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Assets of Money Market Institute firms rise to $4.2 trillion

Posted on September 24, 2015 by -

The Money Management Institute, whose investment advisory and wealth management firm members manage some $4.2 trillion, has released a statistical overview of data and trends in its industry for the second quarter of 2015. Highlights of the overview, MMI Central 3Q 2015, included:

¶ Investment advisory solutions assets rose 2% to $4.2 trillion. The increase occurred despite volatility in the global equity and fixed-income markets, and continued a six-year upward trend. The S&P 500 Index gained 0.3% during the quarter.

¶ Unified Managed Accounts (UMAs) rose 6% (recording the largest increase in assets for the fourth consecutive quarter), Rep as Portfolio Manager again followed with a 3% gain, followed by Separately Managed Accounts (SMAs) at 2%, and Rep as Advisor (a non-discretionary, fee-based advisory option) and Mutual Fund Advisory programs, both at 1%. 

¶ One-year IAS asset growth of 11% through June 2015 bettered the 7% gain in the S&P 500 Index. Here too UMA (46%) and Rep as Portfolio Manager (17%) were the leading segments while SMA Advisory, Rep as Advisor and Mutual Fund Advisory lagged both the overall IAS industry and equity markets with gains for the trailing year of 6%, 5% and 5%, respectively.

¶ The longer-term UMA growth trend is an indication that some of the steam is being taken out of SMA and Mutual Fund Advisory programs, as advisors increasingly see the benefits of consolidating various sleeves in one custodial account.

¶ Total IAS net flows continued strong at $63 billion for the second quarter, up $3 billion over the preceding quarter. Rep as Portfolio Manager net flows of $28 billion led all segments and was followed by UMA Advisory with a healthy $18 billion in flows. SMA Advisory programs were also relatively strong for the quarter with net flows of $11 billion. Mutual Fund Advisory posted net flows of $5.5 billion while Rep as Advisor was barely in positive territory with net flows of less than $1 billion.

¶ The aggregate trailing four-quarter net flows for the second quarter of 2015 were $267 billion, just $1 billion ahead of the trailing one-year flows for the second quarter of 2014.

Rep as Portfolio Manager, with $959 billion in assets, continues to steadily edge closer to the $1 trillion mark, which only Mutual Fund Advisory has surpassed. While UMA Advisory outpaces Rep as Portfolio Manager on a percentage basis in quarter-over-quarter asset growth, it does so off an asset base just less than half the size of Rep as Portfolio Manager. The real growth story is to be found in the trailing flow data over the past three years, which Rep as Portfolio Manager dominates. 

Among major industry segments, the 2% growth in IAS assets in the second quarter compares to an approximate 5% increase for exchange-traded funds, a 2% gain for long-term mutual Funds, and a 1% decline for money market munds.

The 2015-2016 MMI Industry Guide to Investment Advisory Solutions, which will be released in late October, includes an annual industry forecast derived from a survey of senior executives at sponsor firms. This year’s survey posed questions about sponsor firms’ commitment to and progress on the transition to goals-based wealth management (GBWM). Among the survey highlights:

¶ GBWM continues to gain traction, and it is clear that it has become a priority among sponsor firms. An overwhelming proportion of respondents (89%) indicated that GBWM is now an important initiative at their firms.  

¶ When asked to project the proportion of their firms’ accounts that will transition to GBWM over the next five years, the responses were highly optimistic with a roughly fourfold increase – from the current 10% to 38% – predicted at the end of five years. 88% of executives surveyed indicated that their firms were investing a moderate to significant amount in GBWM, but 89% of those same executives thought that their firms’ spending on GBWM wasn’t adequate and should be increased.

¶ GBWM-related investments are being put to work in a number of ways. Sponsor firms are beginning to put in place the infrastructure – including planning tools, platform software and other technologies – needed to deliver GBWM.  

¶ Most of the current initiatives focus on the front end of the advice delivery process because front-end planning is the first step in implementing a goals-based process, planning modules and interface improvements are likely to drive near-term revenue growth, and converting the front end to GBWM reorients both the client and the financial advisor.

© 2015 RIJ Publishing LLC. All rights reserved.

Retirement conferences this fall

Posted on September 24, 2015 by -

FPA (Financial Planning Association) Annual Conference, September 25-27, Boston Convention and Exhibition Center, Boston, MA.

IMCA (Investment Management Consultants Association), Focus on Fiduciary, September 29, National Press Club, Washington, DC.

NAIFA (National Association of Insurance and Financial Advisors) Annual Conference, October 3-5, New Orleans, LA.

ASPPA (American Society of Pension Professionals and Actuaries), October 18-21, Gaylord National, National Harbor, MD.

NAPFA (National Association of Personal Financial Advisors), October 20-23, JW Marriott, Indianapolis, IN.

MMI (Money Market Institute) Fall Solutions Conference, October 21-22, Grand Hyatt, New York, NY.

LIMRA Annual Conference, October 25-27, Sheraton Boston Hotel, Boston, MA.

CFA Institute Research Foundation 50th Anniversary Forum, October 26, NYSSA Conference Center, New York, NY.

2015 SPARK Forum, November 8-10, The Breakers, Palm Beach, FL.

Society of Actuaries, Application of Predictive Modeling in VA/FIA Management, November 15, Chicago IL.

Society of Actuaries, Equity-Based Insurance Guarantees Conference, November 16-17, Chicago, IL.

T3 (Technology Tools for Today) Advisor Conference, February 10-12, 2016, Marriott Harbor Beach Resort, Fort Lauderdale, FL. 

 

 

Mega-deals missing from first-half life/annuity M&A: A.M. Best

Posted on September 24, 2015 by -

Global merger and acquisition activity for the life/annuity segment for the first six months of 2015 “remained elevated but lacked the large mega-deals of the property/casualty and healthcare segments,” according to a new Best Special Report.

The report, “Life/Annuity First Half 2015 Global Merger and Acquisition Trends and Analysis,” describes 37 deals, up 37% from the 27 deals in same period in 2014. The total value of those deals was $6.9 billion, down 47% from $12.6 billion in 2014.

The average deal size fell to $538 million from $787 million. The lack of publicly available deal values makes historical comparisons difficult. A.M. Best believes the following key trends drove the recent M&A activity for the first half of 2015 in the L/A segment:

  • Selling off of non-core segments and run-off businesses to companies specializing in them;
  • Regulatory uncertainty regarding Solvency II and SIFI guidelines makes big deals from the largest life insurers unlikely;
  • International cross-border activity is up as companies seek growth in new markets;
  • Lack of large deals as companies appear to be more capital cautious and seek to consolidate and specialize in a low interest rate environment rather than vertically and horizontally integrate as A.M. Best sees in the property/casualty and health segments; and
  • Private equity/investment firms’ activity picks up.

Several deals involved the disposal of non-core businesses. North America had 35% of the market for deals by target investments, followed by Asia, with 26%. Europe made up 24% of deals, down from about 33% in earlier periods. The smaller than average deal count in Europe is partially due to uncertainty regarding Solvency II, A.M. Best believes. Latin America and the Caribbean made up 11% of deals, while Middle East/Africa made up 3%.

Over 40% of all deals were cross-border M&As, as companies go international in search of growth. A.M. Best believes private capital, whether buying or selling, will continue to play an active role in the L/A segment. A.M. Best expects private capital to pursue blocks of business rather than full-on acquisitions.

While A.M. Best believes foreign insurers lack experience in some of the product lines and markets of their newly acquired U.S. insurance carriers, it notes that the U.S. executive management teams in most cases have been incentivized to remain with their companies. 

© 2015 RIJ Publishing LLC. All rights reserved.

Vanguard and T. Rowe Price launch international funds

Posted on September 24, 2015 by -

Vanguard has registered its first dividend-oriented international index funds with the Securities and Exchange Commission. They are Vanguard International High Dividend Yield Index Fund and Vanguard International Dividend Appreciation Index Fund.

The funds, expected to be available in December, will offer three share classes: Investor ($3,000 minimum), Admiral ($10,000 minimum) and ETF.

The Investor shares of the International High Dividend Yield Index Fund will have an expected expense ratio of 0.40% per year, while the Admiral shares and ETFs will cost 0.30%. The Investor shares of the International Dividend Appreciation Index Fund will have an expected expense ratio of 0.35% per year, while the Admiral shares and ETFs will cost 0.25%.

