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Fiserv, Inc., a $4 billion provider of financial services technology, said it has introduced Retirement Illustrator, an “interactive and collaborative” retirement income planning tool for financial professionals.

Based in Brookfield, Wisconsin, Fiserv has more than 3.6 million accounts on its wealth management platform and over one million UMA sleeves. It now owns AdviceAmerica financial planning technology and CashEdge data aggregation capabilities.   

Retirement Illustrator is intended to help advisors present retirement spending requirements and distribution alternatives, accounting for risk events such as withdrawal, longevity, survivor needs and healthcare risks.

“Retirement Illustrator boasts support for the front-office component of the Fiserv convergence strategy. The underlying technology of the solution gives financial professionals a powerful way to illustrate real-life scenarios and the impact on an investor’s retirement plan in a simple, easy to understand manner,” the company said in a release.

The tool enables advisors “to forecast varying market conditions and the impact financial products can have on an investor’s retirement outlook – a powerful sales illustration tool in today’s volatile market. A highly graphical analysis can be generated with clients face-to-face or collaboratively by phone,” the release said.

“An unlimited number of scenarios can be created at the touch of a button, giving advisors a robust and unique way to display side-by-side comparisons of how different product solutions, life expectancies and an array of life choices can affect retirement income,” the release continued.

 “Retirement Illustrator uses Monte Carlo technology to offer simulations of retirement plans in favorable and unfavorable market conditions. The solution answers investors’ most important questions, like ‘What If I retire earlier or later?’, ‘What if I allocate less money or more money’ or ‘What If I die before my spouse?,’ all illustrated with intuitive, graphical demonstrations,” said Cheryl Nash, Fiserv’s president of Investment Services.

© 2012 RIJ Publishing LLC. All rights reserved.

After a review of Hartford’s plan to focus on its property/casualty (P/C) commercial and consumer markets, group benefits, and mutual funds businesses, Fitch Ratings affirmed the credit ratings of Hartford Financial Services Group.

Hartford’s plan calls for the individual annuity business to be placed into run-off, and for HFSG to pursue divestiture options for its individual life, Woodbury Financial Services, and retirement plans businesses. Following the announcement, Fitch affirmed all ratings for HFSG and its primary life and P/C subsidiaries.

“The affirmation reflects our view that HFSG will continue to support its insurance subsidiaries and maintain insurance company capitalization that is consistent with the current ratings, with HFSG not expected to sell any insurance operating companies as part of any divestiture of businesses. While the plan creates execution risk and has the potential to affect HFSG’s business position and the franchise value of its ongoing businesses, Fitch considers these risks to be manageable,” Fitch said in a release.

The release continued:

“We expect a portion of cash proceeds from any future sale of the noncore businesses to be directed toward debt reduction, thereby contributing to a delevering of the balance sheet and an improvement in the weak interest coverage ratios at the holding company. “Hartford’s liquidity position is solid, with approximately $1.6 billion in holding company cash, fixed maturities, and short-term investments at Dec. 31, 2011, providing the necessary flexibility to allow cash to go toward debt reduction.

“We believe management’s target of a 12%-13% return on equity in continuing lines of business may be difficult to achieve in the short term due to the highly competitive P/C underwriting environment and weak investment yield outlook. However, in the long term, higher returns may be attainable as the company’s strategic focus is sharpened, and if market and economic conditions improve.

“Over the long term, management’s decision to exit more volatile businesses such as variable annuities and individual life should help de-risk the company as it becomes less vulnerable to swings in investment performance. Still, market risk will need to be managed carefully to maximize the sales price of businesses that no longer fit with the company’s new strategic focus.

“Execution risk relates primarily to the need to find the right buyer for the non-essential units and in disposing them at a reasonable price given weak market conditions. The longer the company requires to sell the individual life and retirement plan businesses, the greater the risk that prospective buyers will gain the upper hand in negotiations and view it as a distressed sale.

“Until the exited businesses are sold or run off, the risk remains that management time and resources will be diverted away from higher return core operations.”

© 2012 RIJ Publishing LLC. All rights reserved.

Stocks were battered on Monday, but the bloodletting didn’t happen on any stock exchange and Bloomberg didn’t report it. The damage occurred at the Roosevelt Hotel on Madison Ave., during presentations at an otherwise composed Society of Actuaries meeting.

The SoA hosts periodic Investment Symposiums, and this one was staged in New York. One of the event’s four subject tracks—Retirement/Pensions—was of relevance to RIJ readers, as was a session on demographics and investments, where financial pundit Robert Arnott was video-conferenced in from Budapest. 

For me, the leitmotif of the Retirement/Pension track was that risky assets and pensions mix like, for instance, metallic sodium and H₂O. Explosively, that is. The critique of equities, or more specifically, of equities as the most appropriate feedstock for retirement income flooring, came from several angles:

1) Longer time horizons don’t make stocks safer,

2) Asset-liability matching is the only way to ensure positive pension outcomes,

3) TIPS, not equities, should be the primary raw material for generating essential retirement income,

4) As Boomers age, demand for stocks will fall. 

If there were any bulls at this meeting, they were repeatedly gored—at least by the speakers on the retirement/pensions track. (Since these were pension folks, rather than, say, active fund managers, that’s not surprising.)

Zvi Bodie, the Boston University economist, advisor to pension fund managers and co-author of a recent book (Risk Less and Prosper (Wiley, 2011)) that urges individuals to finance their retirements primarily with ladders of Treasury Inflation-Protected Securities, set the tone early.

Taking a position that he articulated in his book, Bodie argued that time-diversification—the conventional wisdom that stocks always pay off in the long run—doesn’t work. Instead, it’s an illusion based on a small and biased set of historical returns.

As evidence, Bodie cited the fact that no sane options dealer would sell you a long-dated put on the S&P 500. Average returns admittedly become less volatile over time (because ups and downs cancel each other out), but cumulative returns can diverge widely over time, as Monte Carlo simulations attest.

When it comes to achieving a no-risk personal pension, Bodie recommends no-risk investments. “If a neighbor comes and asks me for financial advice,” Bodie said, “I tell him, ‘I can’t give you any recommendation on the stock market.’ But I do say, ‘Buy the maximum number of [U.S.] I-Bonds that you can get. They’re paying a zero real rate of return, you can cash them in at their accrued value at any time after the first year, and there’s no downside price risk.’”

