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My Tailor, My Fiduciary

Posted on September 1, 2010 by Editor Test -

Several years ago I was being measured for a suit in the fitting room of a tiny tailor shop on Nathan Road in Kowloon. The bespoke construction process involved three laborious fittings, and on the night before my flight home, my suit still wasn’t ready.

The next morning, as I was packing, someone knocked on my hotel room door. A porter handed me a blue plastic clothes bag. Inside hung my suit, nicely pressed and with my name sewn in gold thread inside. But there was no bill. Since I didn’t have time to resolve the situation, I left for the airport. With the suit.

A few years earlier, my wife and I had visited the offices of her ex-college roommate, now a vice president at a major national brokerage. We were financial newbies, and we hoped she could shepherd us through the wolfish brokerage world. We gave her every penny we had, and she gave us a five percent haircut. Ouch.

Those contrasting situations came to mind recently as I read some of the comments on the SEC website in response to the government’s RFI about applying the fiduciary rule to registered reps. The rule would require brokers, like investment advisors, to act in their clients’ “best interests.”

It would a boon to all Americans if, with the stroke of a virtual pen, the SEC could convert all of the financial intermediaries who now treat their supposedly personal clients like mere customers—and applying the caveat emptor principle—into intermediaries who treat every customer like a personal client. That’s a worthy goal.

But it’s not always practicable. The issue, as I see it, involves one’s personal autonomy. My wife’s former roommate, despite her impressive title and income, was and still is an employee. She operates from a corporate playbook. She doesn’t have the prerogative to put her clients’ interests first. No SEC rule can make her behave like a fiduciary.

My tailor, on the other hand, owns his own shop. He can choose to act as a fiduciary. He can choose to let someone walk out of his fitting room, his shop, and his country with a suit. Or not. That’s how he built his business. If he violates the fiduciary standard, he loses his business. (Obviously, plenty of registered reps own their own shops. Presumably, they make their own decisions.)

You can debate the merits of the suitability rule and the fiduciary rule from now until Mary Schapiro explains why her stupendous deferred compensation package from FINRA doesn’t create a conflict of interest for her in her current job, but you can’t require brokers, who are employees who serve corporations, to act like fiduciaries. That functionality isn’t in their operating system.

What the SEC can do is to try to help investors distinguish between custom-made financial advice and off-the-rack advice that’s merely been altered to become “suitable” for them—and especially not to be fooled into paying bespoke prices (neither wrap fees or huge commissions) for off-the-rack services. Personally, I don’t think the SEC will do that. The government’s efforts are just as likely to produce the opposite result. Suddenly, every suit will be bespoke.

But let’s finish the story of my own custom-made suit. Back home, I wore the suit to a business meeting, to a wedding. It felt great, and I showed everyone how the sleeve buttons actually unbuttoned. A few weeks later, the bill from my tailor arrived in an old-fashioned, hand-addressed airmail envelope. When I called his shop on Nathan Road to give him my credit card number, I asked him why he let me take the suit home before paying for it. He said he wanted me to be sure I was satisfied.

“Your tailor is like your doctor or your lawyer,” Manu Melwani confided several times when I was in his fitting room. (He also told me which ex-POTUS ordered a suit with a Velcro fly.) In other words, he behaved like a fiduciary. I’ve bought two suits from him since then, by FedEx and on open account. As for my wife’s ex-college roommate, we soon emptied our brokerage account and transferred all of our money to a no-load fund company. No hard feelings, but we won’t make that mistake again.

Why We Need The Fiduciary Standard

Posted on August 31, 2010 by Bob Veres -

While the SEC collects a lot of different viewpoints on the fiduciary standard, it might help to spend a little time focusing on the bigger-picture issue that “fiduciary” is trying to address. After all, what’s the point of introducing a fiduciary regulatory scheme into a marketplace that has been functioning profitably and efficiently without it?

You can see this point most clearly if you step back and recognize how differently the financial services world—primarily the brokerage area—operates from the way we do business in virtually every other area of our free market economy.

When I first came into the world of finance, as editor of Financial Planning magazine, one of the first things that sales producers and brokers told me is that every securities transaction has a “winner” and a “loser.” The “winner” had either paid less than the security was actually worth in a free and open market, or had sold something that was worth less than what he charged. In most cases, it was the latter.

Many advisors and brokers back then were selling limited partnerships for significant (8% and up) commissions plus “due diligence” trips to exotic locations as a reward for their selling prowess, plus various overrides, dinners, etc. The fact that virtually all of these investments blew up and lost all or nearly all of their value in the subsequent years suggests that the focus was not on due diligence, analysis or what was best for the consumer.

I still hear this “winners and losers” phrase today in the brokerage world, particularly whenever the brokerage firm’s own products are sold, or when the firm is selling products out of its own inventory. Sometimes the process gets out of hand and the difference between actual value and what is paid becomes too egregious to ignore.

When Banker’s Trust, for instance, was selling complex derivative securities and the brokers then chortled (on recorded calls) about how much had been taken out of the opaque product by the company (“That’s the Banker’s Trust difference…”), the line had visibly been crossed from sharp dealing to forthrightly screwing the customer.

