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Trump rally could be sign of trouble ahead: TrimTabs

Posted on December 21, 2016 by Editorial Staff -

U.S. equity exchange-traded funds received a record $97.6 billion from Tuesday, November 8 to Thursday, December 15, according to TrimTabs Investment Research.

“ETF flows tend to be a good contrary indicator when they become extreme, so the buying frenzy doesn’t bode well for U.S. equities,” said David Santschi, CEO at TrimTabs.

“The market also could get a nasty jolt in January, when investors who’ve been postponing stock sales this year in anticipation of lower tax rates next year start to sell.”

“The stampede into U.S. equity ETFs since the election has been nothing short of breathtaking,” he said in a release. “The inflow since Election Day is equal to one and a half times the inflow of $61.5 billion in all of last year. One has to wonder who’s left to buy.”

The inflow into U.S. equity ETFs since Election Day is equal to 6.3% of these funds’ assets, according to TrimTabs’ research note. By mid-month, December’s inflow had already reached $43.4 billion; the record monthly inflow is $50.7 billion, set in November.

U.S. equity ETFs have had outflows on only three trading days since the presidential election, and inflows swelled to $27.8 billion on the five days ended Thursday, December 15. It was the highest weekly inflow in four weeks.

Will your grandkids shop for annuities on Amazon?

Posted on December 15, 2016 by Editorial Staff -

Amazon may not start delivering annuity contracts by aerial drone anytime soon, but the all-consuming online retailer, along with Walmart, Google and Apple, all represent big threats to slow-footed insurers in the near future, according to rating agency A.M. Best.

Indeed, U.S. life insurers must undergo a “rapid, strategic evolution” if they hope to remain profitable in the face of new types of competition, changing demographic and macroeconomic conditions, and new regulatory challenges, according to a new A.M. Best special report.

Affinity groups, retailers and online comparison platforms are already posing distribution competition to U.S. life insurers, said the report, entitled “Shifting Dynamics Could Lead to Distribution Channel Innovation.”

“Larger retail stores like Walmart offer automobile and health insurance products; however, other retail chains like Costco and affinity organizations such as AARP offer a more diversified suite of products that include life and other insurance lines.

“Another consideration is the presence of Amazon, Apple and Google, which have strong balance sheets with large databases of customer information, superior technological resources and a significant amount of excess capital.

“Should they decide to make a large scale entrance into the insurance marketplace, this could further disrupt the current U.S. life insurance distribution model, which historically has been slow to adapt and is hindered by inefficient legacy systems,” A.M. Best said in a release.

Finding new insurance agents is another challenge. According to a recent A.M. Best survey, the top three concerns in recruiting new agents for life/annuity insurers, according to an A.M. Best survey, include:

Difficulty in attracting younger talent (32.3%)
Recruits lack needed sales skills (24.2%)
Recruits lack of knowledge of the insurance industry (21.0%)
The current force is aging: 62.5% of producers age 50+; only 3.1% are under 35.

Broker/dealers accounted for the largest allocation of New Business Annualized Premium, at nearly 30% in 2015, A.M. Best has found. Some insurers had been acquiring independent broker/dealers in previous years as they searched for new distribution outlets, though many have since disposed of them due to the 2008 financial crisis.

That might not be the right culture match, however. “A.M. Best remains somewhat concerned about the financial consequences for insurers who continue to own and operate independent broker/dealers, and believes additional fines are possible as a result of the recent scandal related to the opening of fake unauthorized accounts at Wells Fargo. The U.S. Department of Labor’s fiduciary rule gives further reason for insurers to consider separating themselves from this distribution outlet,” the release said.

Parts of the insurance sales process may shift to the internet or be assumed by artificial intelligence, the release said, but “continued investment in people, process and technology, such as the potential integration of model validation with data analytics and predictive modeling, likely will lead to improved sales and underwriting results.”

Calculating After-Tax Social Security Benefits

Posted on December 15, 2016 by Kerry Pechter -

A healthy 75-year-old I know has few if any financial worries. He is a partner in a successful plastics factory. He owns a share in a ranch out West. He even has a climate-controlled garage full of new and vintage sports cars.

His main issue, of course, is taxes. He recently complained about how much tax he pays on his Social Security benefits. “There’s almost no benefit left,” he said. But he said it with a dry smile. He knows that the OASDI system wasn’t designed with him in mind.

Yes, many people, including perhaps most of your clients, will earn enough in retirement to owe taxes on as much as 85% of their Social Security benefits.

How much will they pay? A handy crib-sheet recently published by Vanguard shows the formulae for calculating the portion of an individual’s or couple’s Social Security benefits that will be subject to ordinary income tax.

The first step is to calculate the client’s Provisional Income. This is the sum of the client’s Adjusted Gross Income (including realized capital gains), plus the interest they receive from tax-exempt bonds, plus one-half of their Social Security benefit.

Depending on the level of Provisional Income (and depending on whether the client is single, a married couple filing jointly, or a couple filing separately), as little as 0% or as much as 85% of the Social Security benefit will be subject to federal income tax. If a couple’s PI exceeds $44,000, then up to 85% of the Social Security benefit will be taxable (See table below).

The exact percentage of Social Security income that’s taxable, according to Vanguard, is the smallest of the following three calculations:

85% of Social Security benefits.
50% of Social Security benefits + 85% of Provisional Income over $34,000 (for singles) or $44,000 (for couples filing jointly).
50% of PI over $25,000 (single) or $32,000 (married, filing jointly) + 35% of PI over $34,000 (single) or $44,000 (married, filing jointly).

For example, consider a couple with $40,000 in AGI from part-time income, capital gains, and Required Minimum Distributions, $20,000 in interest from municipal bonds and $28,000 in Social Security benefits, after deductions and exemptions. The Provisional Income would be $74,000. How much of their benefits would be taxed?

Under Calculation 1 above, 85% of the Social Security benefit or $23,800 would be taxable.
Under Calculation 2, ($25,500 + $14,000) $39,500 would be taxed.
Under Calculation 3, ($21,000 + $10,500) $31,500 would be taxed.

So, in this case, $23,800 of their Social Security benefit would be taxed. The couple’s taxable income would be $23,800 + $40,000 = $63,800. Given the current tax brackets, they would owe $6,787, or 15% of the amount over $18,550 ($45,250). (In this case, the tax on their capital gains and ordinary income would both be 15%). Of that $6,787, roughly 40% or $2,720 could be thought of as a reduction in their Social Security benefits. (We’re excluding the impact of Medicare-related deductions or taxes.)

So, even without legislating any changes in the calculation of Social Security benefits, the federal government, by the way it taxes those benefits, already claws back part of the payout and, in effect, makes the system marginally more progressive.

Ascensus to run Oregon’s public DC plan for private-sector workers

Posted on December 15, 2016 by Editorial Staff -

Ascensus was chosen this week as plan services provider for the Oregon Retirement Savings Plan, a state-sponsored defined contribution plan option that is preparing for a July 2017 launch.

Passed by the 2015 Legislature to address the crisis of inadequate savings, the Oregon plan will be available to the more than half of the Oregon workforce that does not already have access to a retirement savings plan at work.

Eligible workers will automatically defer a portion—initially 5%percent—of their paychecks deposited into their own secure retirement accounts, unless they opt out. An estimated 64,000 businesses, most them small, are expected to have employees eligible to participate.

