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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

Reviewing my 2012 editorial calendar recently, I saw that someone had penciled in “The Needs of the High Net Worth Investor” as the theme for March. But what can be said on the topic, with regard to annuities? The conventional wisdom is that the rich don’t need annuities.

I guess it depends in part on how you define “rich.” Warren Buffett and Michael Bloomberg may not need annuities. But if people earning $250,000 or more are rich and people with at least $100,000 in securities are “affluent,” the annuity market might be bigger than we thought.

The trouble here is with the careless use of the word “annuities,” a term so general that it merely creates confusion. If you ask more specifically, Are there certain types of annuities that can help the wealthy use their money more efficiently? then the answer has to be yes.

Certainly, rich people do buy annuities or should buy them or should at least know more about them.  

An 80-something retiree who sold his cardboard box factory for several million dollars recently put $2 million in a B-share variable annuity, on the supposition that he could get guaranteed growth. Months later, at a holiday gathering, he asked me if I thought he did the right thing. ‘That depends,’ I said. ‘Did your broker buy you a Mercedes?’ 

Another wealthy relative, a ‘millionaire next door,’ prefers to clip coupons in retirement rather than tour Bali or Machu Picchu because he’s hoarding his fortune against the possibility of huge nursing home expenses. There are annuities that could help him. 

But more to the point: there are at least six kinds of annuities that so-called HNW investors should know more about as they contemplate or enter retirement. Starting with today’s story on Jackson National Life’s new Elite Access variable annuity, we’ll be writing about these products this month.

Longevity insurance. Rich people tend to live longer and therefore have greater longevity risk. The cheapest way for them to mitigate longevity risk (and have more fun with their money in the meantime) is to buy longevity insurance, aka an advanced life deferred annuity.

Fixed annuity/Long-term care insurance hybrids. The open-ended cost of long-term care insurance is one of the biggest threats to the value of bequests. As noted above, many wealthy people self-insure against these costs rather than buy expensive LTCI. Thanks to a provision of the Pension Protection Act of 2006, a deferred fixed annuity/long-term care insurance hybrid can help the wealthy avoid that trap. Part of the interest earned by the fixed annuity funds the LTCI, which is relatively cheap because the annuity assets (acting as a big deductible) cover the first year or two of expenses.

Low-cost variable annuities with alternative investment options. Although many of the wealthy know little about alternative investments and avoid them, these relatively exotic investments are emerging as popular diversification tools because of their low correlation with stocks and bonds. But alternatives, such as actively managed tactical asset allocation funds, can be tax-efficient because of high portfolio turnover. Therefore it makes sense to own them inside a variable annuity.    

SPIAs—for tax-efficient income or to finance a tax-free bequest. In Wealth Secrets of the Affluent (Wiley, 2008), Christopher R. Jarvis and David B. Mandell urge the rich to explore the purchase of life annuities, either with after-tax money (to reap the tax benefit of the exclusive ratio) or with qualified money (to fund a life insurance policy for heirs).  

Charitable gift annuities.  This type of annuity allows a philanthropic HNW retiree to generate retirement income, save on taxes, and fund a charitable cause. In essence, the contract owner gives money to a charity, which pays the owner (and spouse, optionally) a lifetime income. The owner receives an immediate partial tax deduction for the amount that the charity is statistically likely to have left when the annuitants have died. According to a recent New York Times ad, the effective annual rate of return on such a contract, including tax savings, ranges from 6.3% for a 65-year-old single-life purchaser to 11.5% for a 90-year-old single-life purchaser.

Secondary-market annuities. Everyone, including the wealthy, is looking for better returns from low-risk investments today, and some secondary-market period certain deferred payout annuities offer an effective rate of return of seven percent or more. Sure, it’s a walk on the wild side, but some HNW investors are ready to take that risk. Just make sure that you’re working with a trustworthy intermediary who can demonstrate that you will have unequivocal rights to the income.    

