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The Bucket

Posted on February 21, 2013 by Editorial Staff -

Nationwide’s 2012 operating income survived Superstorm Sandy

Despite paying out $400 million for damages related to Superstorm Sandy in the fourth quarter of 2012 and despite “some planned risk management actions” in its variable annuity line, Nationwide reported net operating income of $741 million in 2012, up 43% from $517 million in 2011.

In a release, Nationwide reported total operating revenue for 2012 of $22.4 billion, or some $1.7 billion more than 2011. Nationwide paid over $13.7 billion in property & casualty, life insurance and other benefits to customers in 2012.

“P&C direct written premiums grew across all major product lines in 2012, particularly in our commercial lines,” said Mark Thresher, chief financial officer. “In total, property & casualty premiums rose more than 10% to $16.2 billion, including nearly $800 million in premiums from Harleysville Insurance, which was acquired on May 1, 2012.

“In our financial services business, sales topped $18 billion for the year, down modestly from last year due to some planned risk management actions taken during 2012 in our variable annuity product line.”

Despite Superstorm Sandy, Nationwide reported a net operating income of $18 million in the fourth quarter, down from $142 million during the same period in 2011.

MetLife sheds bank holding company status

MetLife has received the required approvals to deregister as a bank holding company from the Federal Deposit Insurance Corporation and the Federal Reserve. MetLife sold its MetLife Bank’s depository business to General Electric Capital on January 11.

Northwestern Mutual hosts webcast for plan participants

On March 5 at noon Central Standard Time, Northwestern Mutual will host a webcast for plan participants called, “Make Your Money Last: Shattering the Top 5 Retirement Planning Myths.”

Northwestern Mutual’s vice president-market strategy, Rebekah Barsch, will discuss longevity risk, income planning and healthcare costs. The webcast is the second in the mutual insurer’s “Planning for Success” series.

Jefferson National VA to offer tactically-managed portfolios from CMG Capital Management

Jefferson National, whose flat-fee Monument Advisor variable annuity offers hundreds of investment options to Registered Investment Advisors and fee-based advisors for tax-deferred investing, has launched three new tactically managed model portfolios with CMG Capital Management Group.

Models available to the RIAs and fee-based advisors working with Jefferson National include CMG System Research Treasury Bond Program, CMG Opportunistic All Asset Strategy and CMG Scotia Partners Growth S&P Plus Program.

These tactical strategies employ what CMG refers to as “enhanced modern portfolio theory,” using “quantitative rules-based trading strategies, incorporating various technical, fundamental and mathematical indicators, with a clearly defined buy and sell discipline,” according to a Jefferson National release.

The high-turnover typical of tactically managed portfolios can produce short-term capital gains, and generate taxes that can reduce returns. Morningstar estimates that over the 74-year period ending in 2010, failure to defer those taxes could have reduced some investors’ returns by as much 100 to 200 basis points a year, the release said.

AIG Life and Retirement gets an A+ from Fitch

Posted on February 21, 2013 by Editor Test -

Fitch Ratings has upgraded the IFS (Insurer Financial Strength) ratings of American International Group’s U.S. life insurance unit, led by AGC Life, to ‘A+’ from ‘A’, according to a Fitch release.

At the same time, Fitch affirmed the ‘A’ IFS ratings of AIG’s rated property/casualty insurance subsidiaries, as well as AIG’s Issuer Default Rating (IDR) of ‘BBB+’ and senior debt rating of ‘BBB’. The rating outlook is “stable.”

In upgrading the IFS of AIG’s Life & Retirement units, Fitch cited “continued improvement in statutory capital position, recovery of investment values over time and return to stronger operating profits and earnings stability.”

The company has largely recovered from the financial crisis and can generate about $4 billion of annual run-rate operating earnings, Fitch said.

“Surrender activity has stabilized and is currently at or below historical levels and is now reflective of the low interest rate environment rather than AIG-specific issues,” the release said. “Net investment spreads have improved as a result of an increase in base yields due to the reinvestment of cash and short-term investments in 2011 combined with lower interest credited.”

But Fitch cautioned: “These positive factors are offset somewhat by concerns as to the effect of continued very low interest rates on product performance and future profitability.”

AIG has repaid its government borrowings and other support; the remaining 15.9% U.S. Department of the Treasury ownership in AIG’s common stock was sold in December 2012, Fitch said. “The organization more closely represents a traditional insurance holding company with an operating focus on global property/casualty insurance and domestic life insurance and retirement products.”

The pending sale of 90% of AIG’s ownership of aircraft leasing firm International Lease Finance Corporation (ILFC) which is expected to close by midyear 2013, will also help, Fitch noted.

The company’s financial leverage as measured by the ratio of financial debt and preferred securities to total capital (excluding operating and ILFC debt and the impact of FAS 115) declined from 31% at year-end 2010 to approximately 22% currently.

Fitch’s Total Financial Commitment (TFC) ratio for AIG, while still high compared to most insurance peers, has improved from 2.5x at year-end 2010 to a current level of 1.3x. Elimination of ILFC debt and airline purchase commitments will further reduce financial leverage and TFC. AIG has also created an adequate liquidity position and has demonstrated access to capital markets through execution of several recent financing transactions.

AIG reported significantly improved profitability in the first nine months of 2012, with net income of $7.6 billion relative to a modest net loss in the prior year period. Life & Retirement’s pre-tax income rose 22% in the same period, year over year. Core operating subsidiary interest coverage on financial debt was 4.9x in the first three quarters of 2012.

Hyper about hyperinflation? Read this.

Posted on February 19, 2013 by Editor Test -

A reality check on unnecessary anxiety about the threat of “hyperinflation” in America is overdue. Luckily, an essay recently posted on Jeremy Grantham’s homepage provides one. Written by James Montier, a member of the Asset Allocation team at GMO, the $106 billion global management firm that Grantham and colleagues founded in 1977, the essay explains that it takes more than a few rounds of quantitative easing in response to a credit crisis to trigger hyperinflation. Below you’ll find a brief abstract of the essay. Click here for the complete version.

“To say that the printing of money by central banks to finance government deficits creates hyperinflations is far too simplistic (bordering on the simple-minded). Hyperinflation is not purely a monetary phenomenon. To claim that is to miss the root causes that underlie these extraordinary periods. It takes something much worse than simply printing money. To create the situations that give rise to hyperinflations, history teaches us that a massive supply shock, often coupled with external debts denominated in a foreign currency, is required, and that social unrest and distributive conflict help to transmit the shock more broadly.

“On the basis of these preconditions, I would argue that those forecasting hyperinflation in nations such as the US, the UK, or Japan are suffering from hyperinflation hysteria. If one were to worry about hyperinflation anywhere, I believe it would have to be with respect to the break-up of the eurozone. Such an event could create the preconditions for hyperinflation (an outcome often ignored by those discussing the costs of a break-up). Indeed, the past warns of this potential outcome: the collapse of the Austro-Hungarian Empire, Yugoslavia, and the Soviet Union all led to the emergence of hyperinflation!”

