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For investors, it’s been a very good year

Posted on November 21, 2012 by Editor Test -

Stock and bond funds appreciated by more than $1 trillion the first ten months of 2012, as stock funds averaged a total return of more than 12% and, despite interest rate suppression, bond funds averaged almost 8%, according to Strategic Insight.

That appreciation, combined with projected net inflow to bond and stock funds (including ETF flows) of $400 billion for the entire year, could make 2012 second only to 2009 (when asset levels rebounded by $2 trillion after the 2008 crash) in AUM growth.

“Next year, assuming meaningful progress is accomplished in Washington, could similarly surprise many of the doomsayers,” said Avi Nachmany, SI’s director of research, in a release.

Money-market funds saw net redemptions of $8 billion in October, bringing redemptions in such funds to nearly $144 billion so far in 2012.

“In 2013 most investors would continue to focus on income and stability. Yet, as economic life across America slowly improves, investment in stock funds will increase too. With 80-90% of all stock fund balances dedicated to retirement savings, thus having accumulation and withdrawals’ time-horizons of 20, 30, or 40 years for most investors, once Americans become more confident about the future, investing for retirement in that more optimistic future through stock mutual funds will expand,” Nachmany said.

In October, net inflows to bond funds reached $30 billion. Bond funds are projected to amass over $300 billion in net inflows for the full year, exceeding the 2010 and 2011 pace, according to Strategic Insight. (Flow data pertains to open-end mutual funds, excluding ETFs and funds underlying variable annuities.)

Equity fund net redemption was $15 billion in October, as stock fund investors waited for election results.

ETFs investing in stocks experienced modest redemptions of $2 billion in October, following inflows of $38 billion during September, their highest monthly take in four years.

Exchange-traded products benefitted from $3 billion of October net intake, bringing total ETF net inflows (including ETNs) to nearly $140 billion for the first ten months of 2012, more than in any of the three previous calendar years. Outside the U.S., ETFs gained $45 billion so far in 2012.

Globally, ETF net flows in 2012 should exceed $200 billion. Gold, emerging markets, diversified international and corporate bond funds were among the many objectives gaining inflows, while a number of domestic growth-oriented funds faced monthly net redemptions.

Target date funds attracted $5 billion in net flows during October, increasing YTD net intake to $45 billion.

“This year target date products are on track to rival the annual net flows record set in 2007 of $58 billion,” said Bridget Bearden, head of Strategic Insight’s defined contribution and target date funds practice.

“Quote” of the Week

Posted on November 21, 2012 by Editor Test -

Solvency II could kill many British DB plans, officials say

Posted on November 21, 2012 by Editor Test -

Britain’s pensions minister said that Solvency II measures in the revised IORP (Institutions for Occupational Retirement Provision) Directive will end any prospect of “risk sharing” among UK companies, and estimated that the total cost to the local pensions industry could reach as high as £400bn (€498bn), IPE.com reported.

The UK government has for months been pushing back against European Union plans to harmonize the Solvency II capital rules for insurance companies with the rules governing pensions across Europe.

If pension funds aren’t given a partial exemption from Solvency II requirements, they would have to shift out of riskier assets, which would drive down their expected returns, hurt their funded status, and force plan sponsors to increase contributions. British pension officials and executives are afraid the cure for pension problems would be worse than the disease.

Addressing a PensionEurope conference in Frankfurt, Steve Webb he pointed out that it was currently illegal for companies in the UK to offer employees pension promises unless they were inflation-protected.

“We are currently looking at ways to encourage firms to offer what you might call ‘Defined benefit light,’ where pensions are essentially like the old DB style, but with more flexibility for the firm, or ‘Defined contribution plus,’ which aims at getting more money in but also looks at [plan] quality, scale, charges and governance,” he said.

He said he wanted to avoid a stark and sudden shift from “high-quality, final-salary, index-linked pensions that are so expensive that firms won’t want to provide them” to “minimalist DC” plans with “minimalist contributions.”

UK companies wanted risk sharing but were “terrified” about Solvency II, and that Brussels would make those promises “very” expensive, Webb said. “The risk is that Solvency II will not only have a devastating effect on the European industry but destroy the prospect of risk sharing.”

Webb also referred to an analysis, published today, on an initial impact assessment he commissioned showing that the cost for the UK pension industry would be as much as £150bn if Solvency II rules for pension schemes were implemented, adding that “if the full Solvency II capital requirements came through, we would be talking about £400bn in the UK.”

“When we discussed the final points of the QIS (Quantitative Impact Statement) methodology, there was a huge elephant in the room – why are we doing this at all?” he said. “What is the question we are trying to answer that could possibly be in that territory?”

Webb finally argued that, in terms of plan closures, his research showed that, over the coming decade, only one in 20 DB plans would remain open to new members in the UK if Solvency II rules were introduced. “This would kill DB,” he said.

New York Life reports 16% annuity sales growth in 3Q 2012

Posted on November 21, 2012 by Editor Test -

New York Life’s annuity sales increased 16% and mutual fund sales increased 10% in the third quarter of 2012 compared with the same period in 2011. Annuity sales in the quarter were driven by income annuity sales, which are up 17%, and variable annuity sales, up 5% compared with the same period a year ago.

Overall, the company announced strong third quarter gains in sales of life insurance, annuities and mutual funds, as well as an increase in agent new hires in the first nine months of 2012. New York Life agents recorded an increase of 11% in sales of recurring premium whole life insurance over the third quarter of 2011.

The company also announced that its dividend payout to participating policyholders would increase by $100 million in 2013, an 8% rise over the 2012 payout. Even in the face of unprecedented low interest rates, the company had strong operating performance and was able to enhance its surplus and dividend through the divestiture of certain international businesses. The company also has had better than expected persistency as policyholders maintain their policies in force despite the challenging economy.

Mutual fund sales are being driven by consistent investment performance from the company’s investment boutiques in both income oriented and capital appreciation funds.

New York Life has recorded a 4% increase in agent recruitment over the same period in 2011, with 2,396 new agents hired through September 30, 2012. The full year 2012 goal for agent recruitment is 3,700.

New York Life has the highest possible financial strength ratings currently awarded to any life insurer from all four of the major credit rating agencies: A.M. Best (A++), Fitch (AAA), Moody’s Investors Service (Aaa), Standard & Poor’s (AA+).