Henry Hu of the University of Texas, who gained a mix of fame and notoriety in 2011 with a plan for investors to buy government annuities, followed in a similar vein. “Many investors have a mystical belief in ‘stocks-for-the-long-run.’ Even at the height of the NASDAQ bubble, a Paine Webber survey showed that the average investor expected an average annual return from stocks of 15.3% over the next 10 years. 

“The fundamental problem, the 800 lb. gorilla in the room, is that we don’t save enough,” Hu added. He suggested that Americans buy U.S. bonds to fund inflation-adjusted annuities issued by the federal government. “If you price it right, it won’t cost the government anything,” he said. “It will also diversify the base of U.S. debt. We’re too dependent on Asian countries for their willingness to buy Treasuries.”

Ron Ryan of Ryan ALM, Inc., came up next to say that public pensions are running huge deficits in part because they don’t have the right benchmarks. Instead of using market benchmarks, he said, they should be using “customized liability benchmarks.”

If each fund’s investment policy were dictated by its own goal, more precise asset-liability matching would be possible, and the achievability of the goals wouldn’t swing up and down with the value of the investments. But that never happens today, he said.

No customized liability benchmarks have existed, however—until now, said Ryan, who helped created the original Lehman bond indices and whose company is now in the business of creating customized liability benchmarks for corporate and public pensions.

“How can you use a generic market index when pension liabilities are all different?” he asked. “Until a customized liability index is in place, nothing on the asset side can work. A handful of market indices dictate how pension assets are managed, but they have nothing to do with the liabilities.” 

The long decline in interest rates since 1982 hurt defined benefit pensions badly, Ryan said, by making them more expensive to fund. Pension fund managers also failed to take advantage of surpluses during the mid- to late 90s by rebalancing from stocks to bonds. From an accounting standpoint, public pensions looked particularly underfunded after the 2008 market crash, he added, because their assets were marked to market while the value of their liabilities were still based on an assumed growth rate of 8%. 

Appearing via a broadband video connection from Budapest, Robert Arnott of Research Affiliates spoke about the findings in his paper in the latest issue of the Financial Analysts Journal, which forecasts slowing GDP growth and declining share prices in developed countries that are aging.

It was no coincidence, for instance, that the bull market in the U.S. started when leading-edge Boomers hit their mid-30s and ended when they hit 62. As he puts it in the paper, “Young adults are the driving force in GDP growth; they are the sources of innovation and entrepreneurial spirit. But they are not yet investing; they are overspending against their future human capital. Middle-aged adults are the engine for capital market returns; they are in their prime for income, savings, and investments.”

He goes on to write, “Large populations of retirees (65+) seem to erode the performance of financial markets as well as economic growth. This finding makes perfect sense; retirees are disinvesting in order to buy goods and services that they no longer produce, and they are no longer contributing goods and services into the macroeconomy. This effect is less pronounced for bonds, presumably because they are sold later in retirement than stocks, in conformity with widespread financial advice.”

© 2012 RIJ Publishing LLC. All rights reserved.

DST Brokerage Solutions merges DST TASS and Wall Street Advisor Services

DST Brokerage Solutions, a unit of DST Systems, a developer of tools, products, and services for broker-dealers, has combined its two sub-accounting service providers to form DST Market Services, LLC.

The new entity was created through the merger of DST TASS and Wall Street Advisor Services, and will continue to deliver mutual fund processing and sub-accounting services.   

As a registered broker-dealer, DST Market Services is subject to the same regulatory environment as their clients.  It will continue to provide mutual fund subaccounting services based on broker-dealer operations experience, an understanding of subaccounting work flow processes, and DST’s technology platform. DST Market Services is also a member of FINRA and SIPC.

Broadridge launches FinancePro 

Broadridge Financial Solutions, Inc., has launched FinancePro, a global, multi-asset, multi-currency securities financing solution that can help financial institutions “optimize their funding activities by enabling them to make better collateral decisions and efficiently scale their repo, treasury and securities lending desks.”

FinancePro enables tracking and management of positions throughout the entire lifecycle of a financing transaction.  The new Tri-party Allocation Simulator allows firms to optimize collateral allocations within tri-party trades prior to submission to the clearing bank. This unique capability reduces the firms’ overall funding expense. 

FinancePro’s reporting capabilities allow front-, middle- and back-office personnel to analyze and act on information across a broad array of criteria, including: geographies, entities, currencies, business units, depositories, asset classes, counter-parties and many other categories.

This increased visibility into aggregated global positions will enhance Broadridge’s clients’ ability to optimize collateral and mitigate market and operational risk across legal or regional business entities.  Advanced workflow functions within FinancePro also allow sales, trading and compliance teams to review and approve financing transactions according to pre-defined thresholds and parameters.

FinancePro integrates with Broadridge’s industry-leading securities processing solutions such as impact, BPS and Gloss as well as other front-, middle- and back-office systems.  A full suite of straight-through-processing adapters is available for executing inter-capital broker transactions.  FinancePro is designed to adapt to applicable regulatory requirements and tri-party reforms.

Investors postponing decisions until after election: BNY Mellon

In the past 10 years, the percentage of American investors who believe they will run out of money someday has risen to 48% from 30%, according to a survey commissioned by BNY Mellon Wealth Management.  

More than six in ten investors (61%) surveyed said that Americans are pessimistic about the markets compared to fewer than four in ten (39%) who sense optimism.

“When it comes to how investors feel about the financial markets, you could say that bleak is the new black,” said Larry Hughes, CEO of BNY Mellon Wealth Management.  “Many people are so negative about the markets that they find it hard to believe that something could possibly go right.
The survey, conducted last February, found that such worries are leading investors to postpone their investing or planning decisions, with 59% saying they are waiting for conditions to improve before taking action.

Nearly four in ten investors said they are holding off until after the Presidential election to take action and more than a third said they don’t intend to make any decision before they have a better sense of where tax and interest rates are heading.
Leo Grohowski, BNY Mellon Wealth Management’s Chief Investment Officer, said he nonetheless sees several opportunities in the current market: emerging market equities, high-yield bonds, dividend stocks.

