Archives: Articles

IssueM Articles

‘Robo’ assets grow 208% in 15 months: Corporate Insight

Posted on October 8, 2015 by -

In a measure of their disruptive force in the investment industry, the 11 leading robo-advisors, or digital advice providers, saw assets under their discretionary control grow 208% from April 2014 to July 2015, according to a new report from Corporate Insight.

“Fintech firms offering online managed accounts are winning customers’ trust. They have established a model that will bring low-cost managed money to the masses,” said analyst Sean McDermott, who leads fintech research for Corporate Insight, in a release.

The new study, Next-Generation Investing 2015: Digital Advice Matures, evaluates some 60 investing-related startups as well as platforms launched by Schwab, TradeKing and Vanguard. It also analyzes robo evolution since 2012.

Eleven robo-advisors—AssetBuilder, Betterment, Covestor, Financial Guard, FutureAdvisor, Jemstep, MarketRiders, Personal Capital, Rebalance IRA, SigFig and Wealthfront—saw total assets increase from $11.5 billion to $21 billion, an 83% percent growth rate in the 15 months ending last July.

“Most of this growth can be attributed to the managed account model, as the appeal of the algorithm-based advice approach seems to have plateaued,” a Corporate Insight release said. The research firm distinguished between assets under discretionary management (i.e., held in low-cost online managed accounts) and assets for which clients receive paid investment advice (i.e., algorithm-based investment advice services).  

The paid investment advice growth rate steadily declined each time Corporate Insight collected data, dropping from a 35% increase between April and July 2014 to 16% between July and December. From there, advised assets declined six percent between December 2014and July 2015.

By contrast, managed account assets among 11 leading digital advice providers grew 208%, from $2.6 billion to $8 billion. These firms saw their highest six-month growth rate (57% from December 2014 to July 2015) when most major domestic indices were flat. New client assets drove most of the growth.

The next year to 18 months will see more incumbent firms acquiring a robo, Corporate Insights said. (BlackRock recently bought FutureAdvisor for a reported $150 million.) Since the first quarter of 2015, several firms—Morningstar, Fidelity and Northwestern Mutual, for instance—have bought a robo, partnered with one, or built their own.

Corporate Insight’s Next-Generation Investing 2015: Digital Advice Matures study is the third in a series where the company has tracked and reviewed the automated advice market.

The first study, Next Generation Investing: Online Startups and the Future of Financial Advice, was released in October 2013. The second, Transcending the Human Touch: Onboarding and Product Strategy for Automated Investment Advice, was published in August 2014.

© 2015 RIJ Publishing LLC. All rights reserved.

Who says America doesn’t save for retirement?

Posted on October 8, 2015 by -

Weighing in at a hefty $24.8 trillion as of mid-year 2015, total U.S. retirement assets were about unchanged from the end of March, according to the Investment Company Institute.  By that measure, retirement assets accounted for 36% of all household financial assets.   

The quarterly retirement data tables are available at “The U.S. Retirement Market, Second Quarter 2015.”  

Assets in individual retirement accounts (IRAs) totaled $7.6 trillion at the end of the second quarter of 2015, up 0.4% from the end of the first quarter. Defined contribution (DC) plan assets rose 0.4% in the second quarter to $6.8 trillion. Federal, state, and local government defined benefit plans held $5.2 trillion in assets as of the end of June, a 0.3% percent decline from the end of March.

Private sector DB plans held $3.0 trillion in assets at the end of the second quarter of 2015. Annuity reserves outside of retirement accounts accounted for another $2.1 trillion.

Of the $6.8 trillion in all employer-based DC retirement plans on June 30, 2015, $4.7 trillion was held in 401(k) plans. In addition to 401(k) plans. At the end of the second quarter, $537 billion was held in other private-sector DC plans, $872 billion in 403(b) plans, $266 billion in 457 plans, and $441 billion in the Federal Employees Retirement System’s Thrift Savings Plan (TSP). 

Mutual funds managed $3.8 trillion, or 56%, of assets held in DC plans at the end of June. Forty-eight percent of IRA assets, or $3.6 trillion, was invested in mutual funds.

As of June 30, 2015, target date mutual fund assets totaled $761 billion, an increase of 2.7% in the second quarter; 88% of target date mutual fund assets were held through DC plans and IRAs.

© 2015 RIJ Publishing LLC. All rights reserved.

Industry-sponsored legal study attacks ‘robo-advisors’

Posted on October 8, 2015 by -

In a brief commissioned by the Pittsburgh-based asset management firm Federated Investors, a Washington attorney with expertise in fiduciary matters has asserted that robo-advisors are not the populist panacea to conflicted investment advice that they present themselves to be.

In her June 30, 2015 paper, “Robo-Advisors: A Closer Look,” attorney Melanie L. Fein argues that the DOL has touted robo-advisors as investment alternatives for retirement investors based on “incorrect or misleading” assumptions that “robo-advisors are free or ‘low­cost’ and seek to minimize conflicts of interest.”

According to the paper, “robo-advisors do not provide personal investment advice, do not meet a high standard of care for fiduciary investing, and do not act in the client’s best interest.

“The robo-advisor agreements reviewed herein would not meet the DOL’s proposed ‘best interest’ contract exemption that requires investment advisers to acknowledge their fiduciary status, commit to give only advice that is in the customer’s best interest, and agree to receive no more than reasonable compensation.”

© 2015 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on October 8, 2015 by -

T. Rowe Price introduces less pricey TDFs

T. Rowe Price has launched 13 new Retirement I Funds, a series of target date funds for retirement plans and other institutional investors. They have the same glide paths, underlying funds and asset allocation targets as the firm’s current Retirement Fund TDFs, but lower shareholder servicing costs.

Financial intermediaries, retirement plans, other institutional investors, and individuals investing a minimum of $1 million can use Retirement I Fund series as a low-cost share class option. The Retirement I Fund series add to the 19 I Class offerings T. Rowe Price launched in September 2015.

There is a T. Rowe Price Retirement I Fund for each of 12 target dates from 2005 to 2060, plus a T. Rowe Price Retirement Balanced I Fund. The funds are available as of October 1, 2015.

A T. Rowe Price press release includes disclosures saying that the funds may not be  appropriate for someone retiring long before or after age 65, that the underlying stock and bond funds will change over time, that the funds focus on supporting on supporting an income stream over a long-term postretirement withdrawal horizon, that they are not designed for a lump-sum redemption at the target date and do not guarantee a particular level of income, and that the funds maintain a substantial allocation to equities both prior to and after the target date.  