Bull run

Posted on November 21, 2012 by Editor Test -

“Next year, assuming meaningful progress is accomplished in Washington, could similarly surprise many of the doomsayers,” said Avi Nachmany, SI’s director of research, in a release.

Money-market funds saw net redemptions of $8 billion in October, bringing redemptions in such funds to nearly $144 billion so far in 2012.

Equity fund net redemption was $15 billion in October, as stock fund investors waited for election results.

ETFs investing in stocks experienced modest redemptions of $2 billion in October, following inflows of $38 billion during September, their highest monthly take in four years.

Target date funds attracted $5 billion in net flows during October, increasing YTD net intake to $45 billion.

When rates rise, will bond fund owners bolt?

Posted on November 21, 2012 by Editor Test -

As bond funds continue to absorb assets and the Fed’s policy of suppressing long-term interest rates continues, some observers wonder if a bond bubble is building. They fret that if and when interest rates on new bonds begin to rise and depress the prices of existing bonds, bond fund owners might panic and make the problem worse.

In an essay in this month’s issue of the Journal of Financial Planning, Mark W. Riepe, CFA, president of Charles Schwab Investment Advisory in San Francisco, looked at the historical relationship between changes in interest rates and fund flows for intermediate-term (average maturity, four to 10 years) bond funds and for high-yield or “junk” bond funds from August 1992 to July 2012.

Riepe assumed that high-yield fund shareholders would be “more active and motivated by tactical considerations when deciding to get in or out of a fund” and that “the intermediate bond category is more likely to be populated by shareholders who have a longer-term, strategic mindset and seek diversification from stocks.” The correlation between fund outflows during rate hikes would likely be stronger in high-yield bond funds than in intermediate-term bond funds, he hypothesized.

Riepe constructed a series of monthly net asset flows for all mutual funds within the high-yield and intermediate-term categories between the dates listed above, using data from Morningstar. The data on individual funds were aggregated into category totals. The category totals were then correlated with the monthly returns of the Barclays Aggregate Index (for intermediate bond) and the Barclays U.S. Corporate High Yield Index (for high yield).

The data confirmed Riepe’s expectations. They showed that the high-yield category had a positive net cash flow in only 8 of the 64 months when there was a negative total return to the high-yield index, for a 0.53 correlation between returns and net cash flows over the 20-year period. For intermediate bond fund flows, the correlation was only 0.10, though it reached 0.53 when rates rose over a three-year period in the early 1990s. (See chart from Journal of Financial Planning below.)

“High-yield investors, I suspect, will be the quickest to pull the trigger and redeem shares if rates rise… On the other hand, high-yield returns are not driven solely by interest rate movements. High-yield returns have been correlated with equity returns in the past. If rising rates are accompanied by rising stock prices, flows may be modest,” Riepe wrote.

For intermediate-term bond funds, demographics may dampen flows. “If rates increase month after month, as in 1994, some outflows [from intermediate-term bond funds] appear to be likely,” he said. But given boomers’ age and conservatism, he expected them to largely stick with their core bond fund choices even if rates rise.

Easy Does It

Posted on November 21, 2012 by Editor Test -

Two years ago, a leading life insurance executive told RIJ that his company could weather ultra-low interest rates for about five years. Yesterday, in a speech in Manhattan, Fed chairman Ben Bernanke reiterated his intention to keep rates low until at least 2015.

Bernanke told members of the New York Economic Club that his policy is justified by the “headwinds,” such as weakness in housing, bank lending, and public sector expenditures, that the U.S. economy still faces four years after the nadir of the financial crisis.

As for the so-called “fiscal cliff” (an expression rendered memorable by chiasmus, a figure of speech evident in the reversal in “cliff” of the “f” and “c” sounds in “fiscal”), Bernanke said that the goal of long-term deficit reduction would be best served by avoiding big spending cuts and tax increases in 2013.

“Fortunately, the two objectives are fully compatible and mutually reinforcing,” Bernanke said. “Preventing a sudden and severe contraction in fiscal policy early next year will support the transition of the economy back to full employment; a stronger economy will in turn reduce the deficit and contribute to achieving long-term fiscal sustainability.

“At the same time, a credible plan to put the federal budget on a path that will be sustainable in the long run could help keep longer-term interest rates low and boost household and business confidence, thereby supporting economic growth today.”

Low rates to continue even after recovery

In his speech, Bernanke explained the rationale behind his policy of buying mortgage-backed securities, which lifted prices in that sector this fall:

“Our purchases of MBS, by bringing down mortgage rates, provide support directly to housing and thereby help mitigate some of the headwinds facing that sector. In announcing this decision, we also indicated that we would continue purchasing MBS, undertake additional purchases of longer-term securities, and employ our other policy tools until we judge that the outlook for the labor market has improved substantially in a context of price stability.

Although it is still too early to assess the full effects of our most recent policy actions, yields on corporate bonds and agency MBS have fallen significantly, on balance, since the FOMC’s announcement. More generally, research suggests that our previous asset purchases have eased overall financial conditions and provided meaningful support to the economic recovery in recent years.

In addition to announcing new purchases of MBS, at our September meeting we extended our guidance for how long we expect that exceptionally low levels for the federal funds rate will likely be warranted at least through the middle of 2015. By pushing the expected period of low rates further into the future, we are not saying that we expect the economy to remain weak until mid-2015; rather, we expect—as we indicated in our September statement—that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.In other words, we will want to be sure that the recovery is established before we begin to normalize policy.

Rationale for buying Treasuries

A footnote to the published text of Bernanke’s speech noted specifically that his policy of purchasing Treasuries helps reverse the flight to Treasuries from riskier assets.

“One way in which our asset purchases affect the economy is through the so-called portfolio balance channel. Because different classes of financial assets are not perfect substitutes in investors’ portfolios, changes in the supplies of various assets available to private investors may affect the prices and yields of those assets.

“Thus, the Federal Reserve’s purchases of Treasury securities, for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the Treasury securities sold to the Federal Reserve with other assets, the prices of those other assets should rise and their yields decline as well.

“An increase in our asset purchases may also act as a signal that we intend to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors’ expectations for the future path of the federal funds rate and putting additional downward pressure on longer-term interest rates.”