Pennsylvania-based Ascensus is the nation’s largest independent retirement and college savings services provider, with more than $139 billion in assets under administration. The firm is helping seven million Americans save for the future, in partnership with financial institutions.

The Oregon Retirement Savings Board conducted a public request for proposals this fall for a firm to manage the account records, operate the website, and receive and process the retirement payments for what will be the first operating state-sponsored retirement savings plan.

As part of the successful bid, the company will absorb early startup costs and be repaid over the life of the contract. The company will collect a small annual fee from retirement accounts to cover the cost of administration, recordkeeping, marketing, and the package of investment options made available to retirement savers. The value of the contract ultimately will be based on the number of participants and assets invested.

Ascensus provides recordkeeping, administrative, and program management services to some 46,000 retirement plans and over 3.8 million 529 college savings accounts. It also administers more than 1.5 million IRAs and health savings accounts and is a major ERISA consultant.

Oregon officials been meeting with representatives of employers, workers, payroll administrators and consumer groups to guide the formation of the program. It is estimated that– most of them small businesses — will have employees eligible to participate in the plan.

A hearing will be Dec. 15 to collect feedback to a detailed draft of administrative rules, and written comments will be accepted through Dec. 23.

The Oregon plan will impose no fiduciary risk to employers, and clerical responsibilities will be kept low. The plan will not be a pension, is not linked to the Oregon Public Employee Retirement Fund, and will not offer any matching funds or any guarantee of performance by the state or by employers.

Charles Schwab offers hybrid-robo with $25k minimum

Posted on December 15, 2016 by Editorial Staff -

Charles Schwab has launched Schwab Intelligent Advisory, a hybrid, low-cost financial and investment planning advisory service that combines live licensed Certified Financial Planners (CFP) and algorithm-driven technology. The service is expected to launch in the first half of 2017.

The service, according to a Schwab news release this week, is designed for “an emerging or mass affluent investor focused on keeping costs low who doesn’t have a highly complex financial situation.” There will be a $25,000 investment minimum.

New clients will complete a self-guided online planning tool focused on their specific financial situation and goals including both Schwab and non-Schwab accounts, followed by a one-to-one conversation with a credentialed Planning Consultant.

Clients will have access via phone or videoconference to a team of CFPs who can answer questions and make recommendations about financial goals and saving targets, retirement planning, college savings, long-term care planning, and budgeting. Check-ins with CFPs will typically occur annually, but clients also have access to live 24/7 service support via phone, chat, and email.

Most clients will be invested in a fully automated, diversified portfolio using Schwab Intelligent Portfolios comprised of exchange-traded funds (ETFs) from Schwab, Vanguard, iShares and PowerShares.

Investors will have access to up 20 globally diversified asset classes in each portfolio including equities, fixed income, real estate, commodities, and an FDIC-insured cash allocation to manage volatility and risk. Clients can activate automated tax-loss harvesting for each account starting at $50,000.

Advisory fees under Schwab Intelligent Advisory are 0.28% of a client’s managed assets with a $900 quarterly fee maximum. The service will charge no trading commissions or account service fees. The weighted average operating expense ratios for the portfolios currently range from 0.08% for a conservative portfolio, 0.19% for a moderate portfolio, and 0.24% for an aggressive portfolio.

Every aspect of the service is designed to be paperless, to allow desktop and mobile access, and to allow automated account funding on a recurring basis, as well as fund accounts using mobile check deposit.

Fitch reviews impact of DOL rule on wealth managers

Posted on December 15, 2016 by Editorial Staff -

Wealth managers will see differing costs and benefits from the introduction of the Department of Labor’s (DOL) “fiduciary rule,” says Fitch Ratings, which added that it’s too soon to speculate about whether the incoming Trump administration will try to reverse the Obama administration’s rule.

The new DOL rule pertaining to conflicts of interest in retirement advice is due to begin to come into effect in April 2017 and will require wealth managers to maintain a fiduciary standard for clients’ retirement accounts. Wealth managers who manage discretionary retirement accounts will be legally held to higher fiduciary standards and required to make full disclosures regarding conflicts of interest and fees.

In response to the new rule:

Bank of America and JP Morgan Chase have announced that they will move to a purely fee-based model for retirement accounts with set fees charged as a percentage of assets.
Wells Fargo recently announced that it would continue to allow brokers to charge per-transaction commissions.
Morgan Stanley and Edward Jones have also announced that they would maintain commission-based compensation models for retirement accounts.

Depending on whether they pursue a fee-only or commissions model in response to the DOL rule, wealth managers may benefit or suffer, said a Fitch release.

“Switching to fee-based compensation will mean a simpler product structure and would make revenue generated from these accounts more recurring and potentially more predictable,” the release said.

“A fee-based structure could also mean less opportunity for brokers to overtrade client accounts, thus reducing potential legal liability from the introduction of the fiduciary standard. However, these financial institutions could risk losing brokers or smaller clients who do not benefit directly from the introduction of fees.

“Those institutions sticking with commissions will see greater broker retention. It will be more cost-effective for clients who have limited trades per year. However, interactions and account orders will need to be well documented to ensure higher compliance standards are met, and this will come with greater operational, compliance and legal costs.

“Notably, the potential cost of noncompliance could be a significant legal liability. The DOL rule could also have indirect effects on segments of the financial industry not directly targeted by the rule. Investment managers could face further outflows from actively managed products in favor of passive products deemed to more easily satisfy the fiduciary standard.

“That could pressure investment managers’ fee rates. Insurers too could see an increase in compliance costs from the DOL rule as well as changes in some sales practices, although Fitch maintains that the rule is ratings neutral for that sector.”

NAFA elects new board members

Posted on December 15, 2016 by Editorial Staff -

The general membership of NAFA, the National Association for Fixed Annuities, approved recommendations for its newly elected 2017 board of directors at the association’s recent annual meeting in Phoenix, Ariz. The five members who will take office at the start of 2017 include:

Margo Thompson of The Annuity Source, Inc.
Lauri Beck of Insurance Network America
Heather Kane of EquiTrust Life Insurance Co.
Jeff Maxey of InsurMark
Mike Morrone of Nationwide

Brian Mann of Partners Elite Advisory Group will assume the role of chairman of the board of directors, succeeding Nathan Zuidema of Imeriti Financial Network. Dominic Cursio of M3 Financial, Inc will be vice chair, Jim Maietta of Allianz will be secretary, and Chris Conroy of CreativeOne will join the executive operating committee as treasurer.

NAFA membership approved the rest of the board roster:

Cary Carney of Voya Financial
Tony Compton of Great American Insurance Group
Rich Lane of Standard Insurance Company
Eric Marhoun of Fidelity & Guaranty Life
Randy Matzke of Advisors Excel
Paul McGillivray of M&O Marketing
Kevin Mechtley of North American Company for Life and Health Insurance
Kirby Wood of American Equity

Exiting board members were Chris Johnson formerly with National Western Life, Rod Mims of Athene Annuity & Life Assurance Company, Harry Stout of NelsonWells, LLC, and Eric Taylor of AIG Life & Retirement.

Voya: From Orange to Origami

Posted on December 14, 2016 by Kerry Pechter -

So, what’s up at Voya Financial? Like its fellow life insurers, Voya enjoyed two sharp increases in its stock price in 2016—once at mid-year when Treasury yields rose and again after Donald Trump’s surprise election as U.S. president last month. Investors expect Trump to bring new spending programs, higher interest rates, deregulation and a lower corporate tax rate.

