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Better times ahead for U.S. active equity funds: Cerulli

Posted on January 28, 2016 by Editorial Staff -

Managers of active U.S. equity funds face negative factors in 2016—including a potential ‘risk-off’ stance in the run-up to the quadrennial election, more interest rate hikes, and the mixed blessing of high P/E ratios—but there are some positives, said Cerulli Associates in the latest issue of The Cerulli Edge – European Monthly Product Trends edition.

The prospect of a rising dollar should make U.S. equities attractive to Europeans, and investors will expect active strategies to perform better than passive funds in volatile markets, Cerulli analysts said in a release.

For instance, the S&P 500 was flat in dollar terms last year and underperformed European benchmarks. But in euro terms, it rose 20% for year ending November 30, 2015. Allianz’s Ireland-domiciled US equity fund, investing in standard names such as GE, returned 18.7% despite trailing the benchmark.

“Fed hikes may well further strengthen the dollar, making U.S. exports less competitive, which held back some companies in 2015. However, for a European investor in a US fund, there is compensation in a strong dollar, if the product is unhedged,” said Barbara Wall, Europe managing director at Cerulli.

Cerulli is bullish on the U.S. Its analysts noted that domestic investment in infrastructure would help domestically focused industrial names. “A strong U.S. economy will help to generate sustainable corporate profits, dividends, strong M&A activity, and share buyback programs,” Wall said in a release, conceding that China-inspired turmoil may see further outflows in equity funds in the early months of 2016.

Then there’s the expectation that active funds do better in difficult times. “Stock-picking may be key if investors are to realize upside, while limiting downside if the market goes as badly wrong as some fear. Firms with well-established track records, that have been selling reasonably well, can hope to make further gains, especially if the turmoil sees some fall by the wayside,” Gorman said in a release.

“The recent pullback has made many companies look considerably cheaper,” he added. He pointed to T. Rowe Price’s Luxembourg-domiciled U.S. Blue Chip equity fund and MFS Investments’ actively managed U.S. Value Fund as two steady performers.

“U.S. equity funds with decent records of picking the right stocks can hope to sell in Europe, given the lack of alternatives. The upside potential is clear, while the better funds can mitigate the losses during the tougher times. Managers should be using established channels to extol the virtues of U.S. equity funds, as well as pushing to appear on the growing raft of self-directed platforms,” said Wall in the release.

Five lessons for advisors from Vanguard CEO

Posted on January 28, 2016 by Editorial Staff -

Advisors shouldn’t fear but rather should take advantage of the demographic, technological and consumer-oriented regulatory factors that are roiling their industry, said Vanguard CEO Bill McNabb in an address at ETF.com’s Inside ETFs Conference in Hollywood, Fl., this week.

Vanguard’s large family of ETFs and index mutual funds, its low-cost, direct-to-consumer business model and its hybrid robo/human advice services have made it a beneficiary of current trends. According to Morningstar, Vanguard captured more fund flow in 2015 than the next nine mutual fund companies combined.

“Financial advice is having a moment,” McNabb said in a release. “The rise of more technology-based solutions has made advice part of a national conversation in the financial press and in the popular media. The best advisors are seizing this moment to tell their story.”

McNabb offered five concepts for advisors to consider:

We are in a low-cost revolution. Today’s investor expects to pay less for investment funds and services. Robo offerings are creating a new pricing floor. A traditional advisory firm can provide the in-person, individualized services that a robo advisor cannot. However, traditional advisors cannot hang their hat on that fact alone.

Advisors must adapt to a changing industry. Financial advice is evolving and technology is part of that evolution. Most advisors have been using financial technology tools for years. How can advisors further automate routine elements of their practice and digitize and mobilize some of the client experience?

In some ways, the world is not as complex. Investments are becoming more commoditized. Portfolio construction also is becoming commoditized. These functions can now be largely automated through model portfolios and even through target-date funds. That’s no longer a differentiated selling point for advisors.

In other ways, the world is not as simple. For most investors entering retirement, advice is the answer. And with the Baby Boom generation now entering retirement, demand for advice is great. The questions retirees face are increasingly complex. Rules of thumb and single-product solutions rarely provide a complete answer.

Advisors must tell their story. To differentiate themselves, advisors must explain their value proposition. http://www.vanguard.com/pdf/ISGQVAA.pdf

Vanguard has published research showing how advisors can add up to 3% in net portfolio returns over time for their clients with Vanguard Advisor’s Alpha, a wealth management framework that focuses on portfolio construction, behavioral coaching, asset location, and other relationship-oriented services.
Vanguard offers 68 low-cost ETFs in the U.S., with more than $483 billion in assets, up 13.2% from year-end 2014. The firm manages the $57.4 billion Vanguard Total Stock Market ETF (VTI), the $40.4 billion Vanguard S&P 500 ETF (VOO), and the $34.5 billion Vanguard FTSE Emerging Markets ETF (VWO).

More Than a Nice Interface?

Posted on January 21, 2016 by Kerry Pechter -

Fidelity’s office tower soars over downtown Boston, and Vanguard’s corporate campus sprawls near Malvern, Pa. Betterment, the “robo-advisor” that yearns to compete with those direct-to-investor giants, rents three post-industrial lofts in a landmark building with a white cast-iron façade on W. 23rd St. in New York.

Though still relatively small (about 130,000 clients and $3.5 billion under management) venture capital-backed Betterment has big ambitions. Its 35-year-old CEO, Jon Stein, a HarvardAB/ColumbiaMBA grad and son of Dallas urban planners, aims to disrupt the conventional financial services industry—not just at the individual level but at the advisory platform and institutional levels as well.

RIJ talked with Stein (above) for an hour recently at Betterment headquarters (below, right). The offices were open-plan, factory chic. Clusters of Millennials sat at screens on workbench-type tables under exposed ventilation ducts. No isolation-enforcing cubicles, no sound-absorbing carpets. Commuter bicycles mounted on the walls. It was lunchtime, so the bearded, tattooed chef—recruited from a posh Manhattan restaurant, Per Se—could be seen behind trays of hot shepherd’s pie at the far end of the room.

RIJ: It seems like the Vanguard and Fidelity are more like the integrated steel mills that employed tens of thousands of people and produced millions of tons of steel, and Betterment is like the automated mini mills that came along in the 1980s. Would that be an accurate analogy?

Stein: Ironically, we do think of ourselves as more like the vertically integrated steel mill. We are a full-stack solution. That’s our competitive advantage. We’ve rebuilt the plumbing, rebuilt the banking APIs [application programming interfaces], the trading, the recordkeeping, and the back-end infrastructure. That gives us efficiency advantages. We also have the user-experience advantages, like Apple. Because we make the products we sell, we can provide a better user-experience. So we have both. We do more than you think we do.

RIJ: How would you describe the business you’re in?

Stein: We think of ourselves as having several businesses. One is the retail business. We have retail customers who are solicited to sign up, usually at the recommendation of a friend or family member. They tell us about their goals, and we create and manage their portfolios. That’s the retail business. We also have the institutional business. We’re selling to registered investment advisors. We have over 200 firms on the Betterment platform. That’s a white label product, with the advisor’s name on it. Schwab doesn’t offer that. TDAmeritrade doesn’t offer that. Betterment HQ in NYC

RIJ: So, a company like Envestnet would be a competitor?

Stein: Yes, we compete with an Envestnet, or a Charles Schwab, in that space. Then we have the 401(k) business. We built the first recordkeeper that combines recordkeeping with ETFs.

RIJ: People with experience in the 401(k) business tell me that building a recordkeeping system from scratch is sort of an IT nightmare.

Stein: I guess I’m a glutton for punishment. Actually, recordkeeping is easier with ETFs. And the whole thing is easier because we have no legacy systems. We’ve been investing in recordkeeping on the retail side for eight years.

RIJ: But you outsource a lot of what the big fund companies do internally, right? You use APEX, for instance, for clearing and execution.

Stein: APEX doesn’t do much for us. We send trades through them.

RIJ: What functions do you do in-house?

Stein: We’re the custodian. We manage the funds. We do the accounting, the statements, the confirmations, and all the regulatory functions. We’re not outsourcing any of that. We manage the money. It sits with Betterment. It’s true that we don’t offer anything like a Vanguard Windsor II Fund [an actively-managed large-cap value fund]. We provide a simpler, streamlined solution. But it’s still end-to-end, and the advice is more sophisticated than Vanguard offers.

RIJ: OK. I had the impression that your core competency was the way you on-boarded new customers—that you applied the kind of frictionless interface that works for an Uber or an Airbnb to the investment business. You’ve got sophisticated ways of keeping track of prospects, and automated e-mail programs that nudge new clients through the enrollment and payment process. I thought that was your key distinction.

Stein: The on-boarding is just the tip of the iceberg. We make it easier to fund your account. You can fund your account same day that you open it. You can’t do that with anybody else. To make that on-boarding experience better, we have the only e-signed paperless rollovers in the industry. You can rollover from 401(k) to a Betterment IRA with an e-signature and a click. We couldn’t do those things if we hadn’t built all the plumbing ourselves.