The ‘UHNW’ of the Middle East control almost US$1 trillion: Wealth-X

There are 1,275 “ultra wealthy” individuals in the United Arab Emirates (UAE), representing 20% of the total ultra wealthy population in the Middle East, according to a new study from Wealth-X. The combined wealth of the UAE’s ultra high net worth ($30 million or more) population stands at US$255 billion.

More than half (57%) of the UAE’s UHNW population built their fortunes through entrepreneurship, the report said. Only 8% fully inherited their fortune; 35% partially inherited and grew their wealth. In other findings from the study:

  • Nearly a thousand UHNW individuals are based in the UAE capital Abu Dhabi (450 individuals) and Dubai (495).
  • Saudi Arabia and the UAE jointly account for over 45% of the UHNW population in the Middle East.
  • Only 3% of the UAE’s UHNW population acquired its wealth through oil, gas and consumable fuels.
  • Industrial conglomerates are the biggest source of wealth for the UAE’s UNHW population, at more than 20%.
  • The UAE is ranked twenty-secondth in Wealth-X’s global ranking of UHNW population by country, after Saudi Arabia(17) and ahead of Kuwait (32).

There are nearly 6,000 UHNW individuals in the Middle East with a combined net worth of US$995 billion. Saudi Arabia has the largest UHNW population (1,495 ultra wealthy individuals). 

MassMutual rolls out benefits exchange platform

MassMutual is launching BeneClick!, a unique, integrated exchange featuring a guidance tool that helps employees prioritize their retirement savings, healthcare and insurance protection benefits based on their individual life stages and then take action.

The new exchange, an online marketplace where people can select their employer-sponsored benefits, is powered by Maxwell Health’s benefits technology platform. Maxwell Health built the first “Health as a Service” platform, an operating system for benefits that “engages employees, incentivizes a holistic view of health, and provides a centralized place to access health and benefits services,” a release said.

BeneClick! is being introduced through MassMutual’s distribution partners on a limited basis and will be available more broadly in mid-2016. Initially, through BeneClick!, MassMutual will offer access to retirement plan enrollment features and life insurance products. It expects to add additional insurance products such as critical illness and accident protection in 2016.

The exchange integrates MassMutual’s MapMyBenefits tool, which enables employees to prioritize their benefits choices. This approach combines retirement readiness, healthcare coverage and preparation for life’s unforeseen events. The tool is designed to help mitigate health and financial issues.

Employers are increasingly turning to benefit exchanges. Approximately 40 million Americans are expected to buy their health insurance coverage from exchanges by 2018, according to a 2015 study by Accenture Plc. Instead of offering a companywide health plan, more employers are asking workers to choose their own plans from a menu of options. 

Voya to administer savings plan of CenterPoint Energy

Voya Financial, Inc. said its retirement business will administer the savings plan of CenterPoint Energy, Inc., a Houston-based Fortune 500 company list that delivers electricity and natural gas to customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas.

The plan, which transitioned to Voya’s administration platform October 1, 2015, represents nearly $1.7 billion in assets and approximately 9,300 plan participants as of September 28, 2015.

Voya will provide administrative and recordkeeping services for the CenterPoint Energy Savings Plan and offer Voya’s newly enhanced participant website, which features the myOrangeMoney retirement income planning capability.  

AARP and JPMorgan to invest $40 million in aging-related startups 

AARP and J.P. Morgan Asset Management have formed the “AARP Innovation Fund,” a $40 million vehicle designed to invest in healthcare-related startups “focusing on improving the lives of people 50-plus.” AARP is the only third-party investor in the fund.

The new venture capital fund will make direct investments in early- to late-stage companies with products in three areas:

Aging at home. The fund will encourage the development of products and services that leverage technology to enable older adults to continue living in their homes safely and affordably. These include home sensor activity tracking; hearing and vision health; mobility assistance; meal plan/delivery/cooking solutions; social communities; physical augmentation devices.

Convenience and access to healthcare. The fund will support the advancement of products and services that enable 50-plus consumers to adopt positive health behaviors, such as telemedicine; consumer diagnostics; consumer care transparency tools.

Preventative health. The fund will seek to expand the market for products and services that help 50-plus consumers prevent the onset of serious health conditions through diet and nutrition management; stress and emotion management/therapy; fitness apps and programs; integrated health engagement incentives; cognitive and brain health.

People 50-plus are responsible for at least $7.1 trillion in annual economic activity, a number that is expected to grow to $13.5 trillion by 2032, an AARP release said. 

Recent market volatility hurts funded status of U.S. pensions

The funded status of the typical U.S. corporate pension plan declined in September for the third month in a row, dropping by 2.4 percentage points to 81.8%, and is now down year-to-date, according to BNY Mellon Fiduciary Solutions.

Public plans, foundations and endowments also failed to meet targets due to declining asset values, according to a BNY Mellon release.    

For the typical U.S. corporate plan, funded status peaked at 85.5% on September 16 before falling 3.7% in the second half of the month, driven by an overall 1.9% decline in assets since August.

Meanwhile, liabilities increased 1.1% as the Aa Corporate discount rate fell by six basis points. Plan liabilities are calculated using the yields of long-term investment grade bonds. Lower yields on these bonds result in higher liabilities. 

Public defined benefit plans in September missed their return target by 2.8% as assets declined 2.2%, according to the September BNY Mellon Institutional Scorecard. Public plans have missed year-to-date and one-year return targets by 9.4% and 10.1%, respectively.

Endowments and foundations missed their spending plus inflation target by 2.8%. According to the monthly report, asset returns for the typical endowment and foundation fell 3.5 percent over the past year, which is behind the spending plus inflation target by 8.6 percent.

“High Yield securities and equities continued to struggle, leading to the decline in asset values that hit typical public defined benefit plans, endowments and foundations,” said the release. “Fixed income ex-High Yield and REITs were the exception, performing well over the month as investors moved away from risk.”

© 2015 RIJ Publishing LLC. All rights reserved.

 

Takeaways from the FPA Conference in Boston

Posted on October 1, 2015 by -

With evidently more passion to learn than they may ever have shown as students, several hundred financial planners packed a double-wide hotel meeting room last week to hear William Reichenstein talk about tax-efficient withdrawal strategies at the Financial Planning Association’s annual conference in Boston.