Voya was already getting the benefit of the doubt from the top insurance rating agency. Even though the $466 billion firm reported a $248 million net loss in 3Q2106, and despite lingering anxiety over the risks lurking in its closed block of variable annuities, A.M. Best upgraded Voya’s long-term issuer credit rating to A+ last month, citing its “favorable market position in selected life insurance, employee benefits and [institutional and individual] retirement markets.”

“In transition” may still be the best way to describe this former U.S. unit of Dutch financial giant ING. Almost four years after its IPO and rebranding as Voya (the name is meant to suggest “voyage”), the firm has retooled itself as a fixed indexed annuity manufacturer and launched an ad campaign featuring origami rodents that talk. But it is still searching for the right mix of products, personnel and organizational structure.

“From the IPO on, we’ve been trying to find synergies, break down silos and focus on becoming ‘One Voya,’” Chad Tope (below right), Voya’s president of Annuities and Individual Life Distribution, told RIJ recently. “We want to be ‘America’s retirement company’ and make sure we make it as easy as possible for people to do business with us.”

Over the past several months, Voya has announced a flurry of new products, managerial changes and a reorganization that moves annuities to the life insurance division. In a minor but discordant note, Voya also finds itself the defendant in a federal wrongful termination suit filed last July by veteran annuity executive Mary Fay, now at AIG. Voya has denied Fay’s allegations.

Coming in 2017: ‘The Journey’

Voya Financial’s two largest businesses are institutional retirement and annuities. It is the sixth largest recordkeeper in the U.S. ($288.7bn in defined contribution assets, according to PlanSponsor). It also ranked 19th in total sales of fixed annuities ($1.42bn) according to LIMRA, 13th in FIA sales, according to Wink, and 15th in sales of variable annuities ($1.15bn, investment-only VA), according to Morningstar, in the first nine months of 2016.

Voya is “a safe, yet steady competitor,” said an analyst at Wink, the annuity and insurance data shop. “They aren’t the first to venture into innovation yet are quick to follow suit with the top competitors.”

In terms of annuity assets under management, Voya’s latest SEC filings show $27.5bn in annuity AUM, including $14.2bn in FIAs, $5.0bn in other fixed annuities and $5.0bn in “investment-only” products. According to Morningstar, Voya still has the tenth-most variable annuity assets, ($65.6bn), now in a closed block.

Voya’s newest annuity, scheduled for release in mid-January, is an FIA called The Journey. “It’s a new design in the marketplace,” Tope told RIJ. It’s an FIA product with a seven-year term. It will compete with, or act like, an indexed certificate of deposit, but tax-deferred. Performance will be linked to “dynamic index strategies” provided by Citi and JP Morgan.

“We’ve had term point-to-point products, with seven- and nine-year terms, but there was no value during the term,” Tope said. “With this design, we’re offering credits.” There are two ways to gain value, Voya said. In each of the first six contract years, if the index registers a gain, the account gets a one-percent credit. At the end of seven years, 100% of the index gain is credited to the contract.

“We talked to banks and broker-dealers about this, and we could have come out with ‘just another product’ that represented an evolution of our current product set,” Tope added. But we asked, ‘What is the need?’ We want to help partners gain new business instead of moving existing assets around.”

Last June, Voya announced a new Quest series of three indexed annuities, including a 6% premium bonus product, a five-year product and a seven-year product. It continues to sell its Wealth Builder and Secure Index FIAs.

Voya has come up with some interesting income-generating concepts. In March 2013, it introduced Lifetime Income Annuity, an indexed product with a non-optional guaranteed lifetime withdrawal benefit with a nine-year surrender period. The benefit base is marked up to 150% of premium after a five-year deferral and to 225% of premium after 10 years, plus potential index gains up to 6% per year. Neither the roll-up nor the index gains are credited to the account value. In the brochure, 4.4% to 4.9% are cited as payout-rate examples.

Internal re-org

A lot of life insurers have struggled with the questions: Where do annuities belong in its corporate structure? With individual products or retirement plans? With investment products or life insurance? Where variable annuities were in vogue, it made sense to put annuities with investments. But does that make sense when FIAs are the main product?

Voya’s answer to the last two questions is No. Having put its VA-with-living-benefit block of business into run-off mode, hedged the risks in that block, and made cash surrender offers to owners of risky contracts, it decided to move its individual annuity out of Retirement Investments and over to the Life Insurance division.

(Voya is effectively out of the VA-with-living-benefit business; it soaks up too much capital. “When ING was selling VAs, they had some of the most generous guaranteed living benefits,” an insurance industry analyst told RIJ. “The lapse rate on those contracts was lower than they had assumed. Even before the IPO, they took a charge for [that]. The VA block has been the biggest drag on the stock price.”)

Hence the reorganization. “We’re strong on both indexed annuities and on universal life,” Tope told RIJ. “They were separate for a long time and were headed up by different CEOs. Now they report to one CEO. The rationale in the past was that variable annuities drove a lot of the sales. On the life side we were focused on term life and guaranteed death benefits. But we were exiting the VA business and didn’t want to sell the guaranteed death benefit on life products any more. We kind of morphed both of these businesses so that they look similar to each other.” (At left, Voya’s businesses.)

Voya has budgeted tens of millions of dollars for its latest reorganization, but expects high returns from the investment. According to its most recent 10-Q filing, Voya will incur restructuring expenses of at least $30 million in the fourth quarter of 2016 but expects to “achieve annual run rate costs savings of at least $100 million in 2018 and subsequent years.”

Outside observers are waiting to see how that works before passing judgment. “A life insurance policy can be more complex than a MYGA [multi-year guaranteed-rate annuity],” said David Paul, a principal at ALIRT Insurance Research. “Traditionally, those two products were supported by different wholesaling arms. It’s obviously a cost-saving decision to have one set of wholesalers support both products, but you have to wonder if wholesaling will suffer. Wholesaling is important to distribution, especially if you sell through the BGAs [brokerage general agencies] and financial institutions.

“My understanding is that Voya used to write more business through IMOs [independent marketing organizations, whose agents are independent], but opted to transition to a more direct-to-producer approach a number of years ago. I’m not sure it worked out as well. It will be interesting to see if the current reorganization is a positive or a negative,” he told RIJ.

The DOL fiduciary rule is also driving the reorganization. “The regulatory environment is pushing us toward the ‘best interest’ of the customer,” Tope said. “That implies the development of a holistic plan, and that’s what we’re good at. People will always have two insurable problems: Dying too soon and living too long. Therefore life insurance and annuities will take on much more importance in the planning process. So bringing the two together makes a lot of sense when you’re trying to achieve the best interest of the client.”

Executives in motion

Since 2013, Voya has experienced a fair amount of high level movement and turnover. In September, as part of the reorganization mentioned above, Carolyn Johnson, who had been president of Annuities at Voya, saw her role expand to include Individual Life. Chad Tope reports directly to her.

In other moves, Kevin Stych will join Voya Financial’s Annuities and Individual Life organization as vice president, national sales manager for brokerage sales, reporting to Tope. Stych had been national sales manager with Voya Financial Advisors (VFA) — the company’s 2,100-advisor retail broker-dealer. In another addition to the Annuities and Individual Life division distribution team, Jim Ryan, who has held senior relationship management positions elsewhere, will serve as vice president, Relationship Management.