RIJ: But it’s still true that you’re benefiting in major ways from the accomplishments of companies that went before you. If custom asset allocation hadn’t become a commodity, you wouldn’t be here.

Stein: It’s true that we couldn’t be building this business without the help of two things: The reduced cost of building information technology today, and the emergence of exchange-traded funds. Today you can get a globally diversified portfolio through an ETF, using one API—through one pipe—and you can go to any vendor [ETF manager] to get it. That’s good for us. We have access to one connection who gives us access to the whole world of ETFs, without any additional build and without any special distribution agreements. We can use iShares or Vanguard or Schwab ETFs. The money is spread out among multiple ETFs and multiple providers. With open architecture, we get the lowest costs and the most liquidity.

RIJ: Then there’s the arrival of the smartphone. That changed everything.

Stein: We now get 60% percent of our log-ins from our mobile app. What’s happening with phones is like the early stage of what happened with desktops. Everything moved to websites. Now everything’s moving to mobile.

RIJ: Let’s talk about fintech and the regulatory environment. The Secretary of Labor himself has said he welcomes the robo-advice industry and thinks it’s good for Baby Boomers who need help managing their retirement money. Some in the fintech industry have said the Department of Labor’s fiduciary proposal can only help their type of low-cost, unbiased advice. Have you personally spoken with people at the DOL about synergy between robos and regulation?

Stein: We have had meetings with policymakers and at DOL and we’ve written a letter supporting their initiative. I wouldn’t say there’s been ‘frequent’ communication between us and the Department of Labor. I’m not a policymaker. I don’t read the proposals or the bills; I rely on smart people for that. The gist of it is that the DOL wants to simplify things. Their goal, whether you think they’re going about it in the right way or the wrong way, is that anybody who gives advice to retirement investors should have their interests well-aligned with the client’s interests. I think that’s a noble ambition.

RIJ: Where do you think all of this is headed? The conventional wisdom is that there will be a convergence that combines robo-advice with a human touch. You already offer phone support, right?

Stein: We’ve got a dozen people answering the phones. We have customer support seven days a week, 12 hours a day. We’re recognized by Consumer Reports as having the best customer service. I think that’s a testament to the fact that we’re putting people first.

RIJ: Yes, but do you foresee combining your technology with in-house human advisors, the way Vanguard has.

Stein: I don’t see a big distinction between the human role and the role of technology. People have always used technology to give advice. I can’t imagine any investment advisor working without technology. We have advisors using our technology today. It’s a big deal for them because of our investments in a better customer experience. We don’t see ourselves as replacing human advisors. Our customers get great advice from talking to our phone team. But they also don’t have to talk to anyone if they don’t want to. I think we do a better job, even without an expensive call center.

RIJ: What about the status quo do you think isn’t working, and what are you trying to fix?

Stein: On average, Americans have a real problem with saving enough for retirement. Today, only 10% to 15% of retirement spending comes from personal savings. A third comes from Social Security. Some comes from working in retirement and the rest comes from personal savings. In the system we’ve designed, most people are at a loss for how much they should be saving. We’ve done a disservice to our population. The way we designed the 401(k) system—it’s like we said to people, ‘You can have access to any medicine you want, but there’s no doctors and no pharmacists.’

RIJ: Speaking of retirement spending, I noticed that you have a retirement income program that calculates monthly withdrawals that vary with the ups and downs of the market. But the example on the website uses a 20-year life expectancy for a hypothetical 65-year-old woman. A lot of planners are now using a 30-year life expectancy.

Stein: Even with a 20-year timeline, we set it up so that you could live for 99 or 100 years, and even when you get there, it’s likely that you will still have significant savings left over. It’s almost too conservative. You could probably spend more than we recommend. I don’t worry about anyone who uses our method running out of money.

RIJ: What’s your exit strategy for you and your venture cap backers? Are you planning to take Betterment public?

Stein: We want to go public. That’s the ambition of the company.

RIJ: Do you think there’s any danger that going public might hurt your relationships with your customers? The current version of the DOL’s fiduciary proposal requires advisors to act ‘solely’ in the interests of their clients. But public companies have to put the shareholder first. Do you see a potential conflict there?

Stein: Not at all. An IBM or a General Motors or an Apple couldn’t succeed if they didn’t have their customers’ interests in mind. When companies stop putting their customers first, the world punishes them. The capitalist system isn’t perfect, but it produces great things. We all rely on it.

RIJ: I was wondering where the name ‘Betterment’ came from.

Stein: The name came from an old-fashioned word for making things better. I liked the idea and liked the name. I probably heard it at home because my parents used it. They were city planners in Dallas, where I grew up, and they would talk about the ‘betterment’ of public streets.

RIJ: What led you into finance?

Stein: I happened into financial services, and I was appalled at what I saw. I was frustrated by the products that the banks were building. I thought, ‘There’s got to be a better way.’

RIJ: You could have made millions on Wall Street, and then quit to do anything you wanted.

Stein: It’s true that I’m not making as much money as I could be right now, but I’ve got the best job in the world.

RIJ: Thank you, Jon.

The January sell-off in stocks—a delayed reaction to the Fed?

Posted on January 21, 2016 by Kerry Pechter -

Any possibility of a causal link between the Federal Reserve’s quarter-point rate hike in mid-December and the 10.7% correction in equity markets since the start of 2016 seemed to be eliminated by the fact that equities did quite well during the last two weeks of the year.

But a Morningstar analyst remarked in a report this week that the $16.8 billion net flow into U.S. equity funds in the month of December—the most in two years—seemed to be a “cyclical phenomenon that probably has more to do with year-end rebalancing” than with optimism about equities.

Overall, equity funds experienced negative flows after two years of inflows. The exception was international-equity funds. They led all category groups in terms of highest inflows for the calendar year, collecting $207.6 billion.

Asked if year-end re-balancing might have delayed an equity sell-off until January 4, Morningstar’s Alina Lamy told RIJ, “It is possible. The trend we’ve repeatedly observed is that managers tend to rebalance in December. The challenge they’re facing is that they rebalance in December regardless of whether market conditions are favorable or not. So it is possible that we could have seen outflows from U.S. equity funds in December were it not for the year-end rebalancing trend.”

The inflow into U.S. equities in the last month of the year also belied the fact that the S&P500 Index finished the year down 1.4%. “In general, flows tend to follow performance,” Lamy wrote in the Morningstar report, “but such a strong inflow into a category that delivered a negative return for the year seems to indicate that investors are looking more toward the future.

“With the Federal Reserve raising rates for the first time in 10 years and the European Union maintaining its quantitative-easing measures, investors seem to believe there is higher potential for growth in Europe and Asia than in the United States. The high inflow to international equity therefore appears more like an anticipatory move at this point.

“Another trend is that a large portion of flows tends to come from funds-of-funds, particularly retirement plans, target-date, and target-risk funds, and these plans have been increasing allocations to international equity. A majority of these large international-equity flows we’ve seen come through the retirement channel. Vanguard is just one example; they have been enhancing diversification for their target-date funds by increasing their international equity exposure.”

Taxable-bond funds sustained the worst outflows by category group in December, $29.0 billion, most of them driven by the high-yield category, which saw outflows of $11.2 billion for the month—the third-largest monthly outflow since 1993.

Third Avenue Management’s announcement that it would liquidate its high-yield bond fund, Third Avenue Focused Credit, without allowing investors to redeem their shares right away, along with falling oil prices, helped ignite the selling.

With only a few exceptions, passive funds gained at the expense of active funds in December and in 2015 overall. Indeed, two of only three firms with inflows to their actively managed funds in December were passive shops—Vanguard and State Street.

Franklin Templeton suffered heavy outflows in December, with two of the firm’s fixed-income offerings among the active funds with the highest outflows. Templeton Global Bond and Franklin Income had outflows of $2.2 billion and $1.7 billion, respectively.

Advisors Provide Icing, But Retirees Need Cake

Posted on January 21, 2016 by Chuck Yanikoski -

After a quarter-century of designing and building retirement planning software, I find myself nearing my own retirement. It’s time to ponder lessons that I have learned or failed to learn. One thing I’ve learned, the hard way, is that most financial services companies and advisors don’t especially want to change the way they serve (or under-serve) most retirement clients, or to radically change the software they do it with.

Lesson One. For most people, retirement planning is not about investments, taxes, estate planning, or even retirement income. It’s about other stuff. It’s about where to live, what to do, what relationships to pursue or drop, and how to solidify their legacies. It’s about focusing on what matters and, surprisingly often, it isn’t money.

True, people pursue their non-financial goals in ways that are enabled or constrained by money. So if advisors weren’t engaged in the financial minutiae of retirement planning, we’d miss important details. But in most cases those details are secondary or even irrelevant.