 *        *        *

It’s likely that many HNW investors never even hear about these tools because they get their financial guidance from fee-based investment advisors who know nothing about annuities or regard them as “terrible investments.” Few advisors understand both investment and insurance products well and, more importantly, know how to combine them to generate maximum savings, utility and risk-reduction for their retired clients. As more financial advisors learn that a grasp of annuities can help them compete for HNW retired clients, that situation may change.       

© 2012 RIJ Publishing LLC. All rights reserved. 

Following a recent No-Action letter obtained from the Securities and Exchange Commission (SEC), Charles Schwab has announced its support for The Depository Trust & Clearing Corporation’s (DTCC’s) Alternative Investment Products service (AIP) as a means to facilitate the custody of alternative investments.

AIP is a service offering of National Securities Clearing Corporation (NSCC), a subsidiary of DTCC. The letter Schwab obtained from the SEC confirmed that broker-dealers can rely on AIP to establish compliance with a broker’s possession and control requirements.

 “Alternative investments are an increasingly important asset class for the industry, including many of the 7,000 independent investment advisor firms that we serve at Schwab,” said Bernie Clark, executive vice president of Charles Schwab & Co., Inc and leader of the Schwab Advisor Services division.

“We have been advocating for an industry-wide solution to create greater standardization in trading and custody. We believe that AIP has the potential to transform the industry’s approach to alternative investments.”

AIP is a data transmission platform that links administrators, broker/dealers, custodians, and issuers of alternative investments to provide streamlined processing of pooled investments like hedge funds, funds-of-funds, REITs, and limited partnerships. By automating this process, AIP can reduce errors, lower costs, and reduce the time it takes to process account information, which benefits advisors, investors, issuers, and custodians like Schwab.

“AIP is designed to provide the alternative investment industry with the same type of efficiency and scalability that exists in the mutual fund industry,” said Schwab executive vice president Bernie Clark. “But success requires participation by alternative investment issuers. We have been working to drive issuer adoption of AIP, and we’ll be stepping up those efforts in the coming weeks and months.”

In order to educate independent investment advisors about AIP and how it will impact Schwab’s custody of alternative assets, the firm is hosting an educational webcast in April with representatives of Schwab and DTCC. More information about the webcast will be available in the coming weeks.

Credit Suisse white paper predicts rally in late 2012

In a new white paper, “European Debt Crisis in Focus: Time to Re-Risk Portfolios?” – Robert Parker, managing director and senior advisor to Credit Suisse, tackles the question: In 2012, Will global markets stabilize or will a flight to safe assets like U.S. Treasurers, gold and German Bunds drive market trends again?

Parker argues that “the time might be right for investors to consider increasing their exposure to risky assets.” The paper also provides views on the outlook for equities, emerging markets, corporate credit and commodities.

Several risks that concerned investors last year – such as a global recession or a hard landing in China – may have diminished, Parker writes, and recent ECB actions to provide liquidity to banks and deficit reduction plans by Eurozone governments have modestly improved market sentiment.

Parker anticipates a gradually rising appetite for risk and a sustained rally in the second half of 2012. For a copy of the white paper, contact Katherine Herring at [email protected].  

The Standard launches new indexed annuity

The Standard Insurance Company said it is expanding its annuity product portfolio with the new Index Select Annuity (ISA), a single premium indexed deferred annuity.

The ISA, which features The Standard’s highest interest rate cap, is designed for individuals looking for an annuity to maximize their earnings potential while minimizing their risk.

ISA policyholders can choose a five- or seven-year surrender-charge period and can divide funds between an index interest account linked to the S&P 500 Index (up to a cap) and a fixed interest account.   

The portion of funds allocated to the fixed interest account will be credited an interest rate that is guaranteed for one year. After that guarantee period, the contract will receive renewal rates based on the current interest rate environment.

The annual index term design locks in credited gains in the index at the end of each 12-month period.  

OneAmerica Retirement sales up 51% in 2011

The retirement business of the OneAmerica companies set new records in 2011 for 401(k) sales, employer-sponsored not-for-profit sales, total assets and plan participants.

The OneAmerica companies achieved 51% year-over-year growth in overall retirement sales, including a 67% increase in 401(k) sales. They ended the year with a record 95% percent retention rate on existing business, including 98.6% retention on their large block of tax-exempt health care business.