Recently, Michael De Feo joined the firm as head of Retirement and Investment Only, arriving from the position of managing director, DCIO, Strategic Alliances and Sub-Advised at Nuveen Investments. He reports to Jake Tuzza, head of Intermediary Distribution for Voya Investment Management.

In November, Ewout Steenbergen, who had been Voya’s chief financial officer since January 2010, left the company. He now has a similar role at S&P Global. Michael Smith, who had been Voya’s CEO of Insurance Solutions, was named by CEO Rodney Martin to replace him.

There’s been a fair amount of turnover. Before Steenbergen left, Voya had also seen the departure of three other top executives from the retirement and annuity business—David Bedard, president of the Annuities Business, in October 2013, Maliz Beams, CEO of Voya Financial Retirement Solutions, in October 2014, and Jamie Ohl, president, Tax-Exempt Markets and Retirement, in September 2014.

‘Whistleblower’ lawsuit

Those departures may be coincidental or the result of aggressive headhunting by other firms. But in an October blogpost, analyst Justin Hibbard at Forward Forensics linked them to a lawsuit—which he called a “whistleblower suit”—filed against Voya in U.S. District Court in Connecticut last July by Mary Fay, who had been Voya’s senior vice president, head of products U.S. from 2012 until November 2013.

The complaint describes a managerial dispute over an estimate of the first-year return-on-equity of Voya’s about-to-be-launched Lifetime Income Annuity product (mentioned above). The suit claims that Voya’s superiors wanted a higher number than Fay and her actuaries felt they could justify; they balked at providing the higher number. The alleged conversation took place seven weeks before Voya’s May 1, 2013 IPO.

Fay’s relationship with senior management subsequently deteriorated to the point where she was told that her position had been eliminated, which the suit claims was an act of retaliation. She left Voya on November 1, 2013 and filed a complaint with the Department of Labor, but later decided to pursue a remedy in federal court. Fay and her attorneys weren’t available for comment. A Voya spokesman said that the company rejects the accusations and stands by the integrity of its actuarial process. Voya’s attorneys filed an answer to Fay’s complaint, denying her charges, on September 30.

What To Tell Nervous (Older) Clients Now

Posted on December 8, 2016 by Kerry Pechter -

After the drama of the November election, when equity prices rose and bond prices fell, queasy investors needed some emotional Dramamine. At such delicate moments, advisors typically send out emails or make phone calls to remind clients that volatility is normal and that they should “stay the course.”

I would propose that, during market turmoil, the messages from “retirement income” advisors to their clients should be substantially different from the messages that investment advisors send to their clients.

Both types of advisors may have the same immediate goal—to prevent clients from making hasty decisions. But the content of the conversation will be very different, because the risks that older clients face are very different from the risks that younger clients face, and advisors need to respond to them in different ways.

Let me explain. Accumulation-stage advisors and their clients are still seeking (“buying”) investment risk. They hold long positions in bonds, mutual funds, stocks and even riskier assets with higher potential for growth. Paper gains, which put them closer to their savings goals, make them feel richer. Paper losses make them feel poorer.

As their positions lose value, they wonder if they might never reach their goals at all. In their imagination, a black abyss opens wide. They begin to panic. Their advisors have to call them and tell them, “Stay calm. Stick with the plan.”

If they are young and have mountains of human capital to fall back on, convincing them to stay calm shouldn’t be hard. In the right frame of mind, they might even begin to see market downturns for what they are: opportunities to pick up bargains.

Distribution-stage advisors and their clients are in a very different position. They are risk sellers. Their main task is to fund their liabilities (lifetime income needs, future health care costs, etc.) and mitigate their risks (sequence of returns risk, interest rate risk, inflation risk). If you’ve already begun to do that with your older clients, they should be able to relax. In the right frame of mind, they’ll look at bull markets as opportunities to take profits and fund liabilities.

By all means, avoid a mismatch in messaging. If you’ve been treating your older, decumulation-stage clients like accumulation-stage clients, it will be screamingly obvious. Clients won’t just be panicky when volatility rises; they’ll be angry. Here are three things that a retirement specialist should be able to tell his or her older clients when they worry:

Relax: you’ve got enough cash. Nearly retired or recently retired clients all face “sequence-of-returns” risk. This isn’t the same as investment risk. It is the risk that, for lack of liquidity, your client will be forced to sell depressed assets to generate current income, thereby locking in losses from which they can’t recover.

But if they’ve already set up enough guaranteed income (either from a cash account, income annuity, pension, Social Security or even a reverse home equity line of credit) to cover their essential expenses for the duration of the downturn, you can tell them to turn off the financial news and relax. If they’re nervous about their highly appreciated equities, now might be the time to sell some of them and fund a cash bucket.

No need to get hyper over interest rates. Retirees tend to hold bonds and bond funds, so they’re vulnerable to interest rate risk—the risk that rising rates will depress the market value of their portfolio. Bond prices fell (and yields rose) after the election, as investors sold bonds and bought stocks in the belief that president-elect Trump will cut taxes, borrow big and finance an infrastructure boom. This may make older clients nervous, but they don’t have to be. Lower bond prices mean higher yields on new bond or bond-fund purchases. If yields keep rising, the cost of annuities may go down.

“Bond news can always be presented in a negative or positive light, depending on whether we’re focusing on price or yield,” advisor Russell Wild told RIJ this week. “I try not to focus on one or the other, as they are two sides of the same coin… Keeping an eye on bond-portfolio duration, rather than price or yield, is what I tell my clients. I remind them that with a short- to intermediate-duration bond portfolio (generally 3 to 5 years), interest rate risk is real, but modest.”

Your long-term needs are covered. Older clients sometimes need to be reminded that longevity risk (the cost of living much longer than expected) and health risk (the risk that unusually large health care costs will wipe out savings) are each a much bigger threat to their financial wellness than short-term volatility in the stock market.

If you’ve protected your clients against these risks, either by setting up a so-called bucketing strategy, or purchasing longevity insurance (i.e., a deferred income annuity that starts payments at age 80 to 85), or creating a plan to deal with the risk of disability or dementia, then you’ve given them concrete reasons to relax. Today’s market volatility won’t bother them if you’ve already addressed their late-life needs.

An exception that proves the rule

You may have noticed my use of the word, “decumulation.” Many or most of your older clients may never enter a decumulation stage per se because they’ll always earn more than they spend and they’ll never need to dip into principal. In theory, you can treat them as perpetual accumulators. But you’ve probably found that even the well-to-do aren’t immune to fear.

As behavioral economists have told us, losses carry much more emotional weight than gains do. In practice, most people, especially older people, are unhappy with the prospect of losing wealth, even if it’s only on paper and even if their basic expenses are safely covered. Rich people may feel threats to the attainment of their discretionary or aspirational goals as acutely as middle-class people feel threats to the satisfaction of their essential needs.

If your older clients are exceptionally worried, maybe you’ve been giving them accumulation-stage advice. You may have assumed, because of their high net worth, that they are still risk-buyers rather than risk-sellers. Or you may have anticipated their investment risk but not addressed the other financial risks they face. If you do decide to think more like a retirement income specialist, you may want to start right away, while asset prices are still high and the cost of funding liabilities is still relatively low.