The Unloved Dollar Standard

Posted on February 19, 2013 by Editor Test -

Since World War II’s end, the US dollar has been used to invoice most global trade, serving as the intermediary currency for clearing international payments among banks and dominating official foreign-exchange reserves. This arrangement has often been criticized, but is there any viable alternative?

The problem for post-WWII Europe, mired in depression and inflation, was that it lacked foreign reserves, which meant that trade carried a high opportunity cost. To facilitate trade without requiring payment after each transaction, the Organization for European Economic Cooperation created the European Payments Union in 1950.

Supported by a dollar-denominated line of credit, the EPU’s 15 Western European member states established exact dollar exchange-rate parities as a prelude to anchoring their domestic price levels and removing all currency restrictions on intra-European trade. This formed the keystone of the hugely successful European Recovery Program (the Marshall Plan), through which the US helped to rebuild Europe’s economies.

Today, most developing economies, with the exception of a few Eastern European countries, still choose to anchor their domestic macroeconomic arrangements by stabilizing their exchange rates against the dollar, at least intermittently. Meanwhile, to avoid exchange-rate conflict, the US Federal Reserve typically stays out of the currency markets.

But the dollar’s role as international anchor is beginning to falter, as emerging markets everywhere grow increasingly frustrated by the Fed’s near-zero interest-rate policy, which has caused a flood of “hot” capital inflows from the US. That, in turn, has fueled sharp exchange-rate appreciation and a loss of international competitiveness – unless the affected central banks intervene to buy dollars.

Indeed, since late 2003, when the Fed first cut interest rates to 1%, triggering the US housing bubble, dollar reserves in emerging markets have increased six-fold, reaching $7 trillion by 2011. The resulting expansion in emerging markets’ monetary base has led to much higher inflation in these countries than in the US, and to global commodity-price bubbles, particularly for oil and staple foods.

But the US is also unhappy with the way the dollar standard is functioning. Whereas other countries can choose to intervene in order to stabilize their exchange rates with the world’s principal reserve currency, the US, in order to maintain consistency in rate setting, does not have the option to intervene, and lacks its own exchange-rate policy.

Moreover, the US protests other countries’ exchange-rate policies. Two decades ago, the US pressed the Japanese to allow the yen to strengthen against the dollar, claiming that Japan’s unfair exchange-rate policies were responsible for America’s ballooning bilateral trade deficit. Likewise, today’s “China-bashing” in the US – which has intensified as China’s contribution to America’s trade deficit has soared – is intended to force the Chinese authorities to allow faster renminbi appreciation.

Herein lies the great paradox. Although no one likes the dollar standard, governments and private market participants still consider it the best option.

In fact, US trade deficits are primarily the result of insufficient, mainly government, saving – not a misaligned exchange rate, as economists have led policymakers to believe. Large US budget deficits during Ronald Reagan’s presidency generated the famous twin fiscal and trade deficits of the 1980’s. This, not an undervalued yen, caused the bilateral deficit with Japan to widen in the 1980’s and 1990’s.

The much larger US fiscal deficits of the new millennium, courtesy of Presidents George W. Bush and Barack Obama, portend large – and indefinite – trade deficits. But American policymakers continue to blame China, claiming that the renminbi has been undervalued for the last decade.

The claim that exchange-rate appreciation will reduce a country’s trade surplus is false, because, in globally integrated economies, domestic investment falls when the exchange rate appreciates. So the ill will that China-bashing is generating is for nothing. Worse, it detracts political attention from America’s huge fiscal deficit – $1.2 trillion (7.7% of GDP in 2012 – and thus impedes any serious effort to rein in future spending for entitlements, such as health care and pensions.

Some contend that large fiscal deficits do not matter if the US can exploit its central position under the dollar standard – that is, if it finances its deficits by selling Treasury bonds to foreign central banks at near-zero interest rates. But America’s ongoing trade deficits with highly industrialized countries, particularly in Asia, are accelerating de-industrialization in the US, while providing fodder for American protectionists.

Indeed, America’s trade deficit in manufactures is roughly equal to its current-account deficit (the amount by which domestic investment exceeds domestic saving). So those concerned with job losses in US manufacturing should join the chorus lobbying for a much smaller fiscal deficit.

Can large US fiscal deficits and near-zero interest rates be justified because they help to revive domestic economic growth and job creation? Five years after the credit crunch of 2007-2008, it seems that they cannot. And, without even that justification, the latest wave of criticism of the US dollar standard appears set to rise further – and to stimulate the search for a “new” arrangement.

But the best new arrangement – and possibly the only feasible one – would follow an old formula: As in the 1950’s and 1960’s, the US would set moderately positive and stable interest rates, with sufficient domestic saving to generate a (small) trade surplus. The cooperation of China, now the world’s largest exporter and US creditor, is essential for easing and encouraging the transition to this nirvana. Apart from the ongoing euro crisis, a stable renminbi/dollar exchange rate is the key to renewed (dollar) exchange-rate stability throughout Asia and Latin America – as envisaged in the original 1944 Bretton Woods Agreement.

Republicans bearish, Democrats bullish: U. of Chicago

Posted on February 19, 2013 by Editor Test -

More than half of Americans (58%) expect the stock market to drop by more than 30% in the next 12 months, as compared to 48% in the September 2012 report issued before the presidential election, according to the Chicago Booth/Kellogg School Financial Trust Index.

Bearish fears are centered primarily among Republicans. “Approximately 67% of survey respondents who identified as Republicans think a big drop is likely, versus 50% in the last wave. This compares to 44% of Democrats,” said Paola Sapienza, co-author of the Financial Trust Index and the Merrill Lynch Capital Markets Research professor of finance at the Kellogg School of Management at Northwestern University.

“However, this pessimism did not translate to an intention to decrease investments in the stock market. All told, 76% of people surveyed said they will leave their investments unchanged in the next 12 months, and an additional 16% plan to increase their investments.”

Twenty-two percent of Americans surveyed for the December 2012 report say they trust the country’s financial system – down one percentage point since September 2012 – reflecting a decrease in trust of both the stock market and banks. Sapienza noted that while trust in banks overall is hovering at 28%, trust in local banks and credit unions is relatively high at 56% and 62% respectively.

Also, the number of people who believe they are likely to be unemployed within the next year rose to 22% since the last quarter, an increase of 10%.

The Chicago Booth/Kellogg School Financial Trust Index measures public opinion over three-month periods to track changes in attitude. Today’s report is the 17^th quarterly update and is based on a survey conducted in December 2012.

View of experts contrasts with average Joe’s
Today’s issue of the Financial Trust Index coincides with a paper presented in January 2013 at the American Economic Association annual meeting, written by Paola Sapienza and Luigi Zingales, the Robert R. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.

In the paper, “Economic Experts vs. Average Americans,” the researchers compare public opinion on several finance and economic policy questions with opinions of the Chicago Booth IGM Economic Experts Panel,.

“On average, the percentage of agreement with a statement differs by 35 percentage points between the two groups,” Zingales said in a release. “We saw the greatest disparity from public opinion when the economists were most in agreement with each other.”

