Italian, tries unsuccessfully to convince kids who are busy playing “Marco Polo” that the real Marco Polo is right in front of them.

Why anybody would custody his or her retirement savings at a discount brokerage, it’s difficult to say. The biggest joke of all is the one E*Trade plays on its prospects by offering a $600 reward for new signups. You must deposit between $250,000 to $499,999 at E*Trade to qualify for that reward, according to the fine print. Unfortunately, other companies have copied this type of click-bait teaser. The DOL, which now regards rollover recommendations as fiduciary acts, might frown on it. 

*                        *                        *

Pacific Life engaged in a bit of slap-water, if not slap-stick, comedy with a commercial during either the Arkansas-Ole Miss game or the Ohio State-Wisconsin game last Saturday. The 30-second spot featured the montage of PacLife’s trademark humpback whales, breaching, fin-slapping and lob-tailing in the ocean as usual. This time, however, each emphatic slap coincided with the crash of percussion instruments in a marching band. It was an efficient, humorous merger of brand-reinforcement and football.

Northwestern Mutual’s commercial airing last Saturday wasn’t new, but it remains noteworthy for its messaging. The voice-over and graphics emphasize the point that smart retirement planning often requires the use of both investments and insurance products in combination, and that Northwestern Mutual specializes in bringing the two together. I don’t know of any other retirement company that makes that pitch so explicitly. The commercial also depicts a very attractive mixed-race couple. The husband is white, the wife African American. The message may be: We’re a modern, hip company; not the “Quiet Company” your father or grandfather knew.

*                        *                        *

Inside the first section of my Sunday newspaper last weekend, I saw Wells Fargo Bank’s full-page ad. The headline said, “Moving forward to make things right.” This is part of the mega-bank’s damage-control campaign amidst its ongoing 17-month reputational train wreck.

“We have eliminated product sales goals for our Retail Banking team members who serve customers in our bank branches and call centers…, the ad copy said in part. “We have provided full refunds to customers we have already identified and we’re broadening our scope of work to find customers we may have missed.”

Banking services are sticky, Americans have short memories and the strength of the Wells Fargo brand (Boomers may remember the Wells Fargo song from “The Music Man”), so the company may survive its current troubles: the resignation of CEO/chairman John Stumpf, a $185 million federal fine and a 24% decline in its stock price since mid-2015 (when the city of Los Angeles announced its action against the bank for pressuring its employees to create millions of phony new accounts for clients in order to meet aggressive sales goals).

Since the financial crisis, ownership of Wells Fargo stock has made its senior managers and others very rich. Just before the financial crisis, the stock reached a high of $30 before plunging to less than $9 in March 2009. It peaked at almost $58 in mid-July 2015, when Los Angeles announced its action.  

Despite those widely publicized revelations, the bank’s stock held most of its value for another year. As recently as six weeks ago, the share price was $50.55. Then came the Consumer Financial Protection Bureau’s announcement of a $185 million fine in early September. Since then the price has slumped to $44.71 (as of October 14). That, added to Stumpf’s unsatisfying appearance before a Senate committee, forced him to retire.

The drop in the Wells Fargo share price may or may not last, and may depend as much on the impact of the DOL fiduciary rule as on reactions to the phony accounts fiasco. But the incident exemplifies the conflict-of-interest that publicly-held companies inevitably struggle to manage. Their mandate to put shareholders’ interests ahead of customers’ interests can breed incentives that lead to abuse. Such conflicts may become harder to manage, and create new legal exposures, under the DOL rule.  

© 2016 RIJ Publishing LLC. All rights reserved.      

It’s splitsville for MetLife and Snoopy

Posted on October 20, 2016 by -

“MetLife. Navigating life together.”

That’s the official slogan for MetLife’s new “global brand platform.” Beachgoers won’t ever see this new slogan trailing behind Snoopy’s famous Sopwith Camel biplane, because MetLife is ending its 30-year ad partnership with the beloved cartoon beagle and the other Peanuts characters created by the late Charles Schulz. 

“This decision wasn’t taken lightly,” said a MetLife spokesperson. In global surveys, MetLife found that only 3% of institutional and individual customers mentioned the insurer when asked what they associated Snoopy with. Only 18% mentioned MetLife when asked what company they associated Snoopy with.Snoopy in Sopwith Camel

“Snoopy did his job,” the spokesperson said. Clients have always equated Snoopy with friendliness and approachability, which helped MetLife 30 years ago when insurers were seen as remote. Today, MetLife wants to be seen around the world as “forward-thinking” and “trustworthy,” and that’s not exactly how Snoopy is perceived.  

“Customers want something different. They are overwhelmed by all the changes in their lives, and they need someone to help them manage it all. They’re not necessarily looking for a total solution, but they want someone to be there for them throughout their lives,” the spokesperson said, adding that the audience of the new messaging includes both institutional and retail customers. MetLife conducts retail business abroad, but not in the U.S.

 “We are moving away from a traditional product-development model to one driven by customer insights,” said Steven A. Kandarian, chairman, president and chief executive officer of MetLife, Inc. The company said it will “remove the complexities traditionally associated with insurance” and create “simplified interactions” with clients.

MetLife’s new mark is a stylized M with two overlapping half-parabolas, one green and one in MetLife’s trademark blue, which is closer to a Dodger blue than an IBM blue. The corners are rounded and the bullet-shaped overlap is a darker shade of MetLife blue.

“The iconic MetLife blue carries forth the brand’s legacy, but has been brightened and now lives alongside a new color—green—which represents life, renewal and energy. The broader MetLife brand palette expands to include a range of vibrant secondary colors, reflecting the diverse lives of its customers,” the release said.