On New Lincoln VA, the Income Benefit Is Mandatory

Posted on December 8, 2016 by Editorial Staff -

Lincoln Financial Group and BlackRock have collaborated on a new low-cost variable annuity contract for clients of fee-based advisors who want immediate, inflation-adjusted income for life.

It’s called Lincoln Core Income, and the three underlying investments are all iShares, chosen from BlackRock’s lineup of exchange-traded funds. The income benefit comes as part of the product, not as an option. The product will be available in the first quarter of 2017, according to a Lincoln Financial Group release this week.

The iShare options, which each cost 28 to 31 basis points per year, are Fixed Income Allocation, Global Moderate Allocation and U.S. Moderate Allocation. The annual mortality and expense risk fee is 55 basis points. The minimum initial premium is $25,000.

The fee for the Core Income living benefit is 85 basis points (with a maximum of 1.50%) for either single or joint life contracts. There are two death benefit options for Core Income, a return of principal guarantee for 75 basis points and a return of account value guarantee for 55 basis points.

No contingent deferred sales charges or surrender periods are associated with the product, making it suitable for advisors who charge their customers a percentage of assets under management.

The initial Core Income payment is set at the time of contract issue, according to the prospectus. It will depend on market conditions at the time of purchase. (The prospectus did not appear to say if the age of the contract owner or annuitant is a factor in the computation of the initial payment. A Lincoln spokesperson said the company could not provide more information at this time.)

In the prospectus, Lincoln gives an example of a client, age 65 to 80 with a premium of $100,000, who receives a payment of $4,000 per year with a 2% annual inflation increase.

Although people from age 51 to age 80 can purchase the product, income is not available until age 60. If taken between ages 60 and 64, the annual Core Income payment is reduced by 25%. The annual income is also reduced by 25% after the death of the first spouse in a joint life contract.

“A shift by advisors towards fee-based models is a growing trend,” said Salim Ramji, Head of BlackRock’s U.S. Wealth Advisory business. “Lincoln and BlackRock are collaborating to meet the need of advisors looking for simpler ways to help clients meet their retirement income goals with more low-cost, quality options using ETFs.”

VA Sales are Down, But AUM Is Up: Morningstar

Posted on December 8, 2016 by Kevin Loffredi -

At $25.0 billion, new sales of variable annuities were 4.13% lower (approximately $1 billion) in Q3 2016 than in the previous quarter. Year over year, sales dropped 21.2% from the $31.7 billion sold in the previous year’s third quarter, according to Morningstar’s quarterly Variable Annuity Sales and Asset Survey.

Nationwide and Ameriprise were the only two issuers with sales gains in the current quarter. Jackson and Prudential were the issuers of the top three contracts by net flows: Perspective II, Premier Retirement VA B and Prudential Defined Income. Jackson National led in the bank, independent, and wirehouse channels; Lincoln led in the regional channel; TIAA topped the captive channel; and Fidelity led in the direct channel.

Eight of the top-ten issuers saw their sales decline in the third quarter compared to the first quarter, where all 10 had negative sales growth. Month-by-month, the sales of reporting companies was choppy, with a 13.92% decline in July followed by a 15.9% increase in August and a 7.7% decrease in September.

During the third quarter, only 13 of the 48 carriers (27%) had positive net flows. This percentage is similar to previous quarters this year, but in previous years about 40% of carriers had positive net flows. Despite the decline in sales from the previous quarter and a larger negative outflow for the quarter, assets under management increased during the quarter by 2.17% to $1.9 trillion. For reference, the return for the S&P 500 Total Return index for the third quarter 2016 was 3.85%.

The assault on L-share contracts continues, thanks to FINRA’s penalization of firms that sell them. Sales fell to 3.4% of total sales this quarter compared to 10.8% in the same quarter last year and 5.2% last quarter. L-share fees are relatively high and, despite their short surrender period, most are sold with lifetime income benefits. FINRA sees this inconsistency as creating the potential for unsuitable sales.

By distribution channel, the captive agency channel led with 38.3% of sales, followed by the independent channel with 32.9%. Year over year, only the regional firms and captive agency channels had notable changes, with a share decline of 2.2% and share growth of 4.3%, respectively.

Income benefits attract older variable annuity buyers: LIMRA

Posted on December 8, 2016 by Editorial Staff -

Buyers of variable annuities with guaranteed living benefit (GLB) riders and buyers of VAs without GLBs have significantly different characteristics, according to new research conducted by the LIMRA Secure Retirement Institute.

People who purchased a variable annuity contract without the guaranteed living benefit are more than five years younger (57.3 years versus 62.5 years) on average than buyers who purchase a GLB rider. Buyers of variable annuities with a guaranteed living benefit are more concentrated around the average retirement age of 62.

LIMRA Age Distribution for VA contracts

Specially, the LIMRA data show:

Purchasers of VA contracts without income benefit riders range from younger than 50 to older than 80, with 10% to 15% in each of eight age groups
Two-thirds of those who buy variable annuities with income benefit riders are concentrated between ages 56 and 70

In terms of age, the audience for variable annuities without the GLB is much more diverse. The average initial premium for VA buyers not electing a living benefit is also $35,000 less.

Among indexed annuity buyers, the average ages for those who purchase the GLB versus those not electing a GLB were stable at 62.6 and 62.7, respectively. There are no substantial differences in their average premiums. Fixed-rate annuity buyers have an average age of 63.5.

The popularity of the variable annuity without a GLB stems from its tax-deferred aspect. The deferred VA is the only investment vehicle that allows savers to set aside large amounts—up to $1 million or more—of after-tax savings for the purpose of long-term tax-deferred growth. The product is especially useful for those in high tax brackets who have already invested the maximum in other tax-deferred vehicles, such as 401(k) plans.

Did your active fund underperform? Maybe a rich kid manages it

Posted on December 8, 2016 by Editorial Staff -

People with relatively modest or obscure family backgrounds can reach the top rungs of the fund management business—but only a few do so, and only if they deliver better returns than their colleagues, according to a new paper from the National Bureau of Economic Research.

In “Family Descent as a Signal of Managerial Quality: Evidence from Mutual Funds,” Denis Sosyura of the University of Michigan and Oleg Chuprinin of the University of New South Wales found that mutual fund managers from poor families consistently achieve better investment results than those from wealthier backgrounds.

The researchers found that fund managers from wealthier backgrounds delivered “significantly weaker performance than managers descending from less wealthy families. Managers from families in the top quintile of wealth underperformed managers in the bottom quintile by 2.16% per year.” The researchers also found significant differences in promotion patterns and trading styles between these two types of fund managers.

This doesn’t necessarily mean, however, that underprivileged people make better fund managers. It may not say anything at all about people from poor families in general. It may only mean that exceptional performance can overcome the handicap of a poor background. Or it may even mean that the fund management business isn’t a meritocracy.

“The researchers emphasize that these findings do not imply that those from poor families are in general better at their jobs than those with a more fortunate background,” wrote a reviewer of the study. “Rather, because individuals from less-privileged backgrounds have higher barriers to entry into prestigious positions, they argue, only the most skilled advance and succeed.”

Previous studies about the relationship between managers’ upbringing and their performance have focused on educational differences, including whether the managers attended elite universities or had access to education-related networks of influential people who could later help boost their careers. Such studies tend to find that managers with a stronger educational background tend to deliver better performance.

