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At IRI Legal Conference, Lawyers Parse the “Fiduciary Rule”

Posted on June 9, 2016 by -

Two unexpected things happened on the first morning of the Insured Retirement Institute’s Government, Legal and Regulatory Conference on Monday in Washington, D.C., which focused on the DOL’s controversial, freshly issued (April 6) fiduciary or “conflict of interest” rule.

First, it was clear that neither Tim Hauser or Judy Mares would be in attendance. They are two Labor Department officials who had, earlier, at different times, been named (with Mark Iwry from Treasury) in the IRI meeting’s preliminary agendas as members of a panel discussion on the Obama administration’s retirement policy.

That was unexpected, but not surprising. The IRI is a plaintiff in week-old lawsuit asking a federal court in Dallas to “vacate and set aside the [fiduciary] Rule,” which the DOL spent six years writing and revising. An IRI spokesperson couldn’t explain their absence, but maybe the DOL felt less than welcome in that venue. Seth Harris, a former Deputy Secretary of Labor, took Hauser’s place.    

Direct opposition to the DOL’s initiative by a major retirement industry group has the potential to create confusion within the industry about whether to begin adjusting to the rule. News of the DOL’s absence from the IRI event was contrasted however by a sanguine word from Steve Saxon, a leading ERISA lawyer at the Groom Law Group who participated in a separate panel discussion at the IRI conference.

Only weeks ago Saxon appeared fit to be tied at the terms of the fiduciary rule. But Monday he acknowledged that his law firm was not representing any of the plaintiffs in the two federal suits filed so far against the DOL, in Dallas and in the District of Columbia. Instead, he told RIJ, “We’re going to work with them.”

By “them,” Saxon meant the DOL. By “we,” he meant a group of “seventeen [401(k)] recordkeepers.” Recordkeepers, it should be said, have less conflict with the DOL than, say, annuity distributors; the new rule will ripple, but not disrupt, the recordkeepers’ business model. Saxon’s comment represented a trace of hope that some of the remaining ambiguities of the new rule might be resolved through negotiation instead the more expensive and time-consuming route of ligitation. 

Criminalizing high commissions?

If you’re new to this controversy, here’s a synopsis. The Obama Administration a few years ago became alarmed about the rollover (when defined contribution plan participants change jobs or retire) of trillions of dollars in tax-deferred savings from tightly regulated institutional 401(k) accounts to loosely regulated retail rollover IRA accounts.

Regulators worried that inexperienced, bred-in-captivity IRA owners might be exposed to sales of investment products and services with much higher prices than could be charged in the 401(k) plans, and to predatory sales practices. So, in 2010, the DOL drafted a “fiduciary” rule requiring advisors to IRA accounts to adhere to the same rules as advisors to 401(k) plans. That is, to act “without regard to” their own financial interests and only in the “best interest” of their clients.

The rule was reproposed in 2015, and finalized two months ago. It all but criminalizes the sale of high-commission or high-cost products to IRA owners. It strikes particularly hard at variable and fixed indexed annuities (FIAs), as well as load mutual funds, whose sales by registered reps and insurance agents are driven by the lure of high commissions. Last week’s lawsuits by the IRI et al, and by the National Association of Fixed Annuities, were the financial industry’s attempt to block the rule from taking effect.  

Variable versus level compensation

Because this was a legal conference, discussions focused on unresolved ambiguities in the fiduciary rule, and on aspects of the law that might make industry players vulnerable either to DOL scrutiny or, more importantly, to class action lawsuits from opportunistic plaintiffs’ attorneys.

One area of ambiguity, according to Harris, involves “differential compensation.” Compensation inevitably varies for selling different products and services. But, under the rule, advisors who choose to sell products that earn more income for them (and cost clients more) will bear the burden of justifying their choices.

In its rule, the DOL says that differences in compensation on sales of products to IRA owners must be based on “neutral factors,” such as differences in the amount of time or expertise that’s required to sell a product, and not based on a desire to incentivize advisors to recommend one product or type of product over another.  

This raises new hair-splitting questions, such as: Is compensation allowed to vary by product category, or by each product within a category? How can anyone objectively compare a one-time commission with an annual asset-based fee? Why do advisors who charge “level fees”—fees based on assets under management—get lighter treatment under the new rule, especially when a one-time commission might be cheaper for the client in the long run, or when asset-based fee structures bias advisors against recommending annuities, which remove assets from direct billable management?   

“The DOL prefers level fees, but that doesn’t work for everybody’s business model,” Harris said. “It’s clear that the DOL disapproves of the old system, where the amount of money you brought into the firm decides your compensation. If at the end of the day we see a lot of advisors saying, ‘It’s not worth it,’ and exiting the distribution system, that will cause a lot of trouble for a lot of folks. I think these issues are solvable. But they are complex, and will be different for each company.”

Asked during a panel discussion whether or not the DOL rule would put downward pressure on FIA commissions, Kansas City compliance consultant Kevin W. Mechtley said, “Today, if you have three contracts with similar features and the same surrender period paying commissions of 5%, 6% and 8%, the 8% product will outsell the others all the time. In the future, it will be hard to keep selling at 8%. A push toward like-commissions for like-products will be the immediate effect of the rule. Over the long-term, it will depend on the results of litigation.”

Who signs the BIC for insurance agents?

Another much-discussed area involves the sale of indexed annuities and the Best Interest Contract. To accept commissions on the sale of products to IRA owners, an advisor, broker or agent must work for a regulated financial institution that will sign a contract pledging that all of its salespersons will work solely in the clients’ interests, and that it will establish procedures for monitoring and documenting their sales activity, and that it will bear the legal liability for their conduct.

For registered representatives, broker-dealers will sign the BIC. But insurance agents who sell indexed annuities fall into a grey area. They are generally affiliated with insurance (or field) marketing organizations (IMOs or FMOs). But IMOs are not, strictly speaking, financial institutions, and it’s not clear whether they want to take on that responsibility.

The DOL rule, in section II, J-3, allows non-financial institutions like IMOs to apply to “individual exemptions” that will allow them to serve as signatories to the BIC for their agents. Steve Saxon of Groom Law Firm said he believes one or more of the IMOs will take advantage of that because it will give them a competitive advantage over other IMOs and allow them to remain in competition with broker-dealers in the sale of indexed annuities.

“There’s going to be an FMO or group of FMOs who will talk to the Labor Department and say, ‘We want to stay in this business. What do we need to do to be the institution that signs the BIC?” Saxon said during a Q&A with the IRI audience. “The FMO will do it because they’ll see it as a business opportunity. But it can take as long as two years to qualify for such an exemption.”

© 2016 RIJ Publishing LLC. All rights reserved. 

Vanguard publishes ‘How America Saves,’ its 401(k) almanac

Posted on June 9, 2016 by -

The Vanguard Group, the full-service retirement plan provider that manages about 12% of the nation’s $6.7 trillion in defined contribution plan assets, has released the 2016 version of its annual report, How America Saves: A report on 2015 Vanguard defined contribution plan data.

First published in 2000, the report is based on the investments of 4.1 million participants in 5,900 plans. This year’s report represents a special edition marking the tenth anniversary of the 2006 Pension Protection Act, which included provisions that allowed for auto-enrollment of participants and auto-escalation of contribution amounts, Vanguard said in a release.

The auto-enrollment feature, which entails enrolling all new employees who don’t actively opt out, has gradually spreading through the DC industry. At year-end 2015, 41% of Vanguard plans used it, up from 10% a decade ago. Of those plans, 70% also featured automatic annual increases. Last year, 63% of new Vanguard participants were hired under automatic enrollment, up from 12% in 2006.

At year-end 2015, about half of all Vanguard participants were solely invested in an automatic investment program, up from 29% at the end of 2010; 42% of all participants were invested in a single target-date fund (TDF); another 2% held one other balanced fund; and 4% used a managed account program. Among participants entering Vanguard plans for the first time in 2015, about 80% were invested entirely in a professionally managed allocation. By 2020, the average will be about 68% for all participants, Vanguard predicts.

Nine in 10 plan sponsors offered TDFs at year-end 2015, up 14% at year-end 2010. Nearly all Vanguard plans offer TDFs and 69% of all participants use TDFs. Sixty-two percent of participants who own TDFs have their entire account invested in a single TDF. Four in 10 Vanguard participants are wholly invested in a single TDF, either by voluntary choice or by default.

The plan participation rate was 78% in 2015. The average deferral rate was 6.8% and the median was 5.9%. However, average deferral rates have declined slightly from their peak of 7.3% in 2007. Average contribution rates declined because of automatic enrollment, which leads to lower average when default deferral rates are set at low levels, such as 3% or lower. The average total participant contribution rate in 2015, including employer and employee contributions, was 9.5% and the median was 8.8%.