Jere Doyle, senior vice president of BNY Mellon and an estate planning strategist for BNY Mellon Wealth Management, notes that the current combination of low interest rates, valuations and taxes offer specific planning opportunities.

“Given low interest rates, intra-family lending can be a compelling and timely estate planning opportunity. Bear in mind that transfer tax rates are likely to go up this year,” Mr. Doyle said.  “There are also a number of mortgage and credit strategies now, too, because of historically low interest rates.”

SIGNiX and VERTEX partner to promote digital signatures 

SIGNiX, a provider of digital signature technology, will partner with VERTEX, a provider of professional services and software to the financial services industry, to promote the use of electronic execution of transactions with secure digital signatures.

“The adoption and importance of e-signature technology has been rapidly accelerating in our industry,” said Steve Wilson, VERTEX’s CEO. “SIGNiX’s secure digital signature service is especially suited to significant financial transactions, and they are the only solution certified by the annuity industry through IRI, the Insured Retirement Institute.”

VERTEX “will offer our standalone solution known as MyDoX for immediate use by companies with no need for integration, but they also have the professional services resources to tightly embed the SIGNiX signature service as a seamless part of any automated process or application,” said SIGNiX CEO Jay Jumper.

Allianz Life promotes Matt Gray to vice president 

Matt Gray has been named vice president, Market Management and Product innovation (MMPI) at Allianz Life Insurance Company of North America. He will lead product strategy and development, customer experience, and customer intelligence initiatives, as well as competitive intelligence, market research, segmentation, and analytics that help inform company strategies.

Gray started with Allianz Life as an intern in 1998. Most recently, he served as assistant vice president for the actuarial group, collaborating across the company in the development of new Allianz Life products including the Allianz ProV1 Annuity, the Simple Income III Rider on the MasterDex X Annuity, the Allianz 360 Annuity, and the Allianz 365i Annuity. During his time with Allianz Life, Gray was part of the team that developed the Allianz Life dynamic hedging platform, assisted Allianz Korea in developing a fixed index annuity, and consecutively led actuarial product development for variable and then fixed index annuities.

Gray holds a Bachelor of Science degree in mathematics from the University of Minnesota. He is a Fellow of the Society of Actuaries, a member of the American Academy of Actuaries, and holds a Series 7 securities registration.

Treasury Department launches “Ready.Save.Grow.” 

The U.S. Department of the Treasury has announced a new public education initiative, Ready.Save.Grow., that will “provide information and access to affordable, safe and convenient Treasury savings options that can help people take control of their future.”

Ready.Save.Grow. offers information and solutions to people who may not be aware of Treasury savings options, such as digital savings bonds and Treasury marketable securities,” said Bureau of the Public Debt Commissioner Van Zeck.

The Treasury Department’s Bureau of the Public Debt offers interest-bearing digital savings bonds starting at $25 and Treasury marketable securities starting at $100, and with no risk of principal loss. These savings options are offered through TreasuryDirect.gov, and can be purchased online or through payroll direct deposit after opening a free TreasuryDirect account.

20% of Americans 50+ unsure how to save

A survey of 463 investors commissioned by Natixis Global Asset Management (NGAM) found that even many affluent people aren’t sure how much they need to save, say they lack money for investing and prefer to spend today rather than save for tomorrow.

“Too many Americans… aren’t aware of the solutions available to them or simply don’t have enough money available to put toward savings,” said John T. Hailer, president and chief executive officer, Natixis Global Asset Management – The Americas & Asia.  

Among the key findings from the NGAM survey:

• 30% of investors with $300,000 to $500,000 of assets, 22% with more than $1 million and 18% of those over age 50 aren’t sure how much to save or invest for future needs..
• 32% of respondents with less than $1 million in investable assets, 16% of those with more than $1 million in assets and 19% of those over age 50 say they can’t afford to save.
• 18% of Americans say they would rather spend today than put money away for the future. 22% of those with less than $500,000 in assets say they’d rather spend than save, compared with 13% of those with more than $1 million.

Steep market movements in the last few years have raised doubt among investors. Overall, 47% say they curbed their savings and investing because they didn’t want to risk losing money. NGAM CEO Hailer said effective retirement solutions should be “durable portfolios” that include commodities, currencies and alternative mutual funds as well as stocks and bonds.  

Other findings from the survey include:

• 28% percent of investors rate their portfolios as “risky,” while 47% categorize them as “neutral” and 25 percent as “not risky.” Just 17% of those with more than $1 million in investable assets label their investment portfolios as “risky,” compared to 33% of those with less than $1 million. More men (35%) than women (19%) classify their investment portfolios as risky.
•  Asked what most motivates them to save, 48% of Americans overall say providing for themselves and their families is their primary objective. Asset growth is the second choice, at 18%, and capital preservation to provide for future generations of their family is third, at 9%. Saving for their children’s education trails at 5%.
• More women than men (53% compared to 43%) say their top reason to save is to take care of themselves and their families. More men than women (21% compared to 14%) said asset growth is the next biggest motivator for saving.

The Natixis Global Asset Management U.S. Investor Insights Survey was conducted by CoreData Research, which surveyed 463 American adults to better understand their investment attitudes, behavior and sentiments. The survey was conducted in May and July 2011. In addition, NGAM conducted qualitative interviews with investors in October 2011.

The NGAM survey looked at four different categories of investors, including: Mass-market investors (with $200,000–$300,000 of investable assets); mass affluent investors ($300,000–$500,000 of investable assets); emerging high-net-worth investors ($500,000–$1 million in investable assets); and high-net-worth investors (more than $1 million of investable assets).

Without tax deferral, 401(k) participants would save less: EBRI

The recent proposal to alter the tax deferred status of 401(k) plans could reduce 401(k) account balances by 6% to 22% for workers ages 26-35 by the time they reach Social Security normal retirement age, according to the Employee Benefit Research Institute (EBRI).

Participants in smaller plans would experience deeper average reductions in 401(k) balances, according to EBRI’s baseline analysis. Participant balances at Social Security normal retirement age for workers currently ages 26‒35 in plans with less than $10 million in assets could decline 23% to 40%, depending on the size of the plan and income of the participant.