In this study, the economists relied on data from individual U.S. Census records on the wealth and income of managers’ parents. The researchers also identified and verified fund managers via Morningstar, Nelson’s Directory of Investment Managers, and LexisNexis Public Records.

They identified hundreds of fund managers, most born in the mid-1940s, whose parents’ Census records were in the public domain. They then examined the performance of hundreds of actively managed mutual funds focused on U.S. equities between the years 1975 and 2012.

Indeed, in tracking career trajectories of mutual fund managers, they find that the promotions of managers from well-to-do families are less sensitive to their performance.

In other words, managers who are born rich are more likely to be promoted for reasons unrelated to performance.

In contrast, those born into poor families are fewer in number and are promoted only if they outperform. Fund managers from less-affluent families who do make it into top ranks are also more active on their job: they are more likely to trade and deviate from the market, whereas those born rich are more likely to follow benchmark indexes.

In the Netherlands, DB plans said to out-deliver DC plans

Posted on December 8, 2016 by Editorial Staff -

Thanks to risk-sharing and the hedging of interest risk on liabilities, defined benefit (DB) plans in the Netherlands can achieve 20% better outcomes at retirement than individual defined contribution (DC) plans, according to the Dutch Bureau for Economic Policy Analysis (CPB).

The CPB had compared two options for a new pensions contract at request of pensions think-tank Netspar. The options were “collective DB” without guarantees and individual pensions accrual with shared investment risk, as well as individual DC contracts without risk-sharing.

The options were proposed by the SER, a panel of employer and employee representatives and academics that advises the Dutch government on social and economic policy. The news was first reported by IPE.com.

Seven percentage points of the extra return produced by DB plans were due to shared investment risk between current and future generations, which enables DB schemes to take on more investment risk, said Marcel Lever program leader at CPB.

The remaining 13 percentage points came from a 25% interest hedge through swaps, on top of the interest cover through bond holdings. With interest swaps, pension funds always receive the long-term rate and pay the short variable rate, Lever said.

“At individual contracts, it is uncommon to hedge interest risk this way. Because the long rate is almost always higher, this construction delivers an additional return of 1.5% on average in the long run,” he said. “In most of our scenarios, a hedge of between 60% and 100% is beneficial.”

Lever said it was still unclear whether an interest hedge would also apply to a pensions contract based on individual accrual with risk-sharing. “The question is whether all participants with individual contracts could provide sufficient collateral such as AAA bonds,” he said.

Asset managers face five headwinds: Casey Quirk

Posted on December 8, 2016 by Editorial Staff -

Unprecedented fee compression and slow growth will force many asset managers worldwide to cut costs and transform their business strategies to survive, according to a new white paper from Casey Quirk, a unit of Deloitte Consulting LLP.

In “Survival of the Fittest: Defining Future Leaders in Asset Management,” Casey Quirk defines the characteristics of the industry today:

Lower capital market returns
Shrinking growth in assets to manage
Widespread portfolio de-risking
Increasing government regulation of investment advice providers
Disruptive technologies that circumvent traditional asset managers

Organic growth—new assets for managers to win—already has slowed from an average rate of 3.5% annually worldwide before the 2008-2009 financial crisis to 1.7% from 2009-2014, and will likely fall below 1 percent in the near future, the report said.

The exception is China’s asset management market, which will likely grow as fast as the rest of the world combined, according to the Casey Quirk analysis.

Additionally, near-zero interest rates and the end of a secular surge in growth worldwide could slice future returns in half. Asset managers and advisors will need to slash fees to maintain the same long-term ratio of fees to returns, which historically has hovered around 25%. Casey Quirk predicts median profit margins for asset managers will drop from 34% to 28% in five years.

Eighty-one percent of the $44 trillion in retail assets in the United States and European Union are expected to be subject to a fiduciary standard by 2018 versus only 33% in 2015, according to Casey Quirk’s research into the effect of the U.S. Department of Labor’s (DOL) fiduciary rule and similar legislation passed in the European Union under the Markets in Financial Instruments Directive (MiFID).

“Asset managers face the strongest headwinds yet as an industry,” but “one-third of asset managers are still growing their market share by embracing new, differentiated strategies that reflect changing realities, as well as supporting products and services that appeal to skeptical investors,” said Ben Phillips, a principal at Casey Quirk, in a release.

The four key characteristics of leading asset managers are:

A broader investment toolkit that has transitioned from legacy benchmark-oriented products to in-demand actively managed capabilities
A strong brand with well-regarded fiduciary and consumer attributes built on trust, investment leadership, and an ability to regularly meet investor expectations about outcomes
A customer experience that highlights the firm’s value-added services for the investor
Data about customers and markets that fuel proprietary analytics

According to Casey Quirk, successful asset managers should:

Allocate resources to new growth initiatives and away from outmoded product lines and client segments that are experiencing outflows
Streamline operations for efficiency; acquire new skills and technologies through M&A
Diversify investments with a broader array of active capabilities and strong product development processes
Digitize distribution
Build a consumer-oriented fiduciary brand

Six Bipartisan Opportunities for the President-Elect

Posted on December 1, 2016 by Eugene Steuerle -

I have never believed that candidates should lay out detailed policy agendas in their campaigns. While broad outlines are helpful, the specifics are too complex for the stump and often unappealing to voters. So to move beyond campaign promises that seldom add up for any candidate, here is how President-elect Trump could move forward in six policy areas even while facing extraordinary budget constraints. Each issue has a framing that gives it a better chance of garnering bipartisan support.

Workers. Many workers made it clear in this election that they feel forgotten by government. While the left and right disagree over how well our government promotes opportunity for workers, they generally agree it could do better. Trump tapped into workers’ frustrations but hasn’t yet identified how to significantly help them. How about this as a start? Simply ask agencies to assess the extent to which their programs could better promote work, even when that is not their primary mission. This applies to a wide range of programs, from wage, housing, health, and food supports to how well the military helps veterans get a job.

Budget Reform. Even if some adviser tells the President-elect that there is magic money to be had through extraordinary economic growth, tackling budget shortfalls will soon become unavoidable.

Never before have so many promises been made for the future, both for unsustainable rates of spending growth and lower taxes. Indeed, all future revenue growth and then some have already been committed for health, retirement, and the interest costs alone. Engaging in more giveaways only exacerbates this problem.

One way to cut the Gordian knot and convince the public to buy into longer-run budget goals is to show how interest savings generated by long-run fiscal prudence eventually allows both more program spending and lower taxes than do big deficits.

International Tax Reform. If the US is going to collect tax revenue from US-based multinationals, it will need to get a handle on this issue. It makes no sense administratively to tax these firms based on the geographical location of headquarters, researchers, patents, borrowing, or salespeople.

The solution involves taxing corporations less but individual shareholders more, while still engaging corporations to withhold those taxes. Any reform must limit the firms’ ability to shift income and deductions to the most tax-advantageous locations.

Individual Tax Reform. Trump could accomplish some individual tax reform by focusing less on reducing the existing $1 trillion-plus level of tax subsidies and more on limiting their automatically-increasing growth rates. He could use the revenue to either reform the tax code or better target the subsidies. For example, he could redesign housing-related tax preferences so they truly promote homeownership.