The recent Goldman Sachs imbroglio captured the firm at a moment when its own interests were different from those of the customer in unusually visible ways. Most of the time, we don’t have this level of visibility, because in the investment world even stocks and bonds that you overpaid for eventually make you money. You make less money than you would have made in a fair transaction, perhaps a lot less—which may be why brokers use another phrase so often: “A bull market hides all sins.”

But let’s stop for a moment and look at other professions and industries in our free marketplace, and recognize how different the brokerage mentality is from… everybody else. When you buy groceries or a new pair of jeans, the store takes a markup, but essentially there’s a fair exchange of value in the transaction—and no visible winners or losers. When somebody buys my newsletter service, I work hard to ensure that the buyer will get more value than what he/she paid me. In my experience, most financial planners operate under the same general ethos.

The “point” of the fiduciary standard is to eliminate this persistent—and unusual, in our marketplace—adversarial relationship between broker and customer, and most especially to rid the financial services marketplace of situations where the customer who is about to enter into a transaction doesn’t realize that there is an adversarial relationship.

This, incidentally, explains very clearly why the independent RIA community of advisors views with great distrust FINRA’s overtures to take over regulation of advisors. FINRA’s regulatory structure boldly endorses this adversarial business model—and, worse, the organization has a poor track record of preventing abuses of it. Indeed, in the past, FINRA seems to have had a high tolerance for practices which visibly benefited the brokerage firms at the expense of their customers—precisely the opposite of what we would want from those acting as protectors of the consumer.

Somehow, the largest financial services organizations in the U.S. marketplace have managed to exempt themselves from the way that most companies do business. Instead of competing on quality, brand and price—as, say, the manufacturer of shoes, groceries, furniture or computers do—they have found ways to generate their profits based on incomplete information and the financial illiteracy of American consumers.

They are not alone (recent revelations about the activities of mortgage brokers comes to mind), but the market meltdown and sales of junk products and revelations of ultra-sharp dealing and subsequent legislation all point to the conclusion that free markets function most effectively, safely and perhaps even profitably whenever the product and service providers strive to provide maximum value for the dollars they receive from the consuming public. A fiduciary standard would codify this behavior in an industry that is unfortunately unfamiliar with its most basic concepts.

The SEC might consider one more issue as it gathers its facts and opinions. Look at the motives of those who are in favor of a fiduciary standard, and at the motives of those who oppose it. Those in favor—generally the most informed consumers and members of the RIA community—have very little to gain, personally and professionally, from their advocacy. The astute consumer will find the fiduciary needle in a haystack regardless of the regulatory structure. RIAs are actually advocating for more meaningful standards imposed on professionals like themselves. Their opinions should, I would argue, be given more weight, because instead of protecting their own wallets and pocketbooks, they are speaking up for the consumer and what they believe is right.

The brokerage firms, meanwhile, are protecting extremely lucrative sources of revenues, including profit margins dramatically higher than most American businesses. I would argue that the SEC should give their arguments less weight in the fiduciary debate. Not only are they predictable and self-serving; they are also visibly not in the interests of the retail financial customer.

I think we can call a spade a spade here: The brokerage firms, in their lobbying efforts, are asking for the continued license to put their hands into the pockets of their customers. FINRA, meanwhile, seems by its regulatory behavior to believe that putting hands into the pockets of consumers is a perfectly acceptable business model, so long as there are limits on how much of the consumer’s wallet can be removed, unseen or unnoticed, in any single transaction.

On the other side of the argument, RIAs and those who advocate for a fiduciary standard are asking the SEC to create a regulatory structure such that, if any money comes out of the consumer’s wallet, it is intentional on the part of the consumer—and, further, that there be a good-faith effort by the other party in the transaction to provide at least as much value and benefit as the monies paid.

As a fiduciary advocate myself, I find myself wondering: “Is there any way that should be considered an unreasonable request? Who would argue that it is?”

If the SEC needs more information on this specific set of comments, I recommend that its research team talk to brokers off the record, preferably off-hours. They’ll tell you that in most, perhaps all of their securities transactions, there is a winner and a loser. Some of the largest financial services institutions in the world, with their considerable resources and expertise, abetted by widespread financial illiteracy, have created an environment where the consistent loser is the consumer.

As the SEC gathers information on the fiduciary standard, I hope it will not lose sight of the whole point of the exercise: Is this the kind of marketplace we would want for American consumers? Is this “winners and losers” marketplace consistent with the SEC’s mandate to protect consumers?

Bob Veres is publisher of Inside Information and a columnist for Financial Planning magazine.

Imperfect Harmony

Posted on August 31, 2010 by Kerry Pechter -

As the hundreds of comments on the Security and Exchange Commission’s website demonstrate, there’s plenty of discord over the question of “harmonizing” the ethical rules that registered representatives and investment advisers play by.

In July, the new Dodd-Frank Wall Street Reform and Consumer Protection Act punted the political football of creating uniform rules of engagement for brokers and investment advisors over to the SEC, asking the SEC to recommend new rules in six months. The SEC, in turn, invited public input.

The question is whether registered broker-dealer representatives should meet a fiduciary standard and to act in the “best interests” of their clients at all times, as registered investment advisors are required to do, or if reps may continue to follow the more flexible suitability standard, which tolerates conflicts-of-interest that don’t violate the interests of the client.