And we can’t work magic. Most people, when they retire, already hold all the cards they can ever play. The present value of their net worth and their probable future income streams are more or less determined. We can advise them to add risk or exercise more caution at certain times, but the success of those strategies depends on what cards their opponent (i.e., Fate) plays. There are no guarantees, just probabilities.

Lesson Two. Most of the advice our industry offers won’t help people who are already headed for financial trouble. They need to add to the value of their financial resources, relative to expected expenses. Moving money around won’t do that reliably. Often it just adds risk and strengthens Fate’s hand.

Most retirees can improve their financial situation in only two ways: By working more and/or slashing expenses. That is the unappetizing two-layer cake upon which our fancy planning serves merely as icing. The icing has value, but the millions of people who are approaching retirement need to find more cake or go on a diet.

Lesson Three. There’s no market for the kind of planning software that would address this problem.

In 1991, I began imagining software that could give people exactly what they need. It would deal with every financial issue retirees face, with particular emphasis on those with the biggest impact. It would deal with these issues in an integrated way and produce a coherent plan. The software would support complexity, but be simple to use.

Fifteen years later, I had a prototype and took it on the road. But the big financial services companies didn’t want it. The software either required actual cooperation among their silos, or they didn’t offer all the same products and services that the software encompassed.

Financial advisors didn’t want to deal with it either, it turned out. The software either did too much for them, they said, or it operated in unfamiliar ways, or required new workflows. I believed in it because it worked for my clients and myself. But the product’s success began and ended there.

Employers, plan sponsors or other organizations weren’t seriously interested either. A few considered licensing it, but they were reluctant to endorse (and be held liable for) what they didn’t understand. And they didn’t understand it.

Finally, I began offering it to individuals. Many of them have liked the software, and some have renewed it year after year to keep their plans on track. But without a campaign to drive consumer awareness—an effort that only big companies like Apple can afford—I couldn’t generate enough demand.

The Bottom Line. Naturally, it bothers me that my small company reaped only thousands of dollars in sales after spending millions on product development. But my frustration runs deeper than that. Fifteen years ago, I was certain that, if given the right software, the retirement industry would embrace it, and use it to address the non-investment needs of the mass market. In other words, I believed the industry would change. Since 2007, I’ve learned why software like mine hasn’t been widely adopted. The industry, for reasons of its own, has little desire to change.

Fed to roll over Treasuries as they mature

Posted on January 21, 2016 by Editorial Staff -

About $216 billion in U.S. Treasury securities will mature in 2016, but according to a speech this week by New York Fed president William C. Dudley, the Federal Reserve will roll them over rather than let its $2.4 trillion inventory of Treasuries shrink.

The reinvestment policy is designed to be interest-rate neutral. While the Fed won’t increase its overall Treasury holdings, it will still be acting as a buyer of Treasuries, thus maintaining demand, establishing a desired price floor and preventing upward pressure on yields.

Addressing the Economic Leadership Forum in Somerset, NJ, last Sunday, Dudley said:

“As we noted in the December FOMC statement, we anticipate that we will continue reinvestment ‘until normalization of the federal funds rate is well underway.’

“I think this policy makes sense not only because the decision to end reinvestment will represent a further tightening of monetary policy, but also because it is difficult to assess ahead of time the impact of such a decision on financial market conditions given the lack of historical experience.

“I also believe that continuing reinvestment until the federal funds rate reaches a higher level makes sense. We want to ensure that we have the ability to respond to adverse shocks by easing monetary policy by lowering the policy rate. Having more ‘dry powder’ in the form of higher short-term interest rates seems more desirable than less dry powder and a smaller balance sheet.

“My view is that we should not set a numerical tripwire for ending reinvestment. If the economy were growing very quickly and the risks of an early return to the zero lower bound for the federal funds rate were deemed to be low, then I could see ending reinvestment at a relatively low federal funds rate.

“In contrast, if the economy lacked forward momentum and the risks of a return to the zero lower bound were judged to be considerably higher, I would want to continue reinvestment until the federal funds rate was higher.

“In my view, good monetary policy-making requires ongoing assessment and judgment, not the adherence to mechanical rules. I know market participants desire certainty, but in the uncertain world in which we live, that desire is not consistent with the policy that would best achieve our objectives.”

Danish bank offers retail robo-investing in ETF portfolios

Posted on January 21, 2016 by Editorial Staff -

A Danish financial institution, Saxo Bank, has launched what it calls a “large-scale, truly digital investment solution for retail investors.” The web-based service is called SaxoSelect and offers three prefab portfolios built with iShares ETFs from BlackRock.

Saxo Bank clients can choose between a Defensive, Moderate, or Aggressive ETF portfolio. The portfolios are managed by Saxo Bank and are available in selected currencies—initially euros and sterling—and charge an all-in service fee of 90 basis points per year.

“Technology will profoundly change the asset management industry,” said Saxo Bank CEO Kim Fournais, in a press release. “Access to technology, demand for transparency, and focus on performance will change the way individuals manage their savings.”

“The growth of the European ETF market shows no sign of abating, but it is paramount that these tools are delivered to investors in a way that complements their digital habits,” said Michael Gruener, co-head of iShares EMEA Sales at BlackRock.

The Saxo Bank Group is an online, multi-asset trading and investment specialist offering trading and investment technologies, tools and strategies. Founded in 1992 and headquartered in Copenhagen, Saxo employs 1,450 people in 26 offices in five continents.

At December 31, 2015, BlackRock’s AUM was $4.645 trillion, including more than $1 trillion in over 700 iShares funds. The firm has about 13,000 employees in over 30 countries and a presence in North America, South America, Europe, Asia, Australia, the Middle East and Africa.

Bank annuity sales dip 2.5% in first three-quarters of 2015

Posted on January 21, 2016 by Editorial Staff -

Income earned from the sale of annuities at bank holding companies (BHCs) amounted to $2.62 billion in the first three quarters of 2015, down 2.5% from the $2.69 billion in the first three quarters of 2014, according to Michael White Associates (MWA), Radnor, Pa.

Wells Fargo & Company (CA), Morgan Stanley (NY), Raymond James Financial, Inc. (FL), JPMorgan Chase & Co. (NY), and Bank of America Corporation (NC) led all bank holding companies in annuity commission income.

Third-quarter BHC annuity commissions were the sixth-best quarterly annuity commissions in history at $888.5 million. They were down 0.8% from $893.0 million in second quarter 2015, however, and down 0.3% from $888.5 million earned in third quarter 2014.

Of the 583 bank holding companies surveyed:

49.1% (286) participated in annuity sales activities during the first three quarters of 2015.
Their $2.62 billion in annuity commissions and fees constituted 17.6% of their total mutual fund and annuity income of $14.84 billion.
The $2.62 billion represented 39% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $6.71 billion.

Of the 6,270 banks, 876 or 14.0% participated in annuity sales activities, earning $594.8 million in annuity commissions or 22.7% of the banking industry’s total annuity fee income. Bank annuity production was down 2.5% from $644.4 million in the first three quarters of 2014.

“Of 286 large top-tier BHCs reporting annuity fee income in the first nine months of 2015, 180 or 62.9% were on track to earn at least $250,000 this year,” said Michael White, president of MWA and author of the study, in a release. Of those 180, 81 BHCs or 45.0% achieved double-digit growth in annuity fee income.

“That’s a 7.2-point decrease from the same period of 2014, when 93 institutions or 52.2% of 178 BHCs on track to earn at least $250,000 in annuity fee income achieved double-digit growth. This decreased double-digit growth in annuity revenues among large BHCs demonstrates the continued weakening of the bank annuity sector.”

Over two-thirds (68.4%) of BHCs with over $10 billion in assets earned third quarter year-to-date annuity commissions of $2.49 billion, constituting 94.8% of total annuity commissions reported. This was a decrease of 2.5% from $2.53 billion in annuity fee income in the first three quarters of 2014.

Among this asset class of largest BHCs in the first three quarters, annuity commissions made up 17.4% of their total mutual fund and annuity income of $14.35 billion and 41.2% of their total insurance sales revenue of $6.04 billion.

Banks with $1 billion to $10 billion

Banks in the next tier didn’t fare as well. With 45.2% participating in annuity sales, BHCs with assets between $1 billion and $10 billion recorded a decrease of 18.4% in annuity fee income. Sales fell to $128.9 million in the first three quarters of 2015 from $158.0 million in the first three quarters of 2014 and accounted for 19.3% of their total insurance sales income of $667.0 million.

Among BHCs with assets between $1 billion and $10 billion, leaders included:

Santander Bancorp (PR)
Stifel Financial Corp. (MO)
Wesbanco, Inc. (WV)
National Penn Bancshares, Inc. (PA)
First Commonwealth Financial Corporation (PA)

The smallest community banks, those with assets less than $1 billion, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were:

The Oneida Savings Bank (NY)
Sturgis Bank & Trust Company (MI)
The Security National Bank of Sioux City, Iowa (IA)
Bank of Springfield (IL)
Bank Midwest (IA)

These banks with assets with less than $1 billion generated $50.9 million in annuity commissions in the first three quarters of 2015, down 6.7% from $54.5 million in the first three quarters of 2014. Only 10.6% of banks this size engaged in annuity sales activities, which was the lowest participation rate among all asset classes.