  • At year-end 2015, the Roth feature was adopted by 60% of Vanguard plans and 15% of participants within these plans had elected the option.
  • In 2015, the average account balance for Vanguard participants was $96,288; the median balance was $26,405. In 2015, Vanguard participants’ average account balances declined by 6% and median account balances fell by 11%. Two factors drove the decline in balances: New plans converting to Vanguard in 2015 had lower account balances, and automatic enrollment, which results in more savers with smaller balances.  
  • The average one-year participant total return was –0.4%. Five-year participant total returns averaged 7.3% per year. Among participants with a balance at year-end 2010 and 2015, the median account balance rose by 105% over five years, reflecting the effect of ongoing contributions and rising markets.
  • The percentage of plan assets invested in equities declined to 71%, essentially unchanged from 72% in 2014. Equity allocations continue to vary dramatically among participants. One in 8 participants has taken an extreme position, holding either
  • 100% in equities (7% of participants) or no equities (5% of participants),
  • During 2015, only 9% of participants traded within their accounts, while 91% did not initiate any exchanges. On a net basis, there was a shift of 0.8% of assets to fixed income in 2015, with most traders making small changes to their portfolios. Only 2% of participants holding a single TDF traded in 2015.
  • The number of plans actively offering company stock declined to 10% in 2015 from 11% in 2010. Only 7% of all Vanguard participants held concentrated company stock positions in 2015, down from 10% at the end of 2010.
  • In 2015, 16% of participants had a loan outstanding compared with 17% of participants in 2014. The average loan balance was $9,900. Participants borrowed only about 2% of aggregate plan assets.
  • During 2015, 4% of participants took an in-service withdrawal, withdrawing about 30% of their account balances. All in-service withdrawals during 2015 amounted to 1% of aggregate plan assets.
  • During 2015, about 30% of all participants could have withdrawn their savings because they had separated from service. Most (85%) either remained in their employer’s plan or rolled over their savings to an IRA or new employer plan. Three percent of assets ($24 billion) was withdrawn in the form of cash distributions.  

© 2016 RIJ Publishing LLC. All rights reserved.

Where the Fiduciary Puck is Headed

Posted on June 9, 2016 by -

A native of New England hockey land, David Macchia long ago knew where the retirement puck was headed. Years before digital platforms for advisors or floor-and-upside retirement income plans became conventional, he championed those concepts.

This week, the founder of Wealth2K and marketer of a bucketing strategy called the Income for Life Model held a webinar called “How to Prosper after DOL.” He and colleague Jason Ray interpreted the Department of Labor’s new Fiduciary Rule, which will make commissioned-based sales to retirement (IRA) investors problematic.

To be clear: This was a sponsored webinar. Just as we know that Ralphie’s secret decoder ring in Jean Shepherd’s A Christmas Story will tell him to drink more Ovaltine, we know Macchia’s advice will, at some point, involve his product. But insights preceded the pitch. Here are some of the highlights of the one-hour interactive presentation.

The end of one-off product sales

“As a practical matter, the DOL rule killed the business of single product sales, and ushered in an era based on process,” Macchia (at right) said. “Process will drive the business. In the future, all product sales will need a context and a process around them. If you recommend a product, you will need to link that recommendation to a specific type of risk mitigation within an overall strategy. Choosing products on the basis of risk mitigation will be really important.”David Macchia

Emphasize risk mitigation, not returns

“The three biggest retirement risks are sequence of returns risk—the risk that a person will retire just before or after a market downturn—inflation risk, and longevity risk. If you handle these three risks, the client will have a great chance of success in retirement.” Avoid high-risk strategies for people who can’t afford them, he added. “Don’t recommend a systematic withdrawal plan (SWP) for constrained investors who have low savings relative to the amount of income they need. They don’t have much margin for error. They’re safer with an outcome-based strategy, not a probability-based strategy.”

Income expertise as a competitive advantage

The DOL rule “is a massive gift to people who specialize in retirement income distribution,” Macchia said. “Retirement specialists, especially those who have one of the professional designations (such as the RMA, RICP, or CRC), will be able to make a compelling case for clients to aggregate their retirement assets with them, and aggregation will be the best way to grow assets under management as a way to offset the impact of fee compression.

“The easiest new market to penetrate will be income planning. In the income market, you’ll find the greatest client needs, the most assets, and the opportunity to differentiate yourself from the crowd.

“The methodology for choosing a retirement income strategy has got to be transparent and understandable. If clients understand it, and have a sense of confidence in it, then it’s much less likely that you’ll encounter problems down the road.”

IMOs, broker-dealers and banks will all fare differently

 “The DOL will boost the business model of the independent broker-dealers. But it will alter the dynamics between the advisors and the firms. The broker-dealers will start providing roadmaps for advisors to follow. The banks still do a lot of transaction-based business, and moving past that may be difficult. On the other hand, bank advisors are employees. It will be easy for a bank to define a new top-down corporate policy,”  he said.

“Insurance marketing organizations (IMOs) face the greatest disruption. Under their business model, they are unregulated entities. So they aren’t ‘financial institutions’ under the rule [and can’t, without an individual exemption from the DOL, sign a Best Interest Contract so that their agents can sell products on commission]. It will be interesting to see how IMOs respond to this.”

Distributors will lead product design

“I think you’ll see the power over product design shifting to the distributors. Products will be simpler and more transparent. They will look more alike. I believe that we will eventually see individual product ratings. If a product doesn’t get a certain minimum rating, large distributors won’t be able to sell it,” he said.

“Life insurance companies are now incentivized to reduce compensation. This is a huge reversal, and it will lead to a commoditization of products and standardized fees. It will affect product development. Ron Rhoades has predicted that high-cost mutual funds will see a sales decline. Many variable annuities will see a decline in sales. And fixed indexed annuities will see much more scrutiny.”

A de facto universal standard of conduct

The new fiduciary standard for retirement accounts will inevitably extend to after-tax accounts, Macchia believes. “Can two regimes co-exist in the same household? If Mr. Smith has a retirement account and Mrs. Smith has a taxable account, does one type of account deserve a different level of care? The DOL has given us a universal standard.”

Assume that the DOL rule will take effect

A webinar attendee asked if the lawsuits against DOL are likely to stop the rule from taking effect. “The general consensus is ‘No,’” Macchia said. “The suit filed by NAFA [the National Association of Fixed Annuities] suit might be stronger [than the Financial Services Institute, Securities and Investment Firm Marketing Association, and Insured Retirement Institute], because the courts have ruled that indexed annuities are fixed products [and not variable products, as the DOL inferred]. But if you’re wondering whether to take steps to comply with the rule, yes, start preparing for it. Don’t focus on the 10% chance that it won’t go into effect.”

© 2016 RIJ Publishing LLC. All rights reserved.

Here’s your copy of NAFA’s suit against the DOL

Posted on June 9, 2016 by -

The National Association of Fixed Annuities, which represents primarily manufacturers and distributors of fixed indexed annuities, filed a complaint against the Department of Labor in U.S. District Court, District of Columbia, on June 2, only hours after a similar suit was filed in federal court in Dallas, Texas, by financial services trade groups, the U.S. Chamber of Commerce and the Insured Retirement Institute.

With more than $15 billion in sales in the first quarter of 2016, indexed annuities are the strongest-selling product category in the annuity industry. The new rule threatens to regulate the sale of indexed annuities to IRA owners, who represent a multi-trillion-dollar potential market for FIAs, more tightly.  

Like the IRI suit, the NAFA suit asks the court to vacate the DOL’s new fiduciary or conflict-of-interest rule, which extends the type of regulation that governs 401(k) plans to IRAs for the first time, thus turning the sale of commissioned products, such as annuities, to IRA owners into transactions that are prohibited except by special exemption.

Unlike the IRI suit, the NAFA suit asks the court for an injunction to halt the implementation of the DOL rule. Among other things, the complaint claims that the DOL changed the rules for selling indexed annuities without warning and without offering the indexed annuity industry a chance to respond, that the DOL didn’t consider the economic impact of its new rule on that industry, and that the DOL failed to adequately define the meaning of “reasonable compensation.”

In drafting the final version of its new rule, the DOL unexpectedly changed the rule under which indexed annuities can be sold to IRA owners from the “Prohibited Transaction Exemption 84-24” to the new “Best Interest Contract Exemption,” or BICE. The BICE requires those sales to be made solely in the clients’ interest, “without regard to” the seller’s compensation, and carries a greater burden of legal accountability for not doing so.

© 2016 RIJ Publishing LLC. All rights reserved.   

Social Security, still designed for ladies who’ve vanished

Posted on June 9, 2016 by -

The rules for Social Security weren’t handed down on a stone tablet from the top of Capitol Hill. They were deliberately structured in 1935 to fit the needs of a society and an era where most men worked eight hours a day and most women “kept house” and raised children (and eventually outlived their husbands).

Women still outlive their husbands, but much else has changed since then. Many more women are divorced, have never married, and/or have raised children alone. Little surprise then that Social Security’s original rules don’t fit their needs very well and, in fact, leave them relatively short of benefits in retirement.

In a new research brief from the Center for Retirement Research at Boston College, economist Steven Sass reviews the literature regarding Social Security’s outdated benefit configuration and describes two proposals for adapting it to current conditions. Those two proposals are:

“Earnings sharing.” This proposal would raise all workers’ benefits by 4.5%, but eliminate the “spousal and survivor” benefits that are typically drawn by women who have never worked or have earned far less than their husbands. It would credit each spouse with half of the couple’s earnings when calculating Social Security benefits; at retirement, it would reduce each spouse’s benefit at retirement to fund a survivor benefit equal to two-thirds of the couple’s combined benefit. This change would help divorced women, widows and widowers but wouldn’t help never-married women. It would mean a reduction in benefits for retired married couples.    

Care-giving credits. This proposal would help single mothers who had never been married. Instead of today’s spousal benefits, it would offer credits for care-giving. Individuals who care for a child, age six or under, would see their average wage when calculating Social Security to half the average wage (caregivers earning more than half the average wage would receive no extra credit). The credit would be provided for up to seven years of care-giving. This credit would significantly enhance the benefits available to single-mothers whose care-giving duties keep them out of the workforce for extended periods.

