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More advisors use ‘behavioral finance’ techniques: Brinker Capital

Posted on June 13, 2013 by -

Behavioral finance—the fancy name for client irrationality—was the focus of Brinker Capital’s regular proprietary survey of financial advisor sentiment this spring. The survey showed that many advisors are consciously and formally incorporating elements of behavioral finance into their relations with clients.

For instance, the April 2013 edition of the Brinker Barometer, showed that 27% of the 289 advisors surveyed said they develop a written “Investment Policy Statement” for every client, and that 45% use one with some clients. The rest do not use such a tool.

Such tools are designed to help clients stick to an agreed-upon investment plan when market volatility spikes or when an upsetting newspaper article appears (such as the recent New York Times article warning that $1 million is not enough savings to retire on).   

Of the advisors at insurance companies, independent broker-dealers and in one-person offices whom Brinker surveyed, 77% said they have discussed behavioral finance issues with their clients. “Loss aversion” is “the single most important behavioral finance tenet they integrate into their client work,” they said.  

Brinker found no consensus among advisors regarding their clients’ responses to a financial setback:  

  • 47% of advisors said that when a client is upset with a poorly performing investment, their next investing decision is likely to be “charged with emotion.”
  • 31% said the next decision would be “a wiser one since they’ve learned from the bad experience.”
  • 22% believed that “poor investment performance has little to no effect on the next investment decision.”

Advisors were almost unanimous (94%) in saying that they speak with their clients about the concept of “purchasing power” in retirement—i.e., what the income from their investments might buy in retirement. Only 38% believed that the Consumer Price Index (CPI) was a satisfactory gauge of future spending power. A majority thought that using the CPI “plus three or four percent” was more effective.

Asked what asset classes they intend to allocate more to in 2013:

  • 48% of respondents said “absolute return” (vs. 46% in Q4 ’12)
  • 45% said “equities” (vs. 54% in Q4 ‘12)

Asked what asset classes they intend to allocate less to this year:

  • 58% said “fixed income” (vs. 51%)

Asked what asset classes they intend to allocate “about the same” to this year:

  • 60% said “private equity” (vs. 65%)
  • 49% answered “international” (vs. 57%)
  • 44% noted “emerging markets” (vs. 48% who said they’d allocated more to that asset in Q4 ’12)

© 2013 RIJ Publishing LLC. All rights reserved.

Vanguard issues its annual DC report: “How America Saves”

Posted on June 12, 2013 by -

The 2013 edition of How America Saves, Vanguard’s annual compendium of data on its own full-service defined contribution business, which includes some 1,600 plan sponsors with three million participants and about $500 billion under management, or about one-eighth of all dollars in DC plans in the U.S. 

This year’s results show the steady growth in the use of target-date funds and managed account solutions by plan participants. “At year-end 2012, 36% of all Vanguard participants were solely invested in an automatic investment program—compared with just 17% at the end of 2007. Twenty- seven percent of all participants were invested in a single target-date fund; another 6% held one traditional balanced fund; and 3% used a managed account program,” the report said.

Vanguard expects the trend to continue. “Among new plan entrants (those participants entering the plan for the first time in 2012), a total of 73% of new participants were solely invested in a professionally managed allocation. Because of the growing use of target-date options, we anticipate that 55% of all participants and 80% of new plan entrants will be entirely invested in a professionally managed allocation by 2017,” the report said.

In terms of accumulations, there’s a “barbell” shape to the distribution of account values over participant income levels. For instance, 24% of accounts have $100,000 or more and 31% of accounts have less than $10,000. In between, the percentages drop to the single digits.

The average and median balances hide those extremes. “In 2012, the median participant account balance was $27,843 and the average was $86,212. Vanguard participants’ median and average account balances rose by 9% and 10%, respectively, during 2012. Over the five-year 2007–2012 period, median and average balances rose 11% and 10%, respectively,” the report said.

If an average participant had contributed nothing between the end of 2007 and the end of 2012, his or her account value would have gone up by a combined total of 12%, Vanguard’s data tabulators found. “Reflecting strong stock market performance in 2012, the median 1-year participant total return was 13.3%. Despite the dramatic decline in stock prices during the 5-year period, 5-year participant total returns averaged 2.3% per year or 12% cumulatively,” the report said.

The data show that about $150 billion of the $500 billion in Vanguard’s DC plans belongs to people who no longer work for the plan sponsor but who haven’t moved their money out of the plan. That’s $150 billion in potential IRA rollover money for competing fund companies and custodians.

“Participants separating from service largely preserved their assets for retirement,” the report said. “During 2012, about 30% of all participants could have taken their account as a distribution because they had separated from service in the current year or prior years. “The majority of these participants (82%) continued to preserve their plan assets for retirement by either remaining in their employer’s plan or rolling over their savings to an IRA or new employer plan. In terms of assets, 96% of all plan assets available for distribution were preserved and only 4% were taken in cash.”

© 2013 RIJ Publishing LLC. All rights reserved.

The Ultra-Easy Money Experiment

Posted on June 12, 2013 by -

The world’s central banks are engaged in one of the great policy experiments in modern history: ultra-easy money. And, as the experiment has continued, the risk of failure – and thus of the wrenching corrections and deep economic dislocations that would follow – has grown.

In the wake of the crisis that began in 2007, policy rates were reduced to unprecedented levels, where they remain today, and measures were taken to slash longer-term rates as well. Nothing like it has ever been seen before at the global level, not even in the depths of the Great Depression. Moreover, many central banks’ balance sheets have expanded to record levels, although in different ways and for different rationales – further underscoring the experimental character of the monetary easing now underway.

The risks implied by such policies require careful examination, particularly because the current experiment appears to be one more step down a well-trodden path – a path that led to the crisis in the first place.

Beginning with the sharp monetary-policy easing that occurred following the 1987 stock-market crash, monetary policy has been used aggressively in the face of every economic downturn (or even anticipated downturn) ever since – in 1991, 1998, 2001, and, with a vengeance, following the events of 2007. Moreover, subsequent cyclical tightening was always less aggressive than the preceding easing. No surprise, then, that policy rates (both nominal and real) have ratcheted ever downward to where they are today.

It can, of course, be argued that these policies produced the “Great Moderation” – the reduction in cyclical volatility – that characterized the advanced market economies in the years leading up to 2007. Yet it can also be argued that each cycle of monetary easing culminated in a credit-driven “boom and bust” that then had to be met by another cycle of easing. With leverage and speculation increasing on a cumulative basis, this whole process was bound to end with monetary policy losing its effectiveness, and the economy suffering under the weight of imbalances (or “headwinds”) built up over the course of many years.

The Swedish economist Knut Wicksell raised concerns about such problems long ago. He suggested that a money rate of interest (set in the banking system) that was less than the natural rate of interest (set in the real economy) would result in inflation. Later, economists in the Austrian tradition noted that imbalances affecting the real side of the economy (“malinvestments”) were of equal concern.

Later still, Hyman Minsky contended that credit creation in a fiat-based monetary economy made economic crises inevitable. Finally, many economists in recent decades have identified how excessive leverage can do lasting damage to both the real and financial sides of the economy.

Looking at the pre-2007 world, there was ample evidence to warrant such theoretical concerns. While globalization was holding down inflation, the real side of the world economy was exhibiting many unusual trends. Household saving rates in the English-speaking economies fell to unprecedented levels. Within Europe, credit flows to peripheral countries led to unprecedented housing booms in several countries. In China, fixed capital investment rose to an astonishing 40% of GDP.

Moreover, similar unusual trends characterized the financial side of the economy. A new “shadow banking” system evolved, with highly pro-cyclical characteristics, and lending standards plummeted even as financial leverage and asset prices rose to extremely high levels.

The monetary policies pursued by central banks since 2007 have essentially been “more of the same.” They have been directed toward increasing aggregate demand without any serious concern for the unintended longer-term consequences.

But it is increasingly clear that ultra-easy monetary policy is impeding the necessary process of deleveraging, threatening the “independence” of central banks, raising asset prices (especially for bonds) to unsustainable levels, and encouraging governments to resist making needed policy changes. To their credit, leading central bankers have stated repeatedly that their policies are only “buying time” for governments to do the right thing. What is not clear is whether anyone is listening.

One important impediment to policy reform, on the part of both governments and central banks, is analytical. The mainstream models used by academics and policymakers differ in important respects but are depressingly similar in others. They emphasize short-term demand flows and presume a structurally stable world in which probabilities can be assigned to future outcomes – thus almost entirely ignoring uncertainty, stock accumulations, and the financial imbalances that characterize the real world.