MetLife’s VA Sales are Missed

Posted on November 21, 2012 by Kerry Pechter -

At $54.3 billion, sales of all types of annuities were down 10% in the 3Q 2012 from the same period in 2011. As of September 30, annuity sales totaled $166.1 billion, down 8% year over year, according to LIMRA’s third quarter 2012 U.S. Individual Annuities Sales survey.

LIMRA research director Joe Montminy attributed the decline to the Fed’s low-interest policy. “Protracted low-interest rates have impacted all lines of the annuity business, causing manufacturers to reassess their exposure among various product lines,” he said.

“The sustained uncertain economic environment has many companies implementing conservative risk management strategies in an effort to prudently manage their business,” he added.

Variable annuity sales in the third quarter totaled $36.6 billion, down 8% from the same period in 2011. Year-to-date, VA sales were $112 billion, a decline of 7% from the prior year. The top 20 issuers accounted for 93% of sales. LIMRA’s report represents data from 95% of annuities issuers. (See LIMRA chart below.)

The decline in VA sales doesn’t so much reflect lack of demand as lack of capacity on the part of issuers. Having been torched for an estimated $3 billion in losses on broken hedges during the financial crisis, according to Deutsche Bank, VA issuers are searching for ways to accommodate more Boomer retirement risk without capsizing themselves.

Some companies are keeping hedge costs down on new products by using volatility-controlled funds as mandatory investment choices for contract owners who buy guaranteed lifetime withdrawal benefit riders. Other firms have their hands full hedging the risks on the billions of dollars worth of VA products they’ve already sold.

The impact of their latest strategies may not be felt until next year. “While leading VA writers have announced they are making adjustments to their book of business, LIMRA believes the total impact of these decisions has not fully reached the market,” the LIMRA release said.

The difference is MetLife

About 80% of the $9 billion difference in 3Q YTD VA sales between 2011 and 2012 can be accounted for by the drop in MetLife sales alone. The company had announced its intention to moderate sales this year after leading all VA issuers in 2011 with $28.4 billion.

MetLife has sold $14.1 billion for the year, as of September 30. That was a large number, of course, and represented more than 10% of all sales this year. But in the first nine months of 2011, MetLife sold $21.2 billion.

In 2011, MetLife’s VA sales soared on the increased generosity of its GMIB Max product. Then the company reduced the benefits in the face of Fed low-interest policy, and this year MetLife CEO Steven Kandarian said the insurer would limit its 2012 VA sales to $18 billion to reduce risk.

At the time, some observers wondered if the pursuit of high sales and the subsequent pullback were parts of a deliberate long-range strategy by MetLife. But it may not have been. As one MetLife manager told RIJ privately, “People lost their jobs over [GMIB Max].”

On the other hand, all of the other top-five variable annuity issuers from 2011—Prudential, Jackson National, TIAA-CREF and Lincoln Financial—appear on track to equal or surpass their 2011 VA sales in 2012.

Through nine months of 2012, Prudential had sold $16.2 billion, Jackson National $15.3 billion, TIAA-CREF $10.7 billion and Lincoln Financial $7.3 billion. A year ago, they had sold $15.8 billion, $13.7 billion, $10.1 billion and $7.2 billion, respectively.

The makeup and order of the 20 leading VA issuers has changed slightly this year. At this time in 2011, Sun Life was the 13^th largest issuer; it exited the business and doesn’t appear on LIMRA’s latest Top 20 list. John Hancock, which sold $1.46 billion in the first nine months of 2011, sold only $660 million in the first nine months of 2012.

While some are fading, others are rising. Guardian Life, which was 20^th a year ago with $793.8 million in sales through the first nine months of 2011, is now 17^th with $1.15 billion. Principal Financial, absent from the YTD 3Q 2011 list, was 20^th on the YTD 3Q 2012 list, with $622.8 million in sales.

Here come the DIAs

The fastest-growing product in the annuity industry this year has been the deferred income annuity (DIA). Sales have grown steadily in 2012, from $160 million in the first quarter to $210 million in the second quarter and $270 million in the third quarter of 2012, LIMRA said.

Sales of single premium immediate annuities (SPIAs), at $2.0 billion, were down 9% compared to one year ago, but were up slightly from the second quarter of 2012. In the first nine months of 2012, SPIA sales declined 8% compared with the prior year period.

Fixed indexed annuities (FIA) have continued to boom, relatively speaking, thanks largely to their guaranteed lifetime withdrawal riders (GLWB). LIMRA estimates that 88% of indexed annuities sold offer a GLWB option.

FIA sales were strong in the third quarter at $8.7 billion, primarily due to new companies like Security Benefit ($2.13 billion in total fixed annuity sales in first nine months of 2012) performing well in the market, LIMRA As of September 30, indexed annuity sales were up 6% year over year, at $25.4 billion. LIMRA expects another record sales year for FIAs in 2012.

Because of low yields, however, total fixed annuity sales remained bleak, falling 13% in the third quarter to levels not seen since early 2007. Fixed-rate deferred annuities (book value and market value adjusted) fell precipitously in the third quarter, down 26% from the third quarter of 2011.

Book value sales sank 28% in the third quarter to $5.0 billion. Market-value adjusted (MVA) sales were $1.0 billion, down 17%. For the year, book value and MVA declined 31% and 13% respectively. Fixed-rate deferred product sales are at the lowest level since the late 1990s.

US lags in resilience to financial adversity: Barclays

Posted on November 19, 2012 by Editor Test -

People in faster-growing regions of the world interpret failure differently from Americans, according to the latest report in the Barclays Wealth Insights series.

The report, entitled “If at First You Don’t Succeed… Mapping Global Attitudes to Adversity,” showed that only 71% of US high net worth individuals (HNWI) agreed with the statement, “Viewing failure positively is essential for an economy to grow.”

By comparison, 91% of the wealthy in the Middle East and 80% in Asia agreed. On average, 74% of global HNWIs agree with that statement.

The report also compared traits such as persistence and optimism in different cultures, as well as the way people in different parts of the world view setbacks. Only 37% of US respondents agreed that “Past failure in entrepreneurial endeavors increases the chance that a new business will succeed,” compared with 81% of HNWIs in the Middle East and 67% in Asia.

About half (49%) of US HNWIs believe that anyone can learn to become a successful entrepreneur by working hard, while 83% of respondents in the Middle East reported the same belief.