The United States may be the only country in the world whose old age insurance system is designed to allow a never-employed woman to receive 100% of her husband’s state pension, and those who this benefit most—couples where one spouse’s income alone is large enough to support the family—are likely to resist any attempts to reduce or eliminate it.

Sass observes that “altering Social Security to address these concerns would need to overcome significant political and administrative challenges. But it is worth considering whether other designs would more effectively provide today’s families a basic old-age income after a lifetime of work.”

© 2016 RIJ Publishing LLC. All rights reserved.

Was that a zig (or a zag) on interest rate policy?

Posted on June 9, 2016 by -

As if anyone still has the patience to follow her zigs and zags, the Federal Reserve chairwoman, Janet L. Yellen, is no longer offering any hint that the Fed will raise short-term interest rates at its meeting this month, the New York Times reported this week.

The likelihood of a rate increase has therefore been widely discounted. A few weeks ago, before the recent report on weak job growth in May, Yellen suggested that rates might go up slightly this month. Any future hike is now considered more likely to occur in the second half of 2016. “Fed officials now say they are still thinking seriously about raising rates in July or September,” the Times said.

“Investors have all but written off the chances the Fed will increase rates at its next meeting on June 14 and 15, and Ms. Yellen did not try to change their minds” in her speech this week at the World Affairs Council in Philadelphia, the Times said. The speech was the last public appearance by a Fed official before the June meeting.

But Yellen did say that she still expects economic growth to accelerate — and she still expects to raise rates at some point. “If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate,” she was quote as saying.

“I know market participants really want to know exactly what’s going to happen,” she said in her speech in Philadelphia. “There is, as I said about 18 times, no preset plan.”

© 2016 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on June 8, 2016 by -

E-Trade offers Adaptive Portfolio, robo-advice for 30 basis points

E*Trade Financial, the self-directed online discount brokerage firm that helped create and appease Americans’ appetite for risky day-trading, said it will introduce a robo-advisory service. E*Trade will compete for the client money flowing into robo solutions. Assets under management by robos like Betterment reached $53 billion at the end of 2015, according to Aite Group, up from $2 billion at the end of 2013.

This week, E-Trade introduced Adaptive Portfolio, a product line that uses a combination of stock and bond exchange-traded funds and actively managed mutual funds to create baskets that are weighted according to an investor’s risk preferences and investment goals. People entering through E-Trade’s website answer a series of questions and are sorted into one of six risk categories and corresponding model portfolios based on their answers.

Most robos offer only exchange-traded funds, but E-Trade digital advice clients will be able to mix ETF portfolios with mutual funds if they wish. The account charge on Adaptive Portfolio is 0.3% of assets (30 basis points) annually on a minimum investment of $10,000 plus fund fees. All of the portfolios have a position of one percent cash, and human advisers will be available for investors who want to communicate with one by telephone or instant message.

Personal Capital helps NBA players with financial game plans

To help young pro basketball players avoid careless turnovers when handling their $4.7 million average first-year salaries (often rising to $6 million by their fourth year), Personal Capital, the online financial advisory firm, has become a provider of digital financial tools for the National Basketball Players Association (NBPA).

The NBPA offers education in-person seminars on varied financial topics to players, including pre-draft and rookie players, to prepare them for the 40 or 50 years when they are no longer in the game. Players can now use Personal Capital’s mobile phone-mediated tools to monitor their finances and learn how not to double-dribble their money away. 

“Personal Capital’s tools show players where their money is coming from and going to, their net worth, their investment strategies, the account fees they pay, and their plans for retirement,” said an NBPA release.

“Players have short careers, have complicated taxes and make fast financial decisions that can result in spending money too quickly. Education is only half the battle. It really comes down to behavior and habits,” said former Golden State Warrior and NBAPA director of Player Programs Purvis Short, in the release.

NBA Players have access to these digital tools from Personal Capital:

Cash Flow Analyzer. Offers insights into weekly, monthly and yearly income, spending and savings trends.

Net Worth Calculator. Shows assets and liabilities and overview of all financial accounts.

Retirement Planner. Calculates impact of current investments, savings rate, and future income and spending rates, on retirement readiness.

Investment Checkup. This portfolio analysis tool presents a target investment allocation based on user profile data and shows potential concentrations of risk in stocks or asset classes.

Fee Analyzer. Displays fund fees and costs over time.

Dashboard. A summary of accounts, net worth, cash flow, portfolio performance, investment “gainers and losers,” and asset allocation.

MassMutual to offer lending service that spares plan assets

To help plan participants obtain emergency loans without tapping their retirement plans, Massachusetts Mutual Life Insurance Co. is making fast-track online credit services available through its BeneClick! employee benefits exchange.

The credit services are provided by Kashable, which allows plan participants to apply online and take low-cost loans instantly, then repay them automatically through equal installment payroll deductions or direct deposits, according to a MassMutual release.

Employees are prequalified for credit based on their employment and the amount of credit they qualify for is based on their ability to repay.  The program provides credit at rates starting at 6% APR with a 6-12 month term.

The service is designed to help prevent the stress associated with financial problems from hurting productivity. The 2015 MassMutual Employee Benefits Security Study found that 37% of workers find managing their personal finances “somewhat” or “very” difficult and 40% say personal financial problems distract them during work hours.

Many working Americans lack a cash buffer. According to Bankrate.com’s 2016 Financial Security Index, 29% of Americans have no emergency savings and 21% don’t have enough to cover three months’ expenses.

BeneClick!, powered by Maxwell Health’s benefits technology platform, includes MassMutual’s “MapMyBenefits” tool, which helps employees choose among retirement, healthcare and insurance protection benefits based on their personal life stages. Maxwell Health owns the underlying technology, but MassMutual owns the differentiated features on BeneClick!, a MassMutual spokesman told RIJ. MassMutual also owns the platform’s distribution relationships with intermediaries and controls what products and carriers are distributed through it. 

Fear of unexpected expenses haunts Americans: Northwestern Mutual

Most Americans (85%) report feeling financial anxiety, 36% say their anxiety has increased in the last three years, and 28% worry about their finances every day, according to a new survey sponsored by Northwestern Mutual. Only 14% of Americans say their financial anxiety is decreasing. 

When people were asked to name the source of their financial anxiety 55% said “unexpected expenses.”  When asked to name for the single top benefit that financial security would bring, 52% said “Peace of mind that I never have to worry about day-to-day expenses.”

These findings come from the 2016 Northwestern Mutual Planning & Progress Study. The research was conducted in February among over 2,000 U.S. adults aged 18 and older.

Among those feeling financial anxiety:

  • 67% say it negatively impacts their health
  • 70% say it negatively impacts their happiness
  • 61% say it negatively impacts their home life
  • 70% say it negatively impacts their moods
  • 69% say it negatively impacts their ability to pursue dreams/passions/interests
  • 51% say it negatively impacts their social life
  • 41% say it negatively impacts their career

The most common cause of anxiety is “unexpected expenses.” More than losing a job, being unemployed or running out of money in retirement, American adults fear:

  • Having an unplanned financial emergency (38%); and
  • Having an unplanned medical expense due to an illness (34%)

When asked to name the first two things they would do if they had the financial security to live their lives differently:

  • 9% said they would change careers
  • 12% said they would purchase a boat, car, second home or other luxury
  • 15% said they would stop working
  • 29% said they would pursue a dream/passion
  • 29% said they would work on their own personal health and well-being
  • 34% said they would relocate or buy a home
  • 32% said they would leave money to loved ones to help them feel financially secure

Harris Poll conducted the survey on behalf of Northwestern Mutual. It included 2,646 American adults aged 18 or older who participated in an online survey between February 1 and February 10, 2016. 

CEO of State Street Global Advisors calls for universal workplace savings

The president and CEO of State Street Global Advisors (SSGA), the asset management arm of State Street Corp., called on Congress this week to enact a national framework that ensures workplace coverage for all private-sector working Americans.

In an open letter to Congress, Ron O’Hanley proposed a framework that expands access to workplace retirement savings plans and ensures coverage through auto-enrollment, auto-escalation, tax incentives for small employers, eliminates barriers to open Multiple Employer Plans (MEPs). 

The framework could reduce the expected retirement savings shortfall by up to $740 billion, he said in a release. “Today we face an access imperative,” O’Hanley said. “The Government Accountability Office report on retirement security finds that nearly 40% of working households lack access to, or are not eligible to participate in, an employer-sponsored defined contribution (DC) plan. 

“We applaud efforts by the White House, Congress, and many states to expand workplace retirement savings opportunities through auto-IRAs and open MEPs. However, discrete initiatives will lead to a complex and inefficient set of retirement savings programs that perversely could lead to lower savings levels. It’s time for a national, bipartisan solution that guarantees workplace coverage in a retirement savings plan.”

The full text of O’Hanley’s letter and policy proposal is available here.  

Pershing offers digital solutions, plus help for reps adapting to DOL rule  

As part of its “ongoing digital enablement strategy,” Pershing LLC, a BNY Mellon company, has launched a suite of technology enhancements that provide wealth management firms “with greater flexibility to digitally transform their business.”

Announced during Pershing’s annual INSITE 2016 conference, “The new enhancements aim to make integration easier and improve investor and advisor experiences,” Pershing said in a release. The new initiative was announced during Pershing’s INSITE 2016 conference.