To wit:

Ability to predict the stock market: All the economists, versus only 55% of Americans surveyed, agreed that “Very few investors, if any, can consistently make accurate predictions about whether the price of an individual stock will rise or fall on a given day.”
Executive compensation: Only 39% of economists, versus 67% of the public, believed that “the typical corporate chief executive is paid more than the value he or she adds to the firm.”
Carbon tax vs. car standards: Only 23% of Americans, versus 93% of economists, answered yes to the question, “Do you believe that a tax on gasoline would be a less expensive way for society to reduce carbon dioxide emissions than mandatory fuel economy standards for cars?”
Buy American? Only 11% of economists, versus 76% of economists, believe mandates that the Federal government ‘Buy American’ will boost U.S. manufacturing employment.

The divergence of opinions was believed to reflect a difference in the interpretation of the questions. Sapienza and Zingales wrote, “Economists answer them literally and take for granted that all the embedded assumptions are true; average Americans do not.”

The quarterly Financial Trust Index survey is conducted by Social Science Research Solutions (SSRS). A total of 1,026 individuals were surveyed by live interviewers from Dec. 5 to Dec. 12, 2012. The institutions considered in the survey are banks, the stock market, mutual funds and large corporations.

Genworth wealth management unit releases practice management book

Posted on February 19, 2013 by Editor Test -

Genworth Financial Wealth Management, Inc., a subsidiary of Genworth Financial, Inc., has published a new book, The Power of Practice Management (Bloomberg Press/John Wiley & Sons, Inc. 2013).

Written by Matt Matrisian, Genworth Wealth Management’s director of Practice Management, the book “provides independent financial advisors with ‘how-tos’ for improving their businesses,” according to a Genworth release. Matrisian based the book on his experience at Genworth, AssetMark Investment Services, Inc. and Quantuvis Consulting.

The Power of Practice Management is available for purchase through Amazon.com and at national booksellers.

Hedge funds lost $14.2 billion in 2012

Posted on February 19, 2013 by Editor Test -

Hedge fund investors redeemed a net $14.2 billion in 2012, reversing a $50.7 billion inflow to the industry in 2011, according to BarclayHedge and TrimTabs Investment Research. The results are based on data from 3,492 funds.

Hedge fund redemptions hit a 44-month high of $20.7 billion in December, according to the latest monthly TrimTabs/BarclayHedge Hedge Fund Flow Report, which noted that the industry earned 8.5% in 2012, far below the S&P 500’s 13.4% increase for the year.

“Underperformance versus the S&P 500 Index is a likely culprit in last year’s outflows,” said Sol Waksman, founder and president of BarclayHedge. “We found that from 2010 through 2012, hedge funds gained 14.1% while the S&P 500 Index rose 27.9%. That’s a major shift from the trend over the past five years, when hedge funds gained 10.7% while the S&P 500 was essentially flat.”

Despite lagging performance over the past three years, hedge funds outperformed the S&P 500 Index in the last three months of 2012, gaining 2.46% while the S&P 500 fell 1.0%. Hedge fund investors enjoyed a net 1.7% gain in December, besting a 0.7% rise in the S&P 500 Index for the month.

The Hedge Fund Flow Report also noted that stock-picking hedge fund managers had a good 2012 and a great December.

“Managers of Equity Long Only hedge funds found their groove in December, earning an impressive 4.8% and besting the S&P 500 by 406 bps,” Waksman said. Equity Long-Only funds earned 15.5% in 2012, the best performers among the 13 hedge funds categories tracked by BarclayHedge and TrimTabs. Fixed-Income hedge funds boasted the strongest 2012 inflows at $36.6 billion.

The January 2013 TrimTabs/BarclayHedge Survey of Hedge Fund Managers found widespread optimism about the U.S. economy and the short-term prospects for stocks in 2013. The survey found that bullishness on the S&P 500 surged to a 12-month high in January and that more than two-thirds of the survey’s 121 respondents see less than a 50/50 chance of a sharp correction in the S&P 500 in the first half of 2013.

Calculate safe withdrawal rate with SunGard tool

Posted on February 19, 2013 by Editor Test -

SunGard has released MyRetirement, an analytic tool that helps advisors answer the question many clients ask: “How much can I safely spend during retirement?”

“MyRetirement helps advisors clearly communicate the tradeoffs between clients’ chosen investments, establish confidence levels in meeting retirement goals, and determine a safe withdrawal rate to sustain clients’ standards of living throughout their retirement years,” SunGard said in a release.

A web-based component of SunGard’s WealthStation Financial Planning, MyRetirement “combines probability tools with Monte Carlo analyses to illustrate annual withdrawal rates from multiple model portfolios at different probabilities of success.”

The tool presents the information in chart and table formats to help clients better understand:

Pre-retirement and retirement portfolios
Retirement cash flow
Projected assets at retirement
Asset conversion to retirement income
Retirement budget, retirement income, and current net income comparisons

A Busload of Tools for Assessing Annuities

Posted on February 19, 2013 by Kerry Pechter -

Have you ever been hit by a bus? Have you ever known anyone who was hit by a bus—a city bus, school bus, charter bus, or any of the hundreds of buses that pass through New York’s Port Authority Terminal every day?

Probably not. So why do some people cut short virtually every conversation about income annuities with the dismissal, “Yeah, but what if you got hit by a bus the day after you bought one?”

Clearly, the bus analogy is a bit passé. Advisors who understand decumulation know that including an income annuity in a retirement plan doesn’t have to imply a zero-sum showdown between your clients and the issuer of the contract—or a bus driver.

The annuity decision is more nuanced than that. Those nuances include sub-decisions about how much money to annuitize, when to annuitize it and how best to customize the annuity contract so that it gives the client more financial freedom in retirement, not less.

Cannex, the Canadian-American firm that gathers annuity pricing data from issuers and distributes it by subscription to broker-dealers and other institutions via its Retirement Income Product Exchange, has recently added tools to its website that can help advisors explore the nuances of the annuity purchase.

In this article, we’ll take a brief tour of Cannex’s new tools. These include calculators that allow planners to get price quotes for and run simulations on single-premium immediate annuities (SPIAs) and also to get quotes on the suddenly popular deferred income annuities. Educational resources are also offered.

The most noteworthy of the new tools and features may be a marketing video that advisors can use in presentations to retirement income clients. Created with the help of annuity guru Moshe Milevsky and the Toronto production company Blue Rush, the videos are linked to one of the calculators. That enables an advisor to tailor a video for every client by populating the video with the data from a specific projection or simulation.

The tools are intended, obviously, to help advisors manipulate the data that their broker-dealers buy from Cannex. Though self-serving in that sense, the tools are highly robust, product-neutral, and help answer the key questions that advisors and their clients bring to discussions of income annuities. If you are among the 200,000 or so advisors who have access to the password-protected Cannex site, here’s a summary of what you’ll find. Even if you’re not, a tour of the site might be worthwhile.

‘Should I Buy an Income Annuity?’

After the initial landing page on the Cannex site (which asks you to choose the Canadian or U.S. edition), visitors will see a link called Cannex tools under the heading “Product education.” The next page offers four links, the first of which is labeled “Should I Buy an Income Annuity?” (See illustration below.)