Global HNWIs also report different experiences with the recent global financial crisis: 44% of US respondents say it provided them with opportunities compared with 53% of Asian respondents. Asked “if an entrepreneur’s business is failing, the entrepreneur should persist instead of cutting losses,” 55% of Middle Easterners, 53% of Asians, 41% of Asians agreed.

How entrepreneurs think
Entrepreneurs and non-entrepreneurs think differently about risk, opportunity and failure, the study showed. Self-described entrepreneurs recover from setbacks easier than those who say they are non-entrepreneurs. Among the entrepreneurs, 34% say that failure encouraged them to try again and 29% report being able to bounce back quickly, compared with 19% and 17% of non-entrepreneurs.

Perhaps most significantly, respondents who identify themselves as entrepreneurs are more able to learn from failure than non-entrepreneurs – 56% vs. 41%. They are also more likely to say that failure helped to strengthen their character (39% vs. 21%).

The Barclays survey found that people who are persistent, optimistic or both, are less likely to say they have experienced failure in their personal investments than those who do not possess these traits.

US regional differences
Notable differences in attitudes toward failure emerged between regions in the US:

Only 29% of respondents in the West think past failure increases the chance of future success, the lowest percentage across regions.
The Northeast sees the most opportunity in tough times; 48% said the recent global financial crisis has provided them with opportunities.
The Midwest is the most optimistic region, with 49% of respondents agreeing that they have learned a great deal from business failures and 77% saying that viewing failure positively is essential for an economy to grow.

Ledbury Research conducted the survey of more than 2,000 high net worth individuals in partnership with the Barclays Behavioral Finance team in the first half of 2012. Those surveyed each had over $1.5 million (or the equivalent) in total net worth and 200 had more than $15 million. Respondents were drawn from 17 countries around the world. More than 750 of the respondents identified themselves as entrepreneurs.

Younger investors’ faith in equities remains low: T. Rowe Price

Posted on November 19, 2012 by Editor Test -

Long-term retirement investors have not regained their faith in equity investing, according to a new survey from T. Rowe Price, which polled 850 investors ages 50 and under and found that only 61% believed that stocks are important for achieving retirement savings goals.

Only about half of investors (51%) surveyed said that their risk tolerance remains the same as before the financial crisis, and 37% say they are now avoiding stocks because of current economic or market conditions.

Through September 2012, net new cash flow into stock mutual funds was negative in 30 of the last 48 months and in 15 of the last 16 months, according to the Investment Company Institute. Other findings of the T. Rowe Price survey included:

37% of investors say that they are currently not investing in stocks. Factors cited include the pace of the U.S. recovery, general market volatility, political uncertainty, rising health care costs, actual or potential unemployment, the pace of the global economic recovery, the pace of the U.S. housing market’s recovery, the Eurozone debt crisis, and potentially higher taxes next year on income, dividends, and capital gains.
76% of investors say they are only “somewhat or not at all” willing to take on more credit risk to obtain a potentially higher yield from bonds.
81% of investors say they are saving about the same or more than they were before 2008.

Advisor Software, Inc., partners with Redtail Technology

Posted on November 19, 2012 by Editor Test -

Advisor Software Inc., a provider of wealth management solutions for the financial advisor market, has agreed to provide its planning tools to financial professionals who use Redtail Technology Inc. client relationship management (CRM) systems. The partnership will integrate ASI’s direct-to-advisor product, goalgamiPro, with Redtail’s CRM suite.

Developed for advisors looking for an alternative to the comprehensive, book-length financial plan, goalgamiPro is a web-based platform that uses the notion of the household balance sheet to enable advisors to create a plan in eight minutes, and generate a series of client-focused one-page reports.

In addition to improving advisor efficiency by reducing planning time, the goalgamiPro quick planning solution has also been designed to:

Generate leads: goalgamiPro comes with a household balance sheet PowerPoint deck for lunch or dinner seminars. goalgamiPro is then used to prepare a report for a free 30-minute household balance sheet assessment.
Strengthen client relationships: goalgamiPro also comes with Collaboration Connect, a client goal planning website enabled by the advisor and integrated with goalgamiPro.

“As the technology for the financial services industry becomes increasingly CRM-centric, individual advisors are seeking planning tools that can easily be launched when time does not allow for completing a full financial planning analysis,” said Neal Ringquist, President and Chief Operating Officer of ASI. “The integration of goalgamiPro with Redtail’s very popular CRM platform gives advisors an optimal tool to make quick assessments of their clients’ goal plans.”

Tax changes offer advisors opportunity to contact investors

Posted on November 19, 2012 by Editor Test -

Most high net worth investors (63%) worry that their investment portfolios will be hurt by tax code changes in the wake of President Obama’s re-election, and 64% don’t believe they can offset pending tax increases, according to a new Nationwide Financial survey.

The Harris Interactive survey of 751 investors with $250,000 or more in annual household income or investable assets released found that 60% of survey respondents say they either won’t or are unsure if they will meet with a financial advisor to discuss how these changes may affect their portfolio.

More than half (56%) of survey respondents believe their individual federal taxes will increase. Nearly half (48%) expect tax rates to increase, particularly for the wealthy, and 30% believe tax rates will increase across the board. Nearly seven in ten think either that Bush-era tax cuts will be eliminated entirely (35%) or reduced for the wealthiest Americans (33%).

Despite these concerns, 61% either don’t plan to make adjustments to their portfolio or don’t know what adjustments to make. Of those who do plan to meet with a financial advisor, 26% will wait until 2013 or after tax code changes take affect.

As advisors well know, Bush-era tax cuts are set to expire at the end of 2012, raising the top four marginal brackets and eliminating the 10% bracket. The phase-out of itemized deductions for high income earners is set to return. Tax on dividend income is set to increase from 15% to ordinary income rates (up to 39.6%). Long-term capital gains rates are scheduled to rise to 20% from 15% for most taxpayers. Those with high overall income and investment earnings will face an additional 3.8% Medicare investment earnings surtax. The gift and estate tax exemption is scheduled to shrink from $5.12 million to $1 million.