Pershing’s clients will now have the choice to leverage available services via the new API store or they can select tools from third-party providers integrated with NetX360, Pershing’s technology for broker-dealers, wealth managers and advisors.
The new NetXServices API Store, powered by NEXEN, provides firms with self-service access to BNY Mellon’s library of APIs. In the store, clients will find digital services for account opening and funding, asset allocation and automated rebalancing. The API store facilitates integration by providing inline documentation, code samples and “sandbox testing.”

A number of digital advice providers currently use Pershing as a custodian and leverage its ecosystem to scale their businesses, including Motif, NextCapital, and Personal Capital, Pershing’s release said. Jemstep, Marstone, SigFig, and Vanare are among the digital advice providers available for integration. Pershing selected the firms based on their user experience design, flexibility and their ability to integrate with NetX360 and NetXInvestor. 

In the areas of customer relationship management (CRM), financial planning, wealth reporting and other services on both NetX360 and NetXInvestor, Pershing said it has already integrated the fourth generation of MoneyGuidePro and NaviPlan.
In another announcement, Pershing said it would help financial services firms comply with the Department of Labor’s (DOL) Conflict of Interest rule.

Pershing said it will launch the following new advisory capabilities to assist registered reps with the transition from a commission-based sales model to a fee-based advisory model:

New mutual fund and/ETF wrap solutions designed to serve emerging investors. Pershing clients will be able to access expanded managed account solutions to help them serve a broad spectrum of investors from emerging to mass affluent investors. The solutions feature mutual fund/exchange traded fund (ETF) models from industry leading firms designed to provide a diversified risk-based portfolio with lower account minimums. 

Enhanced versions of Pershing’s practice management materials supporting the shift to advisory. Pershing also plans to roll out third-party tools to facilitate conversations between registered reps and their clients on transitioning accounts. Pershing is currently examining planning tools and other resources that advisors may use to help with the transition of client accounts where appropriate.

© 2016 RIJ Publishing LLC. All rights reserved.

Test Your Reverse Mortgage IQ

Posted on June 2, 2016 by -

Whether it’s an urban brownstone, a tract-mansion in the suburbs or a rural trailer on cinder blocks, our homes are often our biggest financial assets and our biggest liabilities. For many older people, home equity outweighs their savings. Their mortgage payment, if they still have one, may also be their single largest expense.

Yet “seniors” as a group don’t know much about reverse mortgages. That’s ironic, because home equity conversion mortgages (HECMs), as they are officially known, could help a lot of retirees improve their standards of living by unlocking the equity in their homes.

Not long ago, The American College decided to address the issue of using home equity in retirement, and to make reverse mortgages part of the curriculum of its Retirement Income Certified Professional designation. To benchmark the public’s level of knowledge about HECMs, the College’s New York Life Center for Retirement Income also sponsored a survey.

The survey consisted of 10 true-or-false questions about HECMs. Pollsters Greenwald & Associates and Research Now administered it to about 1,000 Americans between ages 55 and 74 with at least $100,000 in investments and $100,000 in home equity.

If you’re an advisor, or if you think you might ever consider using a reverse mortgage, we invite you to take the quiz yourself. One of the survey’s findings was that people with financial advisors didn’t score any better or worse than respondents without advisors. You can jot down answers to the questions below or access an electronic version of the quiz. 

The test should be particularly useful for advisors with older clients, especially advisors who practice lifecycle planning and/or develop holistic financial plans for their clients. Such planners typically include the entire household balance sheet in the plan, including home equity and potential for earning income in retirement (human capital).

After you take the quiz, a link will take you to The American College report on the survey, where you can find out how well you did and compare your knowledge with that of others. 

The American College Reverse Mortgage Quiz

  1. The earliest age at which a person who is the sole owner of a home can enter a reverse mortgage is 62. (T/F)
  2. If the value of your home has grown since you bought it, entering into a reverse mortgage would result in a taxable gain. (T/F)
  3. Under a reverse mortgage the homeowner generally is not required to repay the loan until he/she stops using the home as the principal residence. (T/F)
  4. You cannot enter into a reverse mortgage unless your home is completely paid off and there is no outstanding mortgage balance. (T/F)
  5. One downside with a reverse mortgage is that if the home goes under water (the home is worth less than the amount owed to the lender), the homeowner, estate or heirs need to pay off the additional debt. (T/F)
  6. The only currently available form of payment from a reverse mortgage is a single lump sum distribution. (T/F)
  7. The amount of money that you can borrow as a reverse mortgage depends on the age of the younger borrower or eligible non-borrowing spouse, the current interest rate and the value of the home. (T/F)
  8. A reverse mortgage is different from a traditional mortgage in that the homeowner is not responsible for any property taxes or insurance payments. (T/F)
  9. Generally using a reverse mortgage early in retirement to support a retirement plan is better than as a last resort toward the end of retirement. (T/F)
  10. Because of concerns about poor money management and financial elder abuse, the Government has restricted the use of reverse mortgage proceeds to health care benefits, long-term care costs, home improvements and tax payments. (T/F)

To find out how well you did on the test compared to typical older investors, click here. If you got five or more correct, you beat the average. If you scored a seven or higher, you passed. The average score was 4.8 and only 30% of those surveyed passed the test. No one posted a perfect score.

Men’s average score (5.4) was the higher than women’s (4.1). Those ages 62 to 74 outperformed those ages 55 to 61. Those with more savings and home equity tended to know more about HECMs.

As you can see, Americans don’t know much about reverse mortgages. That’s not surprising. For reasons that were described in RIJ’s recent series on reverse mortgages, the loans have received lots of bad publicity over the past decade and the rules have changed more than once. HECMs are rarely recommended by advisors, who typically aren’t licensed to broker mortgage loans and have no clear financial incentive to learn about them or show their clients how to use them.

Besides the quiz, The American College gathered attitudinal information about the 1,005 people who took the survey. Although a majority of respondents wanted to stay in their homes during retirement, only 44% had ever considered tapping their home equity. Only 25%, including only 63% of the 14% who had considered a reverse mortgage, felt “comfortable” spending down home equity in retirement.

Older Americans clearly have enough home equity to spark a HECM boom. Collectively, retirees and near-retirees have some $5 trillion in home equity, according to one estimate. Eighty-one percent of Americans ages 60 and older own homes. The median net worth for people age 65 and older is about $194,000, of which about $150,000 is equity in their homes, according to the U.S. Census Bureau.

But home equity, like income and wealth in general, isn’t evenly distributed. The least wealthy half of Americans have an average of less than $100,000 in home equity, and even the next 40% have an average of only about $120,000 in home equity on average, according to the Federal Reserves’ 2016 Survey of Consumer Finances. The wealthiest 10% of Americans—those most likely to have advisors—had an average of more than $400,000 in home equity in 2013 (down from a peak of $600,000 in 2007).

While that imbalance might limit the size of the HECM market, reverse mortgages can still serve as important components in a holistic retirement income plan for certain people—those who want to wipe out an existing mortgage, get a chunk of cash, create a monthly income, or have a source of ready money that would remove the pressure to sell depressed stock during a market downturn. 

“Retirement income planning is extraordinarily challenging. Retirement income professionals are expected to manage a variety of client risks, legal changes, and ethical issues when developing a comprehensive plan,” wrote Jamie Hopkins, the co-director of the New York Life Center for Retirement Income and a professor of taxation at The American College.

“The survey responses show that many people moving into retirement with some home equity do not fully understand reverse mortgages, including those individuals that have reviewed reverse mortgages as a potential income source,” he added.

“While a reverse mortgage is not the right solution for every retiree, it can be a helpful retirement income tool. A reverse mortgage can diversify your home equity, build in a non-market correlated source of income to help offset market and sequence of returns risk, can be used to improve cash flow by turning off payments to a traditional mortgage, and be used for tax efficiency purposes during retirement.”

© 2016 RIJ Publishing LLC. All rights reserved.

Financial Groups Take DOL to Court—in Texas

Posted on June 2, 2016 by -

Leaving investors to wonder why anyone would oppose a rule requiring brokers to act in their clients’ best interests, financial trade groups and lobbying organizations sued the Department of Labor today for relief from the DOL’s conflict-of-interest or “fiduciary rule,” promulgated in early April.

Plaintiffs in the lawsuit are the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute, the Securities Industry and Financial Markets Association, the U.S. Chamber of Commerce, and a number of local Texas organizations. A law professor said today that the suit, if successful, might have force only in Texas.

The suit was filed in the United States District Court, Northern District of Texas, Dallas, rather than in the DOL’s home court of the District of Columbia. The Chief Judge of the Northern District is Barbara M.G. Lynn, a Clinton appointee who joined the court in November 1999. She assumed the chief judgeship only about a month ago.

For an analysis of a then-hypothetical lawsuit against the DOL, published by RIJ last February, click here. 

The plaintiffs ask the federal court to vacate and set aside the DOL rule and its prohibited transaction exemptions. In asking for relief, the plaintiffs named seven grounds for the lawsuit, or counts:

  • The Department has improperly exceeded its authority in violation of ERISA, the Internal Revenue Code, and the Administrative Procedure Act.  
  • The fiduciary rule violates the Administrative Procedure Act because it is arbitrary, capricious and irreconcilable with the language of ERISA and the Internal Revenue Code.   
  • The Department unlawfully created a private right of action.  
  • The Department failed to provide adequate notice and to sufficiently consider and respond to comments.
  • The Federal Arbitration Act prohibits the BIC and principal transactions exemptions’ regulation of class action waivers in arbitration agreements.
  • The Department’s regulation of fixed indexed annuities and group variable annuities is arbitrary, capricious, barred by the Dodd-Frank Act, and was not subject to proper notice and comment.
  • The Department arbitrarily and capriciously assessed the rule’s benefits, consequences and costs.
  • The Department’s Best Interest Contract Exemption impermissibly burdens speech in violation of the First Amendment. 