The calculator on this page should feel familiar. It resembles the annuity price quote tools offered at some direct-to-consumer income annuity sales sites where the end-purpose is to generate sales leads for phone banks of licensed insurance agents. The Cannex calculator will, in fact, let you input the age, state, premium amount and contract type and generate a payout rate.

This calculator shows off an income annuity’s best feature: its ability to maximize safe income during retirement. It allows the advisor to see how much extra income his client could get each year by buying an income annuity with part of his savings, compared with the income generated by an equally safe 4% withdrawal strategy.

A single 65-year-old man with $500,000 in savings, for instance, could spend $23,085 a year if he put $100,000 in a life-with-10-year-certain SPIA and drew 4% a year from the other $400,000 just as safely as he could spend $20,000 by drawing 4% from the whole $500,000.

Indirectly, the calculator reveals the “mortality credit” of the annuity. Also called the “survivorship credit,” that’s the premium that comes from outliving fellow life annuity owners.

This tool also provides a link to the video described above, automatically embedding the data from the calculator into each video. (Below, a screen capture from the video.) The advisor can also access price quotes from the Cannex database through this page, and link to an article about income annuities by Cannex CEO Lowell Aronoff.

The real-time price quotes are important, because they show how much the payout amounts quoted by different carriers at any given time can vary. The monthly income quotes on the hypothetical $100,000 contract described above ranged from a low of $348 a month to a high $412 a month.

The ILY and the IRR

The second and third tools help advisors quantify two factors—an annuity’s Implied Longevity Yield (ILY) and its Internal Rate of Return (IRR). They too indirectly express the value of the mortality credit.

A creation of Dr. Milevsky’s QWeMA Group, the ILY helps the advisor decide whether a retiree should buy an income annuity today or wait several years and use a systematic withdrawal plan to provide income in the meantime.

An ILY of 3.9% over a 10-year waiting period, for instance, would mean that if a 65-year-old client knew he could earn more than 3.9%—risk-free—on his investments over the next 10 years, then he should draw income from those investments during that time and delay the annuity purchase for 10 years. If not, he should put that money in an income annuity today. The ILY goes up over time; if you changed the age of the client to 75 in this example, his ILY would rise to 4.7%.

The IRR of any specific annuity can also be calculated on the Cannex site. Most advisors want to know the IRR of an annuity over the average life expectancy, so they can compare it to the investment return they think they can achieve for a client during the time.

But that approach misses the point, for two reasons. First, the IRR is always a guesstimate because nobody knows when the annuitant will die. The longer he or she lives, the higher the IRR. Second, an IRR isn’t the most helpful yardstick for gauging the value of an annuity, because an annuity isn’t an investment. It is insurance—insurance against the risk of outliving one’s life expectancy.

The Cannex calculator works around this problem by offering three sample IRRs for each annuity. For instance, a 65-year-old New York man with a $100,000, single life-with-10-year-certain annuity would have an IRR of 3.26% if he lived to his average life expectancy (84). But his IRR would be 4.83% if he lived to age 94 (thus outliving 75% of his peers) and 5.50% if he lived to 100 (outliving 90% of his peers).

Notice the fairly narrow range between 3.26% and 5.50%. The older you are when you buy the annuity, the wider the range and, therefore, the greater the chance that the annuity will either pay off big or not at all. If you changed the New York man’s age-at-purchase to 75, his IRR at life expectancy (age 88) would be just 0.76%. At the 75^th percentile (age 94), it would be 4.94%. At the 90^th percentile (age 100), it would reach 6.61%. Again, it’s an indirect expression of the potential value of the mortality credit.

What type of income annuity is right for me?

Assuming that the advisor and client have gotten through the first three calculators and know how much money they want to spend on the annuity and when they want to buy it, the fourth tool on the website allows the advisor and client to compare the payout rates of different contract designs.

An advisor can input a client’s information—age, state of residence, amount of premium, sex and preference for a single or joint-life contract—and then see how much a life-only contract, a life-with-10-years-certain, a life-with-20-years-certain and life-with-cash-refund would pay, respectively.

This type of exercise will generally show a 65-year-old client and spouse—perhaps to their pleasant surprise—that an average joint-life-with-20-year-period-certain contract (which guarantees that they or their beneficiaries will get their principal back and more) will deliver only slightly less income per month than a joint-life only ($453/month versus $445/month per $100,000 premium), where the income ends when both spouses have died, even if they die shortly after they buy the contract.

That’s another indirect measure of the mortality credit—or, in this case, the lack of one. The insurance companies are evidently confident that at least one member of a 65-year-old couple that seeks out an annuity will live at least 20 years. (Annuity buyers tend to be healthier than average Americans.) Consequently, the life-only contract pays just $8 a month more than the 20-year-period-certain contract.

Rules-of-thumb work too

As noted above, only advisors affiliated with institutions that subscribe to Cannex will have access to these tools. This article may therefore seem unnecessarily long. But the four Cannex tools themselves, although proprietary, nonetheless provide an opportunity for a general review of some of the most important elements of the annuity purchasing decision.

It should be noted that calculators of this type are subject to their own law of diminishing educational returns. There’s an ever-present temptation to use them to churn out overly precise results on the basis of a few arbitrary assumptions about, say, future market returns or longevity.

There’s also an ever-present risk of using them to breed an overwhelming number of optional solutions to a problem, or of creating trade-offs so finely balanced that they would prevent King Solomon from making a decision. Sometimes, when faced with the unknowable, heuristics (i.e., rules-of-thumb) work just as well or better.

When shopping for an income annuity, a fairly safe default strategy for the typical mass-affluent couple would be to buy a joint-life annuity with 10, 15 or 20 years certain that generates just enough income, along with Social Security and other reliable sources of lifetime income, to cover all their basic expenses from age 70 or so onward. One final note: it’s absolutely essential to know the entire range of market prices of annuities at the time you buy. Buying blind could cost your client a small fortune.

Sorry to Burst Your Bubble

Posted on February 14, 2013 by Kerry Pechter -

Two competing narratives dominate conversations about bonds these days. The first story line is that, for the sake of retirees, insurance companies and others who rely on interest income, bond yields need to go up—soon.

The alternative story is that a rise in prevailing interest rates could pop the bond “bubble” and punish bondholders with a devastating loss of market value that will take years to recover.

The causes and effects of a rise in interest rates vary, of course. The causes might include a change in monetary policy, a sudden drop of faith in or demand for dollar-denominated debt or fear that inflation is apt to rise in the future.

The effects of a rise in yields also vary. It could slow down the economy and hurt equity prices. If you own individual bonds, a rise in rates will depress the prices of the bonds. The longer the bond’s “duration,” which is related to its maturity, the farther it will drop in price.

For the typical U.S. near-retiree who is invested in a diversified bond fund, a rise in rates would do more good than harm. The fund’s NAV will drop in the short run, because the prices of existing bonds have to move lower to equal the yield of new, higher-coupon bonds.