Reichenstein spoke rapidly at the podium; he has given this slide show before. But the audiences are always fresh, and this one was rapt. Affluent retirees hate taxes, of course (perhaps because taxes can be their single biggest expense). And lowering clients’ taxes is a good way for advisors to earn their asset-based fees.   

A professor at Baylor University, Reichenstein is well known in retirement circles. Many of the advisors seated in chairs or at tables or parked along the walls of the room in the Boston Convention and Exhibition Center knew his 2011 book, “Social Security Strategies” (with William Meyer), and some had no doubt read his recent article in the Financial Analysts Journal (with Meyer and Kirsten Cook) on which this day’s presentation was based.

His presentation compared five different withdrawal strategies: i.e., five sequence patterns in which to draw a client’s income in retirement from a combination taxable accounts, tax-deferred accounts (e.g. rollover IRAs) and tax-exempt accounts (e.g., Roth IRAs).

The punch line: The fifth strategy can increase the life of a hypothetical portfolio to 36.17 years, or about three years longer than the “conventional” strategy of drawing income from taxable accounts first, then traditional IRAs/401ks, then Roth IRAs, and 20% longer than withdrawing Roth IRA first, then traditional IRAs, then taxable money.

The fifth strategy is a bit complicated, so pay close attention (or read the academic paper). First, assume a 65-year-old woman who needs $81,400 in after-tax income each year, has an $11,500 standard deduction/personal exemption, and who can withdraw $47,750 from her tax-deferred accounts each year without breaching the ceiling of the 15% tax bracket. Also assume a 50/50 stock/bond portfolio with an average bond return of 4% and stocks returning a 4% geometric average. She withdraws once a year.

At the beginning of each year, the retiree makes two separate Roth conversions of $47,750, which takes her income to top of 15% bracket. She also withdraws funds from her taxable account until exhausted and then from her tax-exempt Roth IRA.

One Roth will contain short-term bonds and the other US stocks (with repeating returns sequence of – 12.6%, 22.6%, and 5%). At the end of the year, she re-characterizes the Roth (back to a traditional IRA) with the lower value and retains the other. In late retirement years, she withdraws funds from tax-deferred account and tax-exempt account.

“A key to a tax-efficient withdrawal strategy is to withdraw funds from [tax-deferred accounts] such that the investor minimizes the average of the marginal tax rates on these withdrawals,” write Cook, Meyer and Reichenstein in their 2015 FAJ article. “Contrary to the conventional wisdom, the TEA is not more tax advantaged than the TDA.”

Americans Funds as decumulation tools

Purveyors of index funds no longer need to prove that their investment methodology has value, as they once did. Today, sellers of actively managed funds bear that burden. At the FPA convention, Steve Deschenes of the Capital Group (formerly of Sun Life and, before that, MassMutual) made the case for active management in a talk about his firm’s American Funds.

Certain American Funds perform especially well, relative to their benchmarks, during the withdrawal stage (i.e., retirement), Deschenes said. His calculations showed that, all else being equal, a portfolio of A-share American funds (half “moderate allocation” and half “world allocation”) delivered hypothetical ending balances after 20 years of annual withdrawals that were two to almost three times larger than a portfolio consisting of the comparable index fund.

The results included the annual expenses of the American funds but not the initial sales charge, which can reach as high as 5.75%. The case study assumed a starting balance of $500,000 and either 4%, 5% or 6% withdrawal rate (plus annual inflation increases of 3% the previous year’s withdrawal) over a 20-year period ending in December 31, 2014.

Three key fund attributes drove the outperformance of selected American funds and others with the same characteristics, Deschenes said. The success factors were high rates of manager ownership in the fund, relatively low expense ratios, and low “downside capture” ratios. (In a down market where an index registered a loss, a comparable active fund that registered a much smaller loss would have a low downside capture ratio.)

The “true cost” of retirement

Fee-based (who earn AUM fee and commissions) and fee-only (AUM fees) financial planners tend not to use annuities to mitigate their clients’ risk of running out of money in retirement. Traditionally, they rely on rules of thumb about income replacement ratios and safe withdrawal rates.

But what if those rules of thumb are based on unfounded assumptions? David Blanchett, Morningstar’s retirement guru and one of the FPA conference headliners, gave a presentation in which he argued that each retiree household has its own specific income and spending needs that vary over the course of retirement. As a result, the rules of thumb don’t necessarily apply. 

The “true cost” of retirement for most people will probably be lower, as much as 20% lower, Blanchett argues. For instance, he believes that most people won’t need income in retirement that’s 70% to 80% of their pretax income. In many cases, that number will be closer to 50%.

Why? Because most people won’t live until age 95. In the old days, advisors thought it was rational for retirees to plan on reaching the average life expectancy. Then they were urged to plan for a very long life. Now, Blanchett seems to be saying, it’s OK to plan on average life expectancy.

Blanchett offers a similar insight about the safe withdrawal rate, long assumed to be 4% of the original balance per year, increased slightly each year to account for inflation. For most people—i.e., those who live only 15 or 20 years in retirement—a 5% payout rate will offer enough safety. Using the higher payment rate means either of two things: You’ll be able to spend 20% more each year or you can save 20% less.

The moral of Blanchett’s story: “The true cost of retirement is highly personalized based on each household’s unique facts and circumstances, and is likely to be lower than amounts determined using more traditional models.”

© 2015 RIJ Publishing LLC. All rights reserved.

The Chinese Economy and Fed Policy

Posted on October 1, 2015 by -

Janet Yellen’s speech on September 24 at the University of Massachusetts clearly indicated that she and the majority of the members of the Federal Reserve’s Federal Open Market Committee intend to raise the short-term interest rate by the end of 2015. It was particularly important that she explicitly included her own view, unlike when she spoke on behalf of the entire FOMC after its September meeting. Nonetheless, given the Fed’s recent history of revising its policy position, markets remain skeptical about the likelihood of a rate increase this year.

The Fed had been saying for several months that it would raise the federal funds rate when the labor market approached full employment and when FOMC members could anticipate that annual inflation would reach 2%. But, although both conditions were met earlier in September, the FOMC decided to leave the rate unchanged, explaining that it was concerned about global economic conditions and about events in China in particular.