Recalling John Maynard Keynes’s dictum that “the world is ruled by little else” but “the ideas of economists and political philosophers,” perhaps policymakers need new ideas. If so, the immediate prognosis for the global economy is not good. The latest fashion in policy advice is essentially still more of the same.

The call for “outright monetary financing” involves raising government deficits still further and financing them through a permanent increase in base money issued by central banks. Targeting the level of nominal GDP (or the unemployment rate, as in the United States) is a way of convincing financial markets and potential spenders that policy rates will remain very low for a very long time. All of these policies run the risk of higher inflation and/or still more dangerous economic imbalances.

Sadly, a fundamental mainstream reassessment of how the economy works is by no means imminent. It should be.

William White, a former deputy governor of the Bank of Canada and a former head of the Monetary and Economic Department of the Bank for International Settlements, is chairman of the Economic and Development Review Committee at the Organization for Economic Cooperation and Development (OECD).

© 2013 Project Syndicate.

The Fed at a Crossroads

Posted on June 12, 2013 by -

I first entered the System as a neophyte economist in 1949. Then, as now, the Federal Reserve was committed to maintaining a pattern of very low interest rates, ranging from close to zero at the short end to 2½ percent or less for Treasury bonds. If you feel a bit impatient about the situation now, quite understandably so, recall that the earlier episode lasted 15 years.

The initial steps taken in the midst of the 1930’s continuing depression were at the Fed’s initiative. The pattern was held through World War II in explicit agreement with the Treasury. Then it persisted right in the face of double-digit inflation after the war, increasingly under the duress imposed by the Treasury and Presidential pressure.

The growing restiveness of the Federal Reserve was reflected in testimony by Mariner Eccles in 1948: “Under the circumstances that now exist, the Federal Reserve System is the greatest potential agent of inflation that man could contrive.”

That was pretty strong language by a sitting Fed governor and a long-serving Board Chairman. But it was then a fact that there were many doubts about whether the formal legal status of the central bank could or should be sustained against Treasury and Presidential importuning. At the time, the influential Hoover Commission on government reorganization itself expressed strong doubts. At any rate, over time calls for freeing the market met strong resistance.

Treasury debt had ballooned in the War, exceeding 100% of GDP, so there was concern about an intolerable impact on the budget if interest rates rose strongly. Ending Federal Reserve support might lead to panicky and speculative reactions, and declines in bond prices would drain bank capital. Main line economists, and the Fed itself, worried that a sudden rise in interest rates could put the economy back in recession.

All of that resonates today, some 60 years later, even if few now take the extreme view of the first report of the then new Council of Economic Advisors: “Low interest rates at all times and under all conditions, even during inflation” would be desirable to promote investment and economic progress. Not exactly a robust defense of the Federal Reserve and independent monetary policy.

Eventually, the Federal Reserve did get restless, and finally in 1951 rejected overt Presidential pressure to continue the ceiling on long-term Treasury rates. In the event, the ending of the “peg” was not dramatic. Interest rates did rise over time, but long bonds, with markets habituated for years to a low interest rate, remained at moderate levels. Monetary policy, free to act against incipient inflationary tendencies, contributed to 15 years of stability in prices, accompanied by strong economic growth and high employment. The recessions were short and mild.

No doubt, the challenge of orderly withdrawal from today’s broader regime of “quantitative easing” is far more complicated. The still-growing size and composition of the Fed’s balance sheet implies the need for, at the least, an extended period of “disengagement.” Moreover, the extraordinary commitment of Federal Reserve resources, alongside other instruments of government intervention, is now dominating the largest sector of our capital markets, that for residential mortgages. Indeed, it is not an exaggeration to note that the Federal Reserve, with assets of $3.5 trillion and growing, is, in effect, acting as the world’s largest financial intermediator, acquiring long-term obligations and financing short-term, aided and abetted by its unique privilege to create its own liabilities.

Beneficial effects of the actual and potential monetization of public and private debt, the essence of the QE program, appear limited and diminishing over time. The old “pushing on a string” analogy is relevant. The risks of encouraging speculative distortions and the inflationary potential of the current approach plainly deserve attention. All of this has given rise to debate within the Federal Reserve itself. In that debate, I trust sight is not lost of the merits—economically and politically—of an ultimate return to a more orthodox central banking approach.

I do not doubt the ability and understanding of Chairman Bernanke and his colleagues. They have a considerable range of tools and instruments available to them to manage the transition, including the novel approach of paying interest on excess reserves, potentially sterilizing their monetary impact. What is at issue—what is always at issue—is a matter of good judgment, leadership, and institutional backbone. A willingness to act with conviction in the face of predictable political opposition and substantive debate is, as always, a requisite part of a central bank’s DNA.

Those are not qualities that can be learned from text books. Abstract economic modeling and the endless regressions of econometricians will be of little help. The new approach of “behavioral” economics itself is recognition of the limitations of mathematical approaches, but that new “science” is in its infancy.

A reading of history may be more relevant. Here and elsewhere, the temptation has been strong to wait and see before acting to remove stimulus and then moving toward restraint. Too often, the result is to be too late—to fail to appreciate growing imbalances and inflationary pressures before they are well ingrained.

There is something else beyond the necessary mechanics and timely action that is at stake. The credibility of the Federal Reserve, its commitment to maintain price stability, and its ability to stand up against pressing partisan political pressures is critical. Independence can’t just be a slogan. Nor does the language of the Federal Reserve Act itself assure protection, as was demonstrated in the period after World War II. Then, the law and its protections seemed clear, but it was the Treasury that for a long time called the tune.

In the last analysis, independence rests on perceptions of high competence, of unquestioned integrity, of broad experience, of non-conflicted judgment and the will to act. Clear lines of accountability to the Congress and the public will need to be honored.

Moreover, maintenance of independence in a democratic society ultimately depends on something beyond those institutional qualities. The Federal Reserve—any central bank—should not be asked to do too much, to undertake responsibilities that it cannot possibly meet with the appropriately limited powers provided.

© 2013 RIJ Publishing LLC. All rights reserved.

Disaster Flick

Posted on June 12, 2013 by -

With an orange Volkswagen bus, a film crew and a poster inviting people to “Be part of the movie,” Chad Parks took off on a six-week journey last year to interview ordinary Americans about retirement. He cruised the Las Vegas Strip, hung out in Boulder’s pedestrian mall and waylaid passersby in a New Orleans park. He heard many versions of a single story: typical Americans aren’t ready for retirement.

Parks’ videotaped interviews are the substance of “Broken Eggs” (www.brokeneggsfilm.com), a new documentary that explores what he calls “the looming retirement crisis.”

The film, as the video clips posted on the website demonstrate, will introduce viewers to the flesh-and-blood people behind the familiar dry statistics: that nearly half of American workers have saved less than $10,000 for retirement and fewer than 30% have saved eshannonven $1,000, at a time when pensions are disappearing, Social Security’s trust fund is shrinking and 401(k) plans are proving susceptible to volatility.    

“This fatal combination of outsourcing our futures to the government, corporations abandoning their pensions, and people not taking personal responsibility and saving enough will hit us hard,” he told RIJ recently. “The term ‘a perfect storm’ has been overused, but that’s what it is. No one is taking a top down look and tying all these trends together so we can have a clear picture of the reality of the way people retire.”

Broken Eggs is intended to add detail to that picture. The documentary, which he produced, aims to delve deeply into the retirement problem and spark some ideas for solutions. The film records the struggles of Baby Boomers, Gen-Xers and Millennials as they cope with the chore of saving for retirement. By the end of this summer, Parks hopes to begin distributing the film, perhaps through Netflix, Hulu, PBS or one of the cable channels. He also plans to distribute copies to financial companies as well as to universities and schools for use as an educational tool.

“For me, a good documentary makes me change my behavior,” said Parks. “I hope that people who watch will really stop and think, yeah, I got to do something.”

Wobbly three-legged stool

 “Broken Eggs” was conceived as a marketing campaign for Parks’ own company, The Online 401(k), a San Francisco-based company that specialized in web-based 401(k) plans for small businesses. Parks and his marketing director, Sylvia Flores, envisioned a promotional film. But as they researched their topic, they gradually realized the immense scope of it.  

Parks now describes the film as a non-profit “artistic” project, independent of his company (the company contributed $400,000 to the production). To provide the filmmaking experience he lacked, he brought in former CNN producer Emily Probst Miller. Miller signed on, she said, because CNN had never addressed the topic, although she considers it “one of the biggest social issues of our time.”

The story is about the insecurity and fear that many Americans feel about retirement. If Social Security, private pension plans and 401Ks each represent a leg of the theoretical “three-legged stool,” there’s a widespread sense that the stool is tottering.