But as the fund manager reinvests interests, principal and new cash in the new bonds, the higher yields immediately start to erase the short-term capital loss. For the plain vanilla investor with money in a total bond market index fund and an investment horizon of more than about five or six years, a return to more normal 10-year Treasury rates would be all to the good.

A look at the way bond funds recover from rate hikes and an review of the effect of rate hikes in the 1970s and 1980s on bond funds shows that fears of a bond bubble are overblown.

Recovery mode

Just as a fever causes discomfort while it helps the body recover from infection, higher interest rates cause temporary pain to a bond fund owner while helping the fund recover its losses and achieve higher yields.

The average duration of a bond fund tells you roughly when the fund will recover the capital losses of an interest rate hike, bond experts say. If the average duration is five years, for instance, that’s about how long it will take for the fund to gain back through interest what it lost in market value.

“It’s a rule of thumb,” Roger Aliaga-Diaz (below left), a researcher at Vanguard and co-author of the 2010 paper, “Deficits, the Fed, and Rising Interest Rates: Implications and Considerations for Bond Investors.” “In general, we say that if you take Barclays Capital U.S. Aggregate Bond Index, which has a four- to five-year average duration, and your investment horizon is more than four or five years, an interest rate rise will hurt you up front but the loss will be more than compensated over your time horizon by higher yields.”

A blogger at www.longtermreturns.com, who unfortunately insists on anonymity, told RIJ that there’s no precise formula for predicting the breakeven point of a bond fund in a rising rate environment, but that average duration is close enough. (Duration indicates the sensitivity of a bond’s price to changes in interest rates. A one-percentage point rise in rates would cause the price of a bond with a five-year duration to fall by 5%.)

“I don’t think [such a formula] can exist, since most bond funds do not hold their bonds to maturity. But again, I think the approximation above is plenty good for practical breakeven calculation and also good enough for expected return calculation,” the blogger said.

There is the opportunity cost of waiting for the bond fund to reach a breakeven point after a rise in rates, but there’s no remedy for that other than trying to time the market and cash out of the fund before rates go up, and buy the fund back at a lower price afterwards.

“This is market timing,” said Russell Wild, a financial planner and author of Bonds for Dummies. “There may be no crash, in which case, your cash will lose 2% to 3% a year while you’re waiting to rates to rise.”

History lesson

To gauge what might happen if rates rise in the future, it’s useful to look back and see the effect of rate hikes in the past. From the middle 1960s to the early 1980s, interest rates in the U.S. were raised in response to inflationary pressures. The nominal damage was confined to long-term corporate and Treasury bonds.

Between 1965 and 1980, returns on long-term corporate bonds and 20-year Treasury bonds suffered almost as many down years as up years, and had annualized nominal gains of only 2.9% and 2.5%, respectively. (They were devastated by inflation, however, losing 40% and 45% of their purchasing power, respectively.)

In other words, rising coupon rates and falling prices cancelled each other out, to a degree. Periods of rising rates correspond to flat spots for the red and blue lines on the chart at right. For additional charts of this type, click here.

“Looking at SBBI [Morningstar’s annual Stocks, Bonds, Bills and Inflation report], ~20-year constant maturities Treasuries lost between 7.9% and 14% in price annually from 1977 to 1981, but at the same time they were paying out between 7.9% and 11.5% in income so net total returns were right around zero,” said LTR. “The worst of those five years was negative 4.0% in 1980; 1981 was positive 2%; 1977-1979 were all right around –1% each).”

That’s not good, but it’s not a crash either. As for intermediate-term bonds, they were not hurt by the increases in rates. According to LTR, “Five-year constant maturities had positive nominal total returns every single year from 1970 to 1993, averaging about 3% for 1977-1980 and over 9% in 1981. It only went up from there!”

Bottom line: Boomers with a substantial amount of their savings in diversified bond funds with average durations shorter than their own time horizon for retirement are not sitting on a giant bubble of interest rate risk.

$300 billion parked with former employers

Posted on February 14, 2013 by Editor Test -

About $300 billion worth of securities is sitting in 401(k) accounts because most Americans take five years or more to roll their defined contribution savings into IRAs when they change jobs, according to a new survey by Cambridge, Mass-based Cogent Research.

Cogent’s Investor Rollover Assets in Motion report, based on a survey of 4,000 investors with at least $100,000 in investable assets, also showed that hen former plan participants finally do move the money to an IRA custodian, they tend to choose a custodian with a household name.

Fidelity, Vanguard and Charles Schwab are the most popular destinations for rollovers, the survey found. This year, for the first time, T. Rowe Price and USAA were among the top five targets of rollover assets. They were followed by Morgan Stanley Smith Barney, Edward Jones, TD Ameritrade, Wells Fargo Advisors and TIAA-CREF.

Sheer inertia appears to keep the assets in place until a specific life event, such as a marriage or a death, compels a former participant to confront the mild but generally unfamiliar chore of transferring money from a 401(k) account to an IRA. For 71% of investors surveyed, the delay lasted for five years or more. The older the investor, the more likely that was to be true.

“There’s definitely a lot of inertia. But once they change jobs or get married or some other significant life event occurs, they say, ‘I have to take some action,’ and they move those dollars off the sidelines,” said Tony Ferreira, a Cogent managing director and co-author of the report.

“Trust” emerged as a more salient selling point than “performance” in Cogent’s latest survey of this type. “The first and foremost factor in the choice of a rollover destination is familiarity with the brand. People used to look for performance, but now they are migrating to brands that they either already work with or trust,” Ferreira said.

“After brand, ‘low fees’ was the second biggest reason for choice of IRA provider. The third was ‘They make it easy,’ and the fourth was ‘brand reputation.’ The fifth biggest reason was that the IRA provider was the same as their 401(k) provider.”

Meir Statman recommends mandatory national DC plan

Posted on February 14, 2013 by Editor Test -

The author of the recent book, What Investors Really Want, is calling for a mandatory, universal workplace-based defined contribution plan in the U.S. that would make Americans less dependent on Social Security for retirement income.

“It is time to switch from libertarian-paternalistic nudges to fully paternalistic shoves,” writes Meir Statman, a professor of finance at Santa Clara University in California and Tilburg University in the Netherlands, in the draft of paper called, “Retirement Income for Non-Savers.”

Automatic enrollment, which has been shown to increase 401(k) participation, is not strong enough a measure to make a difference in the amount of savings available to most people at the end of their working years, Statman argues.

He recommends tax-deferred private savings accounts similar to 401(k) and IRA accounts but mandatory and inaccessible to account owners before they reach retirement age. Locking up the assets until retirement would prevent so-called “leakage” when employees change jobs.

Retirement savings would be paid out in life annuities under Statman’s plan, except for individuals who can demonstrate that they have enough savings to self-insure against longevity risk.

The current system, in which fewer than half of U.S. workers have access to a defined contribution plan and many participants contribute too little, produces a few retirees with more savings than they need and many others with much less than they need, he writes.