Among these banks, annuity commissions constituted the smallest proportion (18.7%) of total insurance sales volume of $271.4 million.

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median year-to-date Annuity Concentration Ratio was 5.60% at the end of third quarter 2015.

Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 16.04% of noninterest income.

The findings are based on data from all 6,270 commercial banks, savings banks and savings associations (thrifts), and 583 large top-tier bank and savings and loan holding companies (collectively, BHCs) with consolidated assets greater than $1 billion operating on September 30, 2015. Several BHCs that are historically insurance or commercial companies have been excluded from the study.

Christie nixes state-run IRA in favor of private marketplace

Posted on January 21, 2016 by Editorial Staff -

Twelve hours after New Jersey’s governor Chris Christie vetoed a bill creating a state-administered retirement plan for private-sector workers, the state assembly voted to cooperate with him and settled on a compromise plan, NAPANet reported this week.

The original bill, similar to legislation in California, Illinois and other states that creates tax-deferred workplace retirement savings plans for American workers whose employers don’t offer one, would have required New Jersey small employers with 25 or more workers to set up an IRA plan funded by payroll deduction.

But Christie, a Republican, objected to the mandatory nature of the plan and expansion of state government and rejected the bill. So the Democratic-controlled legislature authorized the creation of a “small business retirement marketplace,” modeled after one established in Washington state last year. A marketplace was one of three options outlined in an Interpretative Bulletin the Labor Department issued in November at the direction of President Obama.

The new legislation is now called the New Jersey Small Business Retirement Marketplace Act, to be aimed at firms with fewer than 100 qualified employees (ERISA eligibility) at the time of enrollment. A majority of New Jersey workers work in such firms.

The bill Christie vetoed—which had been sponsored by the Democratic leaders in both houses of the state legislature—would have created a Secure Choice Savings Program. Businesses with fewer than 25 employees could choose to offer the plan to their workers. While administered by a seven-member board of state officials, the program would not have been guaranteed by the state or require state funding, though the Garden State would initially have had to cover start-up costs.

Christie referred to the mandatory nature of the retirement plan, similar to programs taking shape in California and several other states, as a reason for his decision to veto legislation that would have enabled it.

“I believe that the approach taken by the Legislature — mandating participation under a threat of fines for not participating — is unnecessarily burdensome on small businesses in New Jersey,” Christie said.

Specifically, he expressed concern that the state would have borne the initial cost of the program and that “the bill creates yet another government bureaucracy to oversee and implement the program, while there are plenty of private sector entities with particular expertise that can perform this function instead.”

The marketplace will offer three options: a SIMPLE IRA, a payroll deduction IRA and a MyRA. Firms participating in the marketplace will have to offer at least two investment options, including a target date fund, or similar fund, and a balanced fund.

Participating employers will not be assessed an administrative fee or surcharge, and the program is directed not to charge enrollees more than 1% in total annual fees.

The new bill directs the State Treasurer’s office to:

Establish a protocol for reviewing and approving the qualifications of all participating financial services firms;
Design and operate a website that includes information on how eligible employers can voluntarily participate in the marketplace;
Develop marketing materials about the program; and
Identify and promote tax credits and benefits for employers/workers related to participating in the program.

The Bucket

Posted on January 21, 2016 by Editorial Staff -

MetLife’s strength and credit ratings placed “under review” by A.M. Best

A.M. Best said it has placed the financial strength rating of A+ (Superior) and the issuer credit ratings (ICR) of “aa-” of the primary life/health insurance subsidiaries of MetLife, Inc., “under review with developing implications.”

“The actions follow MetLife’s public announcement on Jan. 12, 2016 that it will pursue the separation of a substantial portion of its U.S. retail segment and is evaluating structural alternatives for this separation. These alternatives include a public offering of shares in an independent, publicly traded company, a spin-off or a sale,” an A.M. Best release said.

“The ratings will remain under review until A.M. Best receives more definitive direction from the management of MetLife on the final separation strategy to be pursued, as well as the ultimate capital structure and allocation between the organizations,” the release said.

“The new retail focused company would maintain the more capital intensive lines of business, including variable annuities with living benefit riders and universal life with secondary guarantees, which would result in a significant amount of exposure to market volatility and interest rate risk. However, at this time the level of capitalization for this company has not been set,” the release continued.

“A.M. Best acknowledges that MetLife will maintain its industry leading position in the group insurance market and will continue to focus on growing its corporate benefit funding segment, which includes structured settlements and pension risk transfer business. The company will also focus on increasing its international presence in which it holds several market leading positions in both mature and emerging markets.”

The ratings agency also placed the ICR of “a-”, as well as all issue ratings of MetLife, under review with developing implications, along with the FSR of A (Excellent) and the ICRs of “a+” of MetLife’s property/casualty companies.

The P/C companies include Metropolitan Property and Casualty Insurance Company, seven fully reinsured subsidiaries and a separately rated subsidiary, Metropolitan Group Property and Casualty Insurance Company (together referred to as MetLife Auto & Home).

Canadian pension funds gain access to China’s capital markets

The Ontario Pension Board (OPB) and the Canada Pension Plan Investment Board (CPPIB) have become the first pension funds to gain access to China’s capital markets under the more flexible of the country’s two main licenses for foreign institutional investors, IPE.com reported this week.

The two boards have been granted Renminbi Qualified Foreign Institutional Investor (RQFII) status. The China Securities Regulatory Commission (CSRC) approved their licenses in December and announced on Thursday, according to Charles Salvador, director of investment solutions at Z-Ben Advisors.

The $272.9bn (€249bn) Canadian Pension Plan is already active in China. In December, it invested RMB3.2bn (€460m) in Postal Savings Bank of China, one of China’s largest retail banks.

The announcement of the RQFII licenses for the Canadian funds comes after a torrid start to the new calendar year for Chinese markets, with stocks down amid high volatility and the renminbi depreciating.

Under the RQFII program, investors can invest directly in China’s capital markets. The program resembles the Qualified Foreign Institutional Investor (QFII) platform but it is much less restrictive.

The RQFII provides easier access to the Chinese interbank bond market, doesn’t require investors to allocate at least half of their quota to equities (A-shares), and allows investors to use offshore renminbi or other major currencies to fund their quota. QFII is strictly a US dollar-based program.

The approval of the licenses for the Canadian pension funds signals a change in the approach that pension funds will take to investing in Asia, Salvador told IPE.com.

“If they’re looking to gain direct exposure to A-shares, then they’ll have to think twice about going through the QFII platform,” he said. “They’ll have to think about RQFII, and then they also have the option of the Connect platform.” Connect links the Hong Kong and Shanghai stock exchanges, letting investors invest in eligible Shanghai-listed securities.

Until now, asset managers, banks, securities companies, insurance companies and hedge funds have used the RQFII program. GIC, Singapore’s sovereign wealth fund, received an RQFII license early last year, but it is unclear if this was granted to it in an asset management capacity.

Voya urges DOL not to encourage state-based defined contribution plans

Voya Financial, Inc. has submitted a letter to the Department of Labor (DOL) commenting on the DOL’s proposal to exempt state-sponsored IRA savings programs from the Employee Retirement Income Security Act of 1974 (ERISA).

The letter acknowledged that “millions of American workers lack access to workplace retirement savings plans, disproportionately those who work for small employers,” and that “Voya agrees there is an urgent need to expand access to workplace retirement savings plans to address the retirement savings gap.”

But the DOL proposal “would enable a 50-state patchwork of government-administered retirement savings vehicles with inconsistent state and local regulations, low annual contribution limits, no opportunity for employer contributions and limited access to retirement planning and advice,” Voya said.

“This patchwork will be difficult, if not impossible, to dismantle once built, and, if other layers of systems or requirements are added at the federal level in the future, there will be an even more confusing ‘50 plus one’ patchwork of state and federal standards, rather than a single, streamlined standard.”

“Automatic enrollment, sufficiently high limits for employee contributions, flexibility for employers to match contributions, access to high quality retirement planning advice and availability of an appropriate range of investment alternatives” would be preferable to the DOL solution, Voya said.

Voya asked the DOL to withdraw its proposal, and instead “seek a uniform federal solution that encourages employers to offer 401(k) and similar retirement savings plans.” The firm urged the DOL to “work with legislators, private industry and other stakeholders to craft an appropriate federal framework… to address the retirement savings gap rather than creating a new state-based system.”

Protective acquires Genworth blocks via re-insurance

Protective Life Insurance Co, a subsidiary of Protective Life Corp., which is a unit of The Dai-ichi Life Insurance Co., Ltd., has acquired via reinsurance certain blocks of business from Genworth Life and Annuity Insurance Co., Richmond, Va., Protective Life Corp. announced this week.