The issue isn’t merely an academic or legalistic one. It involves turf rights in the financial services landscape. More brokers want to be able to play in the advice space, a potentially more lucrative realm than the increasingly cutthroat transactional space. Advisors, understandably, would like to keep their profession’s barrier-to-entry as high as possible.

Thus the uproar. Meanwhile, Baby Boomers go begging for guidance on how to spend their retirement savings, but vastly distrust the providers of financial services, in part because the rules of the game are so opaque and so fluid. If the SEC can resolve this matter and restore a bit of confidence in the system—a very big if—everyone should be better off.

Vox populi

Over the past five weeks or so, the SEC has received an earful from brokers and advisors. Virtually all of the brokers’ emails urge the government not to subject them to a new and costly layer of regulation. Most, but not all, of the investment advisors’ comments call for extending the fiduciary standard to any intermediary who provides, as one letter put it, “a scintilla” of advice.”

Harold Evensky, the well-known advisor and co-editor of Retirement Income Redesigned (Bloomberg, 2006), believes that it is easy to tell when the fiduciary rule applies. “I believe that for practitioners there is a simple test to determine when they will be subject to a fiduciary standard,” he wrote.

“I refer to this as the ‘YOU’ standard. If an investor calls and says, ‘I’d like to buy 100 shares of XYZ’ – Suitability standard. If an investor calls and says, ‘What does your firm think of XYZ stock?’ and the advisor says ‘we believe . . .’ – Suitability standard. If the investor says ‘Do you think I should buy XYZ stock?’ and the advisor says ‘Yes, I think YOU . . .’ – Fiduciary!

Some advisors regard the brokerage industry as hopelessly compromised under the status quo.

“The only reason for brokers not to be held to a fiduciary standard is the self-interest of the brokerage industry,” wrote Brendan E. Connelly, a fee-only advisor in Madison, Wis. “I was a broker myself at one time and made the difficult yet accurate decision to transition to the fee-only/fiduciary model. Thank God I did as my conscience and my clients both love it. Do the right thing. Resist the lobbying money of the brokerage industry and hold them to a fiduciary standard.”

One-night stand?

Others feel that conflicts of interest are endemic to the brokerage world, and that better disclosures could adequately protect the average investor.

“I believe that extending the fiduciary standard to broker-dealers is not ethically possible. Broker-dealers sometimes work with both parties in a transaction, such as when taking a company public. How would it be determined who deserved the fiduciary obligation?” wrote Edward D. Hinds III, a financial planner in Paso Robles, Calif.

“Customers need to understand whether they are purchasing executions or advice. They need to understand whether it’s a one-night stand or a relationship. They do not understand that now,” wrote Peter J. Chepucavage, an attorney with Plexus Consulting in Washington, D.C.

Reps and agents bridle at the suggestion that they or their suitability standard render an inferior form of care, or that current FINRA regulations and state insurance laws are ineffective. Paul B. Crouch of Lake Forest, Ill., echoed the opinions of many when he wrote:

“I have been in the Insurance industry for over thirty (30) years, and a Registered Representative for seventeen (17) years. Over the years, I constantly receive more layers of regulation. Enough is enough. Adding another layer of regulation means another layer of compliance, and even more costs to consumers… There is a PERCEPTION that the legal fiduciary duty governing investment advisors provides greater investor protection than the suitability standard governing Broker/Dealers. This PERCEPTION is FALSE.”

Kyle Paterik, a Los Angeles financial consultant, expressed fears about exposure to lawsuits. He also took it for granted that the fiduciary rule is incompatible with taking commissions—an assumption that advisors don’t necessarily agree with.

Monday morning quarterback

“My concern with the new vague fiduciary standard is the unchecked ability of our clients to be a Monday morning quarterback and sue us for every dip and turn the market brings…” he wrote. And “by demanding all advisers work on a fee-based schedule, you will be creating a barrier to entry that will shut a large percentage of our population out of receiving quality financial advising and management.”

A two-tier ethical scale is appropriate for a two-tier financial world, suggested Christen Gibbons, ChFC, ChLU, of Ithaca, New York. The fiduciary rule, in other words, may be a luxury that only the high net worth investor can afford.

“When I’m recommending a product to fill a specific insurance or investment need, I work as a representative under the suitability model,” she wrote. “When I’m doing more sophisticated financial planning I am an advisor under the fiduciary standard model.

“This is more costly because of the required reporting and ongoing service including additional advisor liability. I can only do this type of work for people that have higher income or net worth.”

Several reps argued, with reason, that the “best interest” standard of the fiduciary rule is tough to define. “In your consideration of the fiduciary standard, please tell me what is ‘best’? asked Suzette Moline, a registered rep in Sundance, Wyoming.

“Would that be measured by historic underwriting, service standards, price (as in cheapest), premium relative to the benefit of a product, or perhaps the rating of the company providing the product? There are too many interpretations of such a standard… it adds a vague legal liability standard that looks back and is enforced after the fact by the SEC or trial lawyers who have perfect vision in hindsight.”

Robert Ramos, a CFP in Waldorf, Md., agreed: “How on Earth can ‘best interest’ be determined with the myriad of solutions available in today’s marketplace and the every increasing number of new products coming to market?”

Is water wet? Is grass green?