“Among people aged 60 to 69, only 7% took annual distributions exceeding 10% of their balances, and only 18% made any withdrawals in a typical year,” Statman writes. “Among non-retirees, 33% expect that Social Security would be a major retirement funding source. But 57% of retirees report that Social Security is a major source of retirement funding.”

Mandatory savings would yield broad benefits, Statman claims. “Mandatory defined contribution accounts would benefit savers by alleviating the burden on adult children who support destitute non-saving parents and the burden on taxpayers who support destitute non-savers through taxes and transfer payments.”

Australia and Israel already have well-developed mandatory savings plans, according to the paper. In Australia, employers contribute 9% of pay (12% by 2020) each year to employee accounts and employees add another 3%, on average.

In Israel, at least 18.33% of employee earnings go into a mandatory savings plan (5-7.5% from employers, 5-7% from employees and 8.33% more from employers, with the last portion accessible upon either layoff or retirement).

In January, U.S. stock funds received highest inflows since 2004

Posted on February 14, 2013 by Editor Test -

Investors added $86.5 billion to long-term open-end mutual funds in January, and 72 of 93 open-end categories recorded inflows through January 2013, Morningstar reported this week.

Combined with inflows of $28.6 billion for exchange-traded funds, it was the largest one-month inflow on record. All asset classes and each of the top-10 open-end fund providers saw long-term fund inflows.

“Market observers have been waiting for a sign that the multi-year trend of investors buying fixed income while selling U.S. stocks would reverse in a so-called ‘great rotation,’” said Mike Rawson, fund analyst on Morningstar’s passive funds research team. “Inflows of $15.5 billion for U.S.-stock funds, the largest monthly intake since 2004, and the first month of inflows in the last 23 for active U.S.-stock funds, support this development.

“However, U.S. stock funds experienced slower organic growth than any other major asset class in January, and seasonal and one-time factors such as lump-sum contributions to retirement accounts and acceleration of dividend payments indicate that claims of a paradigm shift in investor behavior may be premature,” he added.

Additional highlights from Morningstar’s report on mutual fund flows:

The intermediate-term bond category had the most inflows in January, with $10.5 billion.
Taxable-bond funds led all asset classes with inflows of $31.0 billion in January.
International stock funds took in $18.4 billion during the month.
Vanguard topped all fund families in January with overall inflows of $17.6 billion, 87% of which flowed to the firm’s passive lineup.
Vanguard funds swept the top three spots for fund-level inflows, led by Vanguard Total Bond Market’s inflows of $4.3 billion.
American Funds saw its first monthly inflow since June 2009.

US mutual fund assets near the $15 trillion mark

Posted on February 14, 2013 by Editor Test -

The US mutual fund industry, including open and closed-end funds and exchange-traded funds, approached $15 trillion in assets for the first time in February, according to Strategic Insight, the mutual fund industry research and business intelligence provider.

Rising share prices and strong flows into stock and bond funds accounted for the increase. The industry reached $10 trillion in assets under management in 2006.

In the month of January, the net intake for stock and bond mutual funds reached $90 billion—more than triple the average monthly volume in 2012. An additional $30 billion was added to ETFs in January.

“Assuming modest economic expansion this year, it is plausible that annual stock and bond fund flows exceed $500 billion, more than 50% above the previous annual record,” said Avi Nachmany, SI’s director of research.

For the first time in several years, January’s monthly net intake was weighted more towards stock and balanced funds than towards bond funds. This trend should persist throughout 2013, barring a major market disruption, Nachmany said.

January set the all-time record for monthly flows into actively managed stock and bond funds, at $72 billion (or 80% of total mutual fund flows). The previous record for monthly net flows into actively managed funds was set in January 2007 with $46 billion.

“Remarkably, January witnessed rapidly expanding demand for a very wide range of investment strategies: US stock and balanced funds; emerging and developed international market stock funds; value and growth strategies; and fixed income, with the exception of US Government bond funds,” added Nachmany.

“The two parallel rotations taking place in the fund industry will continue in 2013 and beyond—the rotation towards stock investing and the rotation from cash accounts to bond and income strategies.”

Exchange-traded products (including exchange-traded notes) attracted $30 billion of net intake in January. Flows into stock-oriented products accounted for 97% of the inflows. International equity ETFs netted $15 billion of inflows during the month, while domestic equity netted $14 billion.

Is NEST a threat to Britain’s private pension providers?

Posted on February 14, 2013 by Editor Test -

A committee of Parliament has urged the UK government to lift the restrictions on transfers into and contributions to Britain’s new national, centrally-managed auto-enrollment employer-based defined contribution plan, known as NEST, IPE.com reported.

A failure to lift the restrictions would “lead to a less than optimal outcome for auto-enrolled pension savers,” the press report said. According to the committee, the cap makes NEST more complicated and the transfer ban prevents participants from consolidating their savings at NEST.

“We therefore reiterate our previous recommendation that these two restrictions on NEST be lifted now, rather than waiting for the 2017 review,” the committee report said. “This is necessary to support the continued success of automatic enrolment implementation.”

The removal of restrictions now would increase the likelihood that smaller employers – who can begin offering NEST in April 2014 – would consider NEST as one of their options, said Lee Hollingworth, a partner in the London pension consulting firm, Hymans Robertson.

The select committee expressed concern about restrictions stopping employers from opting for NEST.

“If employers decide they cannot opt for NEST because of the restrictions,” it said, “there is potential for consumer detriment because employees may not then be offered the best value [plan] available.”

Though NEST was designed for workers who don’t have access to an employer-sponsored defined contribution plan, it could present competition to private retirement plan providers in the UK. Lifting current restrictions could make it all the more competitive against the private sector.

Some pension providers have spoken out against the lifting of any restrictions, arguing that they should remain in place until NEST is self-financing and no longer has the advantage of receiving government funding for its operations. Unions, employer groups, the National Association of Pension Funds and NEST itself have urged removal of any barriers to its competitiveness.

Russell puts its “adaptive investing” model in new TDF series

Posted on February 14, 2013 by Editor Test -

Russell Investments has teamed up with Business Logic to create a line-up of target date funds (TDFs) for defined contribution plans. The funds will incorporate Russell’s “Adaptive Investing” re-allocation methodology, which has powered two previous Russell products.

“Russell Adaptive Retirement Accounts combine some customization elements of a managed account service – typically at a lower cost to the participant – with the benefits of traditional target date funds,” said Dick Davies, managing director, defined contribution, at Russell.

The Seattle-based asset manager already offers a series of target date funds-of-funds, called LifePoints. The new target date funds, which Russell describes as “the next generation in target date investing for institutional plan sponsors,” will be offered in addition to LifePoints, a Russell spokesperson told RIJ.

In 2012, Russell included Adaptive Investing in the Russell Retirement Lifestyle Solution. Available through financial advisors, the program aims to maintain a client’s funded status above 100% in retirement.

The model is designed to make sure the client always has enough investable assets to fund a life annuity that will generate enough income to meet his household needs for the rest of his life. It is not necessarily designed to lead to the purchase of a life annuity.

According to a Russell release this week, the Adaptive Retirement Accounts, like conventional TDFs, would be a qualified default investment alternative (QDIA) under federal regulations, but would be more customized than conventional TDFs to each participant.