Editor’s note: RIJ believes that the federal government subsidizes the retirement industry through favorable tax treatment, and that the public therefore deserves the assurance that anyone advising them on their retirement investments will act in their best interest, and be held accountable for it.

A caveat emptor, “buyer beware” or “suitability” standard of conduct is simply not appropriate in a publicly subsidized industry. No one should expect to benefit from the subsidy, estimated at more than $100 billion per year, without bearing the burden of fiduciary duty. Those who don’t like the rules are welcome to limit their sales activities to owners of after-tax accounts. 

A central floorboard of the industry’s argument also seems creaky. Commission-based brokers and agents say, in effect: My sales efforts are too valuable to impede because useful advice comes with it… but the advice is merely incidental, as the law provides, so you shouldn’t regulate me as a fiduciary. 

As we went to press: Secretary of Labor Tom Perez today issued the following statement regarding a lawsuit filed to stop the department from ensuring that retirement savers receive investment advice that is in their best interests.

“People saving for retirement have a legal right and a compelling economic need to receive retirement investment advice that is in their best interest. Today, a handful of industry groups and lobbyists are suing for the right to put their own financial self-interests ahead of the best interests of their customers. 

“Conflicted advice is eroding the savings of working Americans to the tune of $17 billion each year. The Conflict of Interest rule aims to address that problem by requiring retirement advisors to look out for the best interests of their clients. Many financial services professionals, from small town advisers to some of the nation’s largest firms, engaged constructively with the department throughout the rulemaking process and, after publication of the final rule, noted that they do put the interests of their clients first and are well positioned to comply. They recognize that putting their customers first is good for business.

“But there is a small, vocal minority who support the status quo that enables them to put their own interests first. This lawsuit seeks to vindicate their desire to put their own interests ahead of their clients’ best interests.

“This rulemaking was one of the most deliberate, open regulatory processes in recent memory. We had countless meetings and conversations with industry and stakeholders, considered thousands of comments from the public, held several days of public hearings and coordinated with our fellow federal agencies over the course of more than five years. We heard what stakeholders had to say, thoughtfully considered their comments and made improvements to the rule based on their feedback.

The department’s Conflict of Interest rule is built upon solid statutory and legal foundations, and we will defend it vigorously. 

© 2016 RIJ Publishing LLC. All rights reserved.  

The American College Is Keen on HECMs. Here’s Why

Posted on June 2, 2016 by -

Few financial advisors mention reverse mortgages when they talk to their 60-something clients, and few older clients consider these instruments. The American College, which sponsors the Retirement Income Certified Professional designation, would like to reverse that situation.

With its recent survey of upscale Americans over age 55 regarding these federally-insured loans against home equity (see today’s RIJ cover story), the Bryn Mawr, Pa-based academic institution deliberately took a public stand—not that they are good or bad but that they have a legitimate place in any retirement advisor’s financial toolkit.  

“Whether it’s for a legacy or for long-term care expenses or for use strategically at the beginning of retirement, a lot of people will have to consider using their home equity at some point. So we said, ‘Let’s try to lead that conversation,” said Jamie Hopkins, the co-director of the New York Life Center for Retirement Income at the College as well as an attorney and professor of taxation (below).Jamie Hopkins

“We’re not taking a particular stance on the product. But we thought it was very much in our wheelhouse to show people how reverse mortgages should be used and how they shouldn’t be used,” he told RIJ recently.

“Reverse mortgages aren’t right in every situation. But the changes in the last couple of years have made them worthy of a second look. The question is, how can we help the decisions around home equity become coordinated into retirement income planning better?” he added.

In a recent series on home equity conversion mortgages (HECMs) and lines of credit (HECM-LOCs), as reverse mortgages are also known, RIJ explored some of the reasons why these products aren’t more popular, given their potential benefits. They allow people over age 62 to borrow amounts equal to about half or more of their home equity (depending on the age of the youngest borrower, prevailing interest rates, etc.) while continuing to live in their homes. No payments on the loan are due until they die or move, and they pay only the usual taxes and maintenance in the meantime.

There were several reasons. Reverse mortgage pricing is not very transparent, which, coupled with the uncertainty of life expectancies, makes it hard for people to gauge the cost or the value of their loan. HECMs also lack a strong distribution network.  Broker-dealer advisors have little or nothing to gain by recommending them, and a lot to lose (questions from FINRA, their self-regulating body, which traditionally doesn’t approve of reverse mortgages).   

But when The American College was creating its RICP designation, Hopkins and others decided that retirement advisors should learn about reverse mortgages, that the school was the right institution to teach the subject, and that the inclusion of HECMs in the designation’s curriculum would be a distinguishing feature. 

“As we got further into the retirement income planning arena, and looked at the Baby Boomer assets and how to be strategic about it, you could see that people don’t have a lot saved. But they do have Social Security and home equity. Average Americans have twice as much wealth in their homes as they do in other assets. So making the right decisions about Social Security and about the home is important,” Hopkins told RIJ.

Yet few advisors think to leverage this wealth. “Nobody is giving advice in this area,” Hopkins said. “Rarely do I run into RIAs who plan for home equity or any other aspect of the home. It falls outside their planning process. But it’s ridiculous to ignore two-thirds of peoples’ wealth. People just assume that when they die the house will go to the kids. That’s the default plan. But a default plan is not a very good plan. So we said, as a college, shouldn’t we be involved in this topic?”

Changing trademark

“We’re a school that’s trying to change its trademark from life insurance to comprehensive planning. There are no other places that own the thought leadership in [the HECM] area. Social Security and qualified plans are huge topics, you can’t own those topics, but we thought we could make a big impact in this area. I said, ‘Let’s play to where the puck is going to be.’ As a group, the baby boomers won’t collectively make through retirement without using their homes. At some point, most of them will have to use it,” Hopkins said.

Several well-known academics have explored the use of home equity within a retirement income strategy, including economics Nobelist Robert Merton. “But it’s only one professor here or there. We are in the right space to do this. We have the RICP program, we have Wade Pfau (the head of the school’s doctoral program in retirement income) as a researcher on the topic, and we had the New York Life Center for Retirement Income,” he added.

When we created the RICP, “we knew we’d talk about housing decisions, and include descriptions of the basic reverse mortgage and the Saver’s HECM, going through all the features,” he said. “Then we made a more strategic decision. We said, how we pull all the ideas about the home—prepaying the mortgage, taking single-purpose or special purpose loans, home-sharing—and approach them systematically.”

That was a potentially risky move, given the poor reputation of the reverse mortgage industry. But “we haven’t seen pushback,” Hopkins said. “At the beginning we thought, Will companies ask us why we’re doing this? And sometimes an advisor in the RICP program asks why we’re talking about these things. But we get the same kinds of questions about variable products and mutual funds. Any product can be used poorly. But we think there is a spot for reverse mortgages in financial planning. We think it needs to be part of a comprehensive retirement plan.

“The state of reverse mortgage planning looks like the state of long-term care planning a decade ago. People didn’t discuss it. They just assumed that you’ll run out of money and end up on Medicaid and they didn’t buy the insurance. We’ve seen that begin to change, as more people begin planning for their long-term care needs and incorporating long-term care into their retirement plans,” he told RIJ.

“We have this incredibly silo-ed approach to reverse mortgages,” Hopkins added. “The advisor says it’s not his territory. People got to a broker and find that they just get products and not advice. You get a piecemeal approach to financial planning and that’s not how it should work, ideally. A planner should be able to say, here are x, y, z things, and here are the reasons to do them or not do them. Today we don’t get that. I like to say that retirement planning is like ‘shooting a moving target in the wind.’ That’s what makes it so hard.”  

© 2016 RIJ Publishing LLC. All rights reserved.

To make small advisory accounts cost-efficient, Voya uses white-label technology

Posted on June 2, 2016 by -

To serve small accounts more cost-efficiently, Voya Financial Advisors is partnering with FolioDynamix, which markets a white-label unified wealth management platform.

The new service, part of Voya Financial Advisors, will be called Voya Wealth Portfolios. As Voya transitions small-balance clients from commission-based accounts to fee-based accounts, the company will be able to offer them an automated unified managed account option.     

“We designed a solution that allows us to move commission-based accounts into advisory accounts with comparable funds,” said Andre Robinson, head of advisory services at Voya Financial Advisors, in a release. According to Voya, its advisory business grew 30% in 2015.

In an email to RIJ, Robinson wrote, “Wealth Portfolios is designed to enhance the service and associated delivery model for advisors and clients alike. With the product, advisors are able to access the most appropriate Wealth Solutions portfolio after completing the quick on-boarding process.

“These portfolios overall have proven to be suitable for both small and large dollar investors due to the quality of the investment mixture, offering straight-forward pricing and ease of implementation.”

The Department of Labor’s new conflict-of-interest rules create a dilemma for broker-dealers, motivating them to start charging small clients asset-based fees instead of selling them products and earning commissions. But these accounts often can’t generate enough in fees to support a traditional advisory relationship.