MetLife will introduce the new brand globally through 2017. The new design system is currently live across mobile, social and web properties. In the U.S., print ads will appear in the Wall Street Journal, New York Times and Washington Post beginning Oct. 21 and new broadcast ads will be on air in December. Additional advertising is running in Mexico, Korea and Japan.

© 2016 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on October 20, 2016 by -

AXA and BlackRock to manage €10bn each for ING pension fund

In the largest institutional contract win in the Dutch market this year, the €26bn closed-end defined benefit pension fund of the ING financial group has outsourced its liability-matching portfolio to AXA and BlackRock, offering each about €10bn, IPE.com reported.

 “Pensioenfonds ING was facing the same material challenges of most Dutch institutional investors in optimally hedging its interest-rate and inflation risks with the fixed income portfolio,” said Hanneke Veringa, head of the client group in the Netherlands for AXA Investment Management (AXA IM).

AXA IM intends to help other institutional investors benefit from its balance sheet management experience, said Julien Fourtou, the firm’s global head of multi-asset client solutions.

“We will further expand this service to those facing similar constraints, where both funding and regulatory objectives must be met in a cost-efficient manner, while ensuring the boards of the pension funds remain in full control,” he said. The ING Pension Fund said it conducted an extensive selection process before signing deals with BlackRock and AXA IM.

The fund’s return portfolio – which focuses on creating an adequate return for pensions indexation – had already been outsourced, ING said. Reporting on the investment and currency risk management is outsourced to the The pension’s treasury portfolio continues to be run by Florint Capital Cardano will handle reporting on the investment and currency risk management. Investment policy will not change, according to ING Pension Fund. 

Pension funds and insurance companies continue to face the challenge of low-yield environment where inflation was low but expected to rise. Last August, the ING Pension Fund said that it would increase its inflation cover to 25% from 8.5% of real liabilities over the next four years, and expand its matching portfolio allocation to 75% from 70%, at the expense of investments in its return portfolio.

Voya, Shlomo Benartzi partner on behavioral economics research

Voya Financial, Inc., has launched Voya Behavioral Finance Institute for Innovation, a research initiative focused on consumer financial decision-making and retirement savings behavior, the company said in a release.

 “The Institute will test a number of novel concepts that could translate into large-scale solutions to help people save more and achieve better retirement outcomes,” the release said. Its work will “merge behavioral science with the speed and scale of the digital world.”

Behavioral economist Shlomo Benartzi, professor and co-chair of the Behavioral Decision-Making Group at UCLA Anderson School of Management, has been engaged as a senior academic advisor, along with John W. Payne of Duke University’s Fuqua School of Business. 

Rick Mason, senior advisor at Voya Financial, will help coordinate the efforts for the company. Research will be conducted in laboratory, panel and field settings and applied at Voya’s plan sponsor clients and distributors. 

The institute’s researchers will examine how to improve outcomes in areas such as savings rates, participation in workplace plans, portfolio diversification, creating sufficient retirement income and preventing so-called leakage from retirement plans, when participants cash out their savings after leaving a job.

The launch of the Voya Behavioral Finance Institute for Innovation included a forum in New York City on Oct. 18, where Nelson and Benartzi joined Voya executives, clients and distributors, along with members of the media, for a discussion on the Institute’s first white paper, “Using Decision Styles to Improve Financial Outcomes – Why Every Plan Needs a Retirement Check-Up.”

The paper, written by Benartzi, examines the two primary decision-making styles—Instinctive and Reflective—that people use. The two styles, which correspond to “fast” and “slow” processes described in Daniel Kahneman’s bestseller, Thinking, Fast and Slow (Farrar, Straus and Giroux, 2011) will help interpret data collected from the online activities of retirement plan participants and can inform a sponsor about the overall “health” of its plan.

Lafayette Life adds Goldman Sachs index option to its FIA

Lafayette Life, a provider of whole-life insurance, annuities and retirement plans and unit of Western & Southern Financial Group, Inc., has enhanced its Marquis SP, a single-premium, deferred, fixed indexed annuity, according to a release.

Lafayette Life has added one- and two-year, point-to-point allocation options associated with the GS Momentum Builder Multi-Asset Class (GSMAC) Index, sponsored by Goldman Sachs. The new options are in addition to Marquis SP’s three-year, point-to-point allocation option associated with the GSMAC Index. 

The GSMAC Index utilizes a volatility-control design. The annuity’s account value can never decline due to index performance, and there is no interest-rate cap or interest-spread fee on the GSMAC index.

Bogle, Hounsell to discuss retirement financing at town hall in Philadelphia

Jack Bogle, founder of the Vanguard Group, will appear in a public town hall discussion in Philadelphia on October 26. The discussion will focus on how Baby Boomers, Gen Xers, and Millennials can better prepare for retirement.

The discussion, to be held at the WHYY radio and television studios, will accompany a screening of “When I’m 65,” a documentary exploring the psychology, sociology, and future of retirement.  It will air on public television station WHYY on Sunday, November 13, at 7:00 PM.

Pennsylvania Secretary of Banking and Securities Robin L. Wiessmann will deliver opening remarks and WHYY’s Mark Eichmann will moderate the discussion of a distinguished panel:

  • Jack Bogle, The Vanguard Group
  • Dr. Andrew Hill, Economic Education Advisor, Federal Reserve Bank of Philadelphia
  • Cindy Hounsell, President, Women’s Institute for Secure Retirement (WISER)
  • Dr. Joseph Friedman, Professor of Economics, Temple University

The town hall is free and will be held at WHYY’s studios, 150 North Street, Philadelphia, on October 26 at 6:00 PM. No tickets are needed; however advance registration is required. Visit www.whyy.org/events. For more information about “When I’m 65,” visit www.wi65.org

The filming of “When I’m 65” was funded by Detroit Public Television, the Investor Protection Trust, the Investor Protection Institute, and the Pennsylvania Department of Banking and Securities.