The transaction, announced last September 15, was Protective’s first acquisition since becoming part of Dai-ichi Life and the second largest acquisition in Protective’s history, according to a prepared statement from John D. Johns, Protective’s Chairman and CEO. “We continue to have substantial available capital, and we are ready to pursue other acquisition opportunities,” the statement said.

Liberty Mutual becomes Chile’s biggest P/C insurer

Liberty Mutual Insurance has named Fernando Cámbara Lodigiani as CEO of its Chile operations following its acquisition of 99.6% of Compañía de Seguros Generales Penta Security S.A. Together with its existing company, Liberty Compañía de Seguros Generales S.A., Liberty Mutual Insurance is now the largest provider of property and casualty insurance in Chile.

Private passenger automobile insurance is the single largest line of business for Liberty Mutual’s International operations, which insures more than 5.9 million autos worldwide outside the U.S. The Chilean property/casualty market is estimated at US$3 billion.

Cámbara, the CEO of Penta Security, will lead a unified management team comprised of executives from both companies. Penta Security is the fourth largest non-life insurer in Chile. Its products are consistent to those offered by Liberty Seguros, which has grown substantially in the ten years since Liberty Mutual Insurance first entered Chile.

In 2014, Liberty and Penta Security generated CL$171 billion and CL$226 billion of direct written premiums, respectively.
The acquisition in Chile adds to Liberty Mutual’s International local business operations that sell to individuals and businesses in three geographic regions: Latin America, including Brazil, Colombia, Ecuador, and Chile; Europe, including Spain, Portugal, Turkey, Ireland and Russia; and, Asia, including Thailand, Singapore, India, Malaysia, China (including Hong Kong) and Vietnam. Private passenger automobile insurance is the single largest line of business for Liberty Mutual’s International operations, which insures more than 5.9 million autos worldwide outside the U.S.

Video: Income ‘Roundtable’ at The American College

Posted on January 14, 2016 by Kerry Pechter -

When it comes to naming the essential elements of a retirement portfolio, there are as many opinions as there are financial advisors. Equities, insurance, annuities and reverse mortgages—each of these product categories has its advocates and adversaries.

Mastering just one of these categories can be a challenge, and many advisors focus on only one or two. But, given the endless variety of risks and resources that older clients bring to advisors, retirement specialists ideally need to be conversant in all four.

Last November 11, four people who teach in the Retirement Income Certified Professional (RICP) designation program at The American College for Financial Services in Bryn Mawr, Pa., gathered to talk about all these product types, plus Social Security claiming strategies, in a two-hour videotaped roundtable discussion.

The quartet of experts included David Littell, JD, professor of taxation at the College, Wade Pfau, Ph.D., director of the College’s New York Life Center for Retirement Income, Jamie Hopkins, the Center’s co-director, and Curtis Cloke, a Burlington, Iowa, based advisor who teaches an RICP online course. (Richard M. Weber moderated the roundtable, which The American College of Financial Services and the Society of Financial Service Professionals co-sponsored.)

You can link here to the video, which is part of the RICP curriculum. Highlights from the video are also described below.

Reverse mortgages: the Pfau perspective

People either love or ignore reverse mortgages as a retirement income tool, and both positions are defensible. Millions of middle-class Baby Boomers are under-saved. As a group, they hold trillions of dollars in home equity. Surveys show that most of them would like to “age in place.” Many experts, including Nobelist Robert Merton, think reverse mortgages need to be part of almost any middle-class retirement strategy.

Many advisors assume that their high net worth clients, no matter how long they live, will never be desperate enough to need a reverse mortgage. But in the RICP roundtable, Pfau argued that even wealthy clients can benefit from using a reverse mortgage line of credit as a handy source of liquidity during market downturns.

“The conventional wisdom is that the HECM (Home Equity Conversion Mortgage) line of credit becomes a logical option only at the end of life,” Pfau said. “But the new strategy is to get it early in retirement and only use it to avoid selling assets at a loss. It protects you against sequence of returns risk. You can use a cash buffer for the same purpose, but that can create a drag in performance.”

If you open a HECM LOC at age 62, your loan capacity begins growing right away and keeps growing throughout retirement. (Why does loan capacity grow? When people take out a HECM loan, they make no payments toward it and the loan balance grows until they die or sell the house. To assure parity between HECM loans and HECM lines of credit, the program allows the line of credit’s limit to grow at a rate similar to that of the loan balance.)

Annuities as part of an investment strategy: the Cloke technique

Like reverse mortgages, income annuities have long been regarded as appealing mainly to those who don’t have enough savings to cover their retirement needs. In other words: for retirees who can’t afford to live on an inflation-adjusted 4.0% or less for at least 30 years. But that’s not necessarily so, claims Curtis Cloke, who teaches an RICP course in his proprietary “Thrive” retirement methodology.

Just as Pfau argued that reverse mortgage should appeal to a retiree’s desire to stay largely invested during downturns, Cloke explained that high net worth retirees can maintain high equity positions without losing sleep if they buy enough guaranteed income to cover their basic or even their basic-plus-discretionary expenses.

In the November roundtable, Cloke describes an actual case (using pseudonyms) of a 64-year-old husband and 63-year-old wife with assets of $3.1 million, combined Social Security at full-retirement age of $56,000, and a pension (husband’s life only) of $35,000 a year. They wanted an income of $11,000 per month for living expenses, adjusted upward by 3% per year, plus $500 per month for medical insurance, increasing at the rate of 5% per year, for a total real income of $138,000 per year.

Cloke recommended a combination of strategies and products, including the delay of Social Security until age 70, the purchase of inflation-adjusted, cash refund Qualified Longevity Annuity Contracts for income starting at age 85, conversion of traditional IRAs to Roth IRAs, and the use of deferred income annuities with cash refund features.

A lot of advisors might consider it simpler just to cover this client’s income needs with Social Security, pension and a 3% systematic withdrawal from a diversified investment portfolio. But Cloke rejects what he calls an “assume and consume” approach to retirement income, and claims that his method creates enough gains through lower taxes, lower asset management fees, mortality credits and increased equity exposure to more than cover the cost of commissions and insurance product-related costs.

Social Security

Social Security laws changed in November, with the federal government removing the option—some called it a loophole—that allowed workers at full retirement age to file for Social Security benefits but not take them, purely for the sake of enabling their working spouses to begin collecting spousal benefits (not the benefits they earned by working) until age 70, when they would both switch on their own earned benefits.

It was a strategy that could bring a few couples a $50,000 windfall over four years. But the government has taken it away. As David Littell explained during the roundtable, the file-and-suspend strategy ends on May 1, 2016. Until then, only workers who have already reached age 66 and have never claimed benefits can use it until then. “But [the government is] not taking these strategies away from anybody who has already started them,” he said.

Besides file-and-suspend for spousal benefits, one other Social Security option has also been eliminated. “If you were age 66 and filed and suspended, and then at 68 you found out you had cancer, you used to be able to change your mind and they would send you a check for the two years of benefits that you missed,” Littell said. “That’s also going away.”

But there are still reasons to file and suspend, he added. “If a new 66-year-old client who took Social Security at age 62 comes to an advisor and they decide that the client would be better off deferring until age 70, the client can still suspend his payments until age 70 and get credit for the extra four years of deferral,” Littell said.

Long-term care insurance

In another section of the roundtable, Jamie Hopkins, co-director of The New York Life Center for Retirement Income, discussed the fundamentals of long-term care, as well as other end-of-life issues that retirement advisors should be understand.

MetLife To Let VA Liabilities Go

Posted on January 14, 2016 by Kerry Pechter -

Citing its desire to avoid a SIFI designation as the motivation, MetLife, Inc., this week said it would separate from a large part of its U.S. Retail segment, including three life insurance companies and their variable annuity businesses, either selling the companies or creating an independent firm with a new public offering.

MetLife bet big on the variable annuity with living benefits in 2011, writing a record-setting $28.4 billion. Today, MetLife has VA assets of $165 billion, the most among retail VA writers and second only to TIAA-CREF’s group variable annuity assets. MetLife’s VA assets, and the hard-to-control liabilities attached to them, will move to the new entity.

The move doesn’t necessarily mean that MetLife can or will avoid designation as a Systemically Important Financial Institution, according to Fitch Ratings. “It remains unclear if the proposed restructuring will result in MetLife shedding its SIFI designation as the U.S. Financial Stability Oversight Council has not yet to provide an ‘exit ramp’ for designated firms,” Fitch said in a release this week.

But it is clear that “MetLife will no longer write new U.S. retail life and annuity business—a significant strategic shift for the firm,” the Fitch release said, as the parent company pursues “a separation of a substantial portion of its U.S. retail life and annuity business that would be subject to enhanced capital requirements under yet-to-be-announced U.S. nonbank SIFI prudential standards.”