Vanguard International High Dividend Yield Index Fund will track the FTSE All-World ex US High Dividend Yield Index, a new benchmark of more than 800 of the highest yielding large- and mid-cap developed and emerging markets securities.

Vanguard International Dividend Appreciation Index Fund will track the new Nasdaq International Dividend Achievers Select Index, which comprises more than 200 all-cap developed and emerging market stocks with a record of increasing annual dividend payments.

The two new funds will complement Vanguard’s existing domestic dividend-oriented funds, the $15 billion Vanguard High Dividend Yield Index Fund and the $23 billion Vanguard Dividend Appreciation Index Fund. Vanguard now offers almost 20 international index fund and ETFs, the company said in a release. 

T. Rowe looks for bargains in emerging markets

T. Rowe Price has launched the Emerging Markets Value Stock Fund, which invests in emerging markets companies that are “out-of-favor and undervalued but possess identified catalysts that could drive their stock prices higher,” the Baltimore-based fund company said in a release.

Ernest Yeung, the portfolio manager for T. Rowe Price’s International Small-Cap Equity Strategy, will manage the fund, which will hold 50-80 undervalued stocks from emerging-market and frontier-market companies in Europe, Latin America, Africa, the Middle East, and Asia, minus Japan. Current weightings favor financial, telecommunications services and consumer discretionary stocks in Romania, Russia, Brazil, South Africa, China, South Korea, and Taiwan.

Investor Class shares (Ticker: PRIJX) and Advisor Class shares (Ticker:  PAIJX), will have net expense ratios estimated to be capped at 1.50% and 1.65%, respectively, through February 28, 2018. The minimum initial investment is $2,500, or $1,000 for retirement accounts or gifts or transfers to minors (UGMA/UTMA) accounts.

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on September 24, 2015 by -

Allianz Life discovers new client demographic: ‘Post-crash Skeptics’

About 20% of Boomers and “Gen X” generation members are “post-crash skeptics” who have suffered at least six major effects of the 2008 financial crisis and whose financial outlook was permanently altered by it, a new survey by Allianz Life shows.

“This group appears to suffer from a significant psychological impact on their financial attitudes and behaviors, including lost confidence in financial institutions and a switch to more conservative investments,” said the survey, entitled “Generations Apart.”

The survey canvassed 1,000 baby boomers (ages 49-67) and 1,000 Gen Xers (ages 35-48). They were asked 13 questions regarding the 2008 market crash, including whether their home or 401(k) fell in value, whether they or a family member lost a job, and whether their savings and/or retirement planning were affected.

About 83% of post-crash skeptics (versus 58% of the entire survey group) said they were more cautious now. They were about twice as likely to say they lost confidence in financial institutions (77% versus 38%), that they had changed their view of the market to risky (67% versus 32%), and that they had switched to more conservative investments or financial products (43% versus 22%).

Half of post-crash skeptics reported taking on more debt after the crash (compared to 23% of the total respondents) and 41% (versus 15%) reported that they or a partner had lost a job. Four in 10 post-crash skeptics said they’d stopped saving for retirement since the crash—more than three times the rate of Gen Xers and boomers overall. More than half (52%) of post-crash skeptics are “more pessimistic” about their chances for a successful retirement, versus only 39% of the total group.

How some actively-managed funds can reduce sequence risk: Capital Group

A low expense ratio, high manager ownership and a low downside capture ratio, which measures how a fund has fared relative to the market during downturns, are the three most critical factors to consider when selecting retirement investments, according to a new study by the American Funds, a unit of Capital Group.

Over the last 20 years, “actively managed equity funds sharing these three factors significantly outpaced indexes and active peers in a withdrawal scenario,” the study showed.

The proprietary study examined actively managed U.S. and foreign large-cap equity funds, Moderate Allocation funds (mix of U.S. stocks and bonds) and World Allocation funds (mix of global stocks and bonds), as categorized by Morningstar.

The research showed that, after accounting for regular withdrawals, funds sharing the three critical factors collectively outpaced indexes over the last 20 years, a period that includes the dot-com and financial crisis downturns. The same was true when looking at rolling 10-year periods within that same time frame.

Market downturns can be particularly harmful to retirees because they are drawing regular income from their portfolios and, without a salary to make up for losses, they could suffer serious setbacks.

The study, titled Key Steps to Retirement Success: How to Seek Greater Wealth and Downside Resilience, looked at a hypothetical 65-year-old retiring with $500,000 in savings in 1995, with a plan to withdraw 4% initially each year (increasing by 3% annually to account for inflation). 

A portfolio split between Moderate Allocation funds and World Allocation funds sharing the three factors would have generated 85% more wealth than a blended index after 20 years. This investor would have been able to withdraw a total of about $537,000 over this period, with $1.7 million left over.

“This portfolio beat the index while experiencing less volatility (as measured by standard deviation) and greater risk-adjusted returns (as measured by Sharpe ratio),” said the American Funds release. “A similar portfolio of funds managed by American Funds would have generated 105% more ending wealth than the index leaving the investor with $1.9 million at the end of the period.”

Pershing’s Retirement Plan Network adds four new investment models

Four investment model providers—3D Asset Management, Efficient Market Advisors, Morningstar Investment Services, Inc. and Wilshire Associates Inc.—have joined Pershing LLC’s Retirement Plan Network, the BNY Mellon unit announced this week.

Plan advisors who wish to manage their own investment options can use Pershing’s Retirement Model Manager, which allows them to create and manage models across multiple recordkeepers and plans without having to log into separate systems, said a Pershing release.

Other solutions available on the platform include an integrated network of independent recordkeepers, investment products, retirement plan tools and practice management solutions, Pershing said.  

© 2015 RIJ Publishing LLC. All rights reserved.

 

RetirePreneur: Sheryl Garrett

Posted on September 17, 2015 by -

What I do: I have been in the financial services industry 28 years and my current initiative is Garrett Planning Network, an organization with about 300 financial planners around the country.

Where I came from: I was a Money magazine addict by the time I was 19. I would calculate how I could become a millionaire by 22. By 24, I was in the industry. I got a job as a Gal Friday with a fee-only financial planner. I also earned my CFP designation. I then moved to a fee-and-commission planning firm. But my initial experience in selling financial services from 9 a.m. to 9 p.m. was a big turn-off. Eventually I needed to make a change. I met a businesswoman through my involvement with the Financial Planning Association in Kansas City. I joined her firm and we became 50/50 partners in 1995. I stayed until 1998. Sheryl Garrett copy block

We had five employees including ourselves and worked for about 100 families. We offered one service: comprehensive financial planning and portfolio management. A lot of people who wanted to access our advice couldn’t afford to delegate the management of their financial affairs to a professional. I hated turning away people whom I knew I could help, but who didn’t fit our firm’s niche. So I decided to start my own firm.

How Garrett Planning Network works:  We’re the professional home for about 300 like-minded advisors. Financial planners who believe in making competent, objective financial advice accessible to everyone may apply for membership. We share our time, talents and resources to leverage our businesses and services to clients. We also help advisors get new clients.

During our three-day live New Member training class, our monthly webinars, our recordings library, and a whole host of marketing templates and examples, we instruct advisors regarding what works in marketing. My primary function is to raise public awareness of this option for financial advice.

Our Director of Financial Planning and Communications and I help to leverage every member’s media coverage and blogs via our network’s website, Facebook page, and other social media. Our members report that one of the top two sources for their new business is due to their membership in the Garrett Planning Network. We also have rules in place for how they must operate. Fee-only and a simple majority of all engagements must be made accessible without regard to any arbitrary minimums. 

On working with clients: For the first eight years of my career, I was actually afraid of clients. I was not a good salesperson. I didn’t have a lot of backbone when presenting a fee quote or pitching a service offering. But once I discovered the niche that fit me best, I fell in love with financial planning.

What the retirement income industry can do better: Stop focusing on solutions first. Until we fully understand the needs, circumstances, options, opportunities and challenges that face people as they save for, transition into, and live in retirement, we’re missing opportunities to help people in ways that can be far more impactful on their quality of life than recommending a good investment portfolio. Social Security, Medicare, healthcare and living arrangements in retirement, and end-of-life issues, just to name a few, are critical and often overlooked.