Lower fund fees at Prudential Investments 

Prudential Investments has reduced expenses for several of its mutual funds, including the Prudential Total Return Bond Fund, with $17.1 billion in net assets. The list also includes the Prudential Global Total Return Fund, Inc.

In the past five years, Prudential Investments has administered several fee reductions, the equivalent of $30.2 million in savings to investors through Aug. 31, 2016.

Prudential Investments is the mutual fund group of PGIM, a top 10 global investment manager with more than $1 trillion in assets under management and the global investment management business of Prudential Financial, Inc. 

PitchBook to be wholly-owned by Morningstar

Morningstar, Inc. has agreed to buy PitchBook Data, Inc., a nine-year-old firm that delivers data, research, and technology covering the breadth of the private capital markets, including venture capital, private equity, and mergers and acquisitions (M&A).

Morningstar invested early in PitchBook and already owns about 20% of the company. PitchBook will maintain its brand and identity and will continue to be led by founder and chief executive officer John Gabbert, according to a Morningstar release.

The company expects to pay approximately $180 million (subject to working capital adjustments) for the remaining ownership interest in a transaction that values PitchBook at $225.0 million.

Morningstar president Kunal Kapoor, a director of PitchBook since 2012, will become chief executive officer of Morningstar effective Jan. 1, 2017.

Data on private capital markets is difficult to find and often in non-standard formats. PitchBook has comprehensive private market datasets and robust research process. PitchBook’s client count has more than tripled over the past three years (to more than 1,800), and sales bookings have grown by a compound annual growth rate of more than 70 percent for the five years ended Dec. 31, 2015.

The company’s PitchBook Platform and user interface allows clients to access data, discover new connections, and conduct research on potential investment opportunities. PitchBook covers the full lifecycle of venture capital, private equity and M&A, including the limited partners, investment funds, and service providers involved. PitchBook will allow Morningstar to apply its core data and software capabilities to private and institutional investors for the first time.

Based in Seattle, PitchBook had $31.1 million in revenue for the trailing 12 months ended June 30, 2016. The company has more than 300 employees located in Seattle, New York, and London. Morningstar originally invested$1.2 million in PitchBook as a Series A Preferred investor in September 2009 and another $10.0 million as a Series B Preferred investor in January 2016. Subject to customary closing conditions, the two companies expect the transaction to close in the fourth quarter of 2016.

© RIJ Publishing LLC. All rights reserved.

The Annuity That Pays for Itself

Posted on October 15, 2016 by -

Annuity purveyors may be excused for feeling criminalized by the federal government these days. The Department of Labor, after all, has made it harder for those selling variable and indexed annuities to IRA owners to accept manufacturer-paid commissions. Slower sales have been predicted in 2017 for both of those products.

On the other hand, there’s one income-generating annuity whose usage the Feds actively encourage: the qualified longevity annuity contract, or QLAC. It lets retirees buy an income annuity at say, age 65, with up to a quarter of their IRA (<$125,000) and defer income (and the federal tax on that income) until as late as age 85 without violating the rules that require IRA withdrawals to begin at age 70½.

You may be thinking: The deferred income annuity already has three strikes against it. As a simple spread product, it’s not profitable enough for publicly held insurers; by reducing assets under management, it reduces the income of fee-based advisors; and, because of its illiquidity, it’s not even popular with retirees. Indeed, few people probably know it exists.

But QLACs have a couple of admirable, and timely, characteristics. Except for clients who have too little money or are in poor health, QLACs are likely to be in a retiree’s “best interest,” and therefore compliant with the new DOL rule. And, as academics have been saying for several years, they allow retirees to spend their non-annuitized money a little more freely.

To understand the logic of QLACs, consider a new academic paper from the National Bureau of Economic Research. Written by Olivia Mitchell of the Wharton School and Raimond Maurer and Vanya Horneff of Goethe University in Frankfurt, Germany, it demonstrates that longevity insurance, as QLACs are also known, can, when used strategically, almost pay for itself. (The authors present the QLAC as a distribution option in a 401(k) plan, but their findings are valid for IRA owners.)

The three economists, who have studied the use of QLACs in Germany and Singapore, where retirees are required to purchase them with part of their tax-deferred savings, described two hypothetical college-educated women, one who bought a QLAC with 15% of her qualified savings at retirement and one who did not.

They found that the woman with the QLAC could afford to save a bit less before retirement, spend between five percent and 20% more during retirement, and probably have much more spending power after age 85 than the person without access to a QLAC.

“Introducing a longevity income annuity to the plan menu is attractive for most DC plan participants who optimally commit 8-15% of their plan balances at age 65 to a LIA that starts paying out at age 85. Optimal annuitization boosts welfare by 5-20% of average retirement plan accruals at age 66 (assuming average mortality rates), compared to not having access to the LIA,” the authors write.

Maurer, in an email exchange with RIJ, acknowledged that the following scenario would provide an approximation of what he and Mitchell found. For example, a single man with a more typical $120,000 IRA could, under the QLAC rules, allocate $30,000 at age 65 to a life-only QLAC paying about $1,200 per month starting at age 85.

Alternately, the same man, seeking the same level of longevity risk protection, could wait until age 85 to buy an immediate annuity. But a life-only annuity paying $1,200 per month for life, purchased at that age, would cost $100,000. The man would have to create a side fund of about $55,000 at age 65 to accumulate $100,000 by age 85, assuming a 3% growth rate.

In other words, the QLAC gives this hypothetical client $25,000 more spending power in retirement (by spending $30,000 on an annuity at age 65 instead of putting $55,000 in a side or “granny” fund). While $25,000 over 20 years might not sound like much—it’s an average of only about $100 per month—it’s enough to finance a fair amount of vacation travel during the so-called “go-go” years (ages 65 to 75).