EBRI’s report analyzed the potential response of both private-sector 401(k) plan sponsors and participants to a proposed scenario where workers would have to pay federal taxes on these amounts currently, rather than on a deferred basis (as under current law), and receive an 18% government match on all contributions instead. 

 “Surveys of individual participants suggest… that some would decrease or even eliminate their contributions in response to these changes,” said Jack VanDerhei, EBRI research director and author of the report. “Additionally, surveys of plan sponsors indicate that many would modify their plan design, or even terminate these plans.”

Full results of the study are published in the March EBRI Notes, “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances,” online at www.ebri.org

In the debate over reducing the federal deficit, a 2011 plan was proposed that would modify the existing tax treatment of both worker and employer 401(k) contributions and introduce a flat-rate refundable tax credit that serves as a federal matching contribution into a retirement savings account.

FEI applauds passage of Dodd-Frank fix for derivatives end-users

Financial Executives International (FEI) has commended the House of Representatives for passing H.R. 2682 and H.R. 2779, to clarify that commercial end-users of over-the-counter (OTC) derivatives should be exempt from certain regulatory requirements, as intended by the Dodd-Frank Act. 

FEI is a professional association for senior-level financial executives from both major public and private companies. The two bills now go to the Senate for consideration.

“This legislation will ensure end-users can continue to hedge business risks, innovate and grow their businesses without adding billions of dollars in new costs or placing strain on hundreds of thousands of jobs,” said Marie Hollein, president and CEO of FEI.   

H.R. 2682 would clarify that end-users should not be subject to regulatory-imposed margin requirements, and H.R. 2779 would prevent companies’ internal, or inter-affiliate trades from being subject to requirements meant only for certain street-facing swaps. 

Shlomo Benartzi, of Allianz Global Investors Center for Behavioral Finance, publishes Save More Tomorrow

Allianz Global Investors Center for Behavioral Finance has announced the release of Save More Tomorrow (Portfolio Penguin), by Shlomo Benartzi, professor and co-chair of the Behavioral Decision-Making Group of the UCLA Anderson School of Management and chief behavioral economist of the Center.

The book addresses the behavioral challenges that led to the retirement crisis – inertia, limited self-control, loss aversion and myopia – and transforms them into behavioral solutions. Half of Americans do not have access to a retirement saving plan at their workplace; of those who do, about a third fail to join. Those who do join tend to save too little and often make unwise investment decisions.

“This book applies the relatively new field of behavioral finance to 401(k) plans with the ultimate goal of improving retirement outcomes,” said Benartzi in a release. “As we recover from market conditions that left many Americans uneasy about their ability to secure a comfortable retirement, it is critical that plan sponsors use lessons from behavioral finance to make it easier for their employees to save, save more and save smarter.”

The Allianz Global Investors Center for Behavioral Finance was founded in 2010 to help turn academic insights into actionable ideas and practical tools that financial advisors and plan sponsors can use to help their clients and employees make better financial decisions.

© 2012 RIJ Publishing LLC. All rights reserved.

A.M. Best Co. said it has placed under review the bbb+ issuer credit rating and the debt ratings of The Hartford Financial Services Group, Inc. as well as the a+ issuer credit rating and the A (excellent) financial strength rating of the Hartford Insurance Pool.   

At the same time, A.M. Best has placed under review with negative implications the FSR of A (Excellent) and ICRs of “a+” of the Hartford’s key life/health insurance subsidiaries. All companies are headquartered in Hartford, CT.

These rating actions follow the announcement of the Hartford’s decision to focus its strategy on the company’s property/casualty, group benefits and mutual funds businesses. The company will place its individual annuity business into run-off effective April 27, 2012. The company is pursuing other options for certain product lines within its Wealth Management segment, including sales or other strategic alternatives.

The rating actions for the Hartford Life subsidiaries reflect the execution risk in the current economic environment of the group’s plans to divest its Individual Life, Woodbury Financial Services and Retirement Plans businesses.

Additionally, the revised strategy will cause Hartford Life’s business profile to contract over time and be limited to the ongoing Group Benefits and Mutual Funds businesses, as well declining in-force blocks of fixed and variable annuities. This will result in reduced life/health revenues and earnings available to the enterprise.

The under review with negative implications status recognizes the potential for changes in Hartford Life’s ratings and outlook based on the final outcome of management’s intended restructuring.

A.M. Best believes execution risk may be somewhat diminished by the perceived attractiveness of the Individual Life and Retirement Services businesses. A.M. Best’s understanding is that the Hartford’s current plans do not involve the sale of insurance entities, which may expedite the process.

However, A.M. Best notes that the longer it takes to consummate a transaction, the less likely management will generate its targeted proceeds from the sale. Nevertheless, the planned divestitures will allow Hartford Life to release capital allocated to these businesses and potentially upstream funds to the parent. It is currently uncertain what impact the restructuring will have on the group’s remaining investment portfolio.

The rating actions for the Hartford and the Pool acknowledge the potential for successful implementation of the restructuring plan in line with management’s expectations to result in favorable movement on the ratings. The increase in financial flexibility at the holding company, the expected reductions in financial leverage and the benefits of a more focused management strategy centered around the company’s property/casualty business are viewed positively by A.M. Best, and—if the plan is achieved as expected—would likely result in favorable rating action on these entities. At the same time, however, the under review with developing implications status acknowledges the execution risk associated with the plan and the potential for some continued volatility related to the Individual Annuity business that will be retained, which could have negative implications on the ratings of both the Hartford and the Pool.

A.M. Best will continue to work with management as steps are taken toward accomplishing the plan and will evaluate the under review status as appropriate. Due to the scope of the plan, the ratings may remain under review for an extended period of time.

For a complete listing of The Hartford Financial Services Group, Inc. and its key life/health and property/casualty subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/032104hartford.pdf.

The growth of the direct channel growth outpaced that of the advisory channels over the past two years, posting a compound annual rate of 19% versus 14% for advisory channels, according to a new report from Cerulli Associates.  At $3.68 trillion in assets, it is now the second largest retail distribution channel.

The giants of the direct market—Vanguard, Fidelity, T. Rowe Price and others—continue to rely on low prices to attract customers. But they’ve steadily added advice and are working harder to gather assets.