“If we want to study whether a ‘fiduciary duty’ is better for consumers, then we should also study if grass is green, if water is wet, and if deserts are dry,” wrote Luke Dean, a professor of finance at William Paterson University in Wayne, NJ. “A fiduciary duty requires a ‘professional’ to do what is in their clients’ best interest.

“How could anything less than this be good for clients or consumers or even a ‘profession’? There shouldn’t be a ‘fiduciary-lite’ created. Do what’s best for the American consumers and force American corporations to do what’s best for consumers instead of continuing to offer inferior products/advice with superior fees and expenses.

“John Adams said that one of his fundamental doctrines for government was that you had to ‘protect the sheep from the wolves.’ It is unreasonable to expect all American consumers to know the difference between an investment adviser regulated under the 1940 legislation and the 1934 legislation. It’s also unreasonable that we’re still using legislation that is over 70 years old for the financial services and its ‘professionals.’

“Make all financial services professionals be fiduciaries, and you’ll see that more consumers will utilize them. Make insurance companies and investment advisers offer best products at best prices in a transparent fashion, rather than just pushing their own companies’ inferior products with superior commissions and fees.”

As of August 30, more than half (236) of the 400-plus messages were what the SEC called Type A letters. These summarized the opinions of life insurance agents and protested the extension of the fiduciary rule. Less than one-third (131) were Type D letters. These represented the opinions of financial advisors, and recommended the extension of the fiduciary rule to all providers of investment advice. (It was unclear whether the SEC or specific trade organizations provided the boilerplate language for the five standard letters.)

A Snapshot of U.S. Household Debt

Posted on August 25, 2010 by Editor Test -

For the first time since early 2006, total household loan delinquency rates declined in 2010Q2. As of June 30, 11.4% of outstanding debt was in some stage of delinquency, compared to 11.9% on March 31, and 11.2% a year ago, according to a chart-rich report from the Federal Reserve Bank of New York.

Currently about $1.3 trillion of consumer debt is delinquent and $986 billion is seriously delinquent (at least 90 days late or “severely derogatory”). Delinquent balances are now down 2.9% from a year ago, but serious delinquencies are up 3.1%.

Aggregate consumer debt continued to decline in the second quarter, continuing its trend of the previous six quarters. As of June 30, 2010, total consumer indebtedness was $11.7 trillion, a reduction of $812 billion (6.5%) from its peak level at the close of 2008Q3, and $178 billion (1.5%) below its March 31, 2010 level. About three-quarters of household debt consists of mortgages.

The number of credit account inquiries within six months – an indicator of consumer credit demand –ticked up for the first time since 2007Q3. Credit cards have been the primary source of the reductions in accounts over the past two years, and during 2010Q2 the number of open credit card accounts fell from 385 to 381 million. The number of open credit card accounts on June 30 was down 23.2% from their 2008Q2 peak.

About 496,000 individuals had a foreclosure notation added to their credit reports between March 31 and June 30, an 8.7% increase from the 2010Q1 level of new foreclosures. Arizona, California, Florida and Nevada continue to indicate higher than average delinquency and foreclosure rates.

New bankruptcies noted on credit reports rose over 34% during the quarter, from 463,000 to 621,000. While we usually see jumps in the bankruptcy rate between the first and second quarter of each year, the current increase is higher than in the past few years, when it was around 20%.

Mortgage originations fell another 4.1% between 2010Q1 and 2010Q2, to $364 billion. While mortgage originations in 2010Q2 were 20.6% above their 2008Q4 trough, they remain more than 50% below their average levels of 2003-2007. Auto loan originations rose 25% in the second quarter, and were nearly 32% above their trough levels of 2009Q1. Still, auto loan origination balances remain well below their levels of 2005-2006.

About 2.6% of current mortgage balances transitioned into delinquency during 2010Q2, continuing the decline in this measure observed over the last year. Transitions from early (30-60 days) into serious (90 days or more) delinquency improved sharply in 2010Q2, falling from 39% to 33%, the lowest rate of deterioration since 2008Q2.

Nonetheless, despite recent improvements in this rate and the “cure” rate – transitions from delinquency to current status, which rose to nearly 30% – both remain at very unfavorable levels by pre-crisis standards.

Dutch Pensioners in a Panic

Posted on August 25, 2010 by Editor Test -

NETHERLANDS – The Dutch Parliament was set to discuss the prospect of benefits cuts at 14 pension funds yesterday during an emergency debate with social affairs minister Piet Hein Donner, IPE.com reported.

Donner should spell out exactly which pension funds are likely to cut benefits and rights in order to avoid panic among workers and retirees, said Paul Ulenbelt, the socialist party member of Parliament who organized the meeting.

Ulenbelt, who opposes the cuts, said that employers and even workers should the plug financial gaps. If needed, he said, the government should ultimately step in with “loans and guarantees.”

“If we can save banks and guarantee Greece’s financial liabilities, we can’t let the elderly down,” he said.

In the wake of the financial crisis, 340 of 600 Dutch private pension funds had to submit a recovery plan mapping out how to increase their funding to a minimum of 105% within five years. Of the 18 pension funds that already factored in rights cuts, however, 14 have failed to recover sufficiently, Donner said in a letter to Parliament.