So, counter-intuitively, the longevity insurance gives the retiree more liquidity in retirement rather than less. Of course, the same individual could simply ignore longevity risk, not set aside any side fund at all and assume that he will die by age 85. But advisors who specialize in retirement income might tend to advise against that.

“This is a nice example which is easy to understand,” Maurer wrote in an email to RIJ this week. The QLAC strategy, the paper notes, works best on average for people with substantial qualified savings, which in many but not all cases means people with higher educational attainment, higher incomes and longer life expectancies.

Maurer, Horneff and Mitchell aren’t the first to observe that by relieving retirees of the duty to hoard their savings against the possibility of living past age 85 and by unlocking the “mortality credits” that accrue to owners of life-only annuities as a result of risk-pooling, deferred income annuities can make retirement more financially comfortable for many people.

To name just a few: Jason Scott of Financial Engines, Wade Pfau of The American College, David Blanchett of Morningstar, Moshe Milevsky of York University, and Jeffrey Brown of the University of Illinois–Chicago, have all contributed to the literature in this area over the past decade.

QLACs have another big advantage that isn’t mentioned in the new paper. By reducing a retiree’s longevity risk, these contracts arguably create more capacity for taking on equity risk with non-annuitized assets. Owning more stocks can protect clients against inflation risk and arguably raises the likelihood of producing a larger legacy.

To be sure, the pros and cons of longevity insurance have been known for some time. But what’s new are the Treasury Department’s exemption of QLACs from RMDs at age 70½ and the DOL’s “best interest” requirement for retirement advisors. Advising clients to allocate part of their IRAs to longevity insurance might be a smart way for advisors and clients to take advantage of one and satisfy the demands of the other.

© 2016 RIJ Publishing LLC. All rights reserved.

The Annuity That Pays for Itself

Posted on October 13, 2016 by -

Annuity purveyors may be excused for feeling criminalized by the federal government these days. The Department of Labor, after all, has made it harder for those selling variable and indexed annuities to IRA owners to accept manufacturer-paid commissions. Slower sales have been predicted in 2017 for both of those products.  

On the other hand, there’s one income-generating annuity whose usage the Feds actively encourage: the qualified longevity annuity contract, or QLAC. It lets retirees buy an income annuity at say, age 65, with up to a quarter of their IRA (<$125,000) and defer income (and the federal tax on that income) until as late as age 85 without violating the rules that require IRA withdrawals to begin at age 70½.

You may be thinking: The deferred income annuity already has three strikes against it. As a simple spread product, it’s not profitable enough for publicly held insurers; by reducing assets under management, it reduces the income of fee-based advisors; and, because of its illiquidity, it’s not even popular with retirees. Indeed, few people probably know it exists.

But QLACs have a couple of admirable, and timely, characteristics. Except for clients who have too little money or are in poor health, QLACs are likely to be in a retiree’s “best interest,” and therefore compliant with the new DOL rule. And, as academics have been saying for several years, they allow retirees to spend their non-annuitized money a little more freely.

To understand the logic of QLACs, consider a new academic paper from the National Bureau of Economic Research. Written by Olivia Mitchell of the Wharton School and Raimond Maurer and Vanya Horneff of Goethe University in Frankfurt, Germany, it demonstrates that longevity insurance, as QLACs are also known, can, when used strategically, almost pay for itself. (The authors present the QLAC as a distribution option in a 401(k) plan, but their findings are valid for IRA owners.)

The three economists, who have studied the use of QLACs in Germany and Singapore, where retirees are required to purchase them with part of their tax-deferred savings, described two hypothetical college-educated women, one who bought a QLAC with 15% of her qualified savings at retirement and one who did not.

They found that the woman with the QLAC could afford to save a bit less before retirement, spend between five percent and 20% more during retirement, and probably have much more spending power after age 85 than the person without access to a QLAC.

“Introducing a longevity income annuity to the plan menu is attractive for most DC plan participants who optimally commit 8-15% of their plan balances at age 65 to a LIA that starts paying out at age 85. Optimal annuitization boosts welfare by 5-20% of average retirement plan accruals at age 66 (assuming average mortality rates), compared to not having access to the LIA,” the authors write. 

Maurer, in an email exchange with RIJ, acknowledged that the following scenario would provide an approximation of what he and Mitchell found. For example, a single man with a more typical $120,000 IRA could, under the QLAC rules, allocate $30,000 at age 65 to a life-only QLAC paying about $1,200 per month starting at age 85.

Alternately, the same man, seeking the same level of longevity risk protection, could wait until age 85 to buy an immediate annuity. But a life-only annuity paying $1,200 per month for life, purchased at that age, would cost $100,000. The man would have to create a side fund of about $55,000 at age 65 to accumulate $100,000 by age 85, assuming a 3% growth rate.

In other words, the QLAC gives this hypothetical client $25,000 more spending power in retirement (by spending $30,000 on an annuity at age 65 instead of putting $55,000 in a side or “granny” fund). While $25,000 over 20 years might not sound like much—it’s an average of only about $100 per month—it’s enough to finance a fair amount of vacation travel during the so-called “go-go” years (ages 65 to 75). 

So, counter-intuitively, the longevity insurance gives the retiree more liquidity in retirement rather than less. Of course, the same individual could simply ignore longevity risk, not set aside any side fund at all and assume that he will die by age 85. But advisors who specialize in retirement income might tend to advise against that.  

“This is a nice example which is easy to understand,” Maurer wrote in an email to RIJ this week. The QLAC strategy, the paper notes, works best on average for people with substantial qualified savings, which in many but not all cases means people with higher educational attainment, higher incomes and longer life expectancies. 