I was unconvinced. I have believed for some months that the Fed should start tightening monetary policy to reduce the risks of financial instability caused by the behavior of investors and lenders in response to the prolonged period of exceptionally low interest rates since the 2008 financial crisis. Events in China are no reason for further delay.

Consider, first, domestic economic conditions, starting with the employment picture. By the time the FOMC met on September 16, the unemployment rate had fallen to 5.1%, the level that the Fed had earlier identified as full employment. Although there are still people who cannot find full-time jobs, driving the unemployment rate below 5.1% would, according to the Fed, eventually lead to unwanted increases in inflation.

The current inflation picture is more confusing. The annual headline rate over the past 12 months was only 0.2%, far short of the Fed’s 2% target. This reflected the dramatic fall in energy prices during the previous year, with the energy component of the consumer price index down 13%. The rate of so-called core inflation (which excludes energy purchases) was 1.8%. Even that understates the impact of energy on measured inflation, because lower gasoline prices reduce shipping costs, lowering a wide range of prices.

The point is simple: When energy prices stop falling, the overall price index will rise close to 2%. And the FOMC members’ own median forecast puts inflation at 1.8% in 2017 and 2% in 2018.

So if the Fed, for whatever reason, wanted to leave the interest rate unchanged, it needed an explanation that went beyond economic conditions in the United States. It turned to China, which had been much in the news in recent weeks. China was reducing its global imports, potentially reducing demand for exports from the US. The Chinese stock market had fallen sharply, declining some 40% from its recent high. And China had abruptly devalued the renminbi, potentially contributing to lower import prices – and therefore lower inflation – for the US.

But when it comes to the impact of China’s troubles on the US economy, there is less than meets the eye. China’s import demand is slowing in line with its economic structure’s shift away from industry and toward services and household consumption. This means that China needs less of the iron ore and other raw materials that it imports from Australia and South America and less of the specialized manufacturing equipment that it imports from Germany and Japan. The US accounts for only 8% of China’s imports, and its exports to China represent less than 1% of its GDP. So China’s cut in imports could not shave more than a few tenths of a percentage point from US GDP, and even that would be spread over several years.

As for the stock market – widely viewed as a kind of casino for a small fraction of Chinese households – only about 6% of China’s population own shares. The Shanghai stock market index soared from 2,200 a year ago to a peak of 5,100 in mid-summer and then dropped sharply, to about 3,000 now. So, despite the sharp drop that made headlines recently, Chinese shares are up more than 30% from a year ago. More important, wealth and consumption in China are closely related to real-estate values, not equity values.

Finally, the renminbi’s recent decline against the dollar was only 2.5%, from CN¥6.2 to CN¥6.35 – far below the double-digit declines of the Japanese yen, the euro, and the British pound. So, on an overall trade-weighted basis, the renminbi is substantially higher relative to the currencies with which it competes.

Even more relevant, the decline of the renminbi and other currencies in the past year has had very little impact on US import prices, because Chinese and other exporters price their goods in dollars and do not adjust them when the exchange rate changes. While official US data show overall import prices down 11% in the 12 months through August, this is almost entirely due to lower energy costs. When energy products are excluded, import prices are down only 3%.

So the Fed is right to say that inflation is low because of the sharp drop in energy prices; but it need not worry about the effect of major trading partners’ lower currency values. And, again, when the price of energy stops declining, the inflation rate will rise close to the core rate of 1.8%.

So, unless there are surprising changes in the US economy, we can expect the Fed to start raising interest rates later this year, as Janet Yellen has proposed, and to continue raising them in 2016 and beyond. I only hope that it raises them enough over the next 18 months to avoid the financial instability and longer-term inflation that could result from the long era of excessively easy monetary policy.

© 2015 Project Syndicate.  

Questions for the DOL’s Tim Hauser

Posted on October 1, 2015 by -

Hubert A. Ross, a tall, 53-year-old CFP from Destin, Florida who clears his trades through LPL, was almost pleading for a simple answer to what he considered a simple question: Couldn’t the combatants in the battle over Department of Labor’s fiduciary proposal lock themselves in a room for a day or two, negotiate a settlement, and end the five-year standoff over the DOL’s attempt to start regulating rollover IRAs like mini ERISA plans?

“You’re all intelligent people,” Ross said, to anyone nearby, which included panelists David Blass of the Investment Company Institute, Steve Hall of Better Markets, Bonnie Treichel of the Retirement Law Group, and David Certner of AARP, who had just finished debating the proposal at the National Press Club in Washington, DC. “Shouldn’t you all be able to solve this?”

Ross was right: the DOL proposal is simple. It would bar the dodgy “suitability” standard of conduct for sellers of mutual funds and annuities to IRA owners, which allows them to make self-serving recommendations. But, like Nancy Reagan’s “Just Say No” anti-drug campaign, it’s not just simple—it’s simplistic. 

Like Ross, I was at the symposium on the proposal hosted by the Investment Management Consultants Association on Tuesday. The luncheon speaker and main drawing card was deputy assistant Labor Secretary Tim Hauser (right), who in mid-August chaired four days of public hearings on the proposal. Tim Hauser

IMCA has a stake in all this. Its members could be affected by the final proposal when it is published in early 2016. If they are “fee-based,” like Hubert Ross, and earn both asset-based fees and commissions on the sales of securities, they may no longer be able to sell commission-based products to IRA owners without signing a pledge to act solely in the client’s “best interest.”

This requirement, known as the Best Interest Contract (BIC) Exemption, rankles broker-dealers. It entails both a legally binding pledge of good faith and a fresh layer of red tape. Broker-dealer trade groups have warned that they will cease selling commissioned products —such as variable annuities and load mutual funds—to IRA owners just to avoid the BIC. Broker-dealers say the BIC will force them to abandon those consumers, since commissions on packaged products are the compensation-model-of-choice for middle-market clients. (Some believe the industry is bluffing.)

I attended the meeting mainly because Hauser was speaking and welcoming questions from members of the audience, which numbered about 150. Handed a wireless microphone, I was able to ask him: “After what you heard at the hearings, do you now think that the DOL was in fact naive to think that broker-dealers could ever accept the terms of the BIC?”

This question was not as unfairly loaded as it sounds, because during the August hearings Hauser twice asked industry attorneys in just those words: Are we naïve to think that this compromise can work? (One lawyer murmured No and one said frankly Yes.)