“The direct channel [isn’t simply] asset managers distributing their own products to end investors,” said Katharine Wolf, head of Cerulli’s retail investor practice, in a release. “[It’s] a distribution model characterized by… corporate-driven client acquisition, salaried representatives, and corporate-driven advice.”

Cerulli predicts the direct market will grow to close to $5 trillion and will control close to 10% of retail managed accounts assets by 2014, equating to $380 billion.  

Ownership of direct accounts is broad, but lies just below the surface. More than 66% of households report owning a direct account, Cerulli said, but only 25% of households use a direct account as their primary provider relationship.  

Direct firms serve clients with a multi-channel approach (iphone, web, in-person, email, and chat) to maintain consistent client experiences and—when all the parts mesh properly—an impression of seamless handling.   

Direct firms are now among the fastest growing channels distributing mutual fund advisory programs, with new firms are entering the space, Cerulli said.

“Newer entrants… include RIA firms, banks, and technology-driven offerings,” Cerulli said. “The direct model has applications for clients in all wealth tiers, but its sweet spot is clients with between $100,000 and $2 million in investable assets.” 

© 2012 RIJ Publishing LLC. All rights reserved. 

Advisors and clients evaluate a portfolio’s performance differently, according to the Financial Professional Outlook, Russell Investment’s latest quarterly survey of U.S. financial advisors.

The current iteration of the FPO includes responses from about 600 financial advisors working in 141 national, regional and independent advisory firms nationwide.   

While 53% of advisors surveyed said they “measure performance in terms of the portfolio’s progress towards meeting the client’s investing goals,” only 29% say clients also measure performance this way.

Instead, advisors said that clients typically gauge portfolio performance by short-term factors such as one-year returns (54%), the portfolio’s absolute return (49%) and portfolio volatility (41%).

“With the market volatility seen in 2011, it’s not surprising that individual investors are fixated on one-year returns and portfolio volatility. But there is little actionable value in these short-term, backward-looking measures for the individual investor,” said Frank Pape, director of Consulting Services for Russell’s U.S. advisor-sold business.   

Most advisors (78%) were optimistic about the capital markets over the next three years (78%), but only 18% of advisors believed that clients shared that optimism. While this is higher than the 9% recorded in the December iteration of the FPO survey, it is below levels seen in early 2011.

In 2012, advisors on average expect a 3.9% return for a conservative portfolio, 5.9% for a balanced portfolio and 8.3% for an aggressive portfolio. Despite client pessimism, the advisors say that clients’ return expectations are slightly higher than their own: 4.3% for a conservative portfolio, 6.5% for a balanced portfolio and 9.3% for an aggressive portfolio.

“The broad equity markets have already met or surpassed the expectations of advisors and their clients in the latest FPO, with the U.S. broad market Russell 3000 Index up 9.49%, the Russell Global ex-U.S. Index up 13.5% and the Barclays Capital U.S. Aggregate Bond Index up 0.85% year-to-date as of 2/29/12. But we are only three months into the year and anything could happen,” Pape said.   

Priorities differ between advisors and their clients, advisors say. Advisors are most likely to want to talk about portfolio rebalancing and asset allocation, but only 11% of advisors say clients raised this topic themselves.

Additional topics introduced to clients by advisors included portfolio performance (34%) and running out of money in retirement (30%). Clients most often initiated conversations around market volatility (56%), government policy (49%), global events (39%) and portfolio performance (39%).

© RIJ Publishing LLC. All rights reserved.

Potential new rules recommended in an SEC Staff study on uniform fiduciary standards for both broker-dealers (BDs) and registered investment advisors (RIAs) will affect many aspects of their activities, according to a new whitepaper from Citi.

Creating investor proposals, account ‘on-boarding,’ suitability assessments, fee arrangements, initial portfolio implementation and portfolio rebalancing would likely be affected by harmonized standards, said the paper, entitled Broker-Dealers as Fiduciaries? How the SEC Staff’s Study Could Raise the Bar for Investment Advice.

“Financial advisors can expect significant technological and operational challenges to adhere to any new fiduciary standards,” said report co-author Andrew Clipper, head of Wealth Management Services in North America, Citi’s Securities and Fund Services. The paper points out that broker-dealers and RIAs may need better technology in the following areas:

• Automatic linkage from front-to-back of an investor’s information, risk profile, restrictions, proposed portfolio and portfolio execution
• Access across all investment vehicle types within and across multiple accounts in the household
• Household reporting and rebalancing across multiple account types (e.g., brokerage, retirement, trust)
• Tax optimization at the individual investor (tax return) level and across the household

Compliance is expected to be expensive. “Both the SEC and FINRA have recently explored using technology to assist in conducting examinations, and the SEC recognized in the Study on Investment Advisers and Broker-Dealers that BDs may incur on-going costs in developing or acquiring technology,” should the broker-dealer exclusion from the definition of investment adviser be eliminated, said George Magera, a partner in Reed Smith LLP’s Investment Management Group. 

Additional copies of “Broker-Dealers as Fiduciaries? How the SEC Staff’s Study Could Raise the Bar for Investment Advice” can be obtained by writing to [email protected] or calling 877-682-2278.

© 2012 RIJ Publishing LLC. All rights reserved.

Thanks to a buoyant stock market, the number of U.S. households with a net worth of $1 million or more NIPR (not including primary residence) rose by 200,000 to 8.6 million in 2011, according to the Spectrem Group’s Affluent Market Insights 2012 report. There are about 115 million households in the U.S.

It marks the third consecutive year of growth following the 27% decline in millionaire households to 6.7 million in 2008. The total millionaire population remains below the pre-recession high in 2007 of 9.2 million, however.

The ranks of all affluent investors increased in 2011:

• Those with $100,000 or more in net worth NIPR reached 36.7 million from 36.2 million in 2010
• Those with $500,000 or more in net worth NIPR climbed to 13.8 million from 13.5 million in 2010
• Those with $5 million or more in net worth NIPR rose to 1.078 million from 1.061 million in 2010*
• Those with $25 million or more in net worth NIPR grew to 107,000 from 105,000 in 2010*
(*Numbers included in, not in addition to, millionaire households)

Wealthy investors remain worried about the future, however. “Even if they are not directly impacted, continuing high unemployment and the depressed housing market are bedeviling wealthy investors,” said George H. Walper, Jr., president of Spectrem Group, in a release. “Investor optimism has climbed from negative in April 2011 to neutral in February 2012, according to our monthly Spectrem Affluent Investor Confidence Index, but investor outlook won’t significantly improve until unemployment falls significantly lower.”