The coverage ratio of Dutch pension funds, after an initial recovery in spring 2009, has fallen to 100% on average, largely due to a steep drop in long-term interest rates in the second quarter of 2010. Pensions funds have also had to take new longevity figures into account, which has lowered coverage ratios by approximately five percentage points.

Donner said there was no reason to assume low interest rates – approximately 3.2% at present – would increase any time soon, and that the possibility of a quick economic recovery was still uncertain.

The Association of Industry-wide Pension Funds (VB) also called on the 14 funds to inform their participants as soon as possible about the likelihood of rights cuts.

Peter Gortzak, vice-chairman of the FNV, the largest union, said: “The picture painted by minister Donner and regulator De Nederlandsche Bank (DNB) is spreading panic. Although a limited number of small pension funds are in a serious position, the large majority do not need to cut benefits. The DNB and the schemes must first look at alternatives, such as raising contributions or additional contributions by employers.”

The large consumers organization, Consumentenbond, also called for “immediate clarity” for workers and pensioners regarding possible cuts, while ANBO, the pensioners lobbying body, attributed low coverage ratios in the wake of low interest rates to the financial problems of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries.

On its website, the ANBO said: “But we mustn’t give the impression pension cuts are caused by financial mismanagement of southern European governments.”

The NBP – the small but vocal lobbying organization of retirees – demanded an inquiry into the matter, as many pension funds’ boards have made “big mistakes.”

New SALB Launched By Investors Capital Corp.

Posted on August 25, 2010 by Editor Test -

Investors Capital Corporation (ICC), the broker/dealer and investment advisory unit of Investors Capital Holdings, Ltd., has launched the Investor Protector series: a new, innovative managed investment account paired with a stand-alone income benefit.

The account combines Investors Capital Advisory Services’ (ICA) series of asset allocation models with a stand-alone lifetime benefit that offers the investor a 5% lifetime income stream, regardless of market conditions.

Although Lockwood Advisors introduced a stand-alone living benefit in late 2007, ICC claims to be the first independent broker/dealer to offer a lifetime income benefit on managed money.

The initial investment account value establishes the client’s Retirement Income Base (RIB). The investor may lock in a higher RIB if the account value is higher on the anniversary date for an additional fee. At age 65, the client can draw a 5% stream of income based on the highest, locked-in RIB. A spousal benefit is available.

Clients may remove the rider at any time without penalty or surrender charge. The assets are owned by the investor so the investments are fully transparent and accessible.

John Hancock Offers “To” and “Through” Target Date Funds

Posted on August 25, 2010 by Editor Test -

John Hancock Retirement Plan Services will offer two suites of target-date funds, providing participants with a choice of either “to” funds, which are composed mainly of bonds at retirement, or “through” funds, which maintain a substantial equity allocation well into retirement.

John Hancock’s new Retirement Choices target-date portfolios are designed to take participants “to” retirement. They can switch to another investment strategy at time of retirement. The all-index fund asset mix features a lower amount of equities near retirement.

Retirement Choices joins John Hancock RPS’s original Lifecycle suite of TDFs, which was introduced in 2006 and has been renamed Retirement Living. The Retirement Living Lifecycle Portfolios maintain a higher exposure to equities during retirement.

The glide path for Retirement Choices portfolios features a lower allocation to equities and slopes down at a faster pace than it does for the Retirement Living portfolios.

Before launching Retirement Choices, John Hancock RPS surveyed almost 1,000 participants to learn what they want in asset allocation solutions generally and TDFs specifically. About 83% felt it was important for their plan to offer a choice of target-date funds designed to meet the needs of different types of investors. When asked about preference for “to” retirement versus “through” retirement lifecycle options, respondents were split almost evenly.

In Singapore, as in the U.S., Savings Grow Slowly

Posted on August 24, 2010 by Editor Test -

In Singapore, HSBC Insurance has unveiled a new annuity contract called SecureIncome to help Singaporeans save for retirement. The product appears to beat putting money under the mattress, but not by much.

Customers contribute at least $200 a month to the contract and receive a guaranteed yield of 1% to 1.5% over the life of the policy, the Business News reported. The current yield on 10-year Singapore government securities is 1.89%.

When the contract matures, policyholders can withdraw a lump sum, receive a monthly income over 10 years, or leave the money with HSBC and earn a non-guaranteed rate, currently 2.5%. Alternately, they can leave their money with HSBC for another 10 years and receive non-guaranteed monthly dividends.

The contract allows unemployed policyholders to defer payment of premiums for up to a year and to receive a death benefit in advance if they are confirmed to have a fatal illness.

HSBC Insurance CEO Walter de Oude compared SecureIncome with fixed deposits, the most popular retirement savings vehicle for Singaporeans.

“The average bank interest rate for 12-month fixed deposits has remained below one percent for the last seven years,” he said, citing data from the Monetary Authority of Singapore.

A fixed deposit of $100,000 over one year would earn 0.3% a year at Citibank and 0.35% at Standard Chartered.

Plain-vanilla deposits remain the investment of choice for Singaporeans. Eleven percent of Singaporeans expect to place their funds in an interest-bearing savings account within the next year. In contrast, only 5% percent expect to buy an annuity.