On testifying before Congress: I’ve testified on financial literacy, Social Security reform, and conflict-of-interest issues in the industry. I could relate to Vanguard’s John Bogle when he said, ‘Making laws is like making sausage. You don’t want to watch the process.’

My view on the DOL fiduciary proposal: Advisors need to put their clients’ best interests first. Nearly every financial professional I’ve spoken with has witnessed the minor to devastating harm done by unscrupulous advisors. If you give financial advice, you must be held to the fiduciary standard.

My claim to fame: President Obama mentioned me during his speech at the AARP office in February. I got a call a week or so before from a speechwriter for the White House. She wanted comments for a speech. She said, ‘Tell me your story.’ So I shared some stories of victims of financial abuse, without thinking that the president would actually hear them. A week later, the White House called and asked if I could come for the president’s speech at AARP. I went to AARP, entering through a side door. After the president spoke, he said, ‘Sheryl are you here?’ We made eye contact. The audience turned and looked towards me. He told me to stand up! I did and waved to the audience. He mentioned my name eight times when speaking about advisory issues. It still feels like it didn’t really happen.

What I see ahead for retirement income: I’m delighted to see the industry’s focus on Social Security distribution planning, on healthcare in retirement, on reverse mortgages, on longevity risks and strategies to transfer that risk. As we focus on the holistic needs of our clients, we must also be compensated appropriately. Practitioners are electing to go independent and to charge for services that traditionally they could not be compensated for.

On the evolution of the financial planning business: A lot of advisors poo-poo a focus on middle-income clients. But people are more engaged today. There’s a massive amount of news and books on personal finance. There are CNBC shows, shows with Suzie Orman, Dave Ramsay, and others. Middle-income clients will be a ‘sweet spot’ for many advisors.

My retirement philosophy: I’m a fan of Mitch Anthony’s book, The New Retirementality. It’s not natural for people to quit contributing when they have the freedom to stop working for a paycheck. We can ‘re-tread’ versus ‘retire’. What are we retiring to? That’s a very important question. How about taking a sabbatical or ‘practicing’ retirement? Retirement is not an end-game, it’s the beginning of a new chapter in life. I’m also a strong proponent of guaranteed income, or a paycheck for life, that covers basic living expenses. Going into retirement debt-free is also part of my retirement philosophy. It may not make the most sense mathematically or financially, but it provides an amazing feeling of security.

© 2015 RIJ Publishing LLC. All rights reserved.

New investment-focused variable annuity from Nationwide

Posted on September 17, 2015 by -

Nationwide, the ninth largest seller of variable annuities in the first half of 2015, has introduced a new investment-focused flexible-premium variable annuity with a choice of 130 funds, the financial services firm announced this week.

The product is called Destination Freedom+. This type of VA is generally aimed at long-term investors who have much more appetite for tax-deferred investing than their defined contribution accounts can accommodate, and who also want the benefit of being able to trade risky assets without the friction of capital gains taxes.

(VA account gains are taxed at ordinary income rates when withdrawn, typically after age 59½ when the penalty period for early withdrawals has ended.) 

Thirty-two fund families and 132 subaccount options are offered to contract owners, with none of the investment restrictions that accompany guaranteed income riders. There are also four Nationwide Guided Portfolio Solution model portfolios, including a Growth and Income model, an Enhanced Growth and Income model, a Capital Preservation model, and a Capital Appreciation model.

The fund fees range from 0.32% for the least expensive fund to 8.48% a year for the most expensive fund. The higher fund fee doesn’t reflect the actual cost that investors will pay after contractual reimbursements and waivers. 

Nationwide posted $2.76 billion in variable annuity sales in the first six months of this year, for a 4% market share. The Columbus, OH-based firm ranked eleventh in total annuities sold (fixed and variable) as of June 30, 2015, with $3.54 billion.

Freedom+ offers a one percent base cost, which includes an 85-basis point mortality and expense risk (M&E) charge and an administration charge of 15 basis points. Investors can choose either a five-year surrender penalty period starting at 7% or a C-class option with no surrender penalty period for an additional charge of 35 basis points. The minimum initial premium is $10,000 and the minimal additional premium is $500 ($50 for automated electronic transfers).

The only insurance features are the death benefit options: a standard return-of-contract value death benefit, a return of premium enhanced death benefit (20 basis points) and a highest anniversary enhanced death benefit (30 basis points).

According to the product announcement, the product includes a spousal protection feature at no additional cost when an enhanced death benefit is elected. It provides a death benefit for both spouses, regardless of who passes away first. The surviving spouse can receive the death benefit or continue the contract at the higher of the death benefit or contract value. 

Nationwide considers that an important differentiator for this product. “Our contracts are annuitant-driven, unlike most carriers’ that are owner-driven,” a Nationwide spokesman told RIJ. “For non-qualified contracts, the benefit isn’t as apparent as it is for qualified contracts like IRAs, because those have to be set up with only one owner. So, for owner-driven contracts, there is only one life that is tied to a death benefit. However, our product is annuitant-driven, so we can have a single owner, but also co-annuitants. Which means we can have two lives tied to a death benefit.”

The contract also offers an optional an enhanced surrender value for terminal illness (ESVTI). Terminally ill owner-annuitants can access to their full death benefit value before they die. Nationwide claims to be the only insurer offering that type of feature on a variable annuity.   

© 2015 RIJ Publishing LLC. All rights reserved.

Since 1967, income has shifted upward: U.S. Census Bureau

Posted on September 17, 2015 by -

A new report from the U.S. Census Bureau, “Income and Poverty in the United States: 2014,” portrays an America where since 1967 the middle class has shrunk significantly, the lower class has shrunk a bit, and the upper classes have thrived.

In 1967, the Census Data show, 42.7% of the 61,000 households in the U.S. earned between $35,000 and $75,000. They might be considered the middle class. Households earning less represented 38.7% and households earning more represented the smallest share, at 18.6%.

Over the next four decades, a clear shift has occurred. In 2014, only 30.1% were in the middle group. The lowest group had shrunk to 33.7% and the segment with the highest incomes grew to 36.2%, the largest of the three groups.

Snapshot of US householders age 65 and older

While this suggests a country that is growing generally richer, other statistics in the report show that the gains have largely accrued to certain group of people. Households where a married couple is present, for instance, have the highest median income, at more than $80,000. Non-family households led by a female have the lowest median income, at less than $27,000.

Aside from marriage, factors that seemed to favor higher median household incomes, those identifying as Asian or white, males, those ages 35 to 54, those who attained at least a bachelor’s degree, those living in metropolitan areas but not the largest cities, and those living in the West.  

The study does not indicate that older Americans in general are at-risk for poverty. Americans over age 65 represent about 14.8% of the population but account for 12.1% of those with household incomes 50% to 99% of the poverty level and 6.1% of those living on less half the poverty level. Corresponding figures for children under 18, who make up 23.3% of the general population, are about 34% and 33%.

Evidence of the concentration of wealth shows up in data that indicates the percent of national income earned by each of five income quintiles. The richest 20% of American households had 51% of the national income in 2014. (The richest 5% had 22%.) The next 20%—those in the 60th to 80th percentile—shared 23% of the income. The poorest 60% of American households share just 25.6% of the national income. 

Back in 1967, when the oldest Boomers were graduating from college, the top quintile had 43.6% (17.2% to the top 5%). The fourth quintile had 24.2% and the lowest 60% of households shared 32.1% of the national income.

The Census Bureau defined “income” as virtually all cash receipts but excludes capital gains, which have been a significant source of income for upper-income groups during the dramatic rise in stock market indexes after 1982. In adjusting annual income levels for inflation since 1967, the Census Bureau used changes in the Consumer Price Index, which shows inflation since 1977 at an accumulated 347%.

© 2015 RIJ Publishing LLC. All rights reserved.

Robo-advisors should shift to B2B model: Cerulli

Posted on September 17, 2015 by -

Electronic registered investment advisors (eRIAs) in the United States will need to grow aggressively to compensate their venture capital investors after six years, according to the latest research from global analytics firm Cerulli Associates. 

“eRIAs have gathered significant assets during the past several years,” said Frederick Pickering, research analyst at Cerulli, in a release. “Although the technology of the eRIA space has allowed them to scale at a much faster rate than existing traditional financial advisors, they will still need to reach end clients.