Voya also sees the new service as a way to keep small account holders from migrating to mutual fund complex platforms at Vanguard or Schwab.  

“We’ve been watching assets migrate to the mutual fund complexes and away from our broker dealer. We wanted to create a product to help capture those accounts,” Robinson told RIJ in an interview. He said that the DOL rule wasn’t the “driving force” behind the new service, but that Wealth Portfolios “will position Voya to be successful in the new regulatory environment.”

Wealth Portfolios gives clients access to funds from four different fund companies and five model portfolio design options, all managed by sub-advisor FolioDynamix.

In support of its expanding advisory business, Voya Financial Advisors also provides a “white glove” services team and suite of resources to assist affiliated advisors with all aspects of growing their advisory business, including support regarding best practices, case consultation, product and technology training, and conversion assistance.

“We’ve seen that most people are thinking of shifting to the advisory instead of sticking with the commission model. That’s a result of the BICE, and it’s right for the customer. But the industry has struggled with how to deliver on small accounts cost-effectively,” said Steve Dunlap, CEO of FolioDynamix, in an interview.

“Younger people want a relationship with a human being, but not in the traditional way. They want the advisor to be there if they need them, but it doesn’t have to be face-to-face every time,” he added.

“It used to be that you needed at least $50,000 to have an advisory account. The question now is whether, by creating different service models, you can keep clients who might otherwise go to a pure robo solution or to a self-directed brokerage account.

“We think the industry is making a mistake when it says, ‘Let’s take all of the accounts of $100,000 or less and put them in a robo solution.’

“We’re suggesting: ‘Let’s find a way to help advisors service smaller accounts, but on a different basis. They won’t have quarterly meetings with an advisor. But they’ll have access to their own accounts, they’ll be able to monitor them, and it can be low-touch enough to be cost-effective.”

© 2016 RIJ Publishing LLC. All rights reserved.

Chinese bid to acquire Fidelity & Guaranty Life delayed

Posted on June 2, 2016 by -

A large Chinese insurers bid to buy a U.S.-based issuer of indexed annuities has hit a snag, the New York Times reported this week.

The Chinese insurer, Anbang, has been purchasing hotels and financial firms in Europe, Asia and the U.S., and announced last year that it had agreed to buy Fidelity & Guaranteed Life, the Des Moines-based life insurer, for $1.57 billion.  

But this week Anbang withdrew its application to acquire the company with the New York State Department of Financial Services, Fidelity & Guaranty said in a filing on Tuesday with the Securities and Exchange Commission.

Fidelity said the withdrawal was not final and that it expected Anbang to refile in the “near future.” Neither F&G nor FTI Consulting in Hong Kong, which represents Anbang, said why Anbang withdrew its application.

The deal, announced in November, was cleared by the Committee on Foreign Investment in the United States, a government panel that checks acquisitions of American companies for potential national security concerns, Fidelity said in March.

Anbang must obtain regulatory approval for its takeover from states where Fidelity does business. It also has a pending application in Iowa, Fidelity said in its filing on Tuesday. Fidelity shares fell by more than 3.3% on Tuesday in New York, the biggest drop since August.

The Wall Street Journal reported that Anbang had failed to provide information requested by the Department of Financial Services about Anbang’s ownership structure and sources of funding for the takeover. In March, Anbang abruptly ended a $14 billion bid to buy Starwood Hotels and Resorts.  

Anbang, which owns insurance companies, a bank and a leasing company, says it has almost $300 billion in assets. It is owned by 39 corporate shareholders, According to China’s State Administration of Industry and Commerce, it has 39 corporate shareholders, including two state-owned companies that own 5% and 37 interconnected companies that own the rest. 

Anbang’s chairman, Wu Xiaohui, married a granddaughter of China’s former leader, Deng Xiaoping. One Anbang director is the son of Chen Yi, a former long-serving foreign minister and top army general who died in 1972. Another former director is the son of Zhu Rongji, China’s prime minister from 1998 to 2003.

© 2016 RIJ Publishing LLC. All rights reserved.

Indexed annuity industry sets sales record in 1Q2016: Wink

Posted on June 2, 2016 by -

Total first quarter sales for 55 indexed annuity carriers was $15.0 billion, the highest first-quarter sales in the history of the product, according to the 75th edition of Wink’s Sales and Marketing Report.

Though down more than 3% when compared to the fourth quarter of 2015, indexed sales in the first quarter were up nearly 33% when compared with the same period last year.

“While there is typically a huge drop in sales from the fourth to the first quarter, sales of these principal-protection products are down less than five percent,” said Wink CEO Sheryl Moore in a release. 

Allianz Life was the dominant carrier, with an 18.4% share of the indexed market. American Equity Companies were second, followed by Great American Insurance Group, AIG, Nationwide and Midland National Life. Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity for the fifth consecutive quarter.

© 2016 RIJ Publishing LLC. All rights reserved.

Pension buy-out volume up 21% in first quarter

Posted on June 2, 2016 by -

Quarterly group pension buy-out sales topped $1 billion for the fourth consecutive quarter in the first quarter of 2016, according to the latest U.S. Group Annuity Risk Transfer Survey from LIMRA Secure Retirement Institute

At  $1.084 billion, first quarter sales exceeded $1 billion for the first time since 2008, an SRI release said, on 68 transactions.
American General Life Companies, Legal & General America, MassMutual, MetLife, Mutual of Omaha, New York Life, OneAmerica, Pacific Life, Principal Financial, Prudential Financial, Transamerica, Voya Financial, and Western & Southern Financial Group participated in the survey.

Years of low interest rates and rising Pension Benefit Guarantee Corporation (PBGC) premiums have motivated more defined benefit plan sponsors to transfer all or part of their pension liabilities to an insurer by purchasing a group annuity contract with pension assets.

Historically, buy-out sales have been low in the first quarter, increasing slightly in the second and third quarters and peaking in the fourth quarter. But this year’s first quarter sales were up 21%, year-over-year, a spike that LIMRA SRI analysts attributed to PBGC premium increases and market volatility.

“Along with large increases in PBGC premiums, plan sponsors who try to increase funding for their group pensions face an uphill challenge with uncertain market returns and low interest rates,” said Michael Ericson, analyst for LIMRA Secure Retirement Institute, in the release. “Those factors are the main reason 68 companies purchased buy-out contracts in the first quarter.”

Increasing numbers of small and medium-size plans are transferring their pension risk, in addition to large ones, Ericson added.  Sales growth in pension buy-outs can be heavily influenced by jumbo (>$1 billion) contracts. 

LIMRA Secure Retirement Institute publishes the Group Annuity Risk Transfer Survey every quarter. To date, the 13 financial services companies that provide all the group annuity contracts for the U.S. market participate in the survey.  

© 2016 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on June 2, 2016 by -

Morningstar acquires fixed-income analytics firm

Morningstar, Inc., has acquired InvestSoft Technology, a provider of fixed-income analytics. Terms were not disclosed. Morningstar will gradually integrate the firm’s capabilities into its data processing systems and product functionality, rebranding it under the Morningstar name.

InvestSoft helps investment firms analyze fixed-income securities and portfolios, primarily through its BondPro Fixed-Income Calculation Engine, which provides more than 130 analytic and accounting calculations.

“Our asset management and advisor clients have been asking for more robust fixed-income capabilities, and InvestSoft’s analytics will help us create a more complete view of mutual fund and exchange-traded fund portfolios, providing investors with better transparency into bond funds,” said Frannie Besztery, head of data for Morningstar, in a release.

Based in Framingham, Massachusetts, InvestSoft was found by Al Roitfarb  in 1992 as Investment Technology. State Street acquired the firm in 2001, but Investment Technology re-acquired key software in 2005. In 2011, Al Roitfarb and his son, Todd Roitfarb, formed InvestSoft.  

The younger Roitfarb has been CEO since joining InvestSoft in 2011. He previously held roles at Fidelity Investments, Merrill Lynch, and Ernst & Young. Al Roitfarb will become head of architecture, fixed income, and Todd will become head of fixed-income products for Morningstar. The investment banking firm DGZ Associates, Inc. advised InvestSoft on the transaction.

NFP acquires ERISA Fiduciary Advisors

NFP, an insurance broker and consultant that provides employee benefits, property & casualty, retirement, and individual insurance and wealth management solutions, has acquired ERISA Fiduciary Advisors, Inc. (EFA). The transaction closed on March 1, 2016.

Founded in 2005, EFA is an independent, fee-based registered investment advisor and retirement plan consultant with offices in Weston and Stuart, Fla. It provides fiduciary management processes for plan sponsors and fiduciary oversight for wealth management services.

The firm’s principals, Thomas Bastin and Bradley Larsen, will both serve as managing director, Southeast, and report to Nick Della Vedova, president of the retirement division at NFP. 

vWise announces video and digital plan enrollment process

vWise, Inc., a provider of digital solutions for retirement plan providers and plan advisors in Aliso Viejo, Calif., has introduced an interactive video-enriched online enrollment solution that it calls SmartEnroll.

Designed for plan providers, advisors, and their plan sponsor clients, SmartEnroll is intended to make enrollment simpler, reduce print/mail costs, facilitate recordkeeper transitions and allow access from desktops, tablets and smartphones. 