Health Reform. Conservative and progressive health experts agree that the Affordable Care Act suffers from at least two problems: It did not sufficiently tackle the issue of rising medical costs, and many people remain uninsured. Trump could generate more bipartisan support if he aims to reform the system to cover more people while generating enough cost saving to make that goal attainable in a fiscally sustainable way.

Retirement and Social Security. President-elect Trump promised to not cut Social Security benefits while Secretary Clinton said she would raise them. But raised or cut relative to what? An average-income millennial couple is scheduled to receive about $2 million in Social Security and Medicare benefits versus $1 million for a typical couple retiring today.

Younger people, who often expect no Social Security benefits, seem willing to accept changes that would slow the program’s rate of growth. That’s an opening for Trump to sell the reform as a long-term effort that opens up the budget to some of their needs, such as reducing student debt, while still protecting the current elderly.

For many elderly, benefits can even be enhanced through private pension reform to increase individual retirement savings and enhancing Social Security benefits for low-income retirees.

Paraphrasing Herb Stein, who was President Nixon’s chief economic adviser, “what can’t continue won’t.” And that’s true with the nation’s unsustainable fiscal path. Eventually, we will need to take the types of steps that I’ve outlined. With some creative thinking about how to newly frame important issues, President Trump could advance some real possibilities of reform despite a season of ugly campaigning.

The Government We Deserve is a periodic column on public policy by Eugene Steuerle, an Institute fellow and the Richard B. Fisher Chair at the nonpartisan Urban Institute. This article previously appeared at TaxVox.

At DCIIA Forum, Familiar Faces and Fresh Ideas

Posted on December 1, 2016 by Kerry Pechter -

Where, in one place and at one time, can you meet about 350 of the people, including asset managers, recordkeepers, actuaries, academics, consultants and entrepreneurs, who help determine what the rest of us think about when we think about the defined contribution business in the US?

Gathered in the Goldman Sachs building in lower Manhattan yesterday for the Defined Contribution Institutional Investors Association’s seventh annual Academic Forum, I saw people who have, almost like the tugboat captains who used to nudge ocean liners around the adjacent New York harbor, spent years nudging millions of people and massive blocks of assets toward solvent retirements.

Dropping the women’s names first, there was Kelly Hueler, creator of Income Solutions, Stacy Schaus of PIMCO, Lori Lucas of Callan Associates, Toni Griffin of MetLife, former MetLife retirement chief Jody Strakosch, Melissa Kahn of SSgA, and Cindy Hounsell of WISER.

Among the men, there was Brett Hammond (formerly TIAA), behavioral economists Meir Statman and John Beshears, EBRI data wrangler Jack Vanderhei, Franklin Templeton’s Drew Carrington, and Richard Fullmer of T. Rowe Price, Josh Dietch of Strategic Insight and lawyers Jonathan Forman of the University of Oklahoma and Michael Kreps of the Groom Law Group.

As noted above, hundreds of other retirement professionals attended. Over the past half-decade, under the executive direction of Lew Minsky, DCIIA’s membership has quietly grown to include almost the entire roster of financial institutions that run the trillions of dollars in tax-deferred retirement savings. Every fall, the organization holds an academic forum where scholarly research is presented and discussed.

Yesterday, in an auditorium that Goldman Sachs’ own CIA-trained security expert said is the safest space in the safest building in Manhattan, the presentations did not address topical issues like 401(k) litigation or the new DOL fiduciary rule but instead some of the more perennial or fundamental issues that the retirement industry faces. Such as:

‘Auto-Enrollment: Comprehensive Plan Design’

In perhaps the most provocative presentation of the day, Harvard economist John Beshears questioned the efficacy of automatic enrollment (AE). Although AE has indisputably raised participation rates of 401(k) plans, many participants have nullified their savings by taking on more consumer debt, his research showed.

Looking at payroll and credit rating agency data on civilian employees of the U.S. Army, Beshears and his co-authors found that about 60% of their savings in the government DC plan, the Thrift Savings Plan, was offset by new debt. Moreover, if the government’s matching contribution were excluded, virtually all of the employee contribution was offset by new debt, on average.

Jack Vanderhei of EBRI, whose voluminous output of data usually shows the 401(k) system to its best advantage, did not dispute the findings. But he said that EBRI’s projections suggest that when a company moves from voluntary enrollment to AE with automatic escalation of contribution percentages, participants end up with at least a 17.5% increase in “simulated retirement outcomes.”

‘Shark Attacks and Our Work: How Our Beliefs & Abilities Enable Us to Retire’

Two academic economists, Raphael Schoenle of Brandeis University and Geoffrey Sanzenbacher of Boston College, consider two questions, respectively. The first was, “Why don’t young people save more and why don’t retirees spend more?” The second was, “Which jobs can older minds and bodies do best (and worst)?”

Younger people tend to underestimate their lifespans (and fail to save adequately for retirement) and older people on average overestimate their lifespans (and hoard against the possibility of needing long-term care), Schoenle said in answer to the first question. The crossover age, when people on average know how long they are likely to live, is about 73. Plan participants need more “probability literacy,” he said.

Sanzenbacher introduced a “Susceptibility Index,” a scale covering 52 separate physical, cognitive and sensory abilities and 900 different occupations that enables him and his co-researchers to identify the jobs that older people can or can’t handle as well as younger people. “Blue collar” work, not surprisingly, tends to get much harder for people in their 60s—an observation that may dissuade policymakers from raising Social Security’s full retirement age.

‘Long-Term Investing in a Short-Term World’

In a discussion aimed at the asset managers in the room, Meir Statman of Santa Clara University took on the question of whether funds that follow ESG (Environmental, Social and Governance) and SRI (Sustainable and Responsible Investment) guidelines belong in 401(k) plans and Russell Wermers of the University of Maryland addressed questions regarding the place for actively-managed funds in 401(k) plans.

Because ESG/SRI funds invest in companies based on ethics as well as profitability, and because actively-managed funds tend to take bigger risks and charge higher fees (relative to index funds), both test the fiduciary responsibility of plan sponsors to help participants maximize the growth of their savings in a prudent way.

Wermers’ research showed that active funds that are managed with a long-term focus (but not simply buy-and-hold) can outperform high-turnover funds by as much as 3% a year over a five-year period, thus justifying their higher fees. Statman, for his part, claimed that the pleasure that many investors get from owning ESG or SRI funds is a fair substitute for the fund’s under-performance, if any. “People care about more than money,” he said.

‘Four Decades Since ERISA: Rethinking How We Allocate Risks’

Should employers, who have largely abandoned the defined benefit pension business, also get out of the defined contribution business? Dana Muir of the University of Michigan said employers shouldn’t bear the fiduciary risks and administrative costs of plan sponsorship and pointed to experiments in Canada and Australia with non-employer plans.

Going a step farther, Jonathan Forman suggested taking insurance companies out of the retirement business by creating “tontines” instead. Like a traditional annuity, a tontine consists of the pooled investments and longevity risks of a large group of people.

Unlike a traditional fixed annuity, a tontine doesn’t involve guaranteed payouts; participants accept market returns and rely on mortality credits for most of their yield. Annuities in general might be more popular, he said, if the government taxed annuity income at a rate lower than the tax on ordinary income.