Maurer, Horneff and Mitchell aren’t the first to observe that by relieving retirees of the duty to hoard their savings against the possibility of living past age 85 and by unlocking the “mortality credits” that accrue to owners of life-only annuities as a result of risk-pooling, deferred income annuities can make retirement more financially comfortable for many people.

To name just a few: Jason Scott of Financial Engines, Wade Pfau of The American College, David Blanchett of Morningstar, Moshe Milevsky of York University, and Jeffrey Brown of the University of Illinois–Chicago, have all contributed to the literature in this area over the past decade.

QLACs have another big advantage that isn’t mentioned in the new paper. By reducing a retiree’s longevity risk, these contracts arguably create more capacity for taking on equity risk with non-annuitized assets. Owning more stocks can protect clients against inflation risk and arguably raises the likelihood of producing a larger legacy.

To be sure, the pros and cons of longevity insurance have been known for some time. But what’s new are the Treasury Department’s exemption of QLACs from RMDs at age 70½ and the DOL’s “best interest” requirement for retirement advisors. Advising clients to allocate part of their IRAs to longevity insurance might be a smart way for advisors and clients to take advantage of one and satisfy the demands of the other. 

© 2016 RIJ Publishing LLC. All rights reserved.  

A Tale of Two Tax Plans

Posted on October 12, 2016 by -

Two new Tax Policy Center reports quantify the dramatic contrast between the latest tax plans of Hillary Clinton and Donald Trump. 

Clinton has proposed a significant tax increase on high-income households and businesses. Trump’s plan, while less ambitious than the version he released in 2015, would still largely benefit high-income households and result in a substantial boost in the federal debt. 

The Trump plan

Trump’s latest plan would reduce federal revenues by $6.2 trillion over the next decade, with nearly half of the tax cuts going to the highest-income one percent of households.  Clinton, by contrast, would boost federal revenue by $1.4 trillion over the next decade, with the bottom 80% of households receiving tax cuts and the top one percent paying over 90% of the net tax increase.   

These revenue estimates use traditional budget scoring and exclude macroeconomic effects (dynamic scoring) and changes in interest costs. With added interest, the Trump plan would add about $7.2 trillion to the national debt over the next decade.

Because Clinton’s tax plan would reduce interest costs, it would trim the debt by $1.6 trillion over the next 10 years (though her spending proposals would likely soak up much of that revenue). Tax Policy Center will soon release dynamic scores of both plans, which it produces in collaboration with the Penn Wharton Budget Model.

Under Trump’s plan, households would receive an average tax cut of about $3,000 in 2017, or 4.1% of after-tax income. While all income groups would get a tax cut on average, those in the top one percent would enjoy a tax cut of nearly $215,000—a 13.5% increase in their after-tax income.

Middle-income households would receive a tax cut averaging about $1,000, or 1.8% of their after-tax income and low-income households would get a tax reduction of about $100, boosting their after-tax income by 0.8%. However, some single parents and large families would pay higher taxes under Trump’s proposal than they do today.

Trump would collapse the current seven tax brackets to three—12%-25%-33%. He’d combine the current standard deduction and personal exemptions into a single increased standard deduction of $15,000 for single filers and $30,000 for couples, but eliminate head of household filing status. He’d add a new deduction for child and dependent care, and repeal the alternative minimum tax and the estate tax. He’d also cap itemized deductions and tax capital gains in excess of $5 million at death.

Trump would tax all businesses at a top rate of 15%, repeal the corporate AMT and some business tax subsides, and tax unrepatriated foreign earnings of US-based multinationals at a rate of 10% for cash and 4% for other income.

The Clinton plan

Clinton’s plan is the mirror image of the Trump proposal. She’d raise taxes by an average of about 1.2% of after-tax income in 2017, or $800. However, those in the top one percent would face an average tax hike of 7.4% of after-tax income, or $118,000. She’d reduce taxes for low- and middle-income households by an average of about $100, with those in the bottom 20% getting an average tax cut of 0.7% of after-tax income and middle-income households seeing their after-tax incomes rise by 0.2%.

While Trump often accuses Clinton of raising taxes across-the-board—in Sunday night’s debate he claimed she is “raising everybody’s taxes massively”—the vast majority of households would pay roughly the same amount of federal tax under Clinton’s plan as they do today.

Clinton has proposed new tax credits for some households, such as those with high medical expenses or that are caring for aging parents. Her latest plan also expands the child tax credit. To pay for these and other domestic policy initiatives, she’s proposed a 4% surtax on adjusted gross income (AGI) in excess of $5 million, a new minimum tax on filers with AGI in excess of $1 million, and a 28% cap on the tax benefits from certain deductions and exclusions. She’d also retain the current AMT, raise capital gains taxes for assets less than 6 years, and increase taxes on large estates.

The upshot

While Clinton has made modest changes to her tax platform during the course of her campaign, Trump has significantly revised his proposal since last year. Compared to his initial version, his current plan is about one-third less costly, though it would still add trillions of dollars to the federal debt.

While his first proposal would have reduced taxes by an average of $5,000 and cut overall tax revenues by $9.5 trillion over 10 years, this version would reduce taxes by an average of $3,000, and slash federal revenues by $6.2 trillion. Both plans are similarly regressive.

By themselves, Trump’s tax cuts would increase incentives to save, invest, and work while Clinton’s would discourage those activities at the margin. However, because Trump would increase the federal deficit so much, most, if not all, of the macroeconomic benefits of his tax cuts would be washed away by higher interest rates.

When it comes to taxes, among many other things, voters face a stark choice in November.   

© 2016 Urban-Brookings Tax Policy Center.

Retiring (Temporarily) to Paradise

Posted on October 12, 2016 by -

If you’re an advisor, perhaps a few of your clients have mentioned the possibility of retiring someplace warm, unhurried and inexpensive, like a beach town in Central American. Sounds like bliss, right? Well, yes and no.