“Cerulli has constructed several scenarios that approximate the annual growth rate necessary for eRIAs to realize the multiples required for their venture capital and remain standalone direct-to-consumer businesses.” 

Through their research, Cerulli believes that eRIAs’ ability to remain a standalone enterprise will be threatened due to commoditization of the eRIA model from traditional firms entering the space and massive fee compression. 

“Cerulli projects eRIAs will need to grow approximately 50%-60% per year for the next six years and gather approximately $35 billion in AUM to remain a standalone direct channel for consumer business,” Pickering explains. “Given the threat of commoditization within the software-only eRIA business-to-consumers marketplace and the lack of an economic moat to charge a price premium, eRIAs should consider pivoting to a business-to-business model.”

“The eRIA channel has created a business model that undercuts traditional advisory firms, but may lack the financial resources to compete if the business model becomes commoditized,” Pickering continues. “New entrants from traditional advisory firms and start-ups threaten to commoditize the space, drive down fees, and eliminate any remaining premium in eRIA fee structures.”

These findings and more are from the September 2015 issue of The Cerulli Edge – U.S. Edition, which explores innovation, analyzing the role of private equity, the viability of the eRIA model, and how product developers are focusing on international and global strategies. 

© 2015 RIJ Publishing LLC. All rights reserved.

Flows to bond ETFs increased in September: TrimTabs

Posted on September 17, 2015 by -

Bond exchange-traded fund inflows surged to $9.8 billion (2.8% of assets) in the two weeks ended Friday, September 11, according to TrimTabs Investment Research. 

This inflow is the biggest two-week haul since February, and it signals diminishing concern that the Federal Reserve will raise rates soon. “The renewed interest in bonds signals that investors are becoming more risk averse,” said David Santschi, chief executive officer of TrimTabs, in a release. “Concerns about an imminent rate increase are being thrown out the window.”

Inflows into bond ETFs accelerated to $19.9 billion—equal to $400 million daily—since the start of the third quarter, TrimTabs reported. Treasury bond ETFs have been particularly popular, pulling in $7.4 billion (11.2% of assets) since mid-August. Corporate bond ETFs drew heavy buying in the past two weeks, issuing $5.0 billion (2.1% of assets).

“Fund flows are consistent with a range of credit indicators, including the fed funds futures market, that fixed-income investors don’t expect the Fed to raise rates Thursday,” said Santschi.

The rush into bonds has not occurred in response to strong absolute performance, TrimTabs said. Treasury bond ETFs are down 0.4% since the start of August, while corporate bond ETFs are down 0.7%.

© 2015 RIJ Publishing LLC. All rights reserved.

How to Personalize Withdrawal Rates

Posted on September 15, 2015 by -

Whole forests have been pulped and supertanker-loads of ink spilled to produce articles about the various spending strategies that financial advisors can recommend. Some strategies emphasize safety, others emphasize “optimization.” Some roll Monte Carlo simulations to make the future seem less unknowable. Others rely on historical back-testing. 

But experienced financial advisors know that there is no single, sure-fire spending formula. Or rather, the right strategy is the one that satisfies their clients’ fluctuating needs, keeps them solvent until they die, and achieves their legacy goals, if any. “What arrow flies forever?” asked Vladimir Nabokov. “The one that hits its mark.”    

So how does the wise advisor, armed with six or seven different peer-reviewed spending formulas, match the right spending formula with the right client at the right time? How does he or she customize the research to each client’s reality?

Luke Delorme, a researcher at the American Institute for Economic Research in Great Barrington, MA, has come up with a “blueprint” that advisors can use to tackle this almost universal problem—a problem complicated by the fact that many people don’t know or can’t describe what they want.

In his article, “A Blueprint for Retirement Spending,” in the September issue of the Journal of Financial Planning, Delorme takes several of the withdrawal rates recommended by retirement specialists like David Blanchett, Michael Finke, Jonathan Guyton, Michael Kitces, and Wade Pfau, and shows how each can be fine-tuned depending on the preferences of each client. 

“There are some big withdrawal rules out there,” Delorme told RIJ recently. “I’m trying to break the problem down into something more prescriptive—based on household preferences—and to come up with a structure that you can use to prepare for retirement. It’s a starting point.”

Four spending preferences

The first step toward determining a client-specific withdrawal strategy, Delorme writes, is to locate the client’s position on two continuums. Listening to a client’s comments during an interview, the adviser should be able to estimate how afraid they are (or aren’t) of running out of money and how tolerant they are (or aren’t) of a fluctuating cash flow. Overlaying the locations of two continuums, he arrives at four difference preferences:

  • Safe and constant income. “I absolutely must not run out of money under any circumstances. I need to know what I can spend every year.”
  • Safe and flexible income. “I’m moderately concerned about running out of money, but I have a safety net if anything happens.”
  • Optimal and constant income. “I’m as concerned about not spending enough as I am about spending too much.”
  • Optimal and flexible income. “I want to maximize lifetime spending. I have a preference for spending while I can. I am willing to adjust spending based on market fluctuations.

Then he assigns a baseline withdrawal rate to each of these preferences, using the work of previous research about withdrawal rates as a guide. Thus he puts the safe and constant spending rate at 3.8%, the optimal and constant rate at 5.4%, the safe but flexible rate as the RMD (required minimum withdrawal rate, according to IRS rules), and the optimal and flexible strategy as the RMD plus the inflation rate.

Period of adjustments

Having established the baseline rate, Delorme fine-tunes it according to the combination of factors that is unique to each case. These factors, and their impact on withdrawal rates) include: 

  • Age of retirement. Later retirement means higher spending rate.
  • Marital status. Surviving spouses tend to live longer than single people.
  • Health status. Healthy people tend to live longer.
  • Guaranteed income (Social Security, pension, private annuity). More guaranteed income means higher spending rate from savings.
  • Bequest motive. Higher bequest motive means lower spending rate.
  • Exposure to equities. Exposure between 30% and 60% has little effect on spending rate.
  • Fee load. The spending rate is directly reduced by the amount of the expense ratio.
  • Desire to optimize “utility”. Utility maximizers are those who place a lot of importance on traveling or being active as much as possible while they are physically able.  

Delorme gives examples of the spending rate changes associated with these variables. For instance, “For optimal and constant spenders, married couples could increase spending by 0.1 percentage points for each year that the couple delays retirement beyond age 65 (based on the younger spouse’s age).” Another example: “As ratio of pension to savings increases, optimal strategies will spend a higher percentage of savings.”

Two hypothetical clients

Along with tables, charts, equations and a respectful rehash of the academic literature, Delorme provides a couple of hypothetical cases that make his thesis easy to understand and apply in the real world. They represent the extremes of withdrawal rates; most clients would probably fall somewhere in between.

The first hypothetical clients are a very healthy couple who want to retire at age 62, are very conservative about money and have no guaranteed income besides Social Security. Their baseline withdrawal rate is an inflation-adjusted 3.8% a year. It drops 0.3% because of early retirement, 1.0% for risk aversion, 0.5% for fees and 0.5% for “relatively strong” bequest motive. Recommended initial spending rate: 1.5% to 3% constant dollars.

The second hypothetical couple, in average health, intended to delay retirement to age 75. They “love travel” and “want to live it up” in retirement. Their baseline withdrawal rate is an inflation-adjusted 5.6%. It goes up 2% because of late retirement, 0.4% because they have a defined benefit pension in addition to Social Security, and 0.2% because of their 60% equity allocation. It drops 0.8% because of fees. Recommended initial spending rate: RMD+2% or 3%, or between 6.4% and 7.4%.

Equities don’t matter much

Except at the extremes, spending rates aren’t sensitive to changes in equity allocations, Delorme believes.  “As long as you’re in that range [30% to 60%] there’s not a huge difference in spending rate,” he told RIJ. “I’ve found that how much you’re spending each year is much more critical than your equity allocation. If your big concern is whether the portfolio will run out of money or not, lower spending is more important than a rising equity strategy.

“At the end of the day, it comes down to finding an asset allocation that you think people can stomach. I could tell recommend a 70% equity allocation, but if that makes them want to sell off in a downturn, it’s not right for them. Reality doesn’t always align with the model. For people in their 60s or 70s, I think 30% is reasonable.”