“Every age group now has a different expectation of what retirement means,” said Parks. “People in their 60s and 70s generally have the three-legged stool. People in their 50s and 40s maybe have two out of the three legs, maybe Social Security and personal savings.  People in their 30s and 20s and even younger may have nothing but their personal savings to count on. They don’t even know where to begin.”

The retirement dilemma is often described in terms of averages—average savings, average performance, average household debt load and so forth. But, except for that fact that most of the people who appear in Broken Eggs seem to come from the western half of the U.S., there’s not much about them that’s average. Every story is unique.

Meet Rusty, Terry and Shannon

In the film, for instance, you’ll meet Rusty (above right), a 50-something bearded motorcyclist who has managed a small motel in Colorado since a disability sidelined his career in construction work. He never believed his mother’s advice about saving for a rainy day, and seems to take each day as it comes. But you’ll also meet Terry (below, right)  an engineer in his 70s, who despite the fact that he prudently saved 10% of his income and earned a small pension from an aircraft manufacturerJeanne , finds himself still working because he lost over a million dollars betting on Nevada real estate.

Among the women interviewed in the film, there’s Shannon (above, left), a practical-minded Canadian who works for the Canadian government there but who worries that the conservative administration, which has already raised the full retirement age to 67, might reduce her pension further. Her situation was nothing like that of Jeanne (left)  a 41-year-old cellist in a professional orchestra with a three-year-old child, whose lawyer husband recently jolted her confidence in the future by asking for a divorce.

For comic relief, two struggling young stand-up comedians are interviewed on a sidewalk in Austin, Texas. They joke with occasional profanity—this footage is semi-raw—but offer a few serious insights that people seldom share, such as the disillusionment one of them felt when he lost his job and half of his 401(k) account balance at the same time, because the employer’s matching contribution wasn’t vested yet at the time of termination.

Still no answers

Americans have begun to adapt to the new reality, Parks has found. Families have compensated for tight budgets by living in multi-generational households that include grandparents, parents, children and extended family, all under one roof. But the future, as always, holds lots of unknowns. Will Boomers throttle back their consumption when they realize that their savings may have to last for 30 years or more?  How will that affect the economy? And will today’s workers, Terrymany of whom struggle with student loan debt, even be able to contribute to a 401(k)? Some wonder if a 401(k) is even the proper vehicle for one’s life savings.

There are no easy answers to most of the questions posed in “Broken Eggs.” Parks himself favors a hybridized 401(k) system in which the government requires each individual and employer to contribute automatically to an individual retirement fund. Australia has such a system and Senator Tom Harkin of Iowa has proposed a similar plan, he said.

“The looming retirement crisis will affect all of us, but it is avoidable,” writes Parks on the “Broken Eggs” website. “We need to redefine what retirement means, we need to think about our family structures, and we need to be willing to make short-term sacrifices for the greater good. We all need to save in order to literally save ourselves.”  

© 2013 RIJ Publishing LLC. All rights reserved.

Money managers are bullish on global equities

Posted on June 10, 2013 by -

Institutional investors around the globe say they have a better handle on risk, but most worry about the challenges of rising volatility, inflation and low yields, according to a study by Natixis Global Asset Management (NGAM), which oversees more than $785 billion worldwide.  

The results, released by NGAM’s Durable Portfolio Construction Center, include insights from more than 500 institutional investors that collectively manage more than $11.5 trillion in assets.

Five years after the financial crisis upended markets, many institutional investors say the old rules of investing no longer apply in today’s markets. In the U.S., institutional investors (88%) feel strongly that traditional portfolio construction and diversification strategies aren’t ideal for most investors, and 60% of global institutions agree. Additionally, more than 70%, including a high concentration of sovereign wealth funds, say that setting asset allocation and taking tactical advantage of market movements is difficult.

The widespread attraction to equities continues, with investors particularly drawn to global stocks. Asked to project which asset class will perform best this year, the top choice was global equities (27%), followed by domestic stocks (19%) and emerging market equities (15%).

This optimism is reflected in most investors’ allocation plans for 2013, as 58% plan to increase their exposure to global stocks, 46% will add to their emerging market equity holdings and 42% will increase their weighting in domestic stocks.

Lower yields have made the risk-reward tradeoff of bonds less appealing for many investors, as 43% say they plan to scale back on their domestic bond exposure in 2013 and 42% will reduce their global bond allocations. U.S. investors are slightly more optimistic within their own borders, with only 29% saying they will reduce their domestic bond allocations. Investors worldwide are bearish on gold and cash, as more than 80% anticipate lowering or maintaining their current allocations to each.

Institutional investors have an above-average comfort level with alternative assets such as hedge funds, real estate, private equity and commodities. A large majority (85%) report that they own alternatives, and three in four say it is essential to invest in these strategies in order to diversify portfolio risk.

Most (60%) plan to add to their alternative investments, or other assets that don’t correlate with the broader market, in the next 12 months, with the most popular target areas being real estate (41%), private equity (36%) and infrastructure (30%).

Most are also bullish on the near-term performance prospects for alternatives, with 71% predicting that the assets they own will perform better in 2013 than they did last year. Institutional investors in the U.S. are more cautious, with less than half (48%) projecting better year-over-year performance.

While 89% of institutional investors are confident in their ability to meet their own future obligations, that confidence does not extend to individuals saving for retirement. A large majority of institutions (81%) in the U.S. say the average citizen won’t have enough assets in retirement, and seven in 10 (70%) globally say the same – a powerful message considering that many respondents manage retirement assets professionally. Institutional Investors expressed greater concern in Latin America (88%) and the United Kingdom (84%).

© 2013 RIJ Publishing LLC. All rights reserved.

Advisors’ main goal: More wealthy clients

Posted on June 10, 2013 by -

More advisors are optimistic about the economy than in previous years, but are concerned with rising interest rates and tax burdens, and few advisors rank social media as a priority for them, according to the Curian Advisor Survey: 2013 Outlook for Advisor Priorities.”

Curian is a registered investment advisor affiliated with Jackson National Life, a unit of the UK’s Prudential plc. In its sixth annual advisor survey, the firm polled 2,088 independent financial advisors with average AUM of $96.2 million at 186 firms.

Among the survey findings:

  • Acquiring more affluent clients was advisor’s most frequently stated goal for 2013 (72%). When asked the single biggest challenge advisors face, respondents reported growing and attracting clients and generating referrals (49%).
  • Fixed annuities ranked as the product that advisors were expecting to increase their usage of the least (at 2.5%)
  • 83% of advisors reported that they have access to adequate investment products to meet their clients’ retirement income needs.
  • More than 30% of advisors said they have 10% or more of their assets under management allocated to alternatives.
  • More than 87% of respondents said that tax efficiency and after-tax performance are important aspects of the solutions they propose to clients, while nearly 9% said they were not important (4% said they were unsure).
  • 54% of respondents believe the economy will improve in the next 12 months, while 26% were unsure. Only one-fifth of respondents reported they were pessimistic. In December 2011, only 34% of respondents felt optimistic.
  • Unemployment topped the list of the economic issues that advisors believe are the biggest threats to their clients’ wealth management plans at 23%, followed by government spending at 20%.
  • 30% of respondents reported that their clients also feel unemployment is the biggest threat to their wealth management plans, while 14% believe their clients perceive market volatility as the biggest threat. Declining Social Security benefits ranked as the lowest perceived threat for both advisors and their clients.
  • Nearly 95% of respondents were moderately or very concerned about rising interest rates and the impact this may have on the value of clients’ fixed-income investments; close to 6% were not concerned.
  • 63% of advisors also said they have access to and actively use tools and strategies to reduce the impact of taxes on clients’ investment portfolios. However, more than 28% of respondents said they have access to such tools but don’t use them.
  • 27% of advisors surveyed expect to increase their usage of separately managed accounts (SMAs) this year, while 24% said they expect to increase their usage of alternative investment products.
  • More than 31% of advisors report that they plan to increase their usage of alternative investments this year by 5-10%, and one-fifth of advisors plan to increase their usage by 10-15%.
  • 57% of advisors use multi-strategy open-end mutual funds, and 38% of advisors use single-strategy open-end mutual funds, to gain access or exposure to alternative asset classes.
  • More than three-fourths of advisors said they value ease-of-use of the platform and technology as the most valuable service from their advisory solutions provider, closely followed by strong performance history of the investment options provided (nearly 68%).
  • 94% of advisors said their existing clients garner them the most leads, followed by referrals from industry professionals such as CPAs, attorneys, insurance professionals and mortgage/real estate professionals (nearly 50%).
  • Only 6% of respondents selected social media, and fewer than 5% chose traditional media advertising, as one of their top three sources of leads.
  • Most advisors do not use social media within their practices, but those who do said they most frequently use LinkedIn (35%).
  • When asked what type of mobile device advisors would like to see from an asset management firm, the response was split; 49% preferred apps that mimic a firm’s primary website and 46% preferred calculators or tools for business purposes.
  • While one-third of advisors don’t use a tablet device, more than 50% of respondents reportedly prefer to use an Apple iPad or Apple iPad Mini; 7% use a Samsung Galaxy tablet, fewer than 3% use an Amazon Kindle Fire and other tablet devices had reported usage of less than 2% each.