According to a release, vWise solution “bite-sized content that can be watched, skipped, or watched again,” and to spur participants to specific actions, such as completing a risk questionnaire, selecting a deferral amount or choosing investments.  The experience can be delivered in English or Spanish, and customized to each plan sponsor’s brand and preferences.

SmartEnroll allows data-capture and on-demand reporting and reduces administrative and call center burdens, as well as lowering the costs associated with enrollment kit printing and distribution. When used with SmartConnect, vWise’s two-step, secure email capture tool, vWise solutions facilitate ongoing, targeted participant outreach, communication, and education.  

© 2016 RIJ Publishing LLC. All rights reserved.

Expect Sharp Drop in VA Sales: LIMRA

Posted on May 26, 2016 by -

Variable annuity sales in the U.S. are likely to drop 15-20% in 2016 and an additional 25% to 30% in 2017 as broker-dealers adjust to the requirements of the Department of Labor’s conflict-of-interest rule, and in particular to the rule’s “BIC” Exemption, which applies to variable and indexed annuities.

That prediction came this week from the LIMRA Secure Retirement Institute, which conducts market research for life insurers. “We foresee sales coming down in 2017, but we expect sales to rebound in the future. Growth levels should come up as companies get used to the new normal,” SRI director Todd Giesing told RIJ this week. 

The prediction followed the variable annuity industry’s worst sales quarter in almost 15 years. In the first quarter, total annuity sales were $58.9 billion, or 9% higher than in 1Q2015, but VA sales experienced their lowest level since 2001, at $26.6 billion, or 18% lower than in 1Q2015 and only 45% of the annuity market.

January 2016 sales were 28% lower than in December 2015, according to Morningstar’s quarterly Variable Annuity Sales and Asset Survey, which was released this week. “Looking at the top-ten issuers, they were all in negative territory for sales versus the previous quarter. Seven of the top ten had double-digit negative sales growth from the previous quarter. More broadly, nearly every issuer had negative growth for the quarter,” wrote Kevin Lofreddi, Senior Product Manager for variable annuities at Morningstar Inc.

“The equity markets had huge 10% drop in January, from which they’ve slowed rebounded,” Giesing (below right) said. “This was the second spike in volatility and drop in equities since August of 2015. We’ve seen variable sales drop when equities go down, but not this much. Even during the financial crisis, sales didn’t fall below $30 billion.” Todd Giesing

Lofreddi believes that DOL conflict-of-interest rule, which was issued April 6, 2016, did not affect first quarter variable annuity sales. “But the rule will have an impact in the future as firms ramp up for the changes that need to take place,” his report said.  

“In the first quarter, we were still pre-final DOL ruling,” Geising said. “Expectations were that variable annuities would be under the BICE, and indexed annuities under PTE 84-24. Some of the variable annuity players were already putting more focus on their indexed businesses, especially AIG and Nationwide. We don’t expect a huge drop-off in indexed sales over the next quarter or two, but we expect more impact in 2017.”

“The DOL will have its biggest impact on the rollover market,” Giesing told RIJ. “Out of the $236 billion in individual annuity sales in 2015, $120 billion was in IRAs. Of that, $67 billion was in variable and $34 billion indexed. Of $120 billion, $67 billion in variable and $34 billion in indexed. That’s roughly $100 billion in VA and indexed, which is 84% of IRA annuity sales.”

Variable annuities are largely vehicles for equity investments and tax-deferred trading, and VA watchers put the blame for weak first-quarter sales on the 10% drop in equity indexes in January, which created a flight to the safety of other annuity products, like indexed annuities and fixed-rate annuities, which can’t lose value.

In the first quarter, sales of fixed annuities jumped 48%, to $32.3 billion. \All retail fixed products experienced double-digit growth, compared with the prior year. Indexed annuity sales jumped 35%, to $15.7 billion, with all of the top 10 writers reporting increases. 

“Indexed annuity sales have experienced eight consecutive years of positive growth and we are forecasting that indexed annuities will continue to see strong growth throughout 2016,” the LIMRA release said. Sales of book value and market-value-adjusted fixed-rate deferred annuities, which often spikes when equity market volatility spikes, were up 90% in the first quarter.

First quarter fixed immediate annuity sales were $2.5 billion, up 25% y-o-y, LIMRA’s SRI said, even as higher demand pushed prices up and yields down to a 2016 low of 1.63% on February 11. Deferred income annuity (DIA) sales jumped 29% in the first quarter, to $729 million.  

Eleven companies are now offering qualified longevity annuity contracts (QLAC) products, and 12% of first quarter 2016 DIA sales were in QLAC compliant products. The Institute predicts QLAC sales will see an uptick in 2016. The growth of these products (SPIA and DIA) demonstrates the strong demand for guaranteed income, LIMRA said. 

There’s a stark difference between the top-line and bottom-line numbers for the VA industry. While total assets under contract, at $1.83 trillion, are close to their all time high ($1.88 in 2014), the industry overall is shrinking in terms of net new sales. Net flows in the first quarter of 2016 were negative 1.9%. Net flows were negative 3.3% in 2014 and negative 5.2% in 2015.

Overall sales have been falling since 2011, and have never returned to the peak year of 2007, when gross sales were $179.2 billion and net flows were $34 billion. But variable annuities are still the biggest-selling annuity product in the U.S. They remain the only retail product where an investor can put a virtually unlimited amount of after-tax (non-qualified) savings for tax-deferred growth. They are also the only annuity product that is sold through the securities-licensed broker-dealer channel. More than 70% of VAs in the first quarter were sold either by captive agents (38.7%) or by independent advisors affiliated with broker-dealers (33.2%).

But the VA share of the market has been shrinking, relative to sales of fixed indexed annuities, which continue to climb. “We are seeing a significant shift in the annuity market,” said Giesing. “In the first quarter, VA sales had a 45% market share, compared with a 60% market share just a year ago. We have to go back 20 years—to 1995—to find when the VA market share was 45% or lower.” 

All sectors of the VA market are soft, Giesing said. “When we talked to manufacturers, we found that three-quarters expected variable annuity sales to decline irrespective of whether the product has a guaranteed lifetime withdrawal benefit or if it’s investment-only,” he said in an interview. “And if you look at qualified versus the non-qualified markets, we still had over half of manufacturers expecting moderate to significant declines in non-qualified annuities.”

“When you look at why people turn to annuities, as the only source of guaranteed income, that need won’t go away. Half of annuity sales in 2015 had an income component. By 2021 there will be 11,000 people a day turning 65. Today there are 50 million retirees. We expect that number to reach 66 million by 2025. And as fewer people have the backstop of a defined benefit pension, and if Social Security still faces unknown questions, people will look to annuities. In the short-term, through the end of 2017, you’ll see the manufacturers taking a very conservative approach.”

© 2016 RIJ Publishing LLC. All rights reserved.

Marcia Wagner Explains the DOL Rule

Posted on May 26, 2016 by -

Now hiring: BICE Officer. Requirements: Command of the Best Interest Contract Exemption provision of the Department of Labor’s Conflict-of-Interest Rule, and its effect on broker-dealer and registered investment advisor compensation schemes. Starting date: ASAP. Salary potential: Unlimited.

That’s a purely hypothetical job posting, but according to Boston-based ERISA attorney Marcia Wagner, it may not be hypothetical for long. “’BIC officers’ are going to become a cottage industry unto themselves. You heard it here first, folks,” she said during a webinar yesterday.

Wagner, a popular speaker who combines an authentic Boston accent with the authority of a Harvard Law degree, held forth about the impact the DOL’s new conflict of interest rule or “fiduciary rule” for 90 minutes in the webcast, the latest in a series of four events on the same topic hosted by advisor software maker MoneyGuidePro.

Each webcast has attracted hundreds of attendees, demonstrating the appetite for information about the 1,030-page DOL rule—and insights in how to adapt to it. Between now and next April, when the DOL rule goes into effect, broker-dealers will be scrambling to figure out how to align their current compensation practices with the terms of the Best Interest Contract Exemption, a key element of rule.

Under the DOL rule, the sale of a financial product for variable compensation (such as a third-party commission) to an IRA account owner will be a “prohibited transaction” unless the seller—a registered rep, insurance agent, and sometimes a registered investment advisor—signs a contract pledging to act in the client’s “best interest.” Here are highlights from the webinar:

One-off sales will be suspect; financial plans show good faith. Wagner stressed that financial plans “by their nature” can help demonstrate prudence of advice, and can ensure that recommendations are in best interest of client. Sales proposals should be made within the context of a holistic financial plan.

Similar commissions for similar products. Differential compensation paid by a broker-dealer to a registered rep must be based on neutral factors that are directly tied to the services provided, such as a requirement for extra time or expertise. “Payouts to the rep DOL may vary for different investment, but not for similar investments in the same category, such as variable annuities,” Wagner said.

Deadlines for compliance. Under “transition” BIC, firms must have disclosures ready and must appoint a BICE officer by April 17, 2017. “Full-blown” BIC means having contracts (negative consent is permissible) ready by January 1, 2018.   

No need to wait for DOL to acknowledge your filing. “Thousands of firms will have to notify DOL when instituting BIC. DOL won’t respond, but it will compile this information for future investigation and enforcement purposes,” she said.

Registered Investment Advisors (RIAs) aren’t immune to the BIC. “RIAs have assumed incorrectly that they don’t need BIC at all,” Wagner said. “If they are offering rollover advice to participants, or to an off-the-street participant, where the rollover will mean higher fees than were in the plan, they will need to sign a BIC. They will also need a BIC when recommending a transition from a commission-based to a fee-based arrangement.”