Delorme’s blueprint doesn’t necessarily preclude the use of annuities during all or part of retirement as supplemental “flooring” to Social Security. In his calculations, there’s a slot for pension income; that spot could be just as easily filled by a private annuity as by a pension. His rule of thumb: the higher the ratio of pension income to savings, the higher the safe spending rate from savings.

The AIER

The American Institute for Economic Research was founded in 1933 by Colonel Edward C. Harwood (1900-1980), an American engineer, businessman and economist who is said to have predicted the Great Depression. The non-profit AEIR, which also has a for-profit investment division, is best known for its research on the business cycles.

“Between the 1930s and 1950s, it was one of the few sources of that type of research,” Delorme, who previously worked at the Center for Retirement Research at Boston College, told RIJ.  “I’ve come in to start a new retirement planning, investing and personal finance division. The mission is to provide economic and financial research for average Americans.”

© 2015 RIJ Publishing LLC. All rights reserved.

The Future and How to Survive It

Posted on September 15, 2015 by -

The world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end. Our new McKinsey Global Institute report, Playing to win: The new global competition for corporate profits, projects that the global corporate-profit pool, which currently stands at almost 10% of world GDP, could shrink to less than 8% by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years (see chart below).

From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labor, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013, pushing corporate profits as a share of global GDP from 7.6% to almost 10%.

Today, companies from advanced economies still earn more than two-thirds of global profits, and Western firms are the world’s most profitable. Multinationals have benefited from rising consumption and industrial investment, the availability of low-cost labor, and more globalized supply chains.

But there are indications of a very significant change in the nature of global competition and the economic environment. While global revenue could increase by some 40%, reaching $185 trillion by 2025, profit growth is coming under pressure. This could cause the real-growth rate for the corporate-profit pool to fall from around 5% to 1%, practically the same share as in 1980, before the boom began.

Part of the slowdown in profit growth will stem from the competitive forces unleashed by two groups of hard-charging competitors. On one side is an enormous wave of companies based in emerging economies. The most prominent have been operating as industrial giants for decades, but over the past 10 to 15 years, they have reached massive scale in their home markets. Now they are expanding globally, just as their predecessors from Japan and South Korea did before them.

On the other side, high-tech companies are introducing new business models and striking into new sectors. And the tech giants themselves are not the only threat. Powerful digital platforms such as Alibaba and Amazon serve as launching pads for thousands of small and midsize enterprises, giving them the reach and resources to challenge larger companies.

The competitive landscape has grown more complex, and the pace of change is accelerating. Profits are shifting from heavy industry to idea-intensive sectors that revolve around R&D, brands, software, and algorithms. Sectors such as finance, information technology, media, and pharmaceuticals—which have the highest margins—are developing a winner-take-all dynamic, with a wide gap between the most profitable companies and everyone else. Meanwhile, margins are being squeezed in capital-intensive industries, where operational efficiency has become critical.

New competitors are becoming more numerous, more formidable, and more global—and some destroy more value for incumbents than they create for themselves. Meanwhile, some of the external factors that helped to drive profit growth in the past three decades, such as global labor arbitrage and falling interest rates, are reaching their limits.

As profit growth slows, there will be more companies fighting for a smaller slice of the pie, and incumbent industry leaders cannot focus simply on defending their market niche. Our analysis of thousands of companies around the world shows that the top performers share three traits: they invest in intellectual assets, they play in fast-growing markets, and they have the most efficient operations.

Companies that adapt quickly to these new realities can capture enormous opportunities. Over the next decade, rising consumption in the emerging world will create new markets. Technology will spur new products and services. Start-ups will be able to tap global investors, suppliers, and customers with little up-front investment. But companies will face intense pressure to grow, innovate, and become more productive—not only to seize these opportunities but merely to survive.

© 2015 McKinsey Global Institute.

Maximum Withdrawal Rate: A Historical Perspective

Posted on September 11, 2015 by -

Few topics are more important to retirees than determining (or estimating) the “safe withdrawal rate” from their investment portfolios. As human longevity increases, the demands placed on the retirement nest egg continue to escalate. This study takes a historical perspective on this issue of retirement portfolio withdrawal rate, as opposed to a Monte Carlo perspective.

Rather than estimate the safe withdrawal rate for a retirement portfolio based on hundreds or thousands of simulations, this analysis evaluated the maximum initial withdrawal rate for two different retirement portfolios using actual historical returns over rolling 25-year periods.

The time frame of this study is the 45-year period from 1970-2014. Over this 45-year period there were 21 rolling 25-year periods. A 25-year period simulates the experiences of those who retire at age 65 and draw upon retirement portfolio through the age of 90—assuming they live that long. The maximum initial withdrawal rate that was calculated for each 25-year period led to a 100% success rate in meeting the stipulated ending outcome.

Two investment portfolios were evaluated in this study using well-known market indexes: A 60/40 portfolio consisting of 60% large cap US stock and 40% US bonds and a diversified 7-asset portfolio consisting of large cap US stock, small cap US stock, non-US stock, real estate, commodities, US bonds, and cash. Each asset class in the 7-asset portfolio was equally weighted at 14.28% each. Both portfolios were rebalanced annually.

Taxes and fees (advisor fees and/or investment product fees) were not taken into account.  In actual practice, taxes will differ by type of retirement account and individual circumstances. Investment product fees can be held very low by using an ETF-based investment model (30-40 bps). Inflation was accounted for by use of a COLA (explained later) in the analysis.

Portfolio survival

The survivability of a retirement portfolio depends on the initial withdrawal rate in the first year of retirement. Unless changed in subsequent years, the initial withdrawal rate sets the pace of the portfolio depletion. This analysis assumes that a retiree’s pattern of annual withdrawals from their retirement portfolio is established by their initial withdrawal rate and then annually adjusted by the COLA (cost-of-living adjustment) they select.

Let’s assume an investor with a retirement portfolio of $500,000 by the time she is ready to retire. A 4% initial withdrawal rate the first year produces a cash withdrawal of $20,000. If that is not enough money, she may be inclined to withdraw 5%, or $25,000 the first year. In either case, she plans to increase the amount of cash withdrawn each year by a COLA of 3%. 

As much as we would like to believe that retirees govern their portfolio withdrawals based on research on the topic of sustainable withdrawal rates and Monte Carlo analysis, many don’t. Rather, they withdraw the amount of money needed to fund their first year of retirement. As a result of the cart-driving-the-horse (allowing the needed amount of first year retirement income to determine the initial withdrawal rate percentage) the initial withdrawal rate could be 6%, 8%, or even 12% of the account balance. 

Once the initial withdrawal amount (and therefore the initial withdrawal rate) has been established, the die has been cast. It’s unlikely that retirees will withdraw less money in the second or third year, and so on. In fact, they will likely add a COLA (cost of living adjustment) to their annual withdrawal so that they can keep pace with actual or perceived inflation. Thus, choosing the initial withdrawal amount/withdrawal percentage of account balance is a crucially important decision. It sets into motion a pattern that will dramatically impact how long the portfolio will last. 

Maximum initial withdrawal rate

This analysis takes a novel approach in the evaluation of retirement portfolio survival. Rather than impose a pre-determined withdrawal rate, this analysis determined the maximum initial withdrawal rate that could have been sustained by the portfolio over a 25-year period assuming a 3% annual COLA in the cash being withdrawn. The performances of the portfolios in the study were not estimated through a Monte Carlo simulation but reflected the historical returns of actual indexes.

Three ending outcomes for the retirement portfolios were imposed in this analysis:

(1) An ending account balance of zero dollars in the retirement portfolio after each rolling 25-year period.

(2) An ending balance equal to the starting balance at the end of each 25-year period.

(3) An ending balance twice (2x) as large as the starting balance after each 25-year period.  

Shown in Table 1 are the results for the maximum initial withdrawal rate analysis assuming a zero account balance at the end of each 25-year period. The first 25-year period was from 1970 to 1994. If the initial withdrawal rate was set at 9.70% (meaning that 9.70% of the account balance was withdrawn at the end of the first year) the diversified 7-asset retirement portfolio was exhausted at the end of year 25. The 60/40 portfolio was exhausted after 25 years assuming a maximum initial withdraw rate of 7.76%.