Watching the webcast of the hearings at home, I nodded Yes, yes, yes. For one thing, the DOL had not adequately defined “best,” as a legal definition. Also, the agency seemed to offer a paradox: Advisers can accept conflicted compensation if they pledge to provide unconflicted advice.

To me, conflicts of interest are not mere temptations, which an intermediary can choose to ignore if he or she is sufficiently self-disciplined. They are dark masses whose gravity curves the ethical space around them. They reduce transparency and limit the available range of options. Even when disclosed, they can work to the disadvantage of consumers. So when I first read the DOL proposal, I thought: This can’t work.   

Of course, it would have been naïve to believe that Hauser might confess that the DOL had woken up to the impracticability of the BIC exemption, and he didn’t. “I didn’t ask that question several times,” he demurred, and went on to explain that most of the witnesses at the hearing had assured him that the DOL wasn’t naïve and that the BIC was in fact workable. He politely, and at length, turned my loaded question aside.   

After his address, Hauser paused in the adjoining hallway to field a few more questions. Hundreds of portraits of newsmakers, from Eliot Spitzer to Sharon Stone, cover the length of one wall. Hauser, who worked as a Legal Aid attorney in rural Missouri for six years after graduating from Harvard Law School in 1985, is tall and lanky with tousled light brown hair. He wore wire-rimmed glasses, a grey suit and soft black walking shoes—not the glossy cap-toe Oxfords or tasseled loafers popular on Wall Street or K Street.  

I asked Hauser if the DOL was targeting variable annuities with its proposal. The proposal would require VA sellers to meet the BIC exemption and pledge to act solely in the IRA client’s interest. Under the status quo, advisors can sell VAs for a commission as long as they meet the requirements of so-called PTE 84-24, which does not require such a promise.

Hauser said, “The proposal isn’t intended to favor one product over another.” He noted that variable annuities are complicated, but that they also offer some beneficial guarantees. No, he said, the DOL is not targeting VAs.

That wasn’t a satisfying answer. VAs, about a third of which are sold through independent broker-dealers, have been under attack in the mass media. Journalists often use VAs as an example of sales predation. Jill Schlesinger, the well-known CBS financial reporter, made VAs the butt of a joke at a recent robo-advice conference in New York. Ironically, sales of VAs have already leveled off or dropped. Some broker-dealers now hesitate to sell investment-only VAs to IRA owners because they duplicate the tax deferral that IRA owners already have. 

Finally, I asked Hauser if the DOL distinguishes between different types of commissions. After all, not all commissions are equal. Annuity commissions can be especially opaque. The average purchaser of a B-share VA probably doesn’t know how the contingent deferred sales charge regime works. The commissions that purchasers pay on fixed annuities are built into the prices of the contracts. FIAs are sometimes even advertised as “no-fee” products. But he said, “No we treat all commissions the same.”

That gave me pause. The agency either doesn’t fully understand the many different business models in the financial services industry, or it doesn’t care. Hauser and his boss, EBSA chief Phyllis Borzi, may believe that, by establishing a blanket “Best Interest” principle, they can protect the consumer without picking winners and losers in the marketplace. But they can’t avoid picking winners and losers. A one-size solution never fits all.

Hauser assured the audience on Tuesday that the DOL staff will read all 2500-plus public comments and tweak the final draft of the proposal accordingly. We’ll know more in a few months.    

© 2015 RIJ Publishing LLC. All rights reserved. 

Will DOL proposal trigger “ratings events”? Too soon to say: A.M. Best

Posted on October 1, 2015 by -

The Department of Labor’s fiduciary proposal isn’t considered damaging enough to trigger “rating events” for life insurance companies—at least not until “there is more clarity on the fiduciary guidelines,” the ratings agency A.M. Best said in a release this week.

“According to the public comments by insurance executives, the DOL has been receptive to insurers’ concerns and the next proposal could have significant changes,” A.M. Best analysts wrote. A final draft of the proposal is expected in late 2015 or early 2016.

After reviewing comments posted by insurance groups on the website of the DOL’s Employee Benefit Security Administration, A.M. Best summarized industry sentiment as follows:

  • The insurance industry believes the DOL proposal needs significant changes to make it workable.
  • The insurance industry is concerned the regulation, as originally drafted, could limit advice available to small investors, further confuse potential investors and adversely impact the advisor-client relationship.
  • Costs associated with making changes to products, pricing and compliance practices including greater systems capabilities and additional staffing, would impact future revenues and further increase compliance costs.
  • The proposed definition of a fiduciary is seen as too broad.
  • The DOL should narrow the proposed definition of fiduciary investment advice to exclude routine sales activity, including IRA rollovers.
  • Insurance companies are recommending a time frame of twenty-four to thirty-six months to comply with the DOL proposal instead of the eight months suggested by the DOL. Compliance will require new disclosures, new marketing materials, new support infrastructure and new advisor training programs.

The Best Interest Contract Exemption part of the proposal has drawn strong objections. The BIC allows brokers to continue to receive commissions on sales to IRA owners, but only if brokers pledge to act solely in the best interest of the client. Today, brokers’ recommendations to IRA owners can be self-serving and need only be “suitable” for a client.  

A.M. Best analysts wrote, “Some companies have stated that the BIC Exemption creates uncertainty while adding unnecessary cost complexity for financial institutions. Primerica classified the BIC Exemption as ‘unworkable,’ finding the exception ‘being so complex and burdensome that it is not administratively or operationally feasible.’ There is also concern that the BIC Exemption could expose brokerage firms and investment firms to increased exposure to significant litigation risk.”

© 2015 RIJ Publishing LLC. All rights reserved.

Voya adds volatility-controlled index to its FIAs

Posted on October 1, 2015 by -

A new index crediting strategy, called the Point-to-Point Volatility Control Strategy, is now available on the Voya Secure Index series and Retirement Index Select series of fixed index annuities (FIAs), Voya Financial announced this week.

The Point-to-Point Volatility Control Strategy tracks Deutsche Bank’s proprietary CROCI (Cash Return on Capital Invested) US 5% Volatility Control Index, Voya said. CROCI is designed to reduce volatility to 5% by moving money between select U.S. equities and cash in response to changes in market volatility. 

The CROCI valuation methodology selects 40 of the most undervalued stocks from among approximately the 250 largest companies (by market capitalization) of the S&P 500 Index and groups them together in a propriety index. 