Cue the Traveling Music…

Posted on August 24, 2010 by Editor Test -

Many of the major investment-oriented trade associations hold their annual conferences between mid-September and mid-November. Here’s a list of conferences that might interest you, including links to the relevant websites:

NAIFA (National Association of Insurance and Financial Advisors) Career Conference and Annual Meeting

Sheraton Seattle/Washington State Convention and Trade Center, Seattle, WA

September 11-14, 2010

NAPFA (National Association of Personal Financial Advisors (NAPFA)

Practice Management and Investments Conference

Manchester Grand Hyatt, San Diego, CA

September 22-24, 2010

Retirement Income Industry Association Annual Meeting

Hyatt Harborside, Boston, MA

October 4-5, 2010

Center for Due Diligence

2010 Advisors Conference

Fairmont Chicago-Millenium Park, Chicago, Illinois

October 6-8, 2010

Financial Planning Association Annual Conference

Colorado Convention Center, Denver, CO

October 9-12, 2010

Society of Actuaries Annual Meeting

Hilton New York–New York, NY

October 17-20, 2010

LIMRA Annual Conference 2010

Gaylord National Hotel and Conference Center, Washington, DC

October 24-26, 2010

Insured Retirement Institute Annual Meeting

Westin Michigan Avenue, Chicago, Illinois

October 24-26, 2010

National Association of Fixed Annuities IMO Summit

Hotel Sorella-CityCentre, Houston, Texas

October 27-28, 2010

Society of Actuaries

Equity-Based Insurance Guarantees Conference

Marriott Marquis, New York, NY

November 1-2, 2010

NAPFA Connections Conference

Sheraton Boston, Boston, MA

November 3-5, 2010

Third Annual Retirement Income Symposium

Embassy Suites Chicago Lakefront, Chicago, Illinois

November 8-9, 2010

NAILBA (National Association of Independent Life Brokerage Agencies) Annual Meeting

Gaylord Texan Resort and Convention Center, Grapevine, Texas

November 18-20, 2010

Making The Case for Fixed Indexed Annuities

Posted on August 24, 2010 by Editor Test -

Champions of fixed indexed annuities, those quirky, complex and controversial niche products that were introduced in the mid-1990s, have had cause for celebration in 2010.

FIA advocates frustrated the Security and Exchange Commission’s clumsy attempt to regulate them. And they saw FIA sales soar to $8.2 billion in the second quarter, up 22% from the first quarter, as investors looked for an alternative to volatile equities and low-yielding bonds.

One of the most ardent and steadfast champions of fixed index annuities, which are structured insurance products consisting of bonds with a dash of equity derivatives, has been Jack Marrion, a St. Louis-based consultant and self-published author of “Indexed Annuities: Protection and Performance” and, more recently, “Change Buyer Behavior and Sell More Annuities.”

Earlier this year, he collaborated with David Babbel, a professor at the Wharton School and Geoffrey VanDerPal, chief investment officer of Skyline Capital Management, in scholarly defense of the products. Anyone interested in these products should check it out.

The charts in their study, Real World Index Annuity Returns, show that, based on data from 15 FIA issuers, FIAs outperformed conventional investments during much of the past 10 years —a paradoxical period when the S&P500’s cumulative return has been roughly zero.

From 1997 through 2007, they say, the five-year annualized returns for FIAs averaged 5.79%, compared to 5.39% for taxable bond funds and 4.73% for fixed annuities. From April 1995 through 2009, FIAs beat the S&P 500 over 67% of the time and a 50/50 mix of one-year Treasury Bills and the S&P 500 79% of the time.

During eight five-year periods starting in 1997 through 2004, their data shows, the FIAs they looked at offered an average annualized return of 4.19% to 9.19%, with no negative years. By contrast, an investor in the S&P500 would have seen four positive five-year periods and four negative ones.

How do FIAs maintain such an apparently even keel? In a bad equity markets, their substantial bond component offers downside protection. In rising equity markets, their equity option component increases in value. Investors in FIAs therefore don’t need to fear the bears and aren’t as slavishly dependent on the bulls. Or, as the authors put it:

“By eliminating the prejudicial effects occasioned by significant stock market declines, and locking in returns annually or biannually, there is less of a need to try and capture large upside market swings to recover from the declines.”

Besides insulating investors from volatility, Marrion and his co-authors say, FIAs do, contrary to certain media reports, offer liquidity (penalty-free withdrawals of at least 10% a year) as well as tax-deferred compound growth. (They don’t mention, because it’s not part of their argument, that many FIAs now offer the kind of lifetime income riders that variable annuities offer.)

In sum, the paper sets out to prove—by demonstrating the past performance of specific products—that FIAs as a concept don’t deserve the smear-treatment that certain tabloid-TV investigators, plaintiff’s attorneys and prosecutors, or past SEC commissioners have given them. And it does a compelling job of that.

So why then, as Marrion himself notes on his website, does the index annuity industry continue to “lose the media battle”? The FIA industry would probably argue that the media is biased in favor of the securities industry. But Marrion doesn’t necessarily agree. In fact, he chides the FIA industry for failing to educate the media properly.

But there may be a more fundamental reason, one that’s described in the last paragraph of Marrion, Babbel and VanDerPal’s paper. I’m not referring to big FIA commissions, or long surrender periods, or the lack of transparency, or the unfamiliarity of derivatives, or the bonuses that inevitably confuse the average innumerate American.