Not long ago, through Facebook of course, I contacted a fellow I knew long ago and far away. His passion at the time was composing music, but I didn’t know whether he pursued it or not. At one point, I had heard that he retired early to the tropics. For personal and professional reasons, I wanted to find out how it worked out.

Here’s what he wrote back:

My wife and I retired in 2004 after years in the music business. We bought a house here in Nicaragua eleven years ago. By then my parents had passed away—we spent years taking care of them—and our kids were in college. So we sold our apartment in Manhattan, rented a smaller apartment there, and hit the road. We traveled all over the world for about four years, using our rental in Manhattan as a pit stop.

At one point, we were in Uruguay, in a fishing village called Punte del Diablo on the border with Brazil. We met an American there who had ridden his motorcycle from San Francisco down the west coast of South America to Patagonia and was heading back up the east coast. We asked him what his favorite place had been. He said, “Nicaragua.”

A year or two later our daughter was working on a water project in Costa Rica, so we went down. We rented a house and hung out there with our three children for Christmas and New Year’s. My wife and I felt Costa Rica was too developed. You have to remember we had lived in New York City since 1973. We’d both been in the music business. We had a house in the Hamptons. We were dealing with type A personalities. We felt surrounded and just wanted to get out.

On our travels, we found that we felt most at home in Third World countries. Costa Rica is First World. It reminded us of LA, which we hate, so we left and went north to Nicaragua. We found a house in the middle of ‘National Geographic Nowhere’ and bought it. We’re very remote. The nearest town is ——-, near the Costa Rica border. We are about fifteen miles south of it, via dirt road.  

Mark Blatte

We bought the house in 2006, traveling back and fourth to New York. Finally I told my wife, I couldn’t take the city anymore and wanted to try going down to Nicaragua full time. So we put everything in storage and came here. Surprisingly, it ain’t cheap. We figured out that it’s more expensive for us to live here than in most places in the States.  

During the last two years, we took part two huge charity projects in remote villages. My wife worked with a Canadian foundation to put in playgrounds and early this year she, I and our daughter raised money to have a well dug in a village that had had no potable water due to a drought—which we suspect was caused by climate change. The well will serve from 400 to 800 people. Good things to have done.

Then, three weeks ago, my wife took a bad fall. It scared me to death. She’s OK—nothing broke. But it shook me up. I told her I was ready to move back to the states. So we just put our house on the market. We need to be near good medical facilities. The nearest one to our home is two and a half hours.

In just 500 words, that letter may tell you more about retirement in Central America than you’d learn from hours of browsing the Internet or talking to real estate agents on the phone. It tells me that, if I decided to move to an exotic locale, I should do it during my so-called go-go years of early retirement, not the slow-go years of mid-to-late retirement. It also suggests that, even if we initially surrender to the magnetism of paradise, we’ll eventually feel the gravitational pull of home. Especially if our children, and grandchildren, are waiting for us there.  

© 2016 RIJ Publishing LLC. All rights reserved.

Ruark reports results of first FIA mortality study

Posted on October 12, 2016 by -

Owners of fixed indexed annuity (FIA) with guaranteed lifetime withdrawal benefits have about 20% lower mortality than owners of FIAs without living benefits. That was among the findings of Ruark Consulting’s October 2016 FIA Industry Mortality Study.

The study, which included 11 million contract years of data and 165,000 deaths from thirteen participating FIA issuers, is the first mortality study of the FIA industry, according to a Ruark Consulting release.   

In other findings from the study:

  • FIA mortality experience is different. Similar to what we have seen in our variable annuity industry mortality studies since 2007, standard annuity mortality tables offer a poor fit to observed FIA experience, tending to understate mortality rates at both ends of the age spectrum. FIA mortality also varies widely across the companies participating in the study.
  • Mortality also varies by duration, tax status, and contract size. FIA mortality increases gradually by contract duration, and is significantly lower for qualified contracts with and without GLWBs. However, significantly higher mortality is evident for large contracts.
  • Caution is warranted amidst a changing regulatory landscape. The potential implementation of the “fiduciary rule” may affect the mix of qualified and non-qualified FIA business, and agent and policyholder behavior more broadly. Prudence suggests careful monitoring of experience results and more granular assumption development.

Companies participating in the study included:

  • AIG Life & Retirement
  • American Equity
  • Athene
  • EquiTrust
  • Forethought
  • Genworth
  • Midland National
  • Nationwide
  • Pacific Life
  • Phoenix
  • Protective
  • Security Benefit
  • Voya

Ruark’s FIA and VA industry studies include policyholder behavior such as surrenders, income utilization, mortality, and annuitizations, all of which help determine the long-term financial performance of those products. The study covered the period January 2007 through September 2015.

© 2016 RIJ Publishing LLC. All rights reserved.

DC plan advisors to cut sales of VAs, active funds: Ignites

Posted on October 12, 2016 by -

More than a year before the deadline for full compliance with the Department of Labor’s conflict-of-interest rule, advisors to defined contribution plans are already beginning to review their investment lineups and remove potentially problematic mutual fund options, according to a new report from Ignites Retirement Research.   

Because of the fiduciary rule, 7% of plan advisors expect to reduce their use of actively managed equity mutual funds in DC plans, according to the report. Eight percent of plan advisors expect to scale back their use of variable annuities, most of which sell on a commission basis and therefore can’t be sold unless the advisor signs a “Best Interest Contract” that holds him or her legally accountable to clients. 

“The fiduciary rule will cause plan advisors to scrutinize the cost of mutual funds in DC plans, which should set in motion tens of billions of dollars in mutual fund assets,” said Loren Fox, director of Ignites Retirement Research and co-author of the report, in a release. “DC plans are gradually shifting to lower-cost and passive products. That will make pricier, actively managed mutual funds a harder sell.”