On Wednesday, Fitch placed the financial strength ratings of MetLife Insurance Company USA and General American Life Insurance Company on Rating Watch Negative. Yesterday S&P also downgraded the financial strength ratings of MetLife Insurance Company USA and General American Life Insurance Company one notch to “A+” (5th highest), while placing the ratings on a negative outlook.

David Paul, a principal at ALIRT Research, said some distributors who have sold MetLife VA contracts have had questions about whether the restructuring will affect the safety of the guarantees.

“Nothing has changed at the life insurance subsidiaries that issued the contracts,” Paul told RIJ. “They’re just as strong or as weak as they were. All that’s changed is the implicit support from the parent. Everyone has been programmed to believe that if you have a well-branded parent, that it’s forever.

“But that’s not true,” he added. “The idea that the parent will always be there, you have to take off the table. We issue scores, which are proprietary, to eight MetLife insurance subsidiaries, and those scores range from strong to quite weak.”

ALIRT put the MetLife move in the context of several moves by other VA issuers in after the financial crisis (see chart). “We also note the recent pressure that activist investors (led by Carl Icahn and John Paulsen) are placing on AIG to separate into three operating units, for either spin-off or sale, citing in part the regulatory burdens of the SIFI-designation,” an ALIRT release said.

ALIRT metlife release chart

MetLife Executive Vice President Eric Steigerwalt will lead the new business, according to MetLife release. MetLife said it will spin off or sell MetLife Insurance Company USA, General American Life Insurance Company, Metropolitan Tower Life Insurance Company and several subsidiaries that have reinsured risks underwritten by MetLife Insurance Company USA.

“The parts of the U.S. Retail segment that would stay with MetLife are: the life insurance closed block, property-casualty, and the life and annuity business sold through Metropolitan Life Insurance Company (MLIC). MLIC would no longer write new retail life and annuity business post-separation,” the release said.

Approximately 60% of current U.S. variable annuity account values, including 75% of variable annuities with living benefit guarantees, are in entities that would be a part of the new company. The new company would also contain approximately 85% of the U.S. universal life with secondary guarantee business.

The Company’s other reporting segments – Group, Voluntary and Worksite Benefits (GVWB), Corporate Benefit Funding (CBF), Asia, Latin America, and Europe, the Middle East and Africa (EMEA) – would remain part of MetLife.

“Currently, U.S. Retail is part of a Systemically Important Financial Institution (SIFI) and risks higher capital requirements that could put it at a significant competitive disadvantage. Even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation of the business.” An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden.

“This separation would also bring significant benefits to MetLife as we continue to execute our strategy to focus on businesses that have lower capital requirements and greater cash generation potential. In the U.S., it would allow us to focus even more intently on our group business, where we have long been the market leader. Globally, we will continue to do business in a mix of mature and emerging markets to drive growth and generate attractive returns.”

The new company would represent, as of September 30, 2015, approximately 20% of the operating earnings of MetLife and 50% of the operating earnings of MetLife’s U.S. Retail segment. The new company would have approximately $240 billion of total assets, including $45 billion currently reported in the Corporate Benefit Funding and Corporate and Other segments.

The complete management team of the new company, as well as its board of directors, is to be defined over time as preparations for the transaction take shape.

Steven A. Kandarian, MetLife chairman, president and CEO, said, “At MetLife our goal is to create long-term value for our shareholders and deliver exceptional customer experiences. As a result of our Accelerating Value strategic initiative, MetLife has been evaluating opportunities to increase sustainable cash generation and is directing capital to businesses where we can achieve a clear competitive advantage and deliver a differentiated value proposition for customers. This analysis considers the regulatory and economic environment in each market where we do business. We have concluded that an independent new company would be able to compete more effectively and generate stronger returns for shareholders. Kandarian concluded, “It is important to note that this is just the first step in the process. We will provide more information as the transaction unfolds, consistent with U.S. securities laws.”

Any separation transaction that might occur will be subject to the satisfaction of various conditions and approvals, including approval of any transaction by the MetLife Board of Directors, satisfaction of any applicable requirements of the SEC, and receipt of insurance and other regulatory approvals and other anticipated conditions. No shareholder approval is expected to be necessary. Because the form of a separation has not yet been set, the Company cannot currently provide a specific potential completion date. If the separation takes the form of a public offering, the Company expects that it would file a registration statement with the SEC in approximately six months. No assurance can be given regarding the form that a separation transaction may take or the specific terms thereof, or that a separation will in fact occur.

The Company is also undertaking preparations to complete the required financial statements and disclosures that would be required for a public offering or spin-off. The completion of a transaction taking the U.S. Retail segment public would depend on, among other things, the U.S. Securities and Exchange Commission (SEC) filing and review process as well as market conditions.

Do In-Plan Annuities Have a Future?

Posted on January 14, 2016 by Kerry Pechter -

If anything could breathe new life (and sales) into the annuity industry during a period of stubborn headwinds (the affluent are living longer and a low interest rates are here to stay) it would be the introduction of annuitization options in retirement plans.

In-plan annuities make perfect sense. Minimal distribution costs and institutional pricing could raise annuity payout rates. Participants could get used to the idea of buying future income gradually, and benefit from decades of tax-deferred compounding and interest rate diversification.

While it’s true that defined contribution plans were never designed to create income, and aren’t easy to re-purpose, they’ve inherited the job that defined benefit pensions used to do. DB pensions have found new life as fodder for pension risk transfer deals, but the creativity in that space is largely destructive of institutional income strategies.

But such a revolution can’t happen—not on a broad scale, outside jumbo plans—without a revolution in the minds of plan sponsors. And plan sponsors have conflicted feelings about annuities. The latest evidence of their views comes to us via the “2015 Survey of Defined Contribution Viewpoints,” produced by Rocaton Investment Advisors.

[Editor’s note: This week’s announcement by MetLife that it would spin off some of its insurance subsidiaries might make plan sponsors even more skittish about the stability of in-plan annuity sellers. See today’s RIJ article on MetLife.]

The Rocaton report would seem to offer encouragement to annuity advocates. When asked to name “the one thing” they would like to change about their plan or plans in general, “include a retirement income solution” was the most popular answer (given by 24% of 100 sponsors and 28% of 199 providers).

Further questioning showed, however, that enthusiasm for in-plan income options is bigger on the sell-side than the buy-side. Only 39% of plan sponsors mentioned “considering a retirement income solution” to be one of their three priorities for 2016. But 62% of the plan providers mentioned “retirement income solutions” when asked what new products they’d like to develop.

The authors of the study remarked at the high rate of interest in DC income. They found it to be inconsistent with “the lukewarm use and reaction to retirement income solutions in other questions” in the survey. But the resolution to that inconsistency could be found in sponsors’ answers to the question: “Which retirement income options do you offer?”

Three out of four plan sponsors said they offer “educational or planning tools focused specifically on retirement income.” One in four sponsors said they offer participants access to a managed account program with a focus on non-guaranteed income—the most popular of which is Financial Engines’ Income-Plus program for retirees.

So, we can’t assume that plan sponsors who express an interest in retirement income would use in-plan annuities. About one in six plan sponsors (17%) said they offer participants access to immediate or deferred income annuities through an “annuity window” outside the plan—an apparent reference to Hueler’s Income Solutions platform, which is available, for instance, to members of Vanguard’s plans.

When asked which retirement income options they might consider adding to their plans or consider appropriate for DC plans, 71% of plan sponsors and providers referred to “education or planning tools.” Just over 40% of plan sponsors mentioned an “asset allocation option with a guaranteed income or annuity component.” That may have been a reference to the Qualified Longevity Annuity Contracts that the U.S. Treasury Department approved for use within target date funds in defined contribution plans.

For several years, plan sponsors have hinted that they might be amenable to in-plan annuities if the Department of Labor offered a fiduciary “safe harbor.” This could be an annuity product or annuity selection process that employers could follow without fear of ever having to pay their employees in case the annuity provider failed and the employees’ state guaranty programs also failed.

But insurers should probably not hang much hope on the chance that this will happen. The Department of Labor already offers a safe harbor of sorts—“the best available annuity” language in Interpretive Bulletin 95-1–and has not expressed great interest in going farther.

In short, the Rocaton report doesn’t offer any indication that, despite their assertion that the retirement security of their employees is important to them, plan sponsors in general want to bring annuities per se into their plans. Some of the largest 401(k) plans, especially those whose sponsors provided a DB pension in the past and would like to replicate the income benefit without the liability (like United Technologies), may be the most likely to want to work directly with an insurer. Others, not as much.

One could speculate that the state-sponsored mandatory defined contribution plans that are under construction in California, Connecticut and a few other states might, depending on how they evolve, decide to offer in-plan guaranteed income options to their participants at some point. As non-profits, they might not require the same incentives or protections that private plan sponsors and providers need.