Israelsen chart 1

The next 25-year period was 1971-1995. In this period, the maximum initial withdrawal rate was 10.75% for the 7-asset portfolio and 7.80% for the 60/40 portfolio. Over all 21 rolling 25-year periods the maximum initial withdrawal rate for the 7-asset portfolio averaged 10.59% and 10.20% for the 60/40 portfolio—under the assumption that the portfolio was exhausted at the end of each 25-year period. It is worth noting that the maximum initial withdrawal rates for both portfolios have been smaller in recent years.

Table 2 summarizes the maximum initial withdrawal rate under the assumption that the ending balance in the account at the end of each 25-year period was equal to the starting balance in year 1. Understandably, the maximum withdrawal rate is lower in every case. The average maximum initial withdrawal rate for the 7-asset portfolio was 9.79% vs. 9.44% for the 60/40 portfolio.  Thus, if imposing a requirement that the retirement portfolio finish each 25-year period with an ending balance equal to the starting balance, the maximum initial withdrawal rate was reduced by 8o bps in the 7-asset portfolio and by 76 bps in the 60/40 portfolio.

Israelsen chart 2

Finally, in Table 3 we find the results of the analysis under the assumption that the ending account balance needed to be twice (2x) as large as the starting balance. The average maximum initial withdrawal rate for the 7-asset portfolio was 8.96% and 8.67% for a 60/40 portfolio. The smallest maximum initial withdrawal rate for the 7-asset portfolio over all 21 rolling 25-year periods was 4.94%—which was in the most recent 25-year period, from 1990-2014.

Israelsen chart 3

In summary, these results demonstrate that diversified retirement portfolios can sustain unusually high initial withdrawal rates—far higher than the typical “4% withdrawal rate” guideline.  Understandably, it is impossible to know at the start of any 25-year period what the maximum withdrawal rate can be set at. This analysis does not suggest that an initial withdrawal rate of 8% or 10% be employed, but it also suggests that imposing a very low initial withdrawal rate of 2% or 3% may be too conservative in light of actual index-based historical results.

Finally, this analysis is based on the last 45 years of actual performance, from 1970 to 2014.  Are the last 4.5 decades an anomaly? It is what it is. Or, rather—it was what it was.

Craig L. Israelsen, Ph.D. is an executive-in-residence in the Financial Planning Program at Utah Valley University in Orem, Utah.  He writes monthly for Financial Planning Magazine and is the developer of the 7Twelve® Portfolio. 

The 45-year historical performance of large-cap US stock was represented by the S&P 500 Index, while the performance of small-cap US stock was measured using the Ibbotson Small Companies Index from 1970-1978 and the Russell 2000 Index from 1979-2014. The performance of non-US stock was represented by the Morgan Stanley Capital International EAFE Index Index. U.S. bonds were represented by the Ibbotson Intermediate Term Bond Index from 1970-75 and the Barclays Capital Aggregate Bond Index from 1976-2014. As of late 2008, Lehman Brothers indexes became “Barclays Capital” indexes. The historical performance of cash was represented by three-month Treasury bills. The performance of real estate was measured by using the annual returns of the NAREIT Index (National Association of Real Estate Investment Trusts) from 1970-1977 (annual returns for 1970 and 1971 were regression-based estimates inasmuch as the NAREIT Index did not provide annual returns until 1972). From 1978-2014 the annual returns of the Dow Jones US Select REIT Index were used (prior to April 2009 it was the Dow Jones Wilshire REIT Index). Finally, the historical performance of commodities was measured by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became S&P GSCI.

 

Traits of “leading” life/annuity issuers: Conning

Posted on September 11, 2015 by -

In its third annual review of insurance companies that specialize in issuing individual life and/or annuity products, Conning Inc., global research firm and institutional investment manager, identified 20 companies that demonstrate leadership in the field, as measured by public available sales and performance metrics.

The list of top performers (see table at right) includes eight well-known large companies and a dozen mid-sized and small insurance companies. To be included in the life/annuity category, a company has to receive half or more of its revenues from either life insurance or annuity products. Life Annuity Growth Leaders Conning

Many large, diversified insurance companies, such as AIG, MetLife, Prudential, MassMutual, John Hancock or Northwestern Mutual, are not included in the category because they are not considered life-annuity specialists or because they emphasize group life or group annuity products over individual products.

The list is not a ranking, according to Terence Martin, a Conning director and author of the review, “Individual Life-Annuity Growth and Profit Leaders.” Any number of companies can reach it, based on their fulfillment of the criteria, which include operating margin, return on surplus, premium growth, sales and others. This year’s report, which Conning sells, also reviews the social media capabilities of life/annuity companies.

In the executive summary of the report, Martin noted these characteristics of leading life/annuity specialists:

  • ‘The Leading Small and Leading Large companies both have a higher dependence on single premiums.’ “Size is not a limiting factor in being able to absorb any volatility introduced by single-premium products,” Martin wrote. He told RIJ that mutual companies typically include annual sales that result from dividend reinvestment as single-premium sales.
  • ‘The consistent element we have seen in this study and the prior two is the relative stability of the product mix (life vs. annuity) over time for the Leading companies.’ Martin said that the leading companies showed continuity in focusing primarily on life insurance or primarily on annuities over time.  
  • ‘A calculated increase in exposure to NAIC category 2 may be beneficial’ and ‘The leading groups, particularly the Leading Small and Leading Midsized groups, have more aggressive lengthened their portfolios after the financial crisis.’ The companies on Conning’s list were often able to outperform because they went up in average maturity and/or credit risk (to include bonds rated BBB by Standard & Poor’s and Fitch, the lowest investment grade).
  • ‘Leading companies had lower investment expense ratios than a respective overall groups.’ “This factor wasn’t big enough to have a huge effect on profitability, but it was a marker for excellence,” Martin said. 
  • ‘Success can be found issuing policies of a broad range of sizes and does not require chasing ever-larger policies.’ “The industry has seen the average size of policies creeping up for some time. This trend has been partly driven by the companies, and it has also been agent-driven. We found that companies have been able to make profit selling either large or small policies. Selling large policies isn’t something you have to do to be successful.”
  • ‘The Leading companies generally have higher distributor productivity than their overall corresponding group.’ “Distributor productivity refers to the amount of premium dollars the company gets for every dollar of commission they spend,” Martin said. The study doesn’t control for the fact that some companies tend to sell products, such as indexed annuities, that offer higher commissions than, for instance, fixed immediate income or fixed-rate deferred annuities.
  •  ‘There did not appear to be a clear link between success and capital measures, whether measured by growth, capital leverage, or RBC ratio.’

Conning, based in Hartford, CT, is owned by Aquiline Capital Partners but is in the process of being sold to Cathay Life Insurance Co., according to its website.

© 2015 RIJ Publishing LLC. All rights reserved.

New York Life offers dividend-paying income annuity and QLAC

Posted on September 11, 2015 by -

New York Life has launched a new income annuity, Mutual Income, that pays annual dividends in addition to immediate or deferred income. New York Life is the leading issuer of income annuities in the U.S.

Separately, the firm has issued its deferred income annuity as a QLAC, or qualifying longevity annuity contract, which IRA owners can use to purchase deferred income annuities with income start dates between ages 70½ and 85, within certain premium limits.

A release by the Fortune 100 mutual insurer said that Mutual Income is “designed to offer clients the opportunity to directly participate in the company’s mutual structure.  Separately, New York Life has expanded its income annuity options available on tax-qualified savings,” the company said in a release this morning. 

The initial press release didn’t say whether or not the initial income payout from Mutual Income would be lower than the initial income payments of an annuity that does not offer dividends. Northwestern Mutual was the first mutual insurer to offer a dividend to deferred income annuity purchasers, but its dividend-paying contract has a much lower starting payment than a conventional income annuity from Northwestern Mutual.

A subsequent e-mail statement from New York Life to RIJ said, “Similar to NWM, the starting guarantee is lower than the conventional fully guaranteed version.”

The initial release also did not say whether New York Life would allow contract owners to choose between taking the dividend in cash and applying it to the purchase of additional lifetime income, as Northwestern Mutual does.

A subsequent e-mail statement from New York Life to RIJ said, “Mutual Income also has the same flexibility for dividends to be taken in cash, reinvested to purchase additional lifetime income or a combination of both.  However for qualified Future Mutual Income Annuity, any dividend payments received during deferral must be used to purchase additional income.