Only a small fraction of FIA premiums is used to buy options on the performance of (typically) equity indexes, so FIAs can deliver only a fraction of index gains. They may credit investors with equity returns below a designated “cap” percentage or the gains above a “spread.” Or, especially recently, they can offer nominally unlimited (“uncapped”) credits that are internally limited by volatility control strategies. (FIA owners do not receive dividends, because they do not invest directly in equities. 

These uncapped strategies have been successful in boosting FIA sales, and have created new business for the investment banks that design the custom indices for the issuers. According to a Voya release, the Point-to-Point Volatility Control Strategy uses both volatility controls and a spread to arrive at the percentage gain that it pays investors. “Point-to-point” means that the gains are locked in on each contract anniversary date.

Voya Secure Index series and the Retirement Index Select fixed index annuity are issued by Voya Insurance and Annuity Company and ReliaStar Life Insurance Company, respectively.  

© 2015 RIJ Publishing LLC. All rights reserved.

Kehrer Bielan releases bank annuity sales study for 2014

Posted on October 1, 2015 by -

The 25 largest bank broker-dealers produced almost $22 billion in fixed and variable annuity premium in 2014, accounting for 57% of the total sold by all banks and credit unions, according to new research from Kehrer Bielan.

The ten largest third-party broker dealers, which support annuity and investment sales in 2,559 banks and credit unions, accounted for 38% of the total annuity premium sold through financial institutions. (See chart below, provided by Kehrer Bielan.)

The remaining 3% was sold in the smaller bank broker-dealers or the community banks and credit unions that work with the smaller third party broker dealers.

The large bank BDs produced $11.7 billion in fixed annuity premium (58.0% of the financial institutions channel total) compared to $10.2 billion in variable annuities (56.5%).

BD Annuity Sales Kehrer Bielan

“Many large bank broker-dealers supplement their financial advisors with licensed platform bankers, whose sales are skewed toward fixed annuities,” said Tim Kehrer, senior research analyst at Kehrer Bielan. “The banks and credit unions affiliated with the third-party BDs are much less likely to license customer-facing bank and credit union staff to sell annuities.”

The ten largest TPMs (third-party broker-dealers) accounted for 36% of all fixed annuity premium sold in financial institutions, but 41.2% of variable annuity premium. “Even as firms take steps towards more financial planning and advisory activities, a significant amount of fixed and variable annuities are distributed to their client base,” said Peter Bielan, a principal of the firm. “We find that variable annuities are more popular in banks and credit unions that still do mostly transaction business.”

© 2015 RIJ Publishing LLC. All rights reserved.

Life insurers will take ‘manageable’ GAAP charges in 3Q2015: Fitch

Posted on October 1, 2015 by -

Fitch Ratings issued the following alert this week:

US life insurers will be under increased pressure to rationalize long-term rate assumptions used to establish reserves given the market’s revised expectations for low rates, says Fitch Ratings. We see a heightening risk that life insurers could take charges in third-quarter 2015 due to rate expectations.

With last week’s Fed decision reinforcing expectations for a very prolonged return to higher interest rates, the probability dimmed for near-term low rate relief. Low interest rates mean lower average investment yields for fixed-income investments, which pressures life insurers’ earnings and reserve-adequacy projections.

In the third quarter, life insurers typically conduct a comprehensive review of assumptions underlying GAAP policy reserves. We believe that the Fed’s position increases the likelihood that life insurers will take GAAP charges in third-quarter 2015 tied to a revision in long-term rate assumptions.

While the probably of GAAP charges have increased, Fitch expects that potential charges tied to any assumption updates are expected to be very manageable in the context of life insurers’ earnings and capital. As a result, we believe that the impact of low interest rates on ratings assigned to life insurers to be limited over the near term.

The life insurance industry’s exposure to “interest-sensitive” liabilities that provide investment guarantees, deposit flexibility and liquidity options has increased over time and exacerbated the low-yield issue.

As industry sales have shifted away from traditional protection products involving mortality and/or morbidity (e.g. term-life policies are not considered “interest-sensitive”), products such as annuities and universal life insurance incorporating no-lapse guarantees, have increased. Insurers fund these interest-sensitive liabilities through general account assets.

Over the past several years the spread between investment returns on assets in the general accounts and the minimum rate guarantees (on products such as fixed annuities) has compressed, putting reserve margins at risk.

© 2015 RIJ Publishing LLC. All rights reserved.

Envestment managed accounts to be offered in MassMutual 401(k)s

Posted on October 1, 2015 by -

In what sounds like the introduction of in-plan robo-advice, MassMutual and the registered investment advisor Envestnet Retirement Solutions, LLC are partnering to offer custom managed accounts to participants in MassMutual’s 401(k)s and similar qualified plans.

The service is called “RetireSmart Ready Managed Path.” The asset allocations use investment options already offered by the plan. The service is available to MassMutual plans with at least $5 million in assets.

MassMutual also uses BlackRock managed accounts and CustomChoice Strategies, an asset allocation methodology created by Morningstar, a spokesman for the insurer told RIJ. “But those products are customized at the plan level whereas RetireSmart Ready is customized at the participant level,” he said.

Employers who sponsor MassMutual-administered plans can offer RetireSmart Ready Managed Path either as an actively chosen option for participants or as a Qualified Deferred Investment Alternative (a default option) for automatically enrolled participants. The option is currently available and the QDIA will be available this fall, a MassMutual release said. The RetireSmart QDIA won’t be a target date fund, MassMutual said.

MassMutual’s recordkeeping data shows that the percentage of assets within asset allocation strategies increased by 26.2% in the last five years. Participants can enroll in RetireSmart Ready Managed Path online through the MassMutual RetireSMART Ready Tool after establishing a separate advisory account with ERS.  

MassMutual’s PlanALYTICs tool, launched in 2013, will be used to measure each participant’s progress toward the goal of replacing 75% of pre-retirement income, including full Social Security benefits. The tool uses each participant’s “current age, target retirement age, risk tolerance, existing savings and future retirement needs, including whether or not he or she has a defined benefit plan,” according to a release.  

© 2015 RIJ Publishing LLC. All rights reserved.

Will the ‘BIC’ Affect QLAC Sales?

Posted on September 24, 2015 by -

Is an element of the DOL fiduciary proposal at odds with the Treasury Department’s QLAC provision? During the House Finance Committee hearing on the DOL proposal earlier this month and in written testimony, a financial services industry executive suggested that it is.