Home values still make up a big part of the total wealth of many households. According to Spectrem, the primary residence makes up:
• 29% of total assets for Mass Affluent ($100,000 – $999,999 Net Worth NIPR)
• 16% of total assets for Millionaire ($1MM-$5M Net Worth NIPR)
• 9% of total assets for Ultra High Net Worth: (5MM+ Net Worth NIPR)

Additional wealthy investor insights from Spectrem are available at www.MillionaireCorner.com.

© 2012 RIJ Publishing LLC. All rights reserved.

Bernie Madoff laundered cash for Bogota drug lords. The most reliable leading economic indicator is the level of fossil fuel reserves. Plan sponsors should brace themselves for a flood of proposals for new in-plan retirement income programs.

Those bits of news, among others, were gleaned from the Retirement Income Industry Association’s spring conference at Morningstar’s headquarters this week in sultry Chicago, where ornamental pear trees bloomed oddly out of season.

This year’s RIIA conference, where 120 attendees gathered in a raked, red-chaired lecture hall that faces the untitled Picasso sculpture in Daley Plaza, focused on creating a dialogue between two distribution channels—retail (individual) and defined contribution (institutional)—that rarely talk to each other.

The two-day meeting was segmented into three subject areas—trust, demographics and innovation—and each day’s panels and presentations were anchored by an outside-the-retirement-business speaker: Frank Casey, a money man who blew the whistle on Madoff, and Tim Garrett, a physicist who believes the supply (and price) of energy explains just about everything else in the economy.

‘Bernie’ and dwindling oil reserves

Casey related the sobering and diverting saga of how, in the process of trying to duplicate Madoff’s returns in the late 1990s at Rampart Investment Management, he and analyst Harry Markopolos deduced that the returns couldn’t be duplicated because they were fraudulent.

One enduring mystery of the case has been why the SEC ignored Casey and Markopolos’ warnings about Madoff; Casey attributed it to incompetence, not corruption. In response to a question, he affirmed rumors that Madoff’s scheme included laundering Colombian drug money, and that he, Casey, was at times afraid for his life.

Garrett’s presentation on peak oil—though he didn’t use that expression—also concentrated the mind. Plentiful coal, oil, and natural gas drove the tide of technical innovation in the late 19^th and mid-20^th centuries, he said. The fact that the world was discovering new fossil fuel reserves faster than it was burning them caused the Baby Boom itself, he believed, whose progress through adulthood drove the 1982-2000 bull market.

Unfortunately, the age of cheap energy appears all but over, Garrett said, and unless new reserves are discovered soon, the world’s economy will, literally, run out of gas. Oddly, he didn’t have much to say about the constraints imposed by global warming or the potential for salvation through renewable energy resources.

Two in-plan annuities

Very interesting, you say, but what about retirement income? Two specific annuities for the 401(k) market came to light, one in a formal presentation and one during one of the networking sessions. In a formal presentation, David Deming of Dimensional Retirement, an affiliate of Dimensional Fund Advisors, announced—or rather, re-announced, since it has had a  website for some time—a personal pension product called Dimensional Managed DC.

This product, which RIJ will report on in a subsequent issue, allows plan participants to contribute to a part-TIPS, part-global equity managed account whose assets are intended to be used to buy an annuity at retirement. Participants will be able to track the growth of their future income on an online dashboard. They can also drop out of the program at any time.  

The other soon-to-be-formally-announced in-plan annuity product, discussed informally during networking breaks at the RIIA conference, was a UBS program that has been quietly but not secretly brewing for some time. It appears to be based on pure longevity insurance.

According to Drew Carrington, a UBS Wealth Management managing director and head of DC and retirement solutions, participants will be able to contribute to a contract that provides income when and if the participant reaches his or her mid-80s. Neither Deming nor Carrington named specific life insurance partners for their programs.

Cast party

This year’s spring conference may have been RIIA’s most substantive, timely and productive to date. An assiduous work in progress by Francois Gadenne and many others for more than half a decade, the organization survived the financial crisis, grew by 50% from 2010 to 2011, Gadenne says, and now has several initiatives underway.

One of those initiatives involves classes, hosted variously by Boston University, Texas Tech, and Salem State University (in Massachusetts), that lead to a Retirement Management Analyst designation for advisors. Another involves the launch of a Market Insight group to collect data on the retirement income market.

A third initiative has led to the creation of a periodical, Retirement Management Journal, to publish retirement income research and burnish a reputation for thought-leadership. Simultaneously, RIIA has established alliances and partnerships with organizations as varied as the National Association of Fixed Annuities (NAFA), the Depositary Trust & Clearing Corp. (DTCC) and the Defined Contribution Institutional Investment Association (DCIIA).

The depth of financial backing for an organization is hard to guage, but RIIA’s corporate sponsorship appears to be growing. Ibbotson (a Morningstar company), Allianz Global Investors, Dimensional Fund Advisors, Guided Choice, New York Life, DST Systems, Putnam Investments, and Wells Fargo were listed in the conference program as significant event sponsors.

It’s challenge, but it also feels necessary, to describe the difference between the RIIA conference and other retirement industry conferences. The difference springs primarily from the fact that unlike, say, Insured Retirement Institute or the Financial Planning Association, RIIA represents no single product category or distribution channel, but many of them at once.    

RIIA conferences are more eclectic and less parochial than others, as its motto—“the view across the silos”—would suggest. To be more precise: a more networking-driven mix of executives and entrepreneurs, political mavericks, and compulsive students-of-the-income-game can’t be found at any other conference in this space.  

That mixture generates a difference in vibe—a difference that’s difficult to define but essential to an understanding of the organization’s value. At the risk of exaggerating to make a point, RIIA’s conference differs from others in the way that a cast party differs from a stage play: same players, with their masks off.  

© 2012 RIJ Publishing LLC. All rights reserved.  

On March 15, the New York State Legislature agreed to a deal limiting pensions for future public employees. The state thus joins 43 others that have recently enacted legislation curtailing public retirement benefits.