Four in ten (41%) survey respondents want more education on the tax advantages of annuities and about a quarter want more education on the tax advantages of life insurance (21%) and 401(k) plans (25%). Six in ten (59%) don’t know about the changes to estate and gift tax limitations and say they do not understand very much or at all how a life insurance policy can help them take advantage of the current gift tax exemption limits (60%). Forty-three percent would like more education on that topic.

Harris Interactive conducted the tax study online between September 28 and October 5, 2012. The respondents were 751 adults ages 18+ having $250,000 or more in annual household income or investable assets. Since the survey was conducted before Nov. 6, respondents were asked to assume both potential election outcomes. The data represented here focuses on responses where respondents assumed the President would be re-elected.

Fund flows favor bonds again in October: Morningstar

Posted on November 19, 2012 by Editor Test -

A net $27.7 billion flowed into long-term mutual funds in October, the 10th consecutive month of inflows, according to the November 2012 edition of the Morningstar Direct U.S. Open-end Asset Flows Update.

Bonds once again dominated the flows, though stocks retained their majority. Since October 2007, the percentage of invested assets in long-term stock mutual funds (open-ended and ETF) has dropped to 37% from 48%, and the share in taxable bond funds has doubled, to 26%.

Investors added $29.6 billion to taxable-bond funds ($33.9 billion including exchange-traded funds) and withdrew $8.3 billion from U.S.-stock funds (a $19.6 billion outflow including ETFs) in October. Intermediate-term bond, which is heavy in corporate bonds, brought in $11.4 billion, the most of any category.

Year to date, investors have added $224 billion to the taxable-bond asset class (up 10.8% from the end of 2011) and have withdrawn $85 billion from U.S.-stock funds (negative 2.7%). Since the beginning of the year, intermediate-term bond funds have gained almost $94 billion.

Large-cap stock funds remain the largest category of U.S. funds. Between them, large-blend, large growth and large value have lost a net $60 billion or so in 2012, but they are still the first ($1.14 trillion), third ($827 billion) and fourth ($604 billion) largest fund styles, respectively. Intermediate-term bond funds netted $94 billion in 2012 and ranked second.

Vanguard remained the largest fund family. Its funds netted $81 billion so far this year and grew to $1.53 trillion for a market share of almost 17%. PIMCO led all bond firms with inflows of $8.1 billion in October and $50.5 billion year-to-date.

Other highlights from the Morningstar report included:

Higher-risk segments of the bond market. Multi-sector bond, bank loan, emerging- markets bond, nontraditional bond, world bond, and high-yield bond categories each saw inflows of greater than $1 billion in October. Year to date, these six categories have taken in more than $80 billion, or 13% of beginning-period assets.

Municipal bonds. Investors also found municipal bonds attractive as $917 million flowed into high-yield muni-bond funds in October, bringing the total for the category to nearly $11 billion for the year-to-date period, or 20% of beginning-period assets. National long, intermediate, and short municipals brought in a total of $3 billion for the month and about $28 billion year to date, or 10% of beginning-period assets.

Alternatives. This category of funds has had the greatest organic growth rate of any asset class in 2012, collecting $12.4 billion year-to-date inflows. Within alternatives, investors were looking to hedge their equity exposure. The bear-market category collected $628 million, or 11.6% of assets at the beginning of the month, while long-short funds saw inflows of $628 billion, or 2.6% of beginning-month assets.

U.S. stock funds. The large blend category took in $1.4 billion, but that inflow was offset by outflows in the asset class’s other categories. Large growth, with redemptions of $4.3 billion, saw the largest outflow of any category, while large value funds had outflows of $2.0 billion.

International stock funds. While diversified emerging-markets funds saw inflows, most other international-stock categories experienced outflows. Diversified emerging-markets collected $925 million, while China region and Latin America stock funds both lost slightly more than $100 million. World stock lost $913 million.

PIMCO. Flagship PIMCO Total Return brought in $2.4 billion, more than any other fund for the month. The Gold-rated fund has returned 9.49% year to date, placing it among the top 13% of funds in its category. PIMCO Income and PIMCO Unconstrained Bond each brought in more than $1 billion.

The Bogle Perspective

Posted on November 19, 2012 by Editor Test -

When Jack Bogle mounted the podium to speak at the National Association of Personal Financial Advisors East meeting in Baltimore two weeks ago, everybody there stood up from their lunches and applauded.

And well they should have. Because by inventing Vanguard index funds that cost only 10 to 20 basis points a year, Bogle eliminated the cost of an active fund manager and opened a niche for fee-based advisors.

Bogle, who was my employer in the late 1990s, is famous for popularizing if not inventing two slogans: “Stay the course” and “Costs matter.” Years ago, he pointed out the obvious but overlooked fact that while fees may represent a trivial fraction of an investor’s principal, they can consume a staggering proportion of his returns in the long run.

His lecture at the NAPFA conference was, as it usually is, passionate and populist. Using simple charts and graphs, Bogle demonstrated that the average investor, after adjusting his or her returns for fees, taxes, inflation, bad luck and errors, is lucky to net 2% a year from investing in stocks and bonds.

Maybe they admire him because he says—and his voice cracks into a disarming falsetto when he gets excited—what most of us can’t say, which is simply the truth. He started doing it decades ago, well before sheer longevity gave him license. Case in point: He ended his talk with a declaration that combatting climate change and controlling the proliferation of firearms are the country’s two greatest imperatives. “That has to be stopped,” he said about guns.

Whether investors agree or disagree with Bogle’s broader opinions, they have certainly endorsed his investment philosophy. As of the end of October, Vanguard was the largest mutual fund family, with over $1.5 trillion in assets (a five- or six-fold increase in 15 years) and a market share of about 17%.

* * *

Only a few of the presentations at the NAPFA East conference focused entirely on retirement income.

Jim Otar, the Toronto engineer-turned-advisor, whose 2009 book (“Unveiling the Retirement Myth”) and retirement calculator (the $100 Retirement Optimizer) have earned a modest cult following, gave a talk called Advanced Retirement Distribution Planning. Rick Miller, the well-known Boston-area economist-turned-advisor, gave back-to-back breakout sessions on Understanding Longevity.

Neither of these speakers strongly advocated life annuities per se, but both of them presented evidence that, in my opinion, argued implicitly in favor of them. Their numbers suggested that most healthy couples with long-lived parents who want to maximize their annual spending in retirement should probably use at least part of their money to buy a life annuity that starts sometime after age 70.