Caleb Callahan, chief operating officer (below right) at ValMark Securities in Akron, Ohio, argued that the DOL’s proposed amendment to “PTE [Prohibited Transaction Exemption] 84-24” contains language that would discourage his firm and other firms from selling Qualifying Longevity Annuity Contracts to IRA owners because it raises questions of fiduciary liability. He says that the amendment leaves open the possible interpretation that sellers of QLACs might have to meet the new “BIC” (Best Interest Contract) exemption, which involves pledging to act purely in a client’s best interest.

“The DOL proposed rule would make it difficult, if not impossible, for our business to offer these critical retirement savings products to our clients, contradicting this Treasury Department initiative and sending a conflicting message to Americans,” Callahan wrote in testimony submitted to the DOL. He testified as chairman of the Association of Advanced Life Underwriters’ Retirement Planning Committee.

Reish: QLACs fall under 84-24

QLACs are deferred income annuity contracts (DIAs), sold to IRA owners, whose income payments don’t begin until after the owner reaches age 70½. Before action by the Treasury Department in July 2014, sales of DIAs were problematic because their terms conflicted with rules requiring that distributions from tax-favored accounts begin at age 70½.

The Treasury Department capped QLAC premiums at the lesser of $125,000 or 25% of tax-favored savings, and required that income from a QLAC start by age 85. 

But prominent pension law attorney Fred Reish told RIJ that the amendment won’t affect advisors who want to recommend QLACs to their clients. “As I look at it from a purely legal perspective, I don’t think it will be that big a change for QLACs. That’s because QLACs, as far as I know, are fixed annuities (from the general accounts of insurance companies) and therefore fall under 84-24,” Reish told RIJ in an email.

The language of the proposed amendment seems clear on this point. It says that the DOL wants to deprive only sellers of variable annuities and certain sellers of mutual funds of the existing exemption from fiduciary liability when earning a commission on such sales to IRA owners. According to the DOL/Employee Benefits Security Administration website:

“The amendment would revoke relief for insurance agents, insurance brokers and pension consultants to receive a commission in connection with the purchase by IRAs of variable annuity contracts and other annuity contracts that are securities under federal securities laws and for mutual fund principal underwriters to receive a commission in connection with the purchase by IRAs of mutual fund shares.”

Instead, sellers of variable annuities to IRA owners and mutual fund underwriters would need to sign a contract pledging that their sales were in the client’s “best interest.” “A new exemption for the receipt of compensation by fiduciaries that provide investment advice to IRA owners is proposed elsewhere in this issue of the Federal Register in the ‘Best Interest Contract Exemption,’” the proposal reads.

A cloud remains over QLACs

Whichever prohibited transaction exemption DOL offers to commission-earning sellers of QLACs, Callahan says, the DOL still considers a QLAC sale to be prohibited transaction by fiduciary, and therefore puts it under a legal cloud. And, regardless of what the DOL intends, if its amendment makes broker-dealers hesitant to sell QLACs for fear violating the regulations, it will effectively frustrate Treasury’s QLAC initiative.   Callahan  

“Each business will need to make a decision on its own basis,” Callahan told RIJ in an email. “But it is pretty clear these are prohibited and you would need to choose an exemption to avoid the prohibition. (That’s why you need an exemption…because it’s prohibited). I’m suggesting for many businesses, including ours—we would choose not to take this risk.”

Callahan added that, even if selling QLACs is safe, recommending the sale of IRA assets to fund a QLAC might not be. “In addition, while the actual sale of the QLAC… could be exempted under 84-24—although it is unclear—the act of advising on how much and when to take [money] out of other plan funds and put [it] into the QLAC is not able to be exempted. In practice, most firms will just pass on this uncertainty and risk when you look at the typical account size and risk/reward. The fact is, it is unclear. And all that matters is what businesses actually do.” 

Impact on VA sales

If any annuity appears to be in the DOL’s cross-hairs, it would be variable annuities, not QLACs. Advisors sells tens of billions of dollars worth of VAs each year, and the market for QLACs is undeveloped. The DOL proposal to amend 84-24 is clearly aimed at making sure that the sale of a variable annuity is in the IRA owner’s best interest.  

 “[PTE] 84-24 was first issued in 1979 and then updated in 1984 (hence the 84 in the name),” Reish wrote in an email. “A number of broker-dealers and insurance companies have successfully used that exemption for many years. … It has some proposed changes–mainly the fiduciary standard (the “best interest” requirement) and the prohibition on misleading statements. But I think that, for quality agents and advisors, that will be manageable.

“For other types of annuities—meaning variable annuities—sold to IRA owners, the changes will be much more material,” he added. “That’s because those sales, or recommendations, will be under BICE, which will be better than largely anticipated, but more burdensome than 84-24.”

© 2015 RIJ Publishing LLC. All rights reserved.

A Conservative Retirement Portfolio in 3 Buckets

Posted on September 24, 2015 by -

Many retired investors are comfortable embracing a healthy equity stake in their portfolios. That’s a sensible tack for retirees with longer time horizons or those who know that they want to leave money behind for their children, other loved ones or charity.

This conservative bucket portfolio has a more modest goal: preserving purchasing power and delivering living expenses for the retiree who has an approximately 15-year time horizon (that is, life expectancy).

This portfolio does stake more than 30% in equities, but it also holds about 55% of its assets in bonds and another 12% in cash. The remainder of the portfolio is in commodities and other securities, such as convertibles and preferred stock.

Let time horizon lead the way
The main idea behind the bucket approach is to segment the portfolio by the spending time horizon: Assets that will be tapped sooner are parked in short-term holdings, and longer-term monies are stashed in higher-returning, higher-volatility asset types, mainly stocks.

To construct a bucket portfolio, the retiree starts with anticipated income needs for a given year, then subtracts certain sources of income such as Social Security and a pension. What’s left over is the amount of cash flow that the portfolio will need to supply each year.

In the case of the conservative portfolio, one to two years’ worth of living expenses (those not covered by Social Security, and so on) are housed in cash instruments (Bucket One), and another 10 years’ worth of living expenses are housed in bonds (Bucket Two). The remainder of the portfolio is invested in stocks and other more volatile assets, such as commodities and a high-risk bond fund. Income and rebalancing proceeds from Buckets Two and Three are used to replenish Bucket One as it becomes depleted.