Fee levelization is a de facto exemption. “There’s been a lot of buzz about it lately,” she said. “Fee levelizing is a way to comply with the prohibited transaction rule. Instead of using the BIC or Prohibited Transaction Exemption 84-24, a firm can levelize its compensation. Levelizing is not an official exemption. I think of it as a de facto exemption. It prevents a prohibited transaction.”

How to levelize fees. “The first step is to identify all forms of variable compensation in your firm, such as commissions and ticket charges and revenue sharing from mutual fund families and annuity providers—that’s compensation to either firms or their financial advisors that varies with sales volume, but not the custodial fees or fees for sweep vehicles that the firm may charge—and restructure them to make sure that the amount of compensation doesn’t vary depending on which product is sold.”

‘Hire them’ is fiduciary advice. “Some advisors thought recommending investment managers wasn’t fiduciary, but now investment management recommendations are ‘covered’ advice under the rule.”

‘Hire me’ isn’t fiduciary advice. While recommendations to hire third parties are fiduciary, self-promotion is not. In other words, an advisor may make a ‘hire me’ recommendation without being viewed as offering fiduciary advice.

Robo-advice. “Many firms are considering ‘robo’ for small IRA accounts. This is of particular interest because there’s an exemption for robos from the prohibited transaction rules,” Wagner said. Government rulings since 1997 have protected recommendations, including recommendations of proprietary products, that are generated by an independent expert or a computer program. “The computer program can’t favor proprietary products if they generate higher income for the advisor, however,” she added.

This won’t necessarily be easy. Firms can expect conflicts to occur between the need to incentivize advisors and the need to act in the client’s best interest, she said. “It will be hard to design a compensation program that eliminates all incentives to provide improper advice.”

The final DOL rule is ‘full strength.’ “It’s not watered down,” Wagner said in response to an listener’s suggestion to that effect. “It’s been made workable and practicable, but I wouldn’t call it watered-down. The enforcement will be done by DOL with respect to ERISA plans. For non-ERISA plans and IRA, owners themselves and the tort or plaintiff bar will do the enforcement. While the IRS has oversight of IRAs, it’s not interested in enforcement. But that could change. There’s also FINRA and the SEC. They might get involved in this.”

Could the presidential election eliminate the rule? “A president Clinton would likely expand the rule. She has said she is in favor of it and that it addresses abuses that need to be curtailed. Trump hasn’t said much about issues related to retirement so it’s hard to know what his positions are. But it’s true that these rules are a creature of the executive branch and whoever is the head of executive branch will have a big say in how they work in the future.”

Can the rule be overturned by Congress or the courts? Wagner didn’t think so. “I think this is a done deal,” she said. “There’s nothing that Congress can do legislatively, because of the president’s veto. With respect to the courts, yes, the financial industry will bring it to court, but I don’t think it will succeed. In the past, the Supreme Court has bent over backwards not to reverse executive branch actions like this, and I doubt that they will want to change a six-year-long regulatory initiative.”

© 2016 RIJ Publishing LLC. All rights reserved.

Donald Trump Believes What?!

Posted on May 26, 2016 by -

If you’ve played Jenga, the wooden tower game, you know that if you remove one of the finger-length timbers from the top of the tower, you’re safe. But if you remove a timber from the lowest, most fundamental layer, the tower collapses. Game over.

Over the past week or so, a comment by Donald Trump about offering to buy back U.S. Treasuries from supposedly anxious debt holders has sparked a fresh round of debate about the federal debt and deficit. (I’m not sure what Trump said; often, instead of Trump’s own words, we hear a reporter’s riff on something that the presumptive Republican presidential nominee said.)   

Distortions notwithstanding, the comment seemed to refer to printing dollars to buy back Treasuries at a discount. Trump was said to have suggested that the U.S. should offer debt holders less than 100 cents on the dollar for Treasuries—a partial default that creditors would presumably prefer to a complete default.Jenga Tower

The media treated it like a real possibility. A Bloomberg TV reporter asked Randall Wray of Bard College, a noted Post-Keynesian economist and interpreter of the work of Hyman Minsky, if such a move could lead to hyper-inflation a la the Weimar Republic of the 1920s, when it took wheelbarrows full of Reichsmarks to buy a loaf of bread. Wray started to explain, but ran out of time.

Let me count the ways that these reports about a Treasury default, and what Trump said (if he said it), don’t make sense.

The owners of Treasuries, foreign and domestic, obtained them with dollars. The dollars were spent into the U.S. economy. Presumably the money was put to good use, and generated profits at a rate higher than the Treasury coupon. (If it didn’t, we wasted an opportunity.) As a country, we can afford to buy back our debt.   

Treasuries are among the world’s most liquid paper, almost the same as cash. Anyone who holds Treasuries today can easily convert them to cash. The prices of Treasuries are at an all-time high; their actual and perceived risk is at an all-time low. If Treasuries were hard to sell—if they were illiquid, like mortgage-backed securities during the financial crisis—the government might in theory have to intervene and bail itself out by exchanging one kind of Federal Reserve Note (cash) for another (bills and bonds). But that’s not a big problem. A country whose debt is denominated in its own currency can always do that. 

Donald Trump U.S. money, and U.S. bonds, which is U.S. money that pays interest, will be popular for as long as people all over the world want to buy stuff that dollars buy. And they will, for a very long time. Among the expensive things that Chinese families want to buy, for instance, are college educations for their young people in places like Cambridge, Mass. and Palo Alto, Calif. They also want our equities, and McMansions in Texas, and lots of other dollar-denominated assets. Like oil.

Now, back to the Jenga analogy. Treasuries are the bottom row of the financial Jenga pile. If Treasuries somehow became risky—if the price fell and the yield rose—then the prices of all of the other securities that are by definition riskier than Treasuries would lose even more of their value. Any sort of debt that’s collateralized or backed by U.S. Treasuries—including the currencies of other countries—would drop in value and require fresh capital.

That would require the liquidation of other securities, which would cause the Mother of All Financial Crises. Soft Treasury prices would be the least of our problems. In fact, you’d see a flight to Treasuries, as we saw in 2008.  To talk about U.S. Treasury bonds as casually as if they were the dispensable top-timbers on a Jenga pile, when they actually comprise the indispensable bottom tier, is ridiculous. A president who indulges in such fantasies would be dangerous.

© 2016 RIJ Publishing LLC. All rights reserved.

First quarter annuity sales: Better for fixed than variable

Posted on May 26, 2016 by -

Despite a 20% drop in sales from the previous quarter, Jackson National Life maintained its leadership in the variable annuity market in the first quarter of 2016, with $4.27 billion in sales. Sales in the fourth quarter of 2015 were $5.34 billion.

The top 10 VA sellers accounted for about 80% of sales. All of the top 25 sellers saw declines in first quarter sales from 4Q2015, as the overall industry took in about 16% less premium. Both LIMRA Secure Retirement Institute and Morningstar Inc. reported first quarter annuity sales statistics this week.

While it was grim for VAs, the first quarter was the best ever for fixed indexed annuities. With $15.7 billion in FIA sales for the quarter, the industry was on track to break the $60 billion mark in 2016. Total FIA sales in 2015 were $54.5 billion.

With $2.79 billion in first quarter sales, Allianz Life again dominated FIA sales. The other two issuers with billion-dollar quarters were American Equity Investment Life  ($1.69 billion) and Great American ($1.11 billion).  In the fixed rate annuity category, New York Life again led in quarterly sales with $3.2 billion; its total fixed annuity sales in 2015 were $8.64 billion.

The same equity volatility that hurt variable annuities in January also helped sales of fixed deferred annuities. They were up 90%, to $12 billion, in the first quarter of 2016 compared with the year-ago quarter. Sales of market value-adjusted fixed annuities, which share interest rate risk with the contract owner, rose 165% year-over-year, to $5.3 billion.

AIG was the largest overall seller of annuities, with variable sales of $2.08 billion and fixed sales of $3.05 billion. Two of its variable annuity contracts, the Portfolio Director (Plus & 2) and the Polaris Platinum IIIB contract, were among the ten best-selling contracts in the first quarter.

In variable annuity sales, there was a slight shake up in the top-10 rankings in the first quarter of this year. AXA jumped to third place from seventh place, on sales of $2.33 billion, down five percent from the previous quarter. AEGON/Transamerica dropped to eight place from fifth place on sales of $1.21 billion, down 25% from 4Q2015.

Several of AXA’s contracts enjoyed leapfrog-jumps in sales rankings. Its Structured Capital Strategies B Share contract enjoyed a 270% year-over-year sales increase, with sales of $666 million in the first quarter of 2016, and moved up to ninth place from No. 24 in the past year. Over the same period, AXA’s Retirement Cornerstone contract moved up to No. 11 in the rankings from No. 47

Structured Capital Strategies is an indexed variable annuity; it works like an indexed annuity, but contract owners get more upside participation in return for limited downside participation. A conventional indexed annuity protects contract owners from any market loss.

Retirement Cornerstone has two-sleeves: an investment sleeve and a sleeve that’s protected by a Guaranteed Minimum Income Benefit rider. If contract owners want to de-risk as they age and lock in ever-larger amounts of guaranteed lifetime income, they can gradually move money from the investment sleeve to the protected sleeve. 

© 2016 RIJ Publishing LLC. All rights reserved.