Here’s why. Otar’s “Zone Strategy” diagrams, which depict the segmentation of clients into those who are underfunded, barely funded, and abundantly funded for retirement, illustrated his contention that the greater the percent of their savings that retirees want to spend each year, the more strongly he would advise them to buy life annuities after age 70—or ignore a high risk of running out of money before they die.

To put that another way: Regardless of how much money you start with, a life annuity can increase your freedom to spend and consume. Those in poor health, or who can afford to live on their investment yield alone, or who value a big legacy over current consumption, are the only ones who wouldn’t benefit from the payoff that comes to annuity owners—assuming that they live a long time.

Rick Miller’s presentation showed just how long Boomer couples (particularly those who are healthy and wealthy) should expect to live, and it’s well into the life-annuity-makes-sense range. An advisor today can count on seeing up to three of every ten 65-year-old male clients and four of every ten 65-year-old female clients reach the age of 90, he said. One in eight retired men and one in five retired women will reach age 95.

Ergo, prudent advisors should assume that their healthy 65-year-old client couples will spend up to 35 years in retirement. (Cindy Levering of the Society of Actuaries assisted Miller on the presentation.)

At present, few fee-based advisors recommend life annuities—because the yields (before age 70) are low and because they’d reduce their own fee income if they did. (Annuitized assets don’t ordinarily count as AUM.) But if an advisor expects at least one member of a client couple to live beyond age 90, encouraging them to buy a joint-and-survivor life annuity might be the most fiduciary thing to do.

At the very least, a life annuity reduces overall portfolio risk and thereby allows clients to take more risk with their non-annuitized wealth. It could also spare them the anxiety and indignity of worrying about market volatility in their old age, or about running out of money before they die, or about spending the funds they had hoped to preserve for a legacy.

The Four Kinds of Financial Advisors

Posted on November 19, 2012 by Kerry Pechter -

As people in the money biz know, financial advisors come in many flavors: Brokers, RIAs, fee-only, fee-based, dually licensed, etc. They differ in the way they’re paid and in the master they ultimately serve, whether it be a bank, their clients, or themselves.

In a presentation at The Wharton School last spring, fee-only planners Paula Hogan and Rick Miller showed that it’s also useful to think of advisors or planners in terms of the professional “paradigm” that they use, consciously or not, when working with their clients.

Advisors, they posit, use one of four paradigms. There’s the Traditional, the Life Cycle, the Behavioral (which tosses psychology into the mix) and what they call the “Advisor Experience” paradigm, where the advisor dons the robe of life counselor.

While most advisors are still Traditionals (i.e., who focus on accumulation-stage investment advice), the combined impact of the financial crisis, Boomer retirement, the advent of behavioral economics and fee compression is forcing more advisors to evolve beyond the traditional approach.

Which kind of advisor are you? Are you strictly a “numbers guy”? Or do your clients share their dreams and self-doubts with you, and rely on you to help them realize their most personal ambitions?

Below you’ll find descriptions of Miller and Hogan’s four paradigms, taken directly from the essay they presented at the conference on “The Market for Retirement Financial Advice” sponsored by the Wharton School’s Pension Research Council and Boettner Center for Pensions and Retirement Research in Philadelphia in May 2012. Maybe you’ll recognize yourself in one or two of them.

Traditional Paradigm (The advisor as technician)

A planner steeped in the Traditional paradigm would focus on building a large portfolio using mainly the strategies of diversification and precautionary saving.
Financial risk would be tailored to the client’s perceived risk tolerance.
The Traditional advisor believes in the long-term safety of stocks, and typically recommends that clients “stay the course” in volatile markets.
If the client has too little savings, the advisor might propose ramping up risk to make up for a shortfall. If the client has a surplus, a traditional advisor would also encourage the client to ramp up risk.
To deal with longevity risk—the risk of outliving savings—the advisor would design a sustainable portfolio withdrawal program, most likely starting with a 4% per year withdrawal rate that rises with inflation each year thereafter.
The withdrawal strategy could include a buffer of several years of cash reserves, smoothed withdrawal rates and/or withdrawal rates that are adjusted in response to market valuations.
Long-term care insurance might be suggested as a complement to portfolio wealth.

Life Cycle Paradigm (The advisor as strategist)

An advisor working from the life cycle point of view would add hedging and insuring to standard portfolio strategies in order to smooth consumption over a lifetime.
He or she would insist on tailoring the risk of the financial portfolio to the risk in the client’s human capital in addition to the clients risk tolerance and personal goals. She would ask the client to specify the timing and cost and relative importance of various life goals.
The Life Cycle advisor would be aiming, especially for the most important goals, to match assets and liabilities through some combination of TIPS ladders and immediate inflation-protected annuities. More aspirational goals would be funded by riskier investments strategies.
The Life Cycle advisor will start showing which goals can’t be fully funded in the case of too little wealth. When there is ample wealth, the Life Cycle Advisor will show how big the client’s legacy will be, given his or her current standard of living. The Life Cycle advisor will also suggest working shorter, longer, or differently as a core strategy.

Behavioral Paradigm (The advisor as ‘framer’)

The advisor coming from the behavioral point of view would want to arrange for portfolio guarantees in order to address the client’s presumed loss aversion. She would also work hard to correctly frame decisions about how much portfolio risk to take and how to view portfolio performances.
The behavioral advisor would focus on annuitization strategies with downside protection guarantees paired with some upside potential, after sorting through the various biases of both the client and the advisor.
Unless the client has a friend or relative who needed custodial care in old age, the behavioral advisor will address the client’s presumed “denial and/or implausible expectations about aging” before developing the appropriate financial strategy.
The behavioral advisor will echo the Life Cycle ideas of changing the level of saving, risk taking, and work duration. To improve decision-making, he will also engage the client in a discussion designed to recheck the client’s values and her way of “framing” money issues. The advisor will ask questions like, “Are you sure there isn’t enough money for your well-being?”