As noted earlier, the conservative portfolio’s focus is on capital/purchasing power preservation and income production, so it stakes roughly 70% in bonds and cash. That will likely strike many retirees and pre-retirees as overly bond-heavy.

After all, starting yields are minuscule, and the next few decades are unlikely to be as kind to bonds as the previous three were. Yields will go up, but they’ll hurt bond prices in the process. In recognition of that fact, I’ve generally aimed to steer the portfolio away from the most interest-rate-sensitive bonds.

Moreover, as with the Moderate and Aggressive portfolios, the specific parameters of the Conservative portfolio can be altered to suit a retiree’s own goals and preferences. For example, a more risk-tolerant, growth-oriented retiree may choose to hold just one year’s worth of cash in bucket one while also shrinking the number of years’ worth of assets in bonds, thereby enlarging the equity stake as a percentage of assets. 

And though I’ve supplied specific fund recommendations in my model portfolios, a retiree needn’t reinvent the wheel to put the bucket approach to work: Many of the key ingredients likely already appear in well-diversified retiree and pre-retiree portfolios.

A total stock market index fund or a portfolio of individual dividend-paying equities could stand in for Vanguard Dividend Growth (VDIGX), for example. Meanwhile, a retiree in search of simplification could use an all-in-one-type investment such as  T. Rowe Price Spectrum Income (RPSIX) to supplant the individual holdings that make up Bucket Two.

The portfolio includes three buckets, one each for short-, intermediate-, and longer-term spending needs.

Bucket One: Years 1-2

  • 12%: Cash (certificates of deposit, money market accounts, and so on)

This portion of the portfolio is geared toward meeting near-term spending needs. Because of this role, it sticks with true cash instruments, as noncash alternatives like ultrashort bond funds have lower yields and more risk than CDs right now. 

Bucket Two: Years 3-10

Bucket Two is designed, in aggregate, to preserve purchasing power and deliver income with a dash of capital appreciation. Fidelity Short-Term Bond serves as the portfolio’s next-line reserves in case Bucket One were depleted and bond and dividend income and/or rebalancing proceeds were insufficient to refill it.

Fidelity Floating Rate High Income, one of the most conservative bank-loan vehicles, provides both a cushion against rising bond yields (bank-loan yields adjust upward along with lending rates) and a measure of inflation protection (yields are often heading up at the same time inflation is).

Harbor Bond is the portfolio’s core fixed-income holding; the PIMCO-managed bond fund has a good deal of flexibility to adjust duration (a measure of interest-rate sensitivity), invest in foreign bonds, and range across bond-market sectors.

I also used Vanguard Short-Term Inflation-Protected Securities to provide a measure of inflation protection; it owns bonds whose principal values adjust upward to keep pace with the Consumer Price Index, but it’s less sensitive to interest-rate-related volatility than intermediate- and long-term Treasury Inflation-Protected Securities vehicles. 

Finally, bucket two includes the conservatively allocated Vanguard Wellesley Income, which is anchored in fixed-income investments but also holds roughly 40% in stocks, both U.S. and foreign.

Bucket 3: Years 11 and Beyond

As the long-term portion of the portfolio, Bucket Three holds primarily stocks. Its anchor holding, as in the Aggressive and Moderate portfolios, is Vanguard Dividend Growth, an ultra-cheap equity fund that skews toward high-quality mega-cap stocks. I’ve also included a healthy stake in Harbor International. The equity portion of the portfolio includes limited exposure to small- and mid-cap stocks; investors who would like more exposure to that area might consider a fund such as Vanguard Small Cap Index (NAESX) or Royce Special Equity (RYSEX).

In addition to two equity holdings, the portfolio also includes a small stake in a commodities investment as well as a position in Loomis Sayles Bond. The former is in place to provide an additional layer of inflation protection, whereas the latter supplies exposure to more aggressive bond types (and even stocks) that are not well represented in Bucket Two.

© 2015 Morningstar, Inc. Reprinted by permission.

The DOL’s Missed Opportunity

Posted on September 24, 2015 by -

The Department of Labor missed an opportunity by not recommending in its fiduciary proposal that advisors to IRA owners should have training in retirement income or perhaps even a retirement designation, such as the RICP, RMA, CRC or CRCP.

As many people have pointed out, the “best interest” standard is idealist but unworkable. It’s impossible to define and it doesn’t address the most important issue. Retirement income planning is fundamentally different from “accumulation” planning. If the DOL wants people to turn their 401(k)/IRA savings into lifetime income, it should point them to professionals who are trained to do that.

Retirement income advice requires skills that most investment advisors don’t have. Income planning demands an understanding of the risks of retirement (longevity risk, health care risk, inflation risk, etc.) and how to mitigate them. It calls for a familiarity with products (like income annuities), processes (like flooring or bucketing) and benefits (like Social Security and Medicare) that don’t matter before retirement.  

The right training has been getting easier to find. The American College has trained thousands of Retirement Income Certified Professionals. The Retirement Income Industry Association runs bootcamps for its Retirement Management Analyst designation. For years, InFRE has offered the Certified Retirement Counselor degree to bank advisors and others. The College for Financial Planning offers the Chartered Retirement Planning Counselor program.

Requiring advisors to hold one of these designations before advising an IRA owner might address the DOL’s primary concern—that too many elderly Boomers will run out of money and end up on public assistance—more directly than merely requiring advisors to act in their clients’ “best interest,” whatever that may be.

Yes, it would be time-consuming and expensive to retrain enough advisors to meet the demand for retirement counseling. But probably no more expensive than complying with a best interest standard. And it would move the advice industry in a useful direction. New layers of disclosure and reporting won’t.  

Instead of taking that approach, the DOL focused on the conflicts-of-interest that third-party commissions can create for advisor/distributors. The DOL is right in believing that these conflicts distort the advice that IRA owners receive. Many of the distortions are common knowledge in the financial industry. But eradicating them through a “pledge” is quixotic. A positive approach might have worked better.  

By proposing a solution that would disrupt the distribution of financial products and deny broker-dealers a major source of revenue, the DOL guaranteed a wall of resistance. Instead, it might have encouraged or required IRA advisors to demonstrate retirement planning expertise. A number of financial firms, who already recognize that retirement expertise can be a competitive advantage, might even have embraced it.

© 2015 RIJ Publishing LLC. All rights reserved.

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.