Though New York needs to reduce its spending, the cuts come at a particularly bad time: over a third of New York workers, both public and private, approaching retirement age have have less than $10,000 in liquid assets. As a result, those workers are projected to be poor or near poor in retirement, with an average budget of about $7 a day for food and approximately $600 a month for housing.

Fortunately, there’s an easy solution. Rather than curtailing public and private pensions, New York and other states could save millions of workers from impending poverty by creating public pensions for everyone.

While the recession bears some blame for the looming retirement crisis, experts agree that the primary cause is more fundamental: Most workers do not have retirement accounts at work. Over half of the workers in New York State, more than four million people in 2010, do not participate in retirement plans with their current employers, while over half of American workers do not have pension plans at work.

Private-sector pensions have been on the retreat for decades. In fact, in the late 1970s and early ’80s, Congress, worried about the dismal rate of pension coverage, tried to remedy the situation by extending 401(k) plans, originally designed for executives, to everyone, while also passing a law to create individual retirement accounts.   

The problem is that these steps set up incentives through the tax code, which means that the biggest benefits go to the highest earners — people who, moreover, would probably have saved anyway. Today 79 percent of such tax breaks go to the top 20 percent of workers.

Meanwhile, despite extensive commercial advertising for retirement planning, coverage for ordinary people stalled. And even many of those who do save for retirement fail to consistently put away the 5 to 10 percent of their pay necessary to adequately supplement their Social Security benefits.

In response, in late February California State Senator Kevin De León and Darrell Steinberg, the Senate president pro tempore, introduced legislation that would allow private-sector workers in California to enroll in a modest, state-operated retirement program financed by the workers and their employers — at virtually no cost to taxpayers.

This would increase coverage because employers would put every worker into a plan, either their own or the California plan. In the California version workers could opt out; some will, but most workers once in a plan will stay in.

Also in February, John Liu, the New York City comptroller, called for a similar plan for New York City residents. His program would pool employee and employer contributions into a professionally managed, citywide retirement fund.

Both plans would use the same professional staff and institutional money managers that invest the state and city pension funds to manage contributions made by participating employers and employees in the private sector.

This is a vital step: public pension plans usually outperform 401(k) plans and individual retirement accounts, because instead of a single worker managing a single account, large institutional plans pool workers of all ages, diversify the portfolio over longer time periods, use the best professional managers that aren’t available for retail accounts and have the bargaining power to lower fees and prioritize long-term investment.

By some estimates, costs for public pensions are over 45 percent lower than for individual 401(k) plans. Of course, since these plans would be financed by workers and their employers, there would be no cost to taxpayers.

Saving for retirement is never easy. But finding a safe place to put your money these days is even harder. Opening up public pension options to everyone is a cheap, simple way to help.

Teresa Ghilarducci, a professor of economics at the New School, is the author of When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them (Princeton University Press, 2008).

© 2012 The New York Times. Reprinted by permission

Investors with both 401(k) plans and IRAs have a combined average balance of $212,600, and members of that group on the verge of or in retirement – between 65 and 69 – have a combined average balance of $359,000, according to Fidelity Investments. 

Fidelity reviewed users of one or both types of retirement accounts within its customer base, and came up with average balances for several distinct subsets of that population. The data can be found in the table below.  

Findings released today by S&P Indices for its full year “2011 S&P Indices Versus Active Funds Scorecard” (SPIVA) show that approximately 84% of actively managed U.S. equity funds underperformed their relative S&P benchmark in 2011. Over the previous three-and five-year periods, approximately 56% and 61% of actively manage equity funds underperformed their benchmark.

Bear markets should favor active managers. Instead of being 100% invested in a market that is turning south, active managers have the opportunity to move to cash, or seek more defensive positions. Unfortunately, that opportunity does not translate to reality. In the two true bear markets the SPIVA Scorecard has tracked over the last decade, most active equity managers failed to beat their benchmarks.

SPIVA reports on the performance of actively managed U.S. funds corrected for survivorship bias and shows equal and asset-weighted averages. The complete SPIVA scorecards for the U.S., Australia, Canada and India is available at www.spindices.com/spivaresearch .

Drilling down to style categories, the SPIVA scorecard shows that approximately 69% of large cap funds, 70% of mid cap funds and 51% small cap funds failed to beat the S&P 500, S&P MidCap 400 and S&P SmallCap 600 respectively over the previous three years. The results are similar over the five-year period and more dramatic over the one-year period for 2011. 

A table showing the percentage of U.S. equity funds outperformed by their benchmarks can be found on the RIJ homepage, March 14 issue.

The script was similar for non-U.S. equity funds, with indices outperforming a majority of actively managed non-U.S. equity funds over the past three- and five-years with approximately 69% and 55% of global equity funds failing to outperform the S&P Global 1200.

While the active versus passive debate gets less play for bond market funds, S&P Indices has seen similar results over five-year horizons in this asset class. In most bond fund categories, benchmark indices have outperformed a majority of active managers.

New Athene fixed annuity issued   

ATHENE MaxRate is a multi-year guarantee annuity with a choice of five or seven-year guarantee periods. Seven-year guaranteed rates are currently 4.15% in the first year and 3.15% in years 2-7; for five years, the rates are 3.85% in year one and 2.85% in years 2-5.

The new product provides a 30-day window at the end of each guarantee period during which contract holders can request a partial withdrawal, surrender their annuity, or convert it into a guaranteed stream of income without incurring a market value adjustment or any withdrawal charges.

If no action is taken during the 30-day window, the annuity will automatically begin a new guarantee period of the same duration with a new guaranteed interest rate.

Most younger investors not confident about retirement:  T. Rowe Price  

Only 39% of investors between the ages of 21-50 are confident that they will have enough money for retirement, according to new study from T. Rowe Price.  

Most younger investors (63%) have no detailed plan for their finances in retirement., but of those who have a detailed plan, 58% believe they will have enough money for retirement, a survey showed.

The study was conducted online in December 2011 by Harris Interactive on behalf of T. Rowe Price among 860 adults aged 21-50 who have at least one investment account. The survey also showed:

• 77% of those who have a plan said that it targets an anticipated monthly budget. 84% cited having a specific monthly withdrawal strategy.
• 78% said their plan considers life expectancy and how long their savings might need to last.
• 74% of Gen X and Y expect to receive retirement income from  401(k)s or other workplace retirement plans.
• 65% expect to receive retirement income from IRAs.
• 64% expect income from non-retirement accounts (checking, savings, stocks, bonds, mutual funds).
• 63% of investors aged 50 and under anticipate receiving Social Security. 