OneAmerica also achieved 20% growth on existing plans and ended 2011 with more assets under management and plan participants than at any other time in the 130-year-plus history of the enterprise.

OneAmerica added sales, service and marketing personnel in 2011, expanded the distribution of its open-architecture trust solution to registered reps, launched a multiple employer plan and won awards for its custom plan participant communications program. American United Life Insurance Company (AUL), a OneAmerica company, was named the number one 401(k) provider in five key satisfaction categories according to the Boston Research Group’s 2011 Defined Contribution Plan (DCP) Sponsor Satisfaction and Loyalty Study.

LPL study documents value of bank investment and insurance programs 

A new study of the role of investment services and insurance customers at retail financial institutions shows that people who buy investments and insurance at their bank tend to be the bank’s most valuable customers. 

The study, “The Value of an Investment and Insurance Customer to a Bank,” was conducted by Kenneth and Christine Kehrer and Peter Bielan, and was co-sponsored by LPL Financial. The findings include:

• People who buy investments and insurance where they bank are among a retail financial institution’s most profitable customers.
• ­Such customers are more likely to stay with that institution than customers who have several banks.
• ­By under-investing in their investment and insurance services businesses, retail financial institutions miss the opportunity to retain those desirable customers.
• Consumers who buy investment or insurance products from their primary bank or credit union have checking account balances 16% higher than those households without a brokerage or insurance relationship. 

• ­Brokerage customers have savings account balances that are on average 85% higher than non-brokerage customers.
• ­Brokerage and insurance customers have more than twice as many credit products and 11% more remote banking products than customers who have not purchased an investment or insurance product from their primary bank or credit union.  

LPL Financial Institution Services provides third-party investment and insurance services to approximately 670 banks and credit unions nationwide. The new study draws on data from the MacroMonitor.

The 2010/2011 MacroMonitor is a national sample survey of 4,374 households, with an oversample of 1,500 affluent households, reweighted to be representative of the U.S. population.  Consumer Financial Decisions Group of Strategic Business Insights, formerly part of SRI International. Conducts the survey every other year.

Advisor Software Inc. enhances Goal-driven Investing platform  

Advisor Software, Inc. (ASI), a provider of wealth management solutions for advisors market, will add “Collaboration Connect” into its Goal-Based Proposal Solution and goalgamiPro platforms. 

The software enhancement allows investors whose advisors utilize either platform to access and modify goals within their financial plans.

Collaboration Connect streamlines an advisor’s workflow by allowing their clients to add or edit specific goals on their own time.  Because of the wide variety of potential life scenarios that can impact each client, multiple categories are presented within Collaboration Connect to personalize each goal.

“Through the launch of personal financial management applications such as goalgami and goalGetter, we’ve learned how users interact with our software, and how best to structure it so investors are more engaged in the financial planning process,” said Neal Ringquist, president and chief operating officer for ASI.

Collaboration Connect is incorporated into both the ASI Goal-Based Proposal Solution and goalgamiPro. The Goal-Based Proposal Solution applies the asset-liability matching concepts of the pension industries’ liability-driven investing methodology to the retail investment problem, allowing advisors to determine their clients’ capacity for risk by analyzing their entire household picture, and generate an investment recommendation based on that analysis.

goalgamiPro is a household balance sheet diagnostic tool that enables advisors to create one-page plans for clients and help determine the feasibility and affordability of clients’ financial goals.

BMO Retirement Institute launched in U.S.

The Toronto-based BMO Financial Group intends to expand the BMO Retirement Institute into the United States. The Institute provides insight and financial strategies for Americans planning for or in retirement.

The BMO Retirement Institute will examine a variety of topics related to retirement and issue comprehensive reports on the financial and non-financial aspects of this milestone. Its inaugural report, Single in Retirement, was released this week. 

David Weinsier joins Oliver Wyman   

David J. Weinsier, FSA, MAAA, has joined the Actuarial Consulting Practice of Oliver Wyman as a partner and head of the firm’s U.S. Actuarial Life Practic  in Atlanta, Georgia.