The report, “Adapting DCIO Strategy for the Fiduciary Rule,” said that more than half (55%) of the DC plan advisors surveyed either intend to review or are very likely to review the mutual funds used in client plans before the DOL’s rule takes effect.

“One-third of financial advisors who counsel DC plans already plan to make changes to mutual funds used in their clients’ DC plans in 2017” and “another 9% are likely to make such changes,” Ignites said in a press release this week.    

The new DOL regulation, which goes into partial effect in April 2017 and full effect at the beginning of 2018, holds advisors to DC plans and IRA accounts to an ethical standard that prohibits them from putting their own interests ahead of their clients interest. In the case of DC plans, advisors could violate the rule by recommending investment options on the basis of how well those options compensate them or their firms, typically through revenue-sharing agreements.

For the study, Ignites Retirement Research surveyed 251 plan advisors with an average of $770 million in DC assets under management. Half of these advisors said they are scheduling meetings with plan sponsors about the impact of the rule and reviewing investment products (strategies, investment vehicles, fee structures, share classes) in DC plans. Another 17% of these advisors said they are “very likely” to meet with plan sponsors before the fiduciary rule’s final deadline.

Some 26% of plan advisors surveyed in the report expect index equity mutual funds to be the top winner in DC plans in the aftermath of the implementation of the fiduciary rule; index funds are typically cheaper than actively managed funds and produce higher net returns, on average. Almost one-fourth (23%) of plan advisors plan to increase their use of products mixing active and passive strategies.

© 2016 RIJ Publishing LLC. All rights reserved.

“Boutique DC consultants” now in demand: Cerulli

Posted on October 12, 2016 by -

Asset managers are now focusing their distribution efforts on middle-market DC plans ($25 million to $250 million), according to new data from Cerulli Associates, which attributed the trend the saturation of the advisor-sold and institutional DC markets, along with fee compression and litigation in the large-plan market.

That means targeting the consultants in that sector. “Boutique DC consultants” were identified as the “most opportune segment for increasing DC assets and revenue,” according to a Cerulli survey of recordkeeperers and DCIO (defined contribution-investment only) asset managers. 

Classic examples of boutique DC consultants include CAPTRUST, SageView, and Lockton, Cerulli said. Some firms are retirement-focused RIAs and others are consultant practices that reside in a wirehouse. They are now attracting plans with significantly greater assets than the typical reach of a retirement specialist advisor.

“The boutique DC consultant category is distinct in that it works with a wide range of DC plans in terms of asset segmentation,” “As boutique DC consultants continue to broaden the scope and size of plans with whom they work, with some even reaching into the large DC plan market, asset managers can no longer afford to ignore them,” said Jessica Sclafani, associate director at Cerulli, in a release.  

“This influential and relatively new intermediary category is a bright spot against a difficult DC landscape characterized by negative net flows in the corporate DC market, fee compression, and an increasingly litigious environment,” the release said.

Cerulli’s latest report, U.S. Defined Contribution Distribution 2016: Engaging the Boutique DC Consultant in the Mid-Sized DC Plan Market, explores the opportunities for DC plan asset and revenue growth despite a challenging backdrop of intense competition and fee pressures.

© 2016 RIJ Publishing LLC. All rights reserved.

Pension risk transfers have varied effects, actuaries say

Posted on October 12, 2016 by -

Pension risk transfers, whereby a defined benefit plan sponsor reduces its risk by transferring all or part of its plan assets and liabilities to a life insurer, impact “the financial security and responsibilities” of different stakeholders in different ways, according to the American Academy of Actuaries.

A new issue brief from the AAA explains those differences. “Whether you’re a plan participant, a plan sponsor, or a pension regulator or plan fiduciary, pension risk transfer can help you take stock of how other key stakeholders view pension risk transfer and what a risk transfer transaction might mean for you,” said Ellen Kleinstuber, chairperson of the AAA’s Pension Committee, in a release this week.  

Pension risk transfers are intended to reduce longevity risk, investment risk, interest rate risk, and other types of financial risk exposures for DB plan sponsors. Transactions may include the purchase of annuities from life insurers, the payment to plan participants of lump sums, and/or the restructuring of plan investments to reduce risk to the plan sponsor, the issue brief explains.

It examines such risk transfer implications as:

  • The possible merits and downsides of different options typically offered to plan participants.
  • The potential risks, benefits, and other business considerations for sponsors, including the effects on plan participants and shareholders, and on sponsor costs and liabilities.
  • The responsibilities, including regulatory compliance concerns, of regulators and plan fiduciaries who serve or protect public or shareholder interests, respectively.

Download the issue brief by clicking on the “Public Policy” tab at www.actuary.org and visiting the issue brief section under “Pension.”

© 2016 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on October 12, 2016 by -

Wells Fargo chief John Stumpf steps down

Faced with an outraged public and a shrinking stock price, John Stumpf stepped down from his post as Wells Fargo chairman and CEO yesterday. Tim Sloan, 56, the current president and chief operating officer of the San Francisco-based mega-bank, will succeed him. 

The Consumer Financial Protection Bureau announced last month that it would fine Wells Fargo about $185 million after determining that 5,300 of the bank’s employees, under internal pressure to reach aggressive sales goals, had created about two million fake client accounts. Prior to that, even though the fraudulent activity at Wells Fargo had been known for many months, Stumpf appeared to have weathered the crisis at the bank. 

But news of the fine led to Senate hearings, where Stumpf, 63, performed poorly before the Banking Committee. During his testimony, according to American Banker, “Stumpf fumbled basic questions such as when exactly the company uncovered the pervasive fraud. Stumpf also provided confusing answers about whether senior executives have been held responsible for the scandal.”