“In reality, for the DIA version, most policyholders will likely opt to reinvest the dividends during the deferral period (because they don’t need it) and take it as cash once income begins.  For the SPIA version, dividends will likely be taken as cash since they need income now.”

According to the release, which arrived just as RIJ was about to publish today,

“Mutual Income works much like a traditional income annuity, where income can begin immediately or be deferred until a future start date of the client’s choosing. 

“As with other income annuities, a client invests a lump sum with an insurer, and receives an income stream that’s guaranteed for life.  But unlike traditional income annuities, the total income amount is not capped at the guarantee. 

“As policy owners, New York Life’s Mutual Income clients will also be eligible for annual dividends that can be used to increase their retirement income beyond the guaranteed amount.”

New York Life managing director Dylan Huang said in a statement, “With the launch of Mutual Income, New York Life is, for the first time, expanding its dividend opportunity to our income annuity clients.” Dividends can provide inflation protection as well, Huang added.

Regarding the QLAC, the release said:

Approximately 70% of purchasers of New York Life’s deferred income annuity are using tax qualified retirement savings they already have in IRAs or 401(k)s—but until now, an individual’s ability to decide when to start income has been limited by Required Minimum Distribution (RMD) rules, which generally require retirees to begin withdrawing from their qualified accounts by age 70½. 

New York Life saw evidence of this limitation among its own customers: almost a third (31%) of purchasers using non-qualified money elect an income start date between the age of 70½ and 85, indicating a desire to defer income to a more advanced age. 

We believe the purchase pattern that we see in our non-qualified sales indicates that there will be even more interest in deferred income annuities now that the income start date is permitted beyond the age of 70½.  When pre-retirees have no restrictions around the income start date, they are using the flexibility that deferred income annuities afford to create retirement income tailored to their specific needs,” added Mr. Huang.  “Some will want to use other assets to fund the early years of their retirement, some will be looking to leverage the power of deferral to provide for expenses later in life and others may want to work into their 70s without having to tap into their retirement savings via an RMD.  All can benefit from learning about the benefits of QLACs.”

© 2015 RIJ Publishing LLC. All rights reserved.

Fitch publishes “US Life Insurance GAAP Results Dashboard”

Posted on September 11, 2015 by -

Analysts at Fitch Ratings published the following summary of the first-half 2015 financial results for 17 financial services companies:

Fitch GAAP Results Sept 2015

Operating profitability relatively flat

During first-half 2015, pretax operating earnings increased 2% over the prior-year period for GAAP reporting companies in Fitch’s rating universe. Pretax operating income continued to benefit from higher fee income, which was offset by lower interest margins and unfavorable mortality. Operating profitability remained relatively flat with average operating ROE of 12.8% in first-half 2015 compared with 12.7% in the prior-year period.

Results vary by segment

Variable annuities, retirement plans and asset management segments continued to benefit from higher account values caused by strong equity markets and solid sales during first-half 2015.

Results in individual life and fixed annuities were adversely affected by unfavorable mortality and continued interest margin compression during the period. The group benefits business was aided by favorable claims experience but continues to face competitive pricing pressure.

Company results mixed

Operating results were almost evenly split between companies reporting better returns in first-half 2015 and those reporting worse returns during the period. Notable items affecting individual company results include a favorable impact from deferred acquisition cost unlocking and reserve releases at Prudential Financial, Inc. and more favorable claims experience in StanCorp Financial Group, Inc.’s primary products. Alternatively, Aflac Incorporated’s results were adversely affected by currency volatility while Protective Life Corporation’s results reflect accounting-related changes due to its acquisition by Dai-ichi Life Insurance Co., Ltd.

Declining investment yields

Investment yields declined in first-half 2015 due to low reinvestment rates and new money invested at lower market yields. Partially offsetting the low rates were prepayment fees and higher returns on Schedule BA assets. Credit impairments remain very low due to a continuous decline in corporate defaults, a trend that began in 2010.

However, interest margin compression on spread-based products remained modest in first-half 2015. Active management of crediting rates and hedging activity continue to mitigate the impact of low interest rates.

Derivative gains

The realized gains for Fitch’s rating universe nearly tripled during first-half 2015 to $2.4 billion from $813 million in the prior-year period. The increase was primarily driven by substantial hedging-related derivative gains from Prudential Financial, Inc.

© 2015 RIJ Publishing LLC. All rights reserved. 

Nationwide hands the ball to Peyton Manning again

Posted on September 11, 2015 by -

Following the success of last year’s ‘Jingle’ ad featuring Peyton Manning, Nationwide unveiled its newest advertising featuring the Denver Broncos quarterback. This new ad will debut during the 2015 NFL Kickoff game on Sept. 10 on NBC and will run throughout the season.

“The original ‘Jingle’ ad was one of the highest performing television ads in the history of our brand,” said Nationwide chief marketing officer Terrance Williams. “People would speak to Peyton using the jingle when they would see him. We used those experiences to develop this new ‘Jingle’ themed advertising.”

Nationwide has been especially aggressive in brand promotion and advertising in the past couple of years. It retired its long-time ‘blue window’ logo, which was internally unliked, replacing it with an older eagle-based symbol. It hired torchy actress and country singer Jana Rae Kramer to star as a leather-clad cat burglar in 2013 commercials. In a 2015 Nationwide Super Bowl ad, actress Mindy Kaling tries to kiss Matt Damon in a restaurant because she thinks she’s invisible (right). Mindy Kaling and Matt Damon

The “invisibility” theme is intended to subtly highlight the idea that Nationwide, which took itself private after the financial crisis, has no shareholders and therefore, like a mutual insurance company or a cooperative like Vanguard, can focus on the needs of its customers, and recognize their individuality. 

“I joined Nationwide because they put members first,” says a headline quoting Manning at the introduction of the new ad.  

The Peyton Manning ad may be the most successful element of Nationwide’s ongoing ad push. Nationwide will refresh the ad with new Peyton “Jingle” moments throughout the season, the company said in a release. The new ad is one of several new enhancements Nationwide has incorporated into its marketing plan for the second of a three-year sponsorship agreement with the NFL.

Besides partnerships with the Dallas Cowboys and the Denver Broncos, Nationwide entered into new relationships this year with the Arizona Cardinals, Atlanta Falcons, Chicago Bears, Cincinnati Bengals, Oakland Raiders and Pittsburgh Steelers. Nationwide will be able to use each team’s branding and logos in advertising and marketing materials.

With these new deals, Nationwide has developed team specific advertising “to connect with the passion of the fans of those teams.” Those ads were released digitally at the end of August.

“Teaming with the NFL and its clubs allows us to spread our ‘On Your Side’ promise to fans everywhere,” said Williams. The company will also increase its efforts around the Walter Payton NFL Man of the Year Award, presented by Nationwide.

Last season, Nationwide contributed more than $250,000 to the various charitable foundations represented by the 2014 nominees, including to the Thomas Davis Defending Dreams Foundation, represented by 2014 winner, Carolina Panthers linebacker Thomas Davis. This season, Nationwide will increase its contributions to the nominees’ foundations to nearly $300,000.

© 2015 RIJ Publishing LLC. All rights reserved.

Wink releases second quarter 2015 indexed annuity sales data

Posted on September 11, 2015 by -

At $12.2 billion, sales of indexed annuities in the second quarter of 2015 were up nearly 8% from the previous quarter but down more than 2% from the same quarter in 2014, according to the seventy-second edition of Wink’s Sales and Market Report, released this week. Fifty-two indexed annuity carriers representing 99.8% of indexed annuity production participated in the survey.  

With a market share of 17.3%, Allianz Life was the top-selling carrier. American Equity Companies, Great American Insurance Group, American General Life Companies and Athene USA completed the top five sellers. The Allianz 222 Annuity repeated as the quarter’s top-selling indexed annuity.

The rate of election of a Guaranteed Lifetime Withdrawal Benefit (GLWB) declined for the third consecutive quarter, suffering the largest quarterly drop (6.5%, to 58.7%) in Wink’s tracking history. “I’m not surprised to see another drop in GLWB election rates. Income-driven sales continue to take a backseat to accumulation sales, due to the recent development of hybrid indices that allow distributors to promote ‘uncapped’ crediting methods,” said Sheryl Moore, president and CEO of Moore Market Intelligence and Wink, Inc., in a release.