With 20 years of life insurance and annuity experience, Weinsier has advised life insurers, reinsurers, investment banks, law firms, and private equity firms. He specializes in mergers & acquisitions, reserve financing solutions, indexed life and annuity products, litigation support, and life insurance mortality.

Weinsier speaks frequently at industry meetings and in 2011 published an award-winning SOA research paper entitled Predictive Modeling for Life Insurers – Application of Predictive Modeling Techniques in Measuring Policyholder Behavior in Variable Annuity Contracts. Before joining Oliver Wyman, he was a director with Towers Watson’s Risk Consulting practice.

Towers Watson has downgraded intermediate global government and intermediate inflation-linked bonds to ‘highly unattractive’.

The global professional services firm says ongoing money-printing by central banks and flows into so-called safe assets have pushed intermediate bond risk premiums to very low levels that no longer properly compensate long-term investors for taking duration risk.

Peter Ryan-Kane, head of Portfolio Advisory for Asia Pacific at Towers Watson, says intermediate bonds “now offer a very low risk premium over cash and/or are discounting a high probability of a macroeconomic backdrop of 10 to 15 years of economic stagnation. This is too pessimistic in our view and our forecast returns suggest bonds are now unattractive.”

Towers Watson research suggests that, in the next year, deleveraging, easy monetary policy and flows into so-called safe bonds are likely to keep bond yields and bond risk premiums low. In the medium-term, as private-sector deleveraging problems fade, there is likely to be a stronger and faster cyclical recovery than most intermediate bond markets appear to be pricing.

 “If investors have a diversified portfolio and a cash benchmark they should typically reduce duration risk by, for example, selling some intermediate bonds to buy cash and high-quality credit to maintain portfolio risk,” Ryan-Kane said.

“Given bonds at most maturities are unattractive at the moment, our general view is that a controlled short interest rate position relative to a fully hedged position is sensible, consistent with the size of other risks within the portfolio.”

© 2012 RIJ Publishing LLC. All rights reserved.

As part of several enhancements to MorningstarAdvisor.com, a free website for financial advisors, Morningstar Inc. has launched a new “alternative investments center.”  

“Advisors play a crucial role in educating their clients about alternative investments,” said Nadia Papagiannis, Morningstar’s director of alternative fund research. “Now advisors have a comprehensive resource for providing clients with a more complete perspective on alternative investments.”

The site also contains Morningstar market tools and an expanded video library featuring interviews with top portfolio managers and newsmakers, analysts, and some of the leaders in the advisory community, along with research reports on funds, stocks, ETFs, closed-end funds, and alternatives.

The site currently has three main content tabs: Alternatives, Practice Management, and Research and Insights.

• Alternatives, the site’s newest tab, provides detailed educational information and analysis of alternative investments, in vehicles such as hedge funds, ETFs, mutual funds, and separate accounts; weekly articles discussing the latest on alternative investment topics and trends; access to Morningstar’s comprehensive quarterly Alternative Investments Observer newsletter; video interviews with alternative investment managers; downloadable handbooks explaining different alternative strategies; and a Solution Center featuring videos and slides designed to help advisors educate their clients about alternative investments.
• The recently expanded Practice Management tab includes advisor profiles, fiduciary topics, technology news and reviews, and best practices for building an advisory business.
• Research and Insights features in-depth interviews with leading portfolio managers, research on college savings plans, screening tips for the best stocks and funds for a client portfolio, sector spotlights, and commentary from Don Phillips, Morningstar’s president of fund research.

The enhanced site also features additional components for social interactivity, a discussion feature allowing advisor dialogue and debate on articles and industry issues, a webinar audio archive, and links to Morningstar’s advisor services, publications, and software platforms—Morningstar Advisor Workstation, Morningstar Office, and Morningstar Principia.

RAMP, a web content optimization company based in Woburn, Mass., worked with Morningstar to develop the new user interface and menu navigation, adding faster search and browsing capabilities, and integrating an iPad-enabled video player with a searchable transcript feature.

© 2012 RIJ Publishing LLC. All rights reserved.