Carrie Tolstedt, the former executive in charge of retail banking, retired in July and remains eligible for a $125 million payout. Shortly after the CFPC settlement was disclosed, Wells Fargo said it would eliminate incentive packages that reward branch employees for cross-selling and hitting sales targets.

Stumpf worked at Wells Fargo and its predecessor companies for more than 30 years. He joined Minneapolis-based Norwest in 1982 and rose quickly. When Wells Fargo merged with Norwest in 1998, Stumpf became head of banking operations in the Southwest. 

In 2002, Stumpf was named executive vice president and head of community banking. Three years later, he was promoted to president and chief operating officer. Stumpf was named CEO of Wells Fargo in June 2007, succeeding Richard Kovacevich. Stumpf added the title of chairman in January 2010.

Raymond James to offer Great American’s fee-based FIA

Great American Life Insurance Company’s new, no-commission fixed indexed annuity with optional guaranteed income rider is now available through financial advisors at Raymond James, where the product will complement the commissioned-based indexed annuities already on the firm’s platform, the insurer announced today.

The Index ProtectorSM 7 fixed-indexed annuity, introduced in August, marks Great American Life’s entry into the investment advisory channel. It is designed for financial advisors who charge clients a percent of assets under management instead of collecting commissions from insurers for selling annuities—a practice frowned upon by the U.S. Department of Labor with respect to tax-deferred accounts. 

The Index Protector 7 offers growth potential through options on the S&P500 Index, tax-deferral, and a return of premium guarantee. The optional Income Keeper rider provides lifetime income payments that could increase each year.

According to Joe Maringer, National Sales Vice President, Great American Life, the Index Protector 7 is an opportunity for consumers to further diversify their portfolios.

“Due to the persistently low interest rate environment, advisors may be seeking alternatives for the traditional fixed income portion of clients’ investment portfolios,” he said in a release. 

Scott Stolz, senior vice president, PCG Investment Products at Raymond James, said in a statement, “Demographic trends continue to favor fixed-indexed annuities. In addition to the much needed income guarantees, they provide our clients the potential to get returns in excess of inflation while subjecting their principal to minimal risk. We invited Great American to provide an annuity option for those advisors and clients who prefer an advisory arrangement. We believe that, given the changing regulatory landscape, the need for fee-based annuities will only grow.”

Great American Life Insurance Company is a member of Great American Insurance Group and is rated “A+” by Standard & Poor’s and “A” (Excellent) by A.M. Best for financial strength and operating performance.

Prudential promotes new global investment unit

PGIM, the global investment management businesses of Prudential Financial, Inc., has launched its first television, print, social and digital advertising campaign.

“The campaign highlights PGIM’s focus on delivering alpha and consistent investment performance through robust risk management and deep asset class expertise based on unique perspectives on long-term structural trends shaping the global economy,” said a release.

The campaign’s theme is based on PGIM’s fundamentals analyses, which provide information on such major global economic shifts as the aging of developed country populations and urbanization.

PGIM manages about $1 trillion for clients in 16 counties. It serves six of the ten largest Fortune 500 companies and 23 of the 25 largest U.S. corporate pension plans.

LifeYield upgrades Social Security-maximizing software

LifeYield, the Boston-based software firm whose product helps retirees minimize taxes optimize Social Security benefits, has enhanced its Social Security Advantage solution, the company announced this week.

The enhancements include “Benefit Delay” and “Benefit Replacement” features, which show advisors how to generate replacement income for clients who delay Social Security benefits and, for couples, how to replace Social Security benefits that are lost when the first spouse dies. 

It’s been show that even affluent clients rely on Social Security for a significant portion of their retirement income. Moreover, affluent clients have higher-than-average life expectancies, and therefore stand to benefit most in the long run by delaying benefits until age 70. 

LifeYield claims that some 50,000 advisors and investors currently use its Social Security Advantage software to maximize income in retirement by claiming Social Security at the optimal time.  

“Many file at the earliest age possible because they need the income. Others file early because they simply may not be aware they can gain up to almost 9% more in payments for each year they delay filing,” said Mark Hoffman, CEO of LifeYield, in a release. “Our tools analyze and suggest where investment and/or insurance products can provide income during the gap years.”

Social Security Advantage can also show married, widowed or divorced individuals can switch between spousal and earned benefit types to maximize their retirement income.  

The LifeYield Advantage Suite of software programs includes Portfolio Advantage, Social Security Advantage, and Income Advantage. 

Envestnet, on a roll, acquires Wheelhouse Analytics

In another DOL rule-related acquisition, Envestnet, Inc., announced this week that it has purchased Wheelhouse Analytics LLC, a technology company that provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises.

In a release, Envestnet said it will “deeply integrate Wheelhouse Analytics’ tools, delivering robust online dashboards and reporting that provides actionable intelligence.” The two companies have partnered since 2014 on several initiatives.

“With Wheelhouse, we will provide the compelling and valuable analytics solution that the industry is looking for, particularly as the regulatory environment has shifted with the Department of Labor (DOL) Fiduciary Rule.” said Bill Crager, president of Envestnet, which he said serves over 50,000 advisors and processes over five million investment accounts.

Envestnet will combine Wheelhouse Analytics’ tools with Yodlee’s data and analytics solutions. Envestnet acquired Yodlee in 2015 in a $538 million transaction.

Wheelhouse Analytics’ existing offerings provide enterprises with fee and performance benchmarking, supporting fee rationalization and best interest client documentation.

Additionally, Envestnet plans to extend Wheelhouse Analytics’ Deal Management and Intermediary Oversight platform to deliver a centralized data hub for product manufacturers and wealth management firms to collaborate on dealer fee agreement management and monitor product usage. 

Terms of the acquisition were not disclosed.

© 2016 RIJ Publishing LLC. All rights reserved.