Advisor Experience Paradigm (The advisor as life-coach)

In the trenches of the Advisor Experience paradigm, much time would be spent at the outset agreeing upon which of the four paradigms is in play and also discovering and resetting any preconceptions the client might have about risk and return expectations and benchmarking.
The Advisor Experience advisor will be ready with the strategies of changing the levels of saving, spending, working, and risk taking but will start with a values discussion. The client will be urged to ask him or herself: What do I care about and value? Where do I find meaning and purpose? What are my money values? How can I align meaning and purpose with money habits? How do I bring about the personal change that I desire?
Implementation of the plan will be a personally developed action plan of measured small-step progress.
The Advisor Experience advisor has multiple roles, including counselor, information resource, technical expert, cheerleader, accountability figure and healer.

Advisors, of course, are free to choose which paradigm they want to follow. But Hogan (left) and Miller make it clear that every client relationship involves behavioral and emotional elements, whether the advisors decide to deal with them or not. To ignore them entirely would be to risk leaving part of the job undone, or perhaps even doing it badly.

The authors don’t appear to favor one paradigm over another, but they imply that as advisors grow in sophistication and experience, they’re likely to graduate from the Traditional to the Life Cycle paradigm and then, depending on their own preference or level of interpersonal skill, to the Behavioral and Advisor Experience paradigms.

It’s no coincidence that this sort of self-examination is happening now in the advisor community. The financial crisis, the migration toward fee-based compensation, the arrival of the Boomer retirement phenomenon, along with need for individuals to take more responsibility for protecting themselves from health, sequence of returns, and longevity risks, are all pushing Traditional advisors toward the Life Cycle model, the two advisors told RIJ in a recent interview.

“The reason you’re seeing so much emphasis on this now is that people are living longer, and they’re more responsible for financing a longer life,” said Hogan, who is based in Milwaukee. “Their money has to last for a long time,” Hogan said.

Miller (right), whose firm, Sensible Financial, is based near Boston, agreed. “The Life Cycle model is just beginning to make in-roads in the profession. More advisors are recognizing its importance. The next wave is going to involve behavioral economics. Advisors are beginning to talk about that, but we’re not applying it in a systematic way.”

A retirement income-oriented advisor, almost by definition, has to adopt the Life Cycle paradigm, which emphasizes risk management, goal-setting, and asset-liability matching, as well as a greater awareness of the erosion of purchasing power by inflation over a long retirement.

“Where 10-year Treasuries have been thought of as the safe asset in Modern Portfolio Theory, the life-cycle perspective would suggest that the safe asset would be TIPS,” Miller added. “Secondly, if you think about your future retirement expenses as a liability, one way to fund that liability would be to use single premium annuity that’s indexed to inflation.”

The evolution from one paradigm to another implies an evolution in compensation models as well. Miller and Hogan don’t address that issue in their essay, but Miller commented on it during an interview. As advisors expand their services beyond product sales and even beyond asset management, they may need forms of compensation other than commissions or asset-based fees.

“It’s useful to think of financial advice as a professional service,” he told RIJ. “So you would expect to see the compensation systems that you see in other professions, such as hourly rates or retainers, and less compensation that’s linked to transactions, and potentially even less linked to assets.”

“Quote” of the Week

Posted on November 15, 2012 by Editor Test -

Unconfirmed: Apollo nearest to acquiring Aviva U.S.

Posted on November 15, 2012 by Editor Test -

Apollo Global Management LLC is said to be in the lead to buy Aviva Plc’s U.S. life insurance and annuities unit, positioning the buyout firm to beat Philip Falcone’s Harbinger Group Inc., according to a report on Bloomberg.net.

Apollo is bidding jointly with Guggenheim Partners LLC, Bloomberg said, quoting a source it did not identify. A sale would occur at a “substantial discount” to the unit’s book value, excluding debt, of 2.4 billion pounds or $3.8 billion, Aviva chief financial officer Pat Regan said last week.

Representatives at Aviva, Apollo, Guggenheim and Harbinger declined to comment on the deal, which is not completed and may still collapse. Aviva acquired most of its U.S. operations through the $2.9 billion purchase of Des Moines, Iowa-based AmerUs Group Co. in 2006.

Apollo, a private-equity firm run by Leon Black, last month boosted capital at its Athene Holding Ltd. annuity business by contributing assets valued at more than $800 million from a publicly traded fund it manages.

That infusion would enable Athene to acquire more annuity assets and eventually achieve enough scale to issue shares to the public, according to a presentation to investors.

Annuities are contracts issued by life insurers that offer tax deferral, guaranteed rates of return, death benefits and/or guaranteed income.

Apollo created Athene in 2009 and expanded in 2011 through the $628 million purchase of Royal Bank of Canada’s U.S. life insurance unit. Athene in July agreed to buy Presidential Life Corp. for about $415 million.

Aviva, the U.K.’s second-biggest insurer by market value, is selling or winding down almost a third of its 58 businesses, striving to get out of less profitable markets and boost capital reserves reduced by the European sovereign-debt crisis.

After IPO, ING U.S. will start two-year rebranding effort

Posted on November 15, 2012 by Editor Test -

Between 2001 and 2012, ING U.S., the holding company for ING Groep’s financial services companies in the U.S., put a huge effort into building the strength of its brand, exemplified by campaigns highlighting the color orange, the Retirement Number, and the image of the Dutch royal lion.

That effort was highly successful. According to industry surveys, brand awareness for ING in the U.S. has grown dramatically, increasing from 11% in 2001 to 79% in 2012, according to a recent SEC filing.

But now that ING U.S. is separating from ING Groep—the U.S. holding company filed a registration statement last week with the SEC for an initial public offering of common stock—ING U.S. faces the task of creating a completely new brand.

ING U.S.’s future brand name hasn’t been disclosed, but the trademarked tagline will be “America’s Retirement Company,” according to the SEC registration statement. Whether it will be able to supplant entrenched retirement leaders like Fidelity and Vanguard remains to be seen.

“We plan to invest substantial resources to develop and build awareness of our new brand, based on our vision to be America’s Retirement Company™. We believe that strong brand recognition is the first step in reestablishing ourselves with all of our stakeholders as a standalone company,” the company said in a release last week.

According to the registration statement, ING U.S. has already developed a rebranding strategy, but doesn’t expect to “formally shift the majority of our advertising and marketing to our new brand name until 8 to 15 months” after the IPO. The rebranding process is expected to take about two years.