The problem is that a contract’s crediting method—the formula that determines how much the investor earns—can change each year at the whim of the issuer.

“Over 95% of index annuity sales are in products that may change at least one element of their interest crediting methodology after each reset period,” the paper says. “The ultimate determining factor in setting index participation in future years is not the interest rate environment or the cost of options, it is what carrier management decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any returns ultimately subjective.”

Unless I misread that passage, it seems reasonable to wonder why any advisor or trusted agent would advise a truly risk-averse investor—the target market for FIAs—to invest in something so unpredictable.

Financial Engines’ Secret Income Plan

Posted on August 24, 2010 by Kerry Pechter -

Financial Engines, Inc., the provider of investment advice and managed account services to defined contribution plan participants, intends to begin offering an in-plan retirement income option to its clients starting in late 2010 or early 2011 and to offer it to as many as 4.2 million participants within three years.

Jeff Maggioncalda, CEO of the Palo Alto, Calif.-based firm, said in a recent conference call with security analysts that the “solution will be different from what’s offered today, and will address concerns that have caused employers to avoid embracing” in-plan income options so far, such as high costs and fiduciary issues.

While offering no details, Maggioncalda said the program would be an extension of the company’s Professional Management managed account services and would allow users of those services to draw a monthly income in retirement. He did not say whether a rollover IRA would be involved.

The program would not require plan sponsors “to add an annuity or change their investment lineups to offer our solution” and would “eliminate the counterparty risk associated with adding an annuity to their plan,” he said, noting that the program would work “with any open architecture combination of investment products.”

Despite that disclaimer, there’s reason to believe an annuity or annuity-like feature could be involved. Financial Engines offered a description of what it considered a viable in-plan income option in an eight-page written response last May 3 to the Department of Labor’s request for information regarding such plans, and a type of annuity was integral to it.

That hypothetical plan involved the purchase of longevity insurance—life-contingent deferred income annuities that can be purchased at a steep discount because they don’t pay out unless and until the contract owner reaches an advanced age, such as 80 or 85.

Longevity insurance has drawn serious attention from academics in recent years, but not from investors. PIMCO has recommended that investors combine its inflation-protected payout fund with a longevity insurance contract as a retirement income strategy. Annuity expert Moshe Milevsky of York University has written about the advantages of longevity insurance. MetLife, Hartford and Symetra offer quotes on longevity insurance, but the product is rarely purchased.

Currently, the most prominent in-plan income solution might be Prudential Retirement’s IncomeFlex program, which allows participants to add a guaranteed lifetime income benefit, like the ones offered on variable annuities, to target-date funds in a 401(k) account. Great-West also offers such an option. MetLife offers SponsorMatch, a program that allows participants to buy chunks of income far in advance of retirement with their employer match.

Financial Engines, which was co-founded in 1996 by Nobel Prize winner William Sharpe, started as a respected but fairly modest provider of online investment advice to 401(k) plan participants. Among other things, it gave participants access to a colorful Internet-based widget that enabled them to conduct their own Monte Carlo projections of hypothetical portfolio returns.

Over time, the company has come to offer Internet-mediated managed accounts to participants within 401(k) plans, and was recently identified as the largest Registered Investment Advisor in the U.S. The company reported $29.4 billion in 401(k) managed accounts as of June 30, 2010, and $300 billion in “assets under contract.” That number refers to the total assets in the 385 retirement plans whose 4.2 million participants can purchase Financial Engines’ managed account services.

In the DoL comments, Jason Scott, Ph.D., the managing director of the Retiree Research Center at Financial Engines, urged the Department of Labor to amend the tax laws to exempt assets in longevity insurance contracts from the calculation of required minimum distributions.

Though not specific, Scott’s comments describe a managed “hybrid solution” in which participants would draw monthly income from a managed account early in retirement “while always maintaining sufficient assets to give participants the option of increasing the income payout through an annuity purchase.”

In addition, “The advantage of the hybrid approach is that as the insurance becomes compelling, the hybrid solution facilitates a shift from a highly liquid and flexible solution to one more focused on guaranteed lifetime income,” the comments said. Such a program sounds similar to the Retirement Management Account that MassMutual briefly marketed until the financial crisis.

Scott has written about longevity insurance for some time. In a 2009 research paper called, “What Makes a Better Annuity?” he and others suggested that the introduction of longevity insurance, because it protects the owner against longevity risk much more cheaply than immediate annuities, could greatly expand the annuity market.

In the DoL comments, Scott noted that an “allocation of 10 to 15% of wealth to a longevity annuity creates spending benefits comparable to an immediate annuity allocation of 60% or more.” The comments also recommend that any future DoL-approved qualified default income solution contain the following elements:

• Fee reversibility – In the accumulation phase, qualified default arrangements must be fully reversible at no cost for 90 days. A similar guideline should apply to retirement defaults.

• Liquidity – Some insurance products, such as an immediate annuity, exchange liquidity for additional retirement income. However, a default that involves the loss of liquidity could be a significant shock to unaware participants. To manage this concern, we recommend either an extended period where liquidity is retained or a requirement that loss of liquidity requires a proactive participant decision.