A conventional TDFs matches an asset-allocation and “glide-path” strategy to a certain retirement year. Russell’s Adaptive TDFs will “incorporate individual participants’ specific demographics and investment experience into the asset allocation modeling and improve the likelihood that they will achieve their specific targeted retirement income,” the release said.

Russell Adaptive Retirement Accounts can “leverag[e] existing investment options” and create TDFs that consider a participant’s age, savings deferral rate, current account balance, salary and DB pension benefit, if any.

Using that information, provided by plan recordkeepers, Russell would “determine the appropriate asset allocation for each participant based on how on-target they are toward meeting their specific retirement income goal… This can all be done without direct participant involvement, since the necessary information already resides with the recordkeeper or on the plan sponsor’s human resources system,” the release said.

Russell has $23 billion in DC assets under management globally as of September 30, 2012. Business Logic, a Chicago-based company whose CEO is John Patterson, has also collaborated with JPMorgan, Transamerica and PIMCO, according to its website.

What’s good for General Motors…

Posted on February 14, 2013 by Editor Test -

Unlike the famously premature reports of Mark Twain’s death, reports of the demise of the defined benefit plan are apparently not exaggerated.

Following the example of General Motors in 2012, more defined benefit (DB) plan sponsors intend to offer participants a one-time lump-sum buyout plan in 2013, according to a new survey by Aon Hewitt, the HR unit of Aon plc.

More than one-third (39%) of 230 U.S. DB plan sponsors representing almost five million employees told Aon Hewitt they are “somewhat” or “very likely” to offer lump-sum payouts to terminated vested participants and/or retirees during a specified period, also known as a “window approach,” in 2013. Just 7% of DB plan sponsors added a lump-sum window in 2012.

Plan sponsors will have an added incentive to move pension liabilities off their balance sheets in 2013 and 2014, as anticipated increases in Pension Benefit Guarantee Corporation (PBGC) premiums raise the cost of pension liabilities, according to Aon Hewitt.

Most employers (84%) won’t change their benefit accruals, the survey showed. Only 16% said they are somewhat or very likely to reduce DB pension benefits, while 17% are somewhat or very likely to close plans to new entrants in 2013. Just 10% are somewhat or very likely to freeze benefit accruals for all or some participants.

Half of employers surveyed are likely or somewhat likely “to conduct an asset-liability study” in 2013, and 60% are somewhat or very likely to institute liability-driven investing.

“Plans that are over funded will likely take measures to lock in this position [by] offering lump-sum windows. An underfunded plan will need to [implement] a glide path investment strategy that will de-risk the plan as the funded position improves,” the Aon Hewitt release said.

While just 18% use this glide path strategy today, the percentage is expected to exceed 30% by the end of 2013, the survey showed, as more plan sponsors abandon the traditional approach of investing a majority of plan assets in equities. Aon Hewitt’s survey found that while 52% of plan sponsors favor this majority equity strategy today, just 31% would use this approach by the end of the year.

Poor Standards at S&P, U.S. Alleges

Posted on February 7, 2013 by Editor Test -

In a civil suit that reopens the wounds of the 2008 financial crisis and tests the potentially conflicted business model that major U.S. crediting rating agencies use, the Justice Department Tuesday charged Standard & Poor’s Ratings Services with fraud.

The government—whose own debt was downgraded in S&P in 2011, helping to trigger an equity market correction—alleges that S&P executives knowingly inflated ratings of structured financial products, such as Residential Mortgage Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs), in the years leading up to the crisis.

According to the complaint, S&P, despite claims of objectivity, inflated ratings to please its investment banking customers and to increase or defend its own revenue and market share.

As a result, the suit charged, was that “investors, many of them federally insured financial institutions,” lost billions of dollars when the products’ weaknesses became public and their value fell. S&P eventually announced a broad downgrade of subprime RMBS in July 2007.

On Wednesday, S&P, a unit of The McGraw-Hill Companies, Inc., responded to the suit with a statement:

“The DOJ and some states have filed meritless civil lawsuits against S&P challenging some of our 2007 CDO ratings and the underlying RMBS models. Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. … At all times, our ratings reflected our current best judgments about RMBS and the CDOs in question. Unfortunately, S&P, like everyone else, did not predict the speed and severity of the coming crisis and how credit quality would ultimately be affected.”

The case may hinge on the content and context of certain internal S&P e-mails sent during 2007, when executives evidently discussed the pressure to mollify their primary customers—the investment banks that underwrote the financial instruments in question—by using “business-friendly” ratings models.

In one internal email quoted in the suit, an executive said:

I do not believe that market share is our only objective. However, we cannot ignore the real risk of losing transaction revenue… The balance between market share and analytical integrity is complex, as one needs to consider ‘long-term’ and ‘short-term’ market share. In the short term it may be more beneficial to use modeling assumptions that are more favorable to transactions that are in the pipeline. In the long-term it may be more beneficial to have a more robust model that can be adapted to new transactions (such as long/short, etc.) so that we don’t lose new opportunities to our competitors.”

Another email that reflected internal debate said:

“The only way I can see to move this forward is to approach our clients and ask them for pools and levels, but this looks too much to me as if we are publicly backing into a set of levels driven by our clients.”

The suit also points to the emergence of gallows humor at S&P when the true value of the RMBS and CDO investments became generally known and a crash began to appear likely:

“On July 13, 2007 an S&P CDO analyst emailed employees at two banks that issued CDOs a cartoon that depicted asset-backed CDOs as a game of ‘Jenga,’ where the object is to remove pieces from a structure, creating a more and more unstable structure, until the entire thing collapses.”

The government will have to prove that the internal emails at S&P amount to smoking-gun evidence of fraud. S&P has protested that unflattering emails were “cherry-picked” for inclusion in the suit by the Justice Department.

At the least, however, the suit is likely to shed new light on the business model that major ratings agencies use. The agencies earn huge fees from their investment banking customers, who are able to shop among the agencies for the most favorable ratings. That potentially creates pressure for grade-inflation. The emails quoted in the lawsuit suggest that analysts at S&P may have been less insulated from commercial pressures than S&P publicly claimed.

The suit echoes the theme of some of the lawsuits that followed the dot-com crash of 2000, when analysts at major investment banks were accused of purposely inflating the ratings of certain technology stocks and encouraging investors to buy securities that the analysts privately disparaged.

The Retirement Income Paradox

Posted on February 7, 2013 by Kerry Pechter -

Boomer retirement may be too varied and fragmented and may contain too many “contradictions” to produce the kind of mass-market bonanza for asset managers or insurance companies that Boomer accumulation delivered to the mutual fund industry.

That’s not to say that the demographic and financial trend doesn’t present significant opportunities. But many advisors and product manufacturers are failing to take full advantage of them.

Those are two takeaways from a new report, “Retirement Income Insights 2013—Attracting and Retaining Retirement Income Clients,” based on a survey of 600 advisors from all of the major distribution channels: wirehouse, independent broker-dealer, bank and registered investment advisor (RIA).