ING Group entered the United States life insurance market in 1975 through the acquisition of Wisconsin National Life Insurance Company, followed in 1976 with its acquisition of Midwestern United Life Insurance Company and Security Life of Denver Insurance Company in 1979. ING Group significantly expanded its presence in the United States in the late 1990s and 2000s with the acquisitions of Equitable Life Insurance Company of Iowa (1997), Furman Selz, an investment advisory company (1997), ReliaStar Life Insurance Company (including Pilgrim Capital Corporation) (2000), Aetna Life Insurance and Annuity Company (including Aeltus Investment Management) (2000) and CitiStreet (2008).

Under the ING brand, these companies offer retail and institutional life insurance, retirement plans, mutual funds, managed accounts, alternative investments, institutional investment management, annuities, employee benefits and financial planning.

In its IPO registration statement, ING U.S. emphasized that it has taken steps to minimize the risks associated with its variable annuity closed block of business. ING was a leading seller of VAs with generous living benefits prior to the financial crisis, but de-risked as the crisis unfolded.

“In 2009, we decided to cease sales of retail variable annuity products with substantial guarantee features (the last policies were issued in early 2010 and we placed this portfolio in run-off). Subsequently, we refined our hedging program to dynamically protect regulatory reserves and rating agency capital of the variable annuities block for adverse equity market movements. In addition, since 2010, we have increased statutory reserves considerably, added significant interest rate risk protection and have more closely aligned our policyholder behavior assumptions with experience.”

The ING U.S. Retirement Solutions business acquired CitiStreet after the financial crisis to become, after Fidelity, the second largest provider of defined contribution retirement plans in the U.S., as measured by the number of plan sponsors and number of plan participants for which we provide recordkeeping services,” the registration statement said. “We are one of the few retirement services providers in the U.S. capable of using our industry presence and scale to efficiently support small, mid, large and mega-sized employers in the 401(k), 403(b) and 457 market segments.”

The spin-off of ING U.S. is just one of the steps that ING Groep N.V. has had to take to reimburse the Dutch government for bailing it out during the financial crisis. The Dutch insurer continues to cut costs internally. Last week, IPE.com reported that ING Groep will eliminate 1,350 jobs at its Dutch pensions insurer, Nationale Nederlanden. Jan Hommen, ING’s chairman, said the measures would save about €200m a year by the end of 2014.

Citing capacity limits, Jackson will refuse incoming 1035 transfers for a month

Posted on November 15, 2012 by Editor Test -

Jackson National Life Insurance Companyannounced last week that it was “approaching the upper range for calendar year 2012 for total premium from variable annuities (VAs) that offer optional guaranteed benefits.”

Jackson estimated it has approximately $1 billion in remaining capacity. As in prior years, Jackson will manage the volume of its VA business commensurate with the overall growth of its balance sheet.

To manage sales volumes, Jackson said it will no longer accept new 1035 exchange business or qualified transfers of assets for VAs that offer optional guaranteed benefits as of 4 p.m. Eastern Standard Time on Tuesday, November 13, 2012.

As of December 15, 2012, Jackson will resume accepting new 1035 exchange business and qualified transfers of assets, if premium from new sales is less than $1 billion between November 13 and then.

No limitation will be placed on new 1035 exchange business or qualified transfers of assets for Jackson’s Elite Access product, which offers alternative investment options that whose potential volatility makes them unsuitable for guaranteed living benefits.

“We are proactively communicating with our distribution partners about Jackson approaching the high end of the range for 2012 sales of our very popular VAs that offer optional guaranteed benefits,” said Clifford Jack, executive vice president and head of retail for Jackson. “Our wholesaling and service teams are well-positioned to implement the necessary actions to limit production with minimal disruptions to our partners and their clients.”

This week, Jackson National Life reported $19.6 billion of total sales and deposits during the first nine months of 2012, driven by $15.3 billion of variable annuity (VA) sales.

VA sales were up 11.3% over the $13.7 billion in VA sales recorded during the first nine months of 2011. Sales of Elite Access totaled $630.1 million during the period from launch on March 5, 2012, through September 30, 2012. Excluding Elite Access, Jackson’s overall VA sales growth during the first nine months of 2012 was 6.8% year over year.

In the first nine months of 2012, Jackson completed the $663.3 million acquisition of SRLC America Holding Corp (SRLC) and remitted a $400.0 million dividend to its parent company, while ending the period with more than $4.1 billion of regulatory adjusted capital, according to a company release.

Compared to the same period of the prior year, fixed annuity sales of $713.5 million were up 34.5%, and FIA sales of $1.2 billion were up 13.5% during the first nine months of 2012.

Curian Capital LLC, Jackson’s retail asset management subsidiary, increased assets under management to $10.4 billion as of September 30, 2012, up from $7.3 billion as of December 31, 2011.

Jackson National Life is rated A+ (superior) by A.M. Best, AA (very strong) by Standard & Poor’s, AA (very strong) by Fitch Ratings and A1 (good) by Moody’s Investors Service.

Nationwide adds TOPS managed volatility funds to VA line-up

Posted on November 15, 2012 by Editor Test -

Nationwide Financial has added four new managed volatility funds to its core VA line-up. Additionally, the company will add three fund options, including one managed volatility fund, for its guaranteed lifetime withdrawal benefit, The Nationwide Lifetime Income Rider(Nationwide L.inc).

New funds for Nationwide’s core VA line-up include:

American Funds Insurance Series^® Protected Asset Allocation Fund^SM
TOPS^TM Protected Balanced ETF Portfolio
TOPS^TM Protected Moderate Growth ETF Portfolio
TOPS^TM Protected Growth ETF Portfolio

The American Funds Insurance Series Protected Asset Allocation Fund will also be available as a Nationwide L.inc investment option. Within the VA, the Protected Asset Allocation Fund can offers an equity allocation range of 40% to 80%, depending on market conditions, with a target mix of 60% stocks and 40% bonds.

The Nationwide VA with Nationwide L.inc offers a 7% simple interest roll-up on the original income benefit base and a 5% payout if withdrawals begin at age 65.

Nationwide Financial will also add two non-managed volatility funds back to the Nationwide L.inc investment option line-up. Both offer 60/40 equity exposure:

NVIT Cardinal Moderate Fund
NVIT Investor Destination Moderate Fund

Life Cycle Paradigm (The advisor as strategist)

Behavioral Paradigm (The advisor as ‘framer’)

Advisor Experience Paradigm (The advisor as life-coach)

Data Connection

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