At present, annuity issuers can gain exposure to the 401(k) participant market through the Hueler Income Solutions “annuity window.” So far a number of insurers do offer immediate and deferred income annuities through that platform, but others anecdotally haven’t done so because it might compete with and perhaps under-price their retail distribution channels.

The Principal offers “simpler” indexed annuity

Posted on January 14, 2016 by Editorial Staff -

The Principal Financial Group has launched the Principal Secure Choice Indexed Annuity, the company announced this week. The product offers a four-year surrender charge period, which Principal called “rare in the indexed annuity marketplace.”

For product details, click here.

The new product a single-premium, fixed deferred indexed annuity with performance linked to performance of the S&P 500 Index (excluding dividends). Position as simpler than other indexed annuities, it offers only one index to track and one application process for the two index-crediting methods investors can choose from.

“The new indexed annuity offers safety along with the opportunity for additional growth to help individuals meet their long-term retirement savings goals,” the release said.

“Overly conservative investments may not keep pace with inflation, and excessively aggressive investments may struggle in down markets,” said Sara Wiener, assistant vice president of annuities at The Principal, in a statement. “This particular annuity offers individuals an option to grow their wealth while taking on less risk.”

Asset managers will face fee pressure in 2016: Cerulli

Posted on January 14, 2016 by Editorial Staff -

Countering the downward pressure on fees will occupy asset managers across much of the world in 2016, according to the latest issue of The Cerulli Edge-Global Edition, from Cerulli Associates, the global analytics firm. In its outlook for the asset management industry in Europe, the U.S., Asia, and Latin America in 2016, Cerulli identified several key threats and opportunities.

In Europe, the migration by insurance companies to unit-linked products represents an opportunity for asset managers, says Cerulli. The growing demand for multi-asset funds should also be exploited. Threats include the emerging trend by institutions to band together to make their own investments, thereby cutting costs by using fewer external managers or even completely dispensing with their services. Exchange-traded funds (ETFs) will continue to be a bugbear for active managers.

“In Europe, as with much of the world, the downward pressure on fees, fuelled by passives, the comparisons platforms enable, and regulators will not let up in 2016. Asset managers are responding–the move by veterans of active management into ETFs is an example. Other examples include, diversification and the acquisition/ creation of platforms and fintech capabilities,” said Barbara Wall, managing director of the Europe office of Cerulli Associates.

Europe accounts for just 18% of the world’s ETF market, compared with the U.S.’s 70% slice. Wall, however, believes that big change is afoot. “A few years ago, just a small number of Europeans would have known what ETF stood for—that is no longer the case, especially among the ranks of the mass affluent and those aspiring to that status. Prominent direct-to-consumer platforms such as Fidelity are offering ETFs from, for example, Vanguard, HSBC, and the iShare range, owned by BlackRock. Online wealth manager Nutmeg, though not a direct-to-consumer platform, is also helping to raise the profile of ETFs among retail investors.”

In the United States, Cerulli foresees fee pressure generating opportunities for managers that offer multi-asset and strategic beta products. Other major challenges cited by U.S. executives include the threat of passive investments, and the increased cost of revenue-sharing costs. The latter has U.S. asset managers looking at new pools of global assets to distribute abroad.

In Asia, Cerulli expects the spotlight to fall on passive products as institutions look for cost-effective solutions and regulators take steps to boost the appeal of ETFs for retail investors. Cross-border initiatives are likely to increase in 2016, offering investors diversified investment options and enabling managers to expand in other markets.

In Latin America, global managers will continue to be hampered by the knock-on effects of U.S. regulation, competition from other asset classes, and reduced flows due to unfavorable exchange rates and struggling economies. Global managers in the region are eyeing the private-equity craze sweeping the region, while separately a cottage industry of specialist distributors is promising to leverage their ties to local institutions to help global firms break into Latin pension space.

“In 2016, the clamor for reduced fees, greater transparency, and an end to ‘closet tracking’ will continue apace; competition will intensify; and institutions will be obliged to follow a road that will be a dead end for some asset managers,” said Wall. “All the while, activist investors will not let up; markets will continue to surprise; and rising costs will strain budgets. But there will be opportunities. To seize upon these, foresight, experience, and occasionally courage will be needed.”

Now pitching for Voya: Allison ‘Mom’ Janney

Posted on January 14, 2016 by Editorial Staff -

Voya Financial, the New York-based retirement, investment and insurance firm—the U.S. arm of ING Group until 2013—has recruited celebrities Allison Janney, of “West Wing” and “Mom” fame, and Jesse Tyler Ferguson of “Modern Family” to deliver its message in TV spots.

“The whole goal is to get Voya talked about. We wanted to tap into America’s love of celebrities to draw interest to the brand,” said Voya chief marketing officer Ann Glover in a release this week. The company said it is spendng $100 million on branding in the U.S.

Beginning Jan. 4, Voya began airing a series of spots featuring the actors interacting with orange origami animals. In one commercial, an acorn-saving squirrel, Voya’s “spokes-metaphor,” teaches Ms. Janney about the importance of planning for retirement.

The new spots, which will be supplemented by online videos, will air throughout 2016 on a range of networks. BBDO Atlanta worked on the campaign. The Mill worked on animation and effects.

The new orange animals in the current campaign are actually folded up bills. They represent the money consumers should be saving, versus the green money they are spending.

The introductory effort first began last year when Voya aired a campaign featuring a giant butterfly undergoing metamorphosis, meant to signal Voya’s transition from ING.

Glover said that over half of those familiar with Voya as a brand are aware that the company provides retirement services, according to internal market research. For the third quarter ended Sept. 30, Voya reported revenue of $210 million, a 37% decline over the year-earlier period, and profit of $40.3 million.

In other news this week, Voya Financial, Inc., said it created the new position of Chief Digital Officer, to be filled by former GE Capital executive Joseph Miranda. He will lead the design, implementation and sustainability of improved digital customer experiences at Voya.

“He will work closely with Voya’s five segments—Retirement, Annuities, Investment Management, Individual Life and Employee Benefits—as well as marketing, operations, analytics and information technology leaders to accelerate the transformation of the digital experience for Voya customers,” a release said.

Miranda joins Voya from GE Capital, where he held roles as vice president, global digital strategy and vice president, commercial excellence, marketing and technology.

At GE Capital, he directed the development and execution of the company’s global digital portfolio, aligning marketing, sales and IT to deliver end-to-end customer engagement initiatives and experiences, simplifying digital processes and driving customer acquisition and retention. Previously, Miranda was vice president, global digital marketing and vice president, channel development at Nielsen.

Miranda is based in Voya’s Windsor, Conn., office. He will report to Alain Karaoglan, Voya chief operating officer and chief executive officer, Retirement and Investment Solutions. He will also join the company’s Operating Committee, which is responsible for setting and leading Voya’s growth strategy.

How “streamlining” a retirement plan pays off

Posted on January 14, 2016 by Editorial Staff -

“Don’t confuse participants with too many fund choices” has been the mantra of some retirement plan designers for years, and plan sponsors have embraced it in principal if not always in practice.

A study written by Donald Keim and Olivia Mitchell of The Wharton School and published this week by the National Bureau of Economic Research adds nuance and weight to this now-conventional wisdom.

Their paper, entitled, “Simplifying Choices in Defined Contribution Retirement Plan Design,” offers the case of an unidentified nonprofit employer that cut 39 funds from its plan’s 90-fund lineup and required the participants who had held deleted funds to either reallocate to any of the remaining funds, default into a target date fund (TDF), or go to a brokerage account.

Use of TDFs increased as a result of the “streamlining.” Participants who defaulted to a TDF increased their average equity exposure slightly while participants who chose their own new sets of funds, including TDFs, reduced their average equity exposure by 4.8%, leading to projected gains for all.

Participants who were affected by the switch to a smaller fund lineup “exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2M, or in excess of $9,400 per participant,” wrote Mitchell and Keim.

“The most interesting finding, both statistically and economically, is that the overall re-allocations into TDFs seen in Table 6 prove to be 10% larger, and the re-allocations out of stock funds 7.6% larger, for the low-income members of the Plan-Defaulted group. In other words, the streamlining reform had a larger impact on low-income savers, making their portfolios better balanced and less risky than before.”

Global Economy ‘Frustratingly Fragile’

Posted on January 8, 2016 by Vanguard Global Economics Team -

In a new “Economic and Investment Outlook,” the Vanguard Investment Strategy Group assesses the future of the global economy, and its forecast—notwithstanding yesterday’s drop in the Dow Jones Average—isn’t all bad.

Given the “structurally lower population growth” and removal of “the consumer-debt-fueled boost to growth between 1980 and the global financial crisis,” Vanguard’s team of economists considers the anticipated 2% growth rate for the U.S. to be about as good as can be expected.