© 2013 RIJ Publishing LLC. All rights reserved.

Emerging market securities can boost a retirement portfolio: BNY Mellon

Posted on June 10, 2013 by -

Adding real assets, emerging market equities and debt, and liquid alternatives to defined contribution plan investment line-ups could improve risk-adjusted returns, reduce volatility and protect against inflation, according to a recent white paper from BNY Mellon.  

The paper is entitled, Retirement Reset: Using Non-Traditional Investment Solutions in DC Plans. It claims that defined benefit (DB) plans tend to outperform DC plans primarily because DB plans include non-traditional assets and DC plans don’t.    

The report notes non-traditional approaches could enhance the success of investors in the current environment, which it expects to be characterized by lower long-term expected returns, higher volatility and heightened inflation risk. 

“If DC plans were constructed more similarly to DB plans, approximately 20% of the DC plan assets would be allocated to non-traditional strategies such as real assets, total emerging markets (which combine equities and fixed income) and liquid alternatives,” BNY Mellon said in a release.

“Equities comprise a higher percentage of the DC portfolios than they do of DB portfolios,” said Capone.   “We believe that applying the best DB practices to DC plans would reduce equity risk and home country bias as well as thoughtfully incorporating alternative investments to increase diversification, return potential and downside risk management.”

The real asset portion of the DC portfolio proposed by BNY Mellon is designed to hedge against inflation and would include Treasury Inflation-Protected Securities (TIPS), real estate investment trusts (REITS), commodities and natural resource equities. 

“Combining emerging markets equity and fixed income would provide a more blended and balanced approach than allocating only to emerging markets equities… The more balanced approach has the potential to reduce portfolio volatility and diversify country and currency risks,” according to the report.

BNY Mellon sees liquid alternatives as a way for DC participants to diversify with assets that have a low correlation with the equities market.  “There is a wide range of liquid alternative strategies. We are using three hedge fund indices as proxies for this asset class,” the release said.

© 2013 RIJ Publishing LLC. All rights reserved.

Pershing launches online ‘practice management center’ for advisors

Posted on June 10, 2013 by -

Pershing LLC, a BNY Mellon company, has established a new online Practice Management Center where its advisor clients can access the clearing organization’s practice management materials, including whitepapers, guidebooks and interactive tools.

Resources on the platform will be organized by Pershing’s practice management “pillars”: Growth, Human Capital, Operational Efficiency and Managing Risk.  A sampling of content available on the site includes:

  • Business Development and Planning–Becoming a Stronger Wealth Manager
  • Recruitment and Retention–The 30% Solution: Growing Your Business by Winning and Keeping Women Advisors
  • Platform and Workflow–Mission Possible III: Strategies to Sustain Growth in Challenging Times
  • Compliance and Supervisory Guidelines–Effective Sales Supervision and Compliance

© 2013 RIJ Publishing LLC. All rights reserved.

Is $1 Million Too Little to Retire On?

Posted on June 10, 2013 by -

The New York Times, bless its good grey heart, informed its readers yesterday that $1 million in savings isn’t enough to retire on.

Many Times readers must have nodded in dolorous agreement as they read that story over their Sunday coffee, but I wasn’t one of them. To have a mere $1 million in savings is a hardship that I would wish on myself and on my closest friends.

Seriously, I understand where the Times is coming from. If your lifestyle costs $300,000 a year, which isn’t rare in Manhattan, then $1 million in savings probably won’t last for 20 or 30 years, even if you start riding the subway instead of using taxis (or a car service).     

So, I agree with this much: If someone in the highest tax bracket lulls himself into thinking that a $1 million nest egg will generate the same income he earned during his working years, he’s in for a nasty surprise.   

*           *           *

But there’s a straw man hiding in that argument.

Have we now set the benchmark for adequate retirement savings at a point where savings must generate not only 100% of pre-retirement income, but also hundreds of thousands more for long-term care and/or a legacy? And must we use today’s risk-free rate to calculate the initial stake? That’s what the article seemed to assume.

That’s putting a huge burden on the saving and investing side, and none on the cost-reduction side or risk-transfer side. For all but the wealthiest retires, the task of economizing—paying off one’s house and cars, shedding college or consumer debt, delaying Social Security until age 70 and considering annuities—will as important as the task of saving and investing.

Or perhaps, for a few people, we’ve re-defined retirement sufficiency upward to mean “independently wealthy.” An advisor recently told me that his most affluent clients don’t see any distinction between discretionary and non-discretionary expenses. Those clients will be difficult to satisfy.  

*           *           *

Aside from its fear-inducing overtone, another noteworthy aspect of the Times article was its assumption that the 4% withdrawal limit is the only way to avoid running out of money in old age.

The article suggested that $1 million could safely generate only $40,000 in income per year, and portrayed people with only $1 million as having few options. Outside of a major metropolitan area, a 65-year-old person (or couple) with $1 million actually has a lot of options.

If they’re truly dissatisfied with the 4% rule, a risk-averse couple could put $800,000 in a joint-and-survivor life annuity at age 65. Even at today’s terrible rates, they’d get $50,400 a year (with 100% continuation to the surviving spouse and an installment refund to beneficiaries), and still have $200,000 for emergencies or a legacy.

Alternately, a couple could put $500,000 in a 10-year period certain annuity paying $54,000 a year and invest the other $500,000 in a 10-year fixed rate annuity at 3%  (with the flexibility to withdraw up to 10% per year penalty free). At age 75, with no withdrawals, the fixed annuity would be worth $671,000. Or, if they have a bigger risk appetite, they could put the non-annuitized assets into a diversified portfolio of stocks and bonds. They could go in a completely different direction and buy $200,000 worth of longevity insurance that pays about $60,000 a year at age 85.

But they still won’t be living the way millionaires expects to live, you say. That depends on how you look at it. As a Middle Eastern proverb says: “He who is not in debt is rich.”    

*          *           *

The Times article, which was the paper’s “most e-mailed” of the day, also bemoaned the fact that owners of high-quality bonds are earning negligible interest. On the one hand, I agree: Low rates are indeed a plague on people looking for a safe home for their cash.

On the other hand, low rates are a blessing for people who’ve been holding stocks for a decade or two.

Without rate repression, the stock indices might well be much, much lower today than they are. And therefore the equity side of Boomer retirement account balances would be much, much lower. (Wall Street apparently agrees: Stock and bond prices trembled after Ben Bernanke hinted in May that the Fed might slow down its bond purchases.)

Like the loveable hooligan in Damon Runyon’s story, “Earthquake,” who redeems himself by holding up the doorway of a burning school so that all of the children can escape the flames, Fed policy has effectively, if not intentionally, propped up stock and bond values to give Boomers a temporary doorway to exit through.   

So instead of cursing low annuity rates or waiting until interest rates go up (and stock and bond values to go down), maybe near-retirees should grab this opportunity to trade their appreciated assets for life annuities with 15-year periods certain.    

© 2013 RIJ Publishing LLC. All rights reserved.

Claiming SS at 62 or 70: A Comparison

Posted on June 10, 2013 by -

A consensus in the financial planning profession is that while the Social Security claiming decision is quite difficult and there can be exceptions, it is often beneficial to delay the receipt of Social Security retirement benefits.

I will provide an exploration of this issue. What follows is not an effort to optimize any decision-making, but rather to observe the long-term impacts of two different types of claiming strategies. I’m considering the case of a 62-year-old male who has left the workforce. This person may or may not be married, and I’m not making any effort to separately determine about a spousal claiming decision.

The 62-year-old leaves the workforce and is estimated to have a $2,500 monthly Social Security benefit at the full retirement age of 66. If this person claims that Social Security benefit at 62, they are entitled to receive 75% of the benefit. On the other hand, if the person waits until age 70, they will be eligible to receive 132% of the benefit.

The 62-year-old has $1 million in assets and a lifetime inflation-adjusted spending goal of $60,000 per year.

The first option I consider is that this person begins Social Security at 62 and then uses financial assets to cover the remainder of their spending needs for as long as possible (as long as assets remain) throughout their retirement.

The second option is that this person delays Social Security until age 70, but purchases an eight year period certain immediate annuity. This is not a lifetime annuity, but an annuity that makes payments for eight years and then stops regardless of whether or not the beneficiary is alive.