FIA sales on pace to exceed $60 billion

Posted on December 1, 2016 by Editorial Staff -

Fixed indexed annuity (FIA) sales were $15.0 billion in the third quarter of 2016, up 5% from the year-ago quarter, and $46.9 billion for the first three quarters of 2016, 22% higher than the first three-quarters of 2015, according to LIMRA Secure Retirement Institute’s Third Quarter U.S. Annuity Sales survey.

“Indexed annuities are on pace to exceed $60.0 billion by year-end, a 10 to 15% increase over prior year,” said Todd Giesing, assistant research director, LIMRA Secure Retirement Institute. “While most other annuity products have faltered because of falling interest rates and anticipation of the Department of Labor (DOL) fiduciary rule, FIAs continue to thrive.”

Total 3Q2016 U.S. annuity sales declined for the second consecutive quarter, to $53.6 billion (down 11% from the prior year). Year-to-date, total annuity sales were $170.9 billion (down 2% from the first three quarters of 2015).

VA sales totaled $25.9 billion in the third quarter, down 21% from 2015. It was the lowest quarterly sales level since 1998 and the third consecutive quarter of VA sales below $30 billion—a streak not seen since 2002. Year-to-date, VA sales totaled $79.4 billion, down $22.0 billion from 2015.

“There has been a significant drop in sales by independent broker-dealers this year as they prepare for the impending DOL fiduciary rule,” noted Giesing. “With so many factors still unknown, carriers have been slow to introduce new products.”

LIMRA Secure Retirement Institute is forecasting VA sales to end the year around $105.0 billion, down just over 20%. Without changes on the DOL fiduciary rule coming from the new Administration or Congress, the Institute predicts VA sales will fall another 25 to 30% in 2017.

Overall fixed annuity sales increased one percent in the third quarter, to $27.7 billion. In the first nine months of 2016, fixed annuity sales totaled $91.5 billion, an increase of 25%.

For the third consecutive quarter, fixed annuity sales (including fixed-rate deferred, FIA, and fixed immediate) dominated annuity market activity. In the third quarter, fixed sales represented 51% and variable annuity (VA) sales accounted for 49% the market. Two years ago, VAs had a 61% share.

Despite the challenging interest rate environment, the Institute forecasts fixed annuities to rise 15% to 20% in 2016 compared with the prior year. This will counter falling VA sales. As a result, total annuity sales should end the year even with 2015.

Sales of fixed-rate deferred annuities, (book value and market value adjusted) fell 4%, to $8.5 billion. Year-to-date, fixed-rate deferred product sales totaled $31.0 billion, up 38%.

Falling interest rates in the third quarter undermined income annuity sales. Fixed immediate annuity sales dropped 4% in the third quarter, to $2.2 billion. Year-to-date fixed immediate annuity sales equaled $7.2 billion, 11% higher than the first nine months of 2015.

The Institute expects fixed immediate annuity sales to end the year around $9.5 billion, 7% higher than 2015.

Deferred income annuity (DIA) sales fell 11% in the quarter to $605.0 million. Year-to-date, DIAs improved 19 percent compared with prior year, totaling $2.2 billion. DIA sales are projected to exceed $3.0 billion, around 15 percent higher than 2015.

The third quarter 2016 Annuities Industry Estimates can be found in the updated Data Bank. To view the top twenty rankings of total, variable and fixed annuity writers for third quarter 2016, please visit Third Quarter 2016 Annuity Rankings. To view the breakout of indexed and fixed-rate annuity sales rankings, please visit: Third Quarter Fixed Annuity Breakout Rankings. To view variable, fixed and total annuity sales over the past 10 years, please visit Annuity Sales 2006–2015.

Does GOP now represent the downtrodden? Not exactly

Posted on December 1, 2016 by Editorial Staff -

Disgruntled working-class voters in the American heartland may have helped carry Donald Trump to victory in last month’s presidential election, but demographic data suggests that the GOP is still very much the party of the rich.

To be sure, wealthy liberals exist. But poor, urban, minority and unmarried voters are also concentrated in the Democratic Party. In terms of income and wealth, the victorious Republicans can be more accurately described as the home of America’s elite.

Data collected by Strategic Business Insights and published in the October issue of its MacroMonitor newsletter shows that significant wealth and ethnic differences exist between the members of the two parties, on average. (See chart at right.)

In terms of income, Republicans came out well ahead of Democrats in the data, which was collected by SBI’s Consumer Financial Decisions group in 2014 and 2015. Republicans’ median annual income at $61,000 per year, was 45% higher than Democrats’ $42,000 per year.

Looking at net worth, the difference is even more pronounced. The median net worth of members of the GOP was $525,000, or 81% higher than the Democrats’ $301,000. Republicans own 38% of U.S. financial assets while representing 27% of households. Democrats, with 32% of households, own only 25% of financial assets.

Although the election result was purportedly driven by a sense of financial insecurity, Republicans are more likely to feel financially secure (26% vs. 15% for Democrats). They are more likely to own a single-family home (73% vs. 56%), more likely to own an investment account (50% vs. 37%) and more likely to be married (62% vs. 44%).

Ethnically, 91% of GOP voters are white, while 43% of Democrats are members of ethnic minority groups. Democrats are as likely to live in big cities as outside big cities (43% and 43%) but Republicans disproportionately live outside big cities (40% outside and 8% inside).

The characteristics of independent voters, who account for 21% of households, overlap a bit with Republicans and a bit with Democrats. Their median annual incomes, at $52,000, fall about halfway between Democrat and Republican incomes. They include a higher percentage of white voters than the Democratic party does, but not as a high as the Republican.

Securian expands suite of annuity solutions

Posted on December 1, 2016 by Editorial Staff -

Securian Financial Group has added four new annuity solutions to its suite of products designed to help financial advisors meet their clients’ retirement income needs:

SecureLink Future: Fixed indexed annuity
Securian is adding a fixed indexed annuity—SecureLink Future—to its product lineup. For clients seeking retirement asset growth plus the protection of guarantees, SecureLink Future provides:

Four account options to allocate purchase payments
Indexed accounts linked to indices from S&P 500 and Barclays
Choice of seven or nine year surrender charge periods

Achiever Lifetime Income: Lifetime withdrawal benefit for SecureLink Future
Advisors can offer clients more guarantees, along with flexible access to their SecureLink Future annuity, with Achiever Lifetime Income—an optional guaranteed lifetime withdrawal benefit (GLWB). Available at contract issue for an annual fee of 1.15% of the benefit base (single and joint), Achiever Lifetime Income provides:

Guaranteed annual income of 3.5% to 7% of the benefit base (single life), or 3% to 6.5 % (joint life)
An 8% percent enhancement added to the benefit base in each year with no withdrawals during the first 10 years
A 200% benefit base guarantee if no withdrawals are taken in the first 10 years

Premier Protector: Accelerated death benefit with spending flexibility
Premier Protector is an optional variable annuity death benefit available at contract issue for an additional cost. Beyond protecting and growing assets for beneficiaries, Premier Protector allows a client to accelerate access to the death benefit upon experiencing a permanent chronic or terminal illness. Once accelerated, the client has complete flexibility in how the benefit proceeds are spent.

Multioption Advantage: Variable annuity for fee-based platforms
Securian has developed MultiOption Advantage—a new variable annuity for fee-based platforms—for advisors and broker-dealers interested in diversifying their variable annuity product offerings. The mortality and expense risk fee is 0.45% during the accumulation period and 1.20% during the annuity period, according to the prospectus.

Data Connection