Wink Indexed Annuity Sales by Qtr 2Q2015

Indexed life sales

For indexed life sales, 46 insurance carriers participated in Wink’s Sales & Market Report, representing 95.3% of production. Second quarter sales were $458.0 million, up more than 20% compared with the previous quarter, and up nearly 28% when compared to the same period last year.

Items of interest in the indexed life market this quarter include Transamerica maintaining the top-ranked company in indexed life sales, with a 15.3% market share. Pacific Life held the second-ranked position, followed by National Life Group, Minnesota Life, and Zurich American Life.

Transamerica Premier Financial Foundation IUL (formerly Western Reserve Life Assurance Company of Ohio’s WRL Financial Foundation) was the top-selling indexed life insurance product for the sixth consecutive quarter. The average indexed UL target premium reported for the quarter was $7,517, up more than 8.0% from the prior quarter.

© 2015 RIJ Publishing LLC. All rights reserved.

Putnam hires another senior executive from Fidelity

Posted on September 11, 2015 by -

Putnam Investments announced that Sumedh Mehta has been named Chief Technology Officer, with responsibility for the company’s worldwide systems infrastructure and application development, as well as technology integration across business lines.

Robert Reynolds, the chief executive of Great-West Financial, which, like Putnam, is owned by Power Financial Corp., was chief operating officer at Fidelity until, after a brief retirement, he came to Putnam in 2008 to revive a sagging brand.

Reynolds subsequently added other former Fidelity executives, including Edward F. Murphy III, to his leadership team at Putnam. Murphy is now president of Empower Retirement, the new brand for Great-West’s institutional retirement businesses.

Mehta will be based in Boston and report to Putnam Chief Financial Officer Clare Richer. He will lead corporate-wide technology groups, including Software Engineering, Enterprise Computing and Telecommunications and Data. Mehta joins Putnam from Fidelity Investments, where he most recently served as senior vice president, Fidelity Investment Management Technology.  

Prior to joining Putnam, Mehta held a series of senior roles in financial services information technology, with a strong focus on asset management. Most recently, he served as Senior Vice President, Equity, High Income, Select Co., Pyramis and Research Technology for Fidelity Investments, where he developed solutions for portfolio managers, traders and research analysts.  

Previously, Mehta served as director of operational effectiveness for Marsh & McLennan Companies and as industry head for the financial services practice at Patni, Inc., a technology consultancy firm.  Earlier in his career, Mehta held positions at Mercer, The Reference, Inc., and The Mathworks.

Mehta holds an MBA degree from Babson College, an M.S. degree in electronic engineering from Columbia University and a BSc. degree in electronic engineering from the University of Southampton.

© 2015 RIJ Publishing LLC. All rights reserved.

GM Adds Hueler’s Income Solutions to its DC Plan

Posted on September 10, 2015 by -

Three years after terminating its defined benefit pension, U.S. carmaker General Motors will offer its 401(k) participants a new way to convert their savings to lifetime income: through the Hueler Income Solutions Annuity Marketplace online rollover platform.

The relationship, announced Thursday, represents a significant win for Minneapolis-based Hueler. Its founder, Kelli Hueler (below right), has spent a decade criss-crossing the country to pitch her “institutionally-priced” income annuity sales platform to plan sponsors and providers. The platform’s other prominent users include plan sponsor IBM and plan provider Vanguard. Vanguard offers participants in all of its 401(k) plans online access to the platform. Kelli Hueler

The GM 401(k) and profit-sharing plan has 58,000 participants in the U.S., $11 billion in assets and an average account value of $190,000. The largest single holding is the GMAM Investment Holdings Trust. A GM spokesperson could not be reached for comment before deadline.

The agreement between the global carmaker and tiny founder-led Income Solutions, whereby GM will promote Income Solutions internally, is unrelated to GM’s relationship with Fidelity, GM’s full-service 401(k) provider. Fidelity has its own online retail annuity platform, where individual investors can shop for immediate and deferred income annuities provided by several insurance companies.

No value of the deal was announced. It may not have a value, in the usual sense. Hueler’s platform involves a 2% fee based on the value of the annuity purchase. That fee covers the costs of maintaining Hueler’s insurance-licensed call center and the internal promotion of the service by the plan sponsors. The annuity issuers bid whatever price they choose to bid for each potential contract. There are no revenue-sharing arrangements or cross-subsidies.

Individual retirement plan participants and retirees whose companies have a relationship with Hueler can surf to the Income Solutions website and solicit current annuity pricing data from AIG, the Integrity Companies, Lincoln Financial, MetLife, Mutual of Omaha and Principal Life Insurance. The site facilitates the sale of annuities through partial rollovers. Some life insurers choose not to put annuity products on the platform because of conflict with their other distribution channels.

The Income Solutions Annuity Marketplace offers single premium immediate annuities, deferred income annuities, longevity insurance, and qualified longevity annuity contracts (QLACs), which are deferred income annuities purchased with tax-deferred money and have income start dates after age 70½. Premiums on QLACs are limited to $125,000 or 25% of the client’s tax-deferred savings, whichever is less. Hueler doesn’t sell variable annuities or indexed annuities.

In 2012, General Motors closed its defined benefit plan and offered 42,000 white-collar retirees a lump sum settlement in lieu of monthly pension payments. GM transferred responsibility for the retirement benefits of 76,000 others to Prudential by purchasing a group annuity for between $2 billion and $3 billion. The deal was reported to reduce GM’s $134 billion global pension obligations by about $26 billion.  

Speaking with RIJ yesterday, Kelli Hueler said the deal was struck after a lengthy due diligence process involving GM’s corporate treasury, asset management and human resources departments. According to Hueler, her service’s simplicity and transparency are attractive to certain plan sponsors. These are typically sponsors who feel an obligation to offer income options to retirees but find the s0-called ‘in plan’ annuity options (where future income is purchased prior to retirement) too difficult to change if necessary, or fraught with potential legal risks and liabilities. Income Solutions is an ‘out of plan’ option—it involves a rollover—and asks little of plan sponsors beyond a commitment to a reasonable amount of internal promotion.  

“This agreement [with GM] makes a statement about our value proposition. It’s resonating with employers. They like the independence of Income Solutions, the full disclosure of compensation, the competitive bidding aspect, the level fees, the objective presentation,” Hueler said in an interview.  

Hueler’s main business contacts are on the institutional side of the retirement industry. Ten years ago, while running a stable value fund data business for retirement plans, she noticed that near-retirees were at a disadvantage in the marketplace because they couldn’t readily compare the prices of a broad range of annuities, whose prices by manufacturer and from month to month.

She knew that an unsavvy or ill-timed purchase by an individual could easily reduce monthly income benefits by as much as 10%. Captive agents promoted only their employers’ products. Open-architecture Internet platforms such as immediateannuities.com were available to individual purchasers, but not as retirement plan option. 

“In 2014 we revamped our delivery of the program, and required collaborative communication and ongoing communication. It’s very different from way we started the platform in the early days. The communication is key. We also service the plan participants. Our help center is able to assist the participants. Our goals in help center are to explain annuitization, to assist participants with purchasing as the need arises,” she told RIJ.

“We play a more active role today than organizations may remember us having. In the last five or six years, it’s become a more high touch program. There’s a lot of e-messaging. We have communications where they can use the income estimator right in the communication. Our approach focuses on partial annuitizations. If the plan sponsors don’t already allow partial annuitizations, we advocate for that. We also advocate for participants to keep the rest of their assets in the plan.”

Amid the current debate over the Department of Labor’s proposed fiduciary rule, which aims in part to shield participants from aggressive rollover marketing at the point of retirement, plan sponsors are sensitive about who they let approach their participants about rollovers. In such a climate, the Hueler model appeals to them.   

“We’re not a product manufacturer that might want to sell other products to the participant. It’s clear what our goal is,” Hueler told RIJ. “When we started this business, we structured the program so that it could fit any fiduciary process. We wanted to remove conflicts, ‘pay-to-play’ arrangements, and issuer selection objectives, and to provide level fees and full disclosure.

“If you keep the process opaque and you’re steering people to one product or another, you lose all credibility. We made strategic decisions early on that were unpopular at the time, and very different from the rest of the marketplace. All of that was self-imposed. But now the world around us has woken up to all of that. Those things are seen as the future.”

© 2015 RIJ Publishing LLC. All rights reserved.