This immediate annuity is not inflation-adjusted, so it will not provide precisely the same income as Social Security would have given with its inflation adjustments, but I otherwise assume that the individual withdraws what they need from their portfolio to spend $60,000 per year after accounting for any income first from the annuity, and then later from Social Security.

The age 62 Social Security monthly benefit is .75*2500 = $1,875. Currently, according to Cannex, spending $100,000 on an eight-year annuity provides monthly income of $1,084. Thus, with the second strategy, I assume the person spends $172,970 to purchase the annuity that will last through age 70 when Social Security benefits begin.

The following analysis is based on 2000 Monte Carlo simulations, with portfolio administration fees of 0.2%. Market returns and inflation are stochastic, and are based on the same current market conditions I have been using in recent research articles.

For the two strategies, I will track the real spending and real remaining wealth over retirement. The figures show the 10th, 25th, 50th, 75th, and 90th percentiles of outcomes. For spending, the distribution is not wide since I assume that the person spends $60,000 per year (in inflation-adjusted terms) for as long as possible. When the dashed lines fall from the spending level constant, it means that wealth is depleted first at the 10th percentile, and then at the 25th percentile, and so on. When financial assets are depleted the only income that remains is the Social Security benefit (wealth is never depleted in the first eight years when annuity income is part of the budget).

For both strategies, I assume a fixed asset allocation of 40% stocks and 60% bonds for the financial assets.

Strategy 1: Claiming Social Security at age 62

Real income

Pfau chart SS1

Real remaining wealth

Pfau chart SS2

Strategy 2: 8-year period certain annuity and claim Social Security at age 70

Real income

Pfau chart SS3

Real remaining wealth

Pfau chart SS4

With Strategy 1, the impact from claiming Social Security at an earlier age is that financial assets are more likely to be depleted and that income drops further in the event of portfolio depletion. The approach used in Strategy 2 of combining the annuity and delaying Social Security makes retirement spending plan more sustainable over the long-term horizon and reduces the harm caused by financial asset depletion. In other words, running out of financial assets is both less likely to happen and less damaging when it does happen.

The main reasons why this is the case is that the benefit increases built into delaying Social Security assume a real return on underlying assets of about 2.9%, which is quite favorable compared to what investors could expect with their portfolio.
The other interesting impact to observe is the distribution of remaining real wealth over retirement. Immediate uptake of Social Security can potentially allow for a higher bequest if one dies early in retirement, but the potential for leaving a bequest actually improves later in retirement with the delayed Social Security strategy. This has rather interesting implications for anyone seeking to provide a legacy to the next generation. 

We must think about the marginal utility of wealth. If someone dies early in retirement, they will leave a larger nest egg to the next generation, and the fact that Strategy 1 provides an even bigger nest egg than otherwise may not have all that much impact on the lifestyle of the recipient.

But in cases with a more lengthy retirement period, the nature of this bequests changes. Delaying Social Security makes it less likely that financial assets are depleted, which means there will be less strain on any potential bequest recipient [e.g., children] to provide reverse support to the retiree. The potential to leave a larger bequest actually is higher with delayed Social Security in these cases when the available bequests with both approaches are less and each dollar of bequest will count for more. In this sense, a retiree may actually be doing a favor for the subsequent generation by delaying Social Security, which may be a counterintuitive result.

© 2013 Wade Pfau. Reprinted by permission.

Don’t Call Them Investments

Posted on June 10, 2013 by -

When people tell you that annuities aren’t the answer, maybe it’s because you’re not asking the right question. Or maybe because you’re asking the right question the wrong way.

Jeffrey Brown, Ph.D., of the University of Illinois has spent much of the last decade studying the way that ordinary people (as opposed to advisors or economists) respond to questions about life annuities. He focuses on how annuities are “framed” or contextualized.

People tend to favor life annuities over other retirement income solutions, he’s found, when the context plays to the strength of annuities—maximizing income and consumption—than when it plays to their weakness—minimizing exposure to market risk and upside potential.

In the end, it comes down to a matter of word choice. Brown has learned through surveys that when you use words like “spend” and “payments” when discussing annuities instead of words like “invest” and earnings,” people tend to like annuities a whole lot better.

At first glance, it sounds too easy: As if kids would eat more broccoli if you called it chocolate cake. But Brown is proposing something closer to: More kids will choose broccoli over chocolate cake if you ask, “Which is more nutritious?” than if you ask, “Which tastes better?”  

Although Brown’s research isn’t exactly intended to promote the sale of annuities, he thinks it can’t hurt.

“Our goal is to better understand consumer behavior and what it implies for our theories of consumer choice,” he wrote to RIJ in an email. “[But] My basic sense is that advisers share many of the same behavioral biases as consumers do.  That is to be expected, as these biases are deeply ingrained. My hope is that by framing the conversation in a more appropriate way with advisers as well as with consumers, we may get some traction.”

Refining the concept

In a just-released paper, Framing Lifetime Income (NBER Working Paper 19063), Brown and co-authors Jeffrey Klinger (Congressional Budget Office), Marian Wrobel (Health Policy Commission) and Sendhil Mullainathan (Harvard) offer some refinements to Brown’s previous findings about annuities, framing and consumer choice.

In the experiment described in the paper, researchers wanted to answer several questions:

  1. When comparing annuities with some other income solution, are people discouraged from choosing annuities if you mention the amount of the purchase payment/investment? In order words, does the mere mention of a large dollar amount make people afraid of losing liquidity or principal?
  2. If the criterion for choosing an annuity was its ability to generate a threshold monthly income, would more people be attracted an annuity, or would they appeal to a narrower audience, i.e., those with a specific gap between their retirement needs and their savings?   
  3. If you guarantee a full or partial return of principal when offering an annuity, will people be more likely to choose it over another solution?
  4. Do prospects’ gender, age, marital status, children or health status affect their preference for annuities under different frames?

To test these questions, Brown collected survey data from about 4,000 people in 2007 and 2008. Of those respondents, 43% were women and 57% were men. More than half were over age 60 and about one-third were over age 65.

On the first, second, and fourth questions, the researchers found little difference. That is, the advantage of the consumption frame over the investment frame stayed much the same whether or not you mentioned the dollar amount of the premium, whether you established a threshold income that only a life annuity could meet, or whether the respondent was male or female, younger or older, or had children or not.

On Question Three, however, the results did show that, in the investment frame, people were about twice as likely (43-47% vs. 20-24%) to prefer a life annuity with principal protection over a savings account paying 4% annual interest. It didn’t matter very much whether the life annuity offered guaranteed return of at least 80% of principal or 110% of principal.

“Within an investment framework,” the researchers wrote, “annuities appear more attractive when they include principal protection, an insight that may explain why consumers who do annuitize are often partial to including period certain guarantees in their products, despite the fact that these guarantees essentially reduce the insurance value of the products.”

These results could have important implications for life annuity issuers who want to increase sales, Brown believes. “Quite a few [annuity markers] have told me this line of research has influenced their thinking.  I am not sure that I should name names, however, but most of the big annuity providers are very familiar with the work,” Brown told RIJ. He added that his findings also support proposals to report 401(k) account accumulations in terms of monthly retirement income projections instead of or in addition to account balances.   

Brown’s research confirms what a lot of life annuity issuers have learned from experience: that annuities make more sense when viewed as retirement income vehicles than as investments, that consumers prefer annuities to a degree to which they are not aware, and that when advisors ask, “What’s the internal rate of return on a life annuity?,” they’re not asking the right question.


© 2013 RIJ Publishing LLC. All rights reserved.

DIA-monds in a rough patch

Posted on June 6, 2013 by -

Sales of deferred income annuities reached a record high in first quarter 2013, according to the Beacon Research Fixed Annuity Premium Study. Results for these products increased for the fifth consecutive quarter and were nearly 150% higher than a year ago. The success of DIAs helped overall income annuity sales grow 1.4% year-over-year.

“Deferred income annuities were a bright spot in a difficult quarter,” said Jeremy Alexander, CEO of Beacon Research. “Ongoing product development and increasing sales underscore the importance of generating guaranteed retirement income for consumers and their advisors.”

But the industry continued to be impacted by the ongoing low interest rate environment. Total fixed annuity results were $15 billion in first quarter, down 11.7% from a year ago and 7.7% sequentially. However, fixed rate MVA sales dipped only slightly from the prior quarter, suggesting that consumers are willing to accept some potential interest rate risk in exchange for higher credited rates.  

Indexed annuity sales decreased 7.9% quarter-on-quarter to $7.8 billion, and fixed rate non-market value-adjusted (MVA) annuities fell 8.1% sequentially to $4.0 billion. Income annuities dropped 8.2%.