Prepared by Dennis Gallant of GDC Research and Howard Schneider of Practical Perspectives, the survey/report is meant to be read by retirement product manufacturers and broker-dealers for whom advisors are a target market. They should find some news in the 113-page report encouraging. Schneider and Gallant found, for instance, that:

Over 70% of advisors increased the number of retirement income clients they serve in the past 12 months.
29% of advisors expect demand for retirement income support to increase significantly in the next 12 to 24 months.
The risk-adjusted total return approach is used to generate income by 40% of advisors, with the remainder of the users split among the pooled or time-segmented approach and the income floor methodology. (See bar chart below.)
Roughly one in three advisors expects to increase use of variable annuities, ETFs, and alternative investments in managing retirement income assets.

But Schneider and Gallant also identified “contradictions” in the retirement income space that hinder advisors and providers alike from tapping the seemingly vast opportunity presented by the movement of Boomer savings from accumulation to decumulation. For instance:

More than anything, advisors need help attracting new retirement income prospects and converting them to clients. They feel confident in their ability to convert savings to income with existing products and processes.
While retirement income clients are important to most advisors, many advisors don’t know how to address basic retirement issues, like setting realistic expectations or educating investors on what challenges retirement will bring.
Although most advisors are confident in their abilities to serve retirees, few know much about essential topics such as Social Security, Medicare, or elder care.
Value provided to retirement income clients does not relate to generating the highest return or the most income. Rather it arises from helping clients with more personal issues—a skill that many advisors lack.

The survey suggested that there is more conversation about retirement income than action. “While most advisors say they are delivering retirement income support, only a limited number, less than five percent, have actually positioned their practice to serve retirement income clients,” said Schneider, president of Practical Perspectives.

“Not a lot of advisors are promoting themselves as retirement income experts. At the same time, their potential income clients don’t know whom to turn to. The mass-affluent clients in particular are a bit lost in terms of how to find the right kind of help. It’s hard for them to find an advisor or a firm that says, ‘Come to us and you’ll find the answers you need about retirement,’” he added. “Advisors know there’s a huge retirement income opportunity out there. But they also have a lot else going on in their practices.”

Schneider chart 2013 Another contradiction: Despite the proliferation of consumer ads (e.g., ads for Charles Schwab, TDAmeritrade and Raymond James in the Feb. 11-18, 2013 issue of The New Yorker) for help with retirement, there’s apparently no perceived standard-setter in the retirement income space. “When we ask broker-dealers ‘Who does retirement well?’ there’s always a 10 to 15-second lull. Firms don’t see anyone doing it particularly well, except perhaps Fidelity, with its ‘Green Line’ campaign,” Schneider said.

At the same time, many advisors concede that they lack the “soft skills” that become even more important in the decumulation phase than during the accumulation phase.

“Advisors understand the nuts and bolts of retirement. They know how to set up income streams. Where they really struggle is with finding clients and engaging with them. Engagement means knowing how to interact with clients, how to get them to grasp longevity risk or sequence of return risk, how to get them to have a realistic vision of what day-to-day life will be like in retirement,” he said.

“Communication skills aren’t as important when dealing with an accumulation-stage client. Retirement requires a different skill set. Advisors who are used to dealing with 45-year-olds are less comfortable talking about when to take Social Security and how to figure out the Medicare puzzle.”

What advisors say about retirement income

(Quotes from interviews by Practical Perspectives and GDC Research)

“The art of knowing how to replace a paycheck is very different than building a portfolio or growth. The distribution phase and the accumulation phase are two very different things.”

“I would hope my broker-dealer would provide more assistance with product information/ support.”

“There’s too much product-pushing to fit needs that have to be integrated with the entire portfolio and person.”

“Distribution systems that exist now are specifically geared toward annuities, which are not the only answer for most clients. I wish I could be involved in the creation of a brand new product- neutral system that can help advisors plan for all aspects of retirement incom

The survey also suggested that product manufacturers and their wholesalers are still trying to put a round peg in a square hole, so to speak, when calling on advisors.

“Product manufacturers have defined retirement income narrowly; usually in terms of creating products that generate income. But that addresses only one aspect of what advisors are doing. The challenge for product providers is to figure out the solutions that advisors will want to use, but also to understand the nuances of how they’re delivering income,” Schneider said.

Advisors, he noted, are often disappointed to find that annuity or mutual fund wholesalers tell the same story to all advisors, ignoring the fact that some advisors use systematic withdrawal while others use bucketing methods, or income flooring products.

But advisors apparently have certain blind spots of their own.

“Two things surprised me,” Schneider commented about the study. “When we asked advisors what concerned them most about the current market environment, the potential for rising rates wasn’t a major concern. That was worrisome because it suggests that advisors think they can anticipate when rates rise, and take action to preserve their clients’ portfolios. But if history is any guide, advisors can’t predict big market moves. They’re much more concerned with inflation and taxes.

“The other big surprise was that a significant number of advisors said they converted 50% or less of their prospects to clients,” he added. “Advisors like to say that if they sit down with a prospect, they’ll convert them 95% of the time. But the dirty secret is that the ratio isn’t that high. Most advisors rely on referrals for new clients. They know there are all these people out there who need help, but they don’t know how to find them.”

Ultimately, advisors and providers alike may be underestimating the new challenges posed by the Boomer retirement wave. “The financial services industry took the problem of accumulation, of building wealth, and applied a simple, model-driven approach, mainly around the principles of Modern Portfolio Theory,” Schneider told RIJ. “In fact, they may have made it seem more complex than it actually was.

“Now, with retirement income, they’re taking an inherently complex and individualized problem and trying to apply model-driven or packaged solutions. But retirement isn’t that easy.”

As equity funds enjoy record inflow, veteran market-watchers fret

Posted on February 7, 2013 by Editor Test -

An all-time record $77.4 billion flowed into all U.S.-listed equity mutual funds and exchange-traded funds in January, according to TrimTabs Investment Research.

“The inflow in January smashed the previous record of $53.7 billion in February 2000, which was just before the technology stock bubble burst,” said David Santschi, CEO of TrimTabs, in a statement.

Of the $77.4 billion, $39.3 billion flowed into U.S. equity mutual funds and exchange-traded funds, while $38.1 billion flowed into global equity mutual funds and exchange-traded funds, TrimTabs reported in a research note to clients.

Both were record amounts. The previous record for U.S. equity funds was $34.6 billion in February 2000. The previous record for global equity funds was $27.1 billion in January 2006.

“These record inflows should make contrarians very nervous,” said Santschi. “Big inflows from fund investors have historically coincided with market tops. Note that four of the top ten biggest inflows were in early 2000.”

Inflows did not slow late last month, suggesting the buying was driven by optimism about the markets as much as by investments of bonus money or reinvestments after tax-related stock sales late last year, TrimTabs speculated.

“The Federal Reserve is creating about $4 billion in new money every business day, and even a few Fed officials are concerned that this money printing is blowing up asset bubbles,” said Santschi. “Investors need look no further than the equity markets to find lots of froth.”

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Jefferson National VA to offer tactically-managed portfolios from CMG Capital Management

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