When asked at what age they expect to retire, the mean age investors gave was 62.  When asked how many years they expect to live in retirement, the mean answer was 22 years. 

Prudential Retirement calls for MEPs for small employers

Prudential Retirement’s Jamie Kalamarides, senior vice president of Institutional Investment Products, testified last week during a U.S. Senate Special Committee on Aging hearing on the shortage of retirement savings plans among small businesses.

Kalamarides discussed Prudential Retirement’s support for expanding retirement coverage through multiple small employer plans, which would allow groups of employers to pool resources under a single defined contribution plan, resulting in lower costs and simplified administrative requirements.  

Compliance with ERISA’s reporting, disclosure and fiduciary requirements may be a concern for many small employers and, the ability to reallocate these responsibilities to professionals through a multiple employer plan would remove a major impediment to small employers extending retirement savings opportunities to their employees.

If multiple employer plans are to play a meaningful role in closing the “retirement coverage gap” clarifications and changes in the law are necessary, including expanding multiple employer plan sponsorship, reallocating fiduciary and plan administration responsibilities and eliminating non–discrimination testing, Kalamarides said.   

Jackson National Life Insurance said it earned a record $683 million during 2011, up 34% over 2010. Jackson has generated more than a half-billion dollars in IFRS net income in seven out of the past eight years.

An indirect wholly owned subsidiary of Britain’s Prudential plc, Jackson generated a record $22.9 billion in total sales and deposits, up 16% over 2010. Retail net flows also increased 11% over 2010 to a record $13.6 billion.

The record sales and net flows were driven primarily by growth in variable annuity (VA) sales at Jackson and deposits at Jackson’s retail asset management subsidiary Curian Capital, LLC. VA sales rose 19% to $17.5 billion, while Curian deposits increased 28% to $2.7 billion.

Jackson’s total IFRS assets increased to $120.2 billion at the end of 2011, up from $107.0 billion at the end of 2010. At December 31, 2011, Jackson had $3.9 billion of regulatory adjusted capital, more than eight times the regulatory requirement after remitting a dividend of $530 million to its parent.

Curian generated $10 million in IFRS pretax operating income during 2011, up from $2 million during 2010. As of December 31, 2011, Curian’s assets under management totaled $7.3 billion, up 32% from the end of 2010.

Consumer demand for fixed annuities fell during 2011 due to the low interest rate environment. During 2011, Jackson sold $1.5 billion in fixed index annuities, compared to $1.7 billion in 2010. Sales of traditional deferred fixed annuities totaled $756 million during 2011, compared to $1.3 billion during the prior year. Jackson took advantage of the availability of wider spreads during 2011 by issuing $382 million in institutional products, a market in which the company participates on an opportunistic basis.

As of February 29, 2012, Jackson had the following ratings:

• A+ (superior) A.M. Best financial strength rating, the second-highest of 16 rating categories
• AA (very strong) Standard & Poor’s insurer financial strength rating, the third-highest of 21 rating categories
• AA (very strong) Fitch Ratings insurer financial strength rating, the third-highest of 24 rating categories
• A1 (good) Moody’s Investors Service, Inc. insurance financial strength rating, the fifth-highest of 21 rating categories

Jackson ranked third in both total annuity and VA sales, and second in VA net flows during the first nine months of 2011. The company achieved the following rankings and market share:

• Third in total annuity sales with a market share of 8.4% percent.
• Third in variable annuity sales with a market share of 11.8% percent.
• Ninth in fixed index annuity sales with a market share of 4.6%.
• 14th in traditional deferred fixed annuity sales with a market share of 1.9%.

Jackson’s affiliate, National Planning Holdings, Inc. , a network of four independent broker-dealers had IFRS revenue of $788 million in 2011, up 14% over 2010, and IFRS pretax operating income of $22 million, up 32% over 2010. The network reported record gross product sales of $16.3 billion in 2011, an increase of 14% over the prior year.

 Despite a difficult interest rate environment, income annuity sales grew almost 18% in fourth quarter and nearly 7% in 2011, according to estimates from the Beacon Research Fixed Annuity Premium Study. This growth gave them a record-high 13% of fourth quarter’s sales. Indexed annuity results held their own, claiming a 48% share of the quarter’s sales – also a record high.

“Income annuities did remarkably well, considering that lower interest rates and a flatter yield curve reduced payouts,” said Jeremy Alexander, CEO of Beacon Research.  “Income annuities generally provide the most retirement income bang for the buck. Sales results indicate that advisors and their clients are becoming aware of how these products can be used to create a personal pension. Similarly, guaranteed lifetime income benefits helped sustain indexed annuity sales despite lower cap or participation rates.”

Total annual fixed annuity sales were resilient during the difficult conditions of 2011, falling just 1.1% to $75.6 billion. Income annuity results advanced 6.6% to $8.5 billion. Indexed annuities did about the same at approximately $33 billion. Fixed rate non-MVA annuity sales of $28.1 billion and MVA sales of about $6 billion were down 3.1% and 5.5%, respectively.

Fourth quarter’s fixed annuity sales also held up surprisingly well on a period-to-period basis, declining only 1.7% to $17.3 billion.  At $2.2 billion, income annuities were up 17.6%.  Indexed annuity and fixed rate MVA results were essentially flat at $8.4 billion and $1.3 billion, respectively.  Fixed rate non-MVA sales decreased 10.3% to $5.4 billion. Overall sales fell 8.8% from third quarter, with weaker results for all product types.

Three of fourth quarter’s top five companies changed position from the prior quarter. American Equity and Aviva moved up a notch to come in second and third, respectively. Western National moved to fourth place. Allianz and New York Life remained in first and fifth place, respectively. Fourth quarter results for the top five Study participants were as follows:

 Total Fixed Annuity Sales (in thousands)

Allianz Life                                                              1,491,418

American Equity                                                    1,372,103                                               

Aviva USA                                                               1,233,303

Western National Life                                          1,118,218          

New York Life                                                            923,031