Estimated Fixed Annuity Sales by Product Type (in $ millions)

 

Total

Indexed

Income

Fixed Rate

Non-MVA

Fixed Rate

MVA

Q1 ‘13

14,960

7,787

2,186

4,016

972

Q4 ‘12

16,200

8,452

2,381

4,369

999

% change

-7.7%

-7.9%

-8.2%

-8.1%

-2.7%

Q1 ‘13

14,960

7,787

2,186

4,016

972

Q1 ‘12

16,940

8,166

2,156

5,253

1,368

% change

-11.7%

-4.6%

1.4%

-23.5%

-28.9%

Allianz was once again the top fixed annuity company in first quarter 2013, followed by Security Benefit Life, New York Life, American Equity and Jackson National. Security Benefit Life moved to second place. New York Life remained in third place, American Equity moved up a notch to come in fourth, and Jackson National rejoined the top five in fifth place.

First quarter results for the top five Study participants were as follows:

Total Fixed Annuity Sales (in $ thousands)

Allianz Life                        1,163,724

Security Benefit                  1,105,733

New York Life                    1,079,443                          

American Equity                   929,899           

Jackson National                  743,682                                                                                            

In first quarter, Western National Life moved from fifth place to take the lead in bank channel and fixed rate non-MVA sales. The other top companies in sales by product type and distribution channel were unchanged from the prior quarter.

Security Benefit Life had two of the quarter’s five top-selling fixed annuities for the first time. Its Total Value Annuity was the quarter’s bestseller, up fourth place last quarter, and Secure Income Annuity joined the top five in third place. New York Life’s Lifetime Income Annuity, the quarterly bestseller throughout 2012, finished second. American Equity’s Bonus Gold and Allianz’s Endurance Plus indexed annuities both dropped two notches, but remained in the top five at number four and five, respectively.

Rank      Company Name                    Product Name                                  Product Type

1            Security Benefit Life                     Total Value Annuity                              Indexed

2            New York Life                                NYL Lifetime Income Annuity            Income

3            Security Benefit Life                     Secure Income Annuity                        Indexed

4            American Equity                           Bonus Gold                                              Indexed

5            Allianz Life                                     Endurance Plus                                       Indexed

“We expect that fixed annuity sales in the coming months will follow the pattern set early in the year,” Alexander concluded. “Sales may increase slightly coming off from a record year for indexed and income annuities, but low interest rates will continue to hamper significant growth in the near future.”

© 2013 Beacon Research.

GAO criticizes “pervasive marketing” of IRA rollovers

Posted on June 6, 2013 by -

In April, the Government Accountability Office (GAO) issued a study that examined and criticized the process that job-changers go through when deciding whether to roll 401(k) savings into a rollover IRA or to transfer them to their new employers’ plans.

Click here for a pdf of the report, entitled “401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants.” 

The GAO, reflecting the government’s general wish to see Americans keep their tax-favored savings in institutionally priced employer-sponsored plans rather than roll them over to retail IRAs when they change jobs, found evidence that 401(k) providers often make the path to a proprietary rollover IRA easy for job-changers, while making the path toward a roll-in relatively difficult.

The report suggested that, for participants, the process of dealing with retirement accounts following job changes is confusing, non-standardized, and frequently shaped by the business interests of the organizations involved—sometimes to the detriment and sometimes to the benefit of the participant. 

“The effort [job-changers] have to make to understand their options and pursue a course of action can be daunting. As a result, participants can be easily steered towards IRAs given the number of administrative obstacles and disincentives to staying in the plan environment and the pervasive marketing of IRAs by 401(k) service providers and IRA providers generally…

 “GAO recommends that Labor and IRS should take certain steps to reduce obstacles and disincentives to plan-to-plan rollovers. Labor should also ensure that participants receive complete and timely information, including enhanced disclosures, about the distribution options for their 401(k) plan savings when separating from an employer.”

© 2013 RIJ Publishing LLC. All rights reserved.

VA Sales Lack Clear Trend

Posted on June 6, 2013 by -

The performance of the variable annuity business in the first quarter of 2013 was mixed.

This year isn’t starting out as strong as 2012 did. Net cash flow into VA contracts—sales minus surrenders, exchanges and distributions—was 76.3% lower in the first quarter of 2013 than in the same quarter a year earlier, according to Morningstar’s Annuity Research Center. At $34.3 billion, total first quarter sales figures were down from $35.7 billion in 1Q 2012.

But 2013 started better than 2012 ended. Net cash flow in 1Q 2013 rose versus 4Q 2012 ($900 million vs. minus $600 million) and sales were up slightly, from $33.9 billion in the final quarter of 2012. Helped by a bull market that pushed the DJIA over 15,000 for the first time, VA assets under management at the end of the first quarter 2013 reached a new record of $1.72 trillion, up from $1.64 trillion at the end of 2012.

Companies Issuing VAs at a FASTER Rate in 1Q 2013 than in 2012

Companies Issuing VAs at a SLOWER Rate in 1Q 2013 than in 2012

Company

Ratio of 1Q Sales to 2012 Total Sales (%)

Company

Ratio of 1Q Sales to 2012 Total Sales (%)

Midland National

47.13

John Hancock

7.25

Minnesota Life

34.74

Guardian Life

9.77

Fidelity Investments Life

33.30

UNIFI Companies

19.00

Inviva

32.35

Security Benefit

19.66

Pacific Life

32.35

MetLife

19.87

Aegon/Transamerica

30.26

Protective

20.08

Symetra

29.68

ING Group

20.86

Lincoln Financial

29.55

Prudential

21.06

Source: Morningstar, Inc. 2013

The overall figures are hard to interpret, however, because the industry is still shaking out and products continue to evolve. The sales leaders are still thriving—especially Jackson National—but the products are generally stingier. “The remaining active retail market companies are largely above water on a net basis, while cash drains from group contracts and exited companies con tinue to be the main culprits driving the low industry number,” wrote Frank O’Connor, director of the Annuity Research Center, in his quarterly report.

De-risking of products can only hurt sales. When VA income riders were patently underpriced in 2005 through 2007, advisors recognized the opportunities and took advantage of them.  As products have become more accurately, and even defensively, priced, demand will inevitably suffer, even at a time when 10,000 Boomers are reaching age 65 daily. 

Billion-Plus VA Sellers in First Quarter 2013

Company

1Q Sales ($bn)

Jackson National

4.565

Prudential Financial

4.206

MetLife

3.517

TIAA-CREF

3.153

Lincoln Financial

3.079

SunAmerica/VALIC

2.293

AXA Equitable

2.078

Aegon/Transamerica

1.597

Pacific Life

1.291

Ameriprise Financial

1.235

Nationwide

1.132

Source: Morningstar, Inc. 2013

The fastest growing product in the first quarter was Jackson National’s Elite Access B share. A year ago, shortly after it was launched, it was ranked 217th in sales. At the end  of 1Q 2013, it was ranked 10th, with $785.5 million in sales.

Other contracts that have moved up significantly in the rankings over the past year are AXA’s Structured Capital Strategies B-Series, and two from Pacific Life: the Destination O-Series and Innovations Select. Neither Elite Access nor Structured Capital Strategies  is aimed at providing lifetime income, but rather to offer tax-advantaged exposure to alternative investments and a buffer against losses, respectively. 

In the various distribution channels, competition is most intense in the asset-rich wirehouse channel. Prudential, Jackson National and Lincoln Financial were the first quarter 2013 leaders in the wirehouses, with sales of $575.8 million, $562.8 million and $526.1 million, respectively. Meanwhile, Lincoln Financial and MetLife fought for leadership in the regional broker/dealer channel, with sales of $670.2 million and $639.7 million, respectively.  

The VA industry remains highly consolidated. The ten largest issuers accounted for about 79% of all sales in the first quarter, and the five largest issues accounted for more than half of all sales.

© 2013 RIJ Publishing LLC. All rights reserved.

 

 

 

A retirement boom as far as the eye can see

Posted on June 5, 2013 by -

The so-called retirement income opportunity won’t begin to fade in 2050, when about half of the youngest Baby Boomers will have reached average life expectancy, according to LIMRA. That’s because the succeeding generation is just as large.

LIMRA cited U.S. Census Bureau data showing that the number of Americans reaching 65 years old each year will continue to grow beyond the Boomer generation. Even when the last Baby Boomer reaches 65, there should be no noticeable decline in the numbers. In 2013, 3.4 million individuals are projected to reach age 65; by 2023, 4.1 million Americans will reach 65; and 4.2 million by 2050.

There will be no post-Boomer dip because immediately following the Boomers are 78.4 million members of “Generation X” and “Gen Y” individuals, who are now between the ages of 30 and 48. After them, 11-29 year olds represent another 82 million individuals currently between the ages of 11 and 29 who will reach retirement in the next 35-55 years. (See chart on the RIJ home page this week.)