You can find a copy of the full report here. The main points are summarized below:

Global economy: Structural convergence

World economic growth will remain frustratingly fragile. As in past versions of Vanguard’s Economic and Investment Outlooks, we view a world not in secular stagnation but, rather, in the midst of structural deceleration. Vanguard’s non-consensus view is that the global economy will ultimately converge over time toward a more balanced, unlevered, and healthier equilibrium, once the debt-deleveraging cycle in the global private sector is complete.

Most significantly, the high-growth “Goldilocks” era enjoyed by many emerging markets over the past 15 years is over. We anticipate “sustained fragility” for global trade and manufacturing, given China’s ongoing rebalancing and until structural, business-model adjustment occurs across emerging markets. We do not anticipate a Chinese recession in the near term, but China’s investment slowdown represents the greatest downside risk to the global economy.

The growth outlook for developed markets, on the other hand, remains modest, but steady. As a result, the developed economies of the United States and Europe should contribute their highest relative percentage to global growth in nearly two decades. Now at full employment, the U.S. economy is unlikely to accelerate in 2016, yet is on course to experience its longest expansion in nearly a century, underscoring our continuing view of its resiliency.

Indeed, our long-held estimate of 2% U.S. trend growth is neither “new” nor “subpar” when one both accounts for structurally lower population growth and removes the consumer-debt-fueled boost to growth between 1980 and the global financial crisis that began in 2007. Our interpretation fully explains the persistent drop in U.S. unemployment despite below-average economic growth.

Inflation: Secular deflationary bias waning

As we have discussed in past outlooks, policymakers are likely to continue struggling to achieve 2% core inflation over the medium term. As of December 2015, however, some of the most pernicious deflationary forces (commodity prices, labor “slack”) are beginning to moderate cyclically. Inflation trends in the developed markets should firm, and even begin to turn, in 2016. That said, achieving more than 2% core inflation across developed markets could take several years and will ultimately require a more vibrant global rebound.

Monetary policy and interest rates: A ‘dovish tightening’ by a lonely Fed

Convergence in global growth dynamics will continue to necessitate and generate divergence in policy responses.

The U.S. Federal Reserve is likely to pursue a “dovish tightening” cycle that removes some of the unprecedented accommodation exercised due to the “exigent circumstances” of the global financial crisis. In our view, there is a high likelihood of an extended pause in interest rates at, say, 1%, that opens the door for balance-sheet normalization and leaves the inflation-adjusted federal funds rate negative through 2017.

Elsewhere, further monetary stimulus is highly likely. The European Central Bank (ECB) and Bank of Japan (BoJ) are both likely to pursue additional quantitative easing and, as we noted in our 2015 outlook, are unlikely to raise rates this decade. This view is another potential factor that could result in a pause for the federal funds rate this business cycle.

Chinese policymakers have arguably the most difficult task of engineering a “soft landing” by lowering real borrowing costs and the real exchange rate without accelerating capital outflows. The margin of error is fairly slim, and policymakers should aggressively stimulate the economy this year in an attempt to stabilize below-target growth.

Investment outlook: Still conservative

Vanguard’s outlook for global stocks and bonds remains the most guarded since 2006, given fairly high equity valuations and the low-interest-rate environment. We continue to view the global low-rate environment as secular, not cyclical.

Bonds. The return outlook for fixed income remains positive, yet muted. In line with our past outlooks, our long-term estimate of the equilibrium federal funds rate remains anchored near 2.5% and below that of the Fed’s “dot plots.” As a result, our “fair value” estimate for the benchmark 10-year U.S. Treasury yield still resides at about 2.5%, even with a Fed liftoff. As we stated in our 2015 outlook, even in a rising-rate environment, duration tilts are not without risks, given global inflation dynamics and our expectations for monetary policy.

Stocks. After several years of suggesting that low economic growth need not equate with poor equity returns, our medium-run outlook for global equities remains guarded, in the 6%–8% range. That said, our long-term outlook is not bearish and can even be viewed as constructive when adjusted for the low-rate environment. Our long-standing concern over “froth” in certain past high-performing segments of the capital markets has been marginally tempered by the general relative underperformance of those market segments in 2015.

Asset allocation. Going forward, the global crosscurrents of not-cheap valuations, structural deceleration, and the exiting from or insufficiency of near-0% short-term rates imply that the investment environment is likely to be more challenging and volatile. Even so, Vanguard firmly believes that the principles of portfolio construction remain unchanged, given the expected risk–return trade-off among asset classes. Investors with an appropriate level of discipline, diversification, and patience are likely to be rewarded over the next decade with fair inflation-adjusted returns.

“Roll-in” deal signed by Retirement Clearinghouse

Posted on January 8, 2016 by Editorial Staff -

Everyone talks about rollovers. You may be less familiar with “roll-ins,” a still-new counter-trend championed mainly by a single firm, Retirement Clearinghouse, LLC, of Charlotte, NC.

The firm’s efforts to popularize 401k-to-401k transfers appeared to bear fruit this week, when Alliance Benefit Group of Illinois (ABGI), a record-keeper and third-party administrator for employer-sponsored retirement plans, announced that it has engaged Retirement Clearinghouse to give its participants access to “managed portability” solutions—that is, to help them roll tax-deferred savings from previous plans or IRAs into their current plans.

Retirement Clearinghouse identifies itself the “only independent portability solutions provider that consolidates retirement assets into active 401(k) accounts.” In a release, the firm said it has consolidated more than $3.17 billion in retirement savings accounts as of November 30, 2015.

The CEO of Retirement Clearinghouse, formerly called RolloverSystems, is former MassMutual executive Spencer Williams. He and Tom Johnson, formerly of MassMutual and New York Life, have spent years promoting their roll-in vision, which they believe serves public policy as well as commercial goals. Robert L. Johnson, the billionaire who founded Black Entertainment Television and sold it to Viacom in 2001, owns Retirement Clearinghouse.

Under the partnership, ABGI will educate participants about the benefits of consolidating their retirement savings in their current employers’ plans. If a plan participant decides to consolidate, Retirement Clearinghouse will “locate, transport and consolidate” their retirement savings accounts in their ABGI plan. “Consolidation specialists” in Retirement Clearinghouse’s call center will work with plan participants, sponsors and record-keepers to find participants’ accounts in previous employers’ plans, and move all balances into their current plans. The service is free to participants, ABGI said.

Peoria, Ill.-based ABGI provides recordkeeping, administration and investment consulting services for employer-sponsored retirement plans in 40 states, with the heaviest concentrations in Illinois, Indiana, Iowa, Missouri and Wisconsin. The firm specializes in designing and servicing participant-directed 401(k), 403(b)(7), 457(b) and other qualified retirement plans. ABGI also acts as administrator for non-qualified retirement plans, interfaced payroll services and Health Savings Accounts.

Research commissioned by Retirement Clearinghouse and conducted by Boston Research Technologies has shown that “despite the difficulty of the consolidation process, 83% of Millennials, 83% of Generation-Xers and 78% of Baby Boomers would roll accounts into their current plans using a service provided, and paid for, by employers.”

Retirement Clearinghouse has promoted its “roll-in” process as an answer to an issue created by the surge in the number of small, abandoned accounts created when people who’ve been auto-enrolled into a retirement plan change jobs. The “managed portability” service offers them an alternative to common practice of cashing out the accounts, which can delay and undermine their accumulation of retirement savings.

Raymond James adjusts the bar for index annuities

Posted on January 8, 2016 by Editorial Staff -

Raymond James, the national broker-dealer and a leader in index annuity sales, issued new requirements this week for the index annuities that its Insurance Group will approve for distribution by its registered representatives, effective January 29, 2016.

The new requirements include:

Upfront commissions will not exceed 5%.
Any additional compensation afforded by the product will be paid in year two or in the form of a trail for the life of the contract.
Initial surrender charges must be less than 10%, unless the contract provides a return of premium guarantee that is effective upon the contract start date.
Carriers must remove crediting options, such as monthly average and monthly cap strategies that investors often misunderstood or rarely use.

In the bulletin, Raymond James said it may limit availability of certain indices within the crediting options to “avoid those that are overly complex or fail to align with the positioning of the product.”

The implications of these new standards are, according to the bulletin:

Any product that does not meet these requirements will be closed to new purchases, but will remain available for additional deposits (where applicable) for current contract holders.
Certain longer-term products will be removed largely due to the surrender charges. Many of these are older products are not often purchased, as newer (and often more appealing) products have been made available.
Many of the existing products will be modified to fit these guidelines. Modifications include: Removing certain crediting strategies, including monthly average and monthly cap; Removing certain index options that may be non-traditional or overly complex in nature
Commission schedules will change, but total compensation to the financial advisor is essentially flat.

“It is likely that additional products will be launched throughout the year as we work with carriers to build new products that meet investor objectives,” the bulletin said.

MetLife’s strength and credit ratings placed “under review” by A.M. Best

Canadian pension funds gain access to China’s capital markets

Voya urges DOL not to encourage state-based defined contribution plans

Protective acquires Genworth blocks via re-insurance

Liberty Mutual becomes Chile’s biggest P/C insurer

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