“Financial services firms should be looking at the retirement market not just for the immediate opportunity offered by Boomers but preparing for the possibility of long-term, sustained growth as Gen X and Y consumers prepare for retirement,” a LIMRA release said.

LIMRA estimates that there will be nearly $22 trillion in investible assets from Americans age 55 and older available for retirement income solutions by 2020. Younger generations—who probably won’t have a pension and likely to be solely responsible for their retirement savings—are likely to have more by the time they reach age 55.

© 2013 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on June 5, 2013 by -

DST’s CFO, Ken Hager, to retire after successor is in place  

DST Systems, Inc. announced that Kenneth V. Hager, vice president, chief financial officer and treasurer, plans to retire after 29 years of service to the company. He will continue in his current role until a successor is in place.    

Hager has served as CFO and vice president since April 1988 and has been treasurer since August 1995.  He led DST’s successful IPO in 1995 and has been DST’s primary interface to the investment community since that time.  During Mr. Hager’s tenure, DST has grown from a $100 million mutual fund processing company to a $2 billion global provider of diversified services to a broad range of industries. 

DST is undertaking a process to name Mr. Hager’s successor.  The Company does not intend to provide an update on the process until a successor is named.

BB&T revamps retirement plan websites

BB&T Retirement and Institutional Services has redesigned its two websites to create a “retirement destination” for plan sponsors and participants, the company said in a release.

Retirement plan sponsors now have access to additional retirement planning resources, such as industry news, fiduciary and compliance updates, worksheets and stock research.

The redesigned plan participant website includes a new section which offers education sections for different stages of retirement planning. Additional changes include easier menu navigation, tab viewing, new charts, in-page help and PDF confirmations. Visitors also have access to interactive retirement planning tools, videos and additional investment and retirement planning services offered by BB&T.

BB&T Retirement and Institutional Services offers a range of employee benefits consulting, fiduciary, philanthropic, corporate trust and investment management services to small and large corporations, charitable organizations, foundations and endowments, and state and local governments.

International bond fund bolsters Vanguard’s ‘Total Market’ lineup 

Vanguard has launched a Total International Bond Index Fund, in three share classes, Investor, Admiral, and Institutional, for purchase immediately. The expense ratios for the fund’s Investor, Admiral, Institutional, and ETF share classes will range from 0.12% to 0.23%, as shown in the table below.

The fund’s ETF shares (ticker: BNDX) commenced trading on June 4, 2013.

The top country holdings as of April 30, 2013 were Japan (22%), France (11%), Germany (11%), Italy (8%), and the United Kingdom (8%). Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged) will be the new fund’s benchmark.

The index comprises about 7,000 investment-grade corporate and government bonds from 52 countries. To meet regulated investment company (RIC) tax diversification requirements, the index caps its exposure to any single bond issuer, including government issuers, at 20%.

According to a release, Vanguard designed the new fund to give investors broad exposure to international fixed income markets and to complement Vanguard’s Total Stock Market Index Fund ($248 billion in assets), Total Bond Market Index Fund ($117 billion), Total International Stock Index Fund ($95 billion), and Total World Stock Index Fund ($3 billion).

Vanguard Total International Bond Index Fund  

Share class

Min. initial investment

Annual expense ratio (%)

Investor 

$3,000

0.23

Admiral 

$10,000

0.20

Institutional

$5 million

0.12

ETF (BNDX)

—

0.20

Source: Vanguard.

Vanguard also announced:

  • Ended: the subscription period for Vanguard Emerging Markets Government Bond Index Fund. Investor, Admiral, and Institutional shares are available for purchase. The fund’s ETF shares (ticker: VWOB) are expected to begin trading on June 4, 2013.
  • Vanguard Total International Bond Index Fund has been added to 18 of Vanguard’s funds-of-funds (including Vanguard Target Retirement Funds) and represents 20% of the fixed income allocation of the funds.   
  • Vanguard Short-Term Inflation-Protected Securities Index Fund has replaced Vanguard Inflation-Protected Securities Fund in three Target Retirement Funds (Target Retirement Income, 2010, and 2015).
  • The 0.25% purchase fee for the Short-Term Inflation-Protected Securities Index Fund has been eliminated.

VA Issuers Keep On Tweakin’

Posted on June 5, 2013 by -

The VA industry in the first quarter of 2013 was impacted by a number of changes in the distribution footprint. Changes in the variable annuity provider list dominated the quarter. SunLife sold its U.S. variable annuity business to Delaware Life Holdings, owned by Guggenheim Partners. Hartford moved to reduce its liability with one of the more impactful buyout offers in recent memory. On the flip side, Forethought Financial entered the market with a new VA issue.

Overall, product development activity was robust. Carriers continue to adjust benefit levels down. In addition, activity continued on the subaccount side to reduce volatility in investment offerings. Carriers filed 97 annuity product changes in the first quarter of 2013. This compared to 101 new filings during the fourth quarter of 2012 and 59 in Q1 of last year.

New product launches were modest. Carriers filed very few new contracts and a small number of new benefits. Most of the activity this quarter centered on fee changes to existing products and revisions to step ups and withdrawal percentages.

Q1 Product Changes

AXA released new versions of its Accumulator (13.0) and Retirement Cornerstone (13.0). The fee is unchanged but the attached benefits are updated (see page 3). AXA issued new versions of its GMIBs. The GMIB I costs 1.15% (up from 1.10%) and guarantees a benefit base to annuitize after a 10-year waiting period. A 5% step up works until age 85 or first withdrawal. The step up is 4% if the first withdrawal is taken before the age 65 anniversary (the highest anniversary value step up is dropped).

A “no lapse guarantee” kicks in at annuitization if the account value falls to zero. An automatic conversion feature turns the benefit into a lifetime GMWB with either a 5% withdrawal of the benefit base or 6% of the account value, whichever is higher. (A joint life option is available as well). The benefit is applied to the Accumulator 13 contracts.

AXA’s new version of the GMIB II costs 1.30% (up from 1.25%) and guarantees a benefit based to annuitize after a 10-year waiting period. A 5% step up works until age 85 or first withdrawal. The step up is 4% if the first withdrawal is taken before the age 65 anniversary. A “no lapse guarantee” kicks in at annuitization if the account value falls to zero. An automatic conversion feature turns the benefit into a lifetime GMWB with either a 5% withdrawal of the benefit base or 6% of the account value, whichever is higher. (A joint life option is available as well). The benefit is available with the Accumulator 13.0 contracts.

Forethought Financial issued its first variable annuity contract, the ForeRetirement VA (B-, C-, and L-shares). The fee for the B-share is 1.15% which includes a 0.50% premium-based charge. The contract offers a Lifetime GMWB with an age-banded withdrawal percentage (5% for a 65 year old; 4.5% in the joint-life version) and two types of step ups: a highest anniversary (based on highest daily value) and a 6% fixed annual step up for ten years. The rider fee is 1.25%. There is also a second Lifetime GMWB with similar withdrawal and step up features and a highest anniversary (based on highest annual value) step up for a fee of 1.05%.

Hartford offered a cash buyout to current contract holders as a way to reduce exposure on their books. Owners of the Lifetime Income Builder II rider were offered the greater of the contract value on the surrender date, or, if the account is underwater, the contract value plus 20% of the benefit base (capped at 90% of the benefit base). Contracts affected include the Director M series and the Leaders series.

Nationwide increased the withdrawal percentage of the joint version of its Lifetime GMWB benefit called “7% Lifetime Income Rider” in January. It is also increasing the fee to 1.50% from 1.20%. A 65-year old will now get 4.75%, up from 4.5%.
Ohio National decreased the step ups and some withdrawal percent- ages on their GLWB Plus (joint version). The withdrawal percentage dropped .25% for a 591⁄2 year old and dropped 0.5% for a 65 year old. The step up dropped to 6% from 7%.
Pacific Life closed the CoreIncome Advantage 5 Plus joint rider in March. Earlier, in February, Pacific Life increased the fee to 1.35% from 1.00%.

Principal lowered the issue age for its Lifetime GMWB to 55. It created a new withdrawal age band on the GLWB for 55–59 year olds of 4.5% (single) and 4.0% (joint).

Prudential issued new versions of the Premier Retirement Series. It raised the fee on its Premier Retirement contract by 15 bps to 1.45% for the B-share. The new version of the Lifetime GBWB (HD Lifetime Income v2.1) drops the withdrawal percentage for a 65 year old to 4.5% from 5% (single) and eliminates the deferred benefit base bonus step up that previously doubled the benefit base after 12 years of no withdrawals.

Prudential also released the unique Defined Income variable annuity as a B-share for a 1.10% fee. The product offers a Lifetime GMWB with a withdrawal rate that ranges from 3% to 7% (single) or 2.5% to 6.5% (joint) for a fee of 0.80%. There is a step up of 5.5% annualized based on the highest daily value. The subaccount option is a long-duration bond fund. Prudential maintains the ability to adjust the step up and withdrawal percentage as needed on new business.

SunAmerica changed its name to American General. The firm is still using the SunAmerica brand name for some of its contracts, including the Polaris line. SunAmerica dropped the step up on its SA Income Builder-Dynamic Options (single and joint) to 6% from 8%. In addition, the carrier changed from an age-banded lifetime guaranteed structure to a straight 5.25% guaranteed withdrawal (older owner at first withdrawal) for single life. The joint version now offers a straight 4.75% lifetime withdrawal that replaces the prior age-banded structure. The carrier also raised the issue age to 65 from 45 on the single and joint versions.

SunAmerica decreased the withdrawal percentage on the SA Income Plus (Dynamic Options 1 and 2) Lifetime GMWB. The withdrawal percentage is now 5.0%, down from 5.5% (single) and 4.5%, down from 5.0% (joint) for the age-band from 45–64. The 65+ age band remains the same. SunAmerica also limited the purchase payment calculation to only include first year purchase payments, down from the first two years of payments. This applies to the Income Plus-Dynamic Options 1–3 and the custom option (Lifetime GMWBs).

SunLife sold its U.S. variable annuity business to Delaware Life Holdings, owned by Guggenheim Partners. This adds to Guggenheim’s variable annuity block of business from Security Benefit. The sale included Sun Life’s U.S. domestic variable annuity, fixed annuity and fixed index annuity products.

VALIC decreased the lifetime withdrawal percentage on the IncomeLOCK Plus 6-Dynamic Option 1 and Option 2. The single life dropped from 5.5% to 5.0% for the 45–65 age band. The joint life withdrawal is now 4.5% down from 5.0%. The 65+ age band remains the same.

© 2013 Morningstar, Inc.

Sign of the Times

Posted on June 5, 2013 by -

My first experience with the 21st century hospitality phenomenon known as “Airbnb” occurred last April in New Orleans.

My cab from Louis Armstrong Airport had just arrived in front of the blue Victorian townhouse with white trim and lavender shutters where I’d booked accommodations for two nights. It was located on a narrow street in Treme (pronounced Truh-MAY), a ragged neighborhood where architectural and horticultural beauty vie with urban decay for your attention—as they do in many parts of that city.

But there was a slight problem. The taxi driver, an Israeli-Arab who was also a part-time graduate student, had not wanted to deliver me to Treme. Too dangerous. During the ride from the airport, he told me, “If I were you, I would not stay there.” Slightly shaken, I used my cellphone to call Felicity, who owned the Victorian and was my Airbnb host. I told her what the driver had said. Naturally, she was furious. “This is a wonderful neighborhood,” she said.

So, when we arrived, cabbie and innkeeper were both stoked for a confrontation. Felicity, a vibrant woman in her sixties whose blue eyes and caramel complexion seemed to embody New Orleans’ overall ethnic make-up but whose accent hinted at a cultivated Manhattan upbringing, scolded the cab driver for disrespecting her neighborhood. The driver looked at her skeptically, perhaps sardonically. He spread his arms as if to say, “Whatever, lady.” Then he sped off, leaving Felicity and me alone on the brick sidewalk in front of her house. She was exactly the person I was hoping to meet.

Accommodating retirement needs

For those who haven’t heard of it, Airbnb.com is an online lodging platform where people who have an unoccupied penthouse or a spare bedroom or sometimes just a futon behind a curtain in their living room can advertise and rent them to budget travelers who relish a lodging experience that can range from the luxurious to the equivalent of visiting a relative or, as we used to say, crashing at a friend’s pad.

Founded in 2008 by two Rhode Island School of Design grads and a Harvard-trained computer programmer, the San Francisco-based start-up already boasts over 10 million lodging-nights booked at some 300,000 locations in 34,183 cities in 192 countries.

Airbnb’s potential as a source of supplemental retirement income for cash-strapped retirees seemed obvious to me the first time I read about it. It offers Boomers with empty nests and others a way to monetize the equity in their homes. Simultaneously, it offers retirees a way to afford the global travel they’ve been dreaming about. Airbnb’s sudden global success can’t help but be, to some extent, a marker for Boomer under-saving as well as a leading indicator of the resourcefulness we can expect from millions of oldsters worldwide as they grapple with income shortfalls in the decades ahead.  

To use Airbnb, you just surf to its website and respond to the prompt that asks you where you want to go and when you plan to travel. You can shop by city or by neighborhoods in a city. Accommodations start at $25 per night and climb from there.

Heading to New York City? How about Soho? You can rent an immaculate apartment that sleeps four for $175 a night or $1,295 a month. Want to relax on the Adriatic island of Corfu for a while? You can stay in a whitewashed, flower-decked hideaway in a small village for $49 a night or $328 a week. Or you could choose from 112 other listings for an apt/home on Corfu.

If you’re wondering how absolute strangers in this somewhat grey-market lodging industry achieve a level of trust high enough to share living quarters (and perhaps a bathroom), Airbnb has an app for that. Guests must submit a request to the hosts. The host remains semi-anonymous while reviewing the request.

As an added measure of security, the host may demand enough personal information about the prospective guest to achieve a sufficient comfort level. The host retains the option to reject the request. If the request is granted, the lodger pays in advance. After the visit ends, the host posts a review of the lodger online where other hosts can see, and the lodger posts a review of the host where other potential lodgers can see. (There are a few horror stories floating around, like the one about the person who discovered that he’d be sharing his “private” room with two other lodgers.) 

Going to [Ex]Treme

When I asked Felicity if she was using Airbnb to help finance her retirement, she said, “Absolutely.” Born in New York City during the Baby Boom, she had lived in many places and worked for a series of not-for-profit organizations throughout her life. Some years ago, drawn to New Orleans by its dynamic music scene, she settled a few blocks from the French Quarter in the Treme neighborhood.

By the time she reached age 60, she hadn’t socked much savings away. But she had acquired a rambling Victorian home with 14-foot ceilings, marble fireplaces and a two-story gallery next to the leafy garden in the back, invisible from the street, which might once have been servants’ quarters or “dependencies.” She began renting these tiny apartments to students by the month.

After Hurricane Katrina inundated Treme and severely damaged the house, Felicity used the insurance proceeds to refurbish it. She put granite counters and new appliances in the kitchen. She refilled the rooms with art, curios and antiques. Like many New Orleans homeowners, she painted the exterior in multiple colors. A few months ago, she began listing her bedrooms on Airbnb for $90 a night.   

My bedroom was at the top of a long, banistered staircase. There was a ceiling fan, a wide bed, a tall wardrobe and a non-working fireplace. I shared a bathroom with the semi-retired Minneapolis couple in the next room. About 8:30 p.m., as I was preparing for the first day of the LIMRA-LOMA Retirement Industry Conference, Felicity knocked on the door and invited me to join her and her companion, who doubles as the building’s “super,” for an impromptu dinner of beef, baked sweet potatoes and boiled greens. 

Sign of the times

Homeowners have always taken in lodgers during hard times. Little wonder that Boomer-era retirees—who themselves may have bunked in makeshift “pensiones” while vagabonding through Western Europe in the 1970s—would think of supplementing their income by renting rooms. To be sure, not all Airbnb hosts are Boomers. Many are young artists, and many of their guests are young artists.

People with a bohemian bent are most likely to be comfortable operating an Airbnb or staying in one. At least some of the hosts skirt a few regulations and avoid a few municipal taxes by not registering their homes as short-term rentals or, in some cases, by subletting without telling their own landlords (not that these practices are condoned by Airbnb, which declined to be interviewed for this article). This is a grey-market phenomenon, both in the sense that it is sometimes off-the-books and in the sense that it’s linked to Boomer aging.

In addition to helping Boomers pay for retirement, Airbnb also makes it easier for Boomers to afford their dreams of global travel in retirement. Airbnb’s rapid growth is undoubtedly driven as much by a rising demand for thrifty accommodations as it is by a rising supply of thrifty accommodations. Boomers who used the book “Europe on $5 a Day” in the ‘60s are likely to gravitate to Airbnb’s website today.

Experts in the retirement industry often project a Ghost-of-Christmas-Future dystopia for people who retire without bounteous savings. They overlook both the resourcefulness of the Boomers and the wealth of fallow resources—including spare bedrooms and finished basements—that are currently invisible or ignored but await monetization. Airbnb is just one manifestation of this new reality.

© 2013 RIJ Publishing LLC. All rights reserved.