• Death benefit – Insurance that maximizes income will not pay a death benefit. However, in a default context, the lack of a death benefit could also be surprising to the heirs of DC plan participants. Similar to liquidity provisions, we recommend either an extended period where a death benefit is retained or a requirement that loss of a death benefit requires a proactive participant decision.

• Conflicts – If the retirement default is an advisory relationship that helps participants with drawdown decisions, existing rules governing prohibited transactions should extend to lifetime income services. Participants should be protected from advice that could be influenced by conflicts of interest associated with the compensation of the advisor.

• Role of Fiduciary in Selecting Default– If a retirement income solution is made a plan default, we recommend that the plan sponsor still play a fiduciary role in the selection and monitoring of any such default.

How to Reduce the Threat of Fiduciary Liability Lawsuits

Posted on August 18, 2010 by Editor Test -

The Chubb Group of Insurance Companies and the law firm of Morgan, Lewis & Bockius LLP have released a special report intended to help firms reduce the risk of a fiduciary liability lawsuit.

The report, “Who May Sue You and Why: How to Reduce Your ERISA Risks and the Role of Fiduciary Liability Insurance,” recommends that employers:

Delegate fiduciary functions to committees with members who have the expertise and time to properly perform their duties.
Establish programs to train fiduciaries on their responsibilities.
Ensure the plan’s fiduciary structure and documents do not conflict with plan practices.
Review fees and expenses at least annually to make sure the plan is not charged for costs that should be allocated to the plan sponsor.
Accurately document all meeting conversations and decisions and recommendations made by outside service providers.

“Business owners and managers need to understand the fiduciary liability exposures they face, especially in an environment where they are likely to reduce staff or employee benefits,” said Christine Dart, vice president and manager for worldwide fiduciary liability at Chubb.

“Employees who still have jobs may not be inclined to ‘rock the boat,’ but those who find themselves overboard are more likely to take legal action against employers, especially if their 401(k) plans sustained losses before they were terminated. Fortunately, employers can take steps to reduce the threat of fiduciary liability lawsuits.”

The U.S. Labor Department reported 910 corrected violations resulting from the 1,042 investigations of violations of the Employee Retirement Income Security Act (ERISA) it conducted in 2009.

“The U.S. Supreme Court’s ruling in LaRue v. DeWolff and regulatory changes have helped empower individual plan participants to bring actions for losses to their own accounts, paving the way for other claims against the fiduciaries,” added Charles “Chuck” Jackson, a labor and employment partner and co-chair of the ERISA Litigation Practice at Morgan, Lewis & Bockius LLP.

“While the goal is to address fiduciary issues before they go to litigation, that may not always be possible,” said Dart. “Companies that follow guidelines such as those suggested in Chubb’s special report may be able to better defend such claims; and fiduciary liability insurance may help manage the defense costs.”

Reliable Sources Disagree on July Fund Flows Data

Posted on August 18, 2010 by Editor Test -

With so many trillions of dollars zipping around the globe every hour of every day, it’s hard to keep track of it all. RIJ received two somewhat different reports on July mutual fund and ETF flows from Morningstar and Strategic Insight recently. If you can explain why there were discrepancies, please write and tell us.

According to Morningstar, overall flows into U.S. open-end mutual funds increased slightly in July to $14.1 billion, as equity and balanced funds saw mainly outflows, and bond, alternative, and commodity funds saw mainly inflows.

According to Strategic Insight, U.S. mutual fund investors added about $25 billion in net new cash to U.S. stock and bond mutual funds in July 2010 (in open-end mutual funds, excluding exchange-traded funds (ETFs) and variable annuity subaccounts).

According to Morningstar, U.S. exchange-traded funds (ETFs) registered total net inflows of $6.8 billion in July, marking the sixth consecutive month of positive asset flows. Total ETF assets are up 6% since the start of the year and 29% over the trailing 12 months.

According to Strategic Insight, investors put net $7.5 billion into US ETFs in July. U.S. ETF assets ended July at $831 billion (just off the April peak of $834 billion). International equity and taxable bond ETFs accounted for the bulk of July’s net inflows.

According to Morningstar, bond funds had another strong month of inflows, with investors adding $22.3 billion to taxable-bond funds and $3.9 billion to municipal bond funds, approximately double the inflows municipal-bond funds saw in June.

According to Strategic Insight, bond funds experienced net inflows of $30 billion in July, as inflows persisted among many lower-volatility bond funds used for cash management. In general, U.S. taxable bond funds drew $25 billion in net investments and U.S. muni bond funds attracted $5 billion.

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

Bond funds had another strong month of inflows, with investors adding $22.3 billion to taxable-bond funds and $3.9 billion to municipal-bond funds, approximately double the inflows municipal-bond funds saw in June.

Nearly $12.4 billion exited domestic-equity funds in July, but international-stock funds saw less severe outflows of $565 million. Flows into emerging-markets equity funds offset redemptions from broader foreign-stock funds. Emerging-markets equity funds had roughly $161.4 billion in total assets as of the end of July, up nearly 41% over the trailing 12 months.

Emerging-markets bond fund assets more than doubled to $30.8 billion over the last year after taking in more than $1.2 billion in July. A significant portion of these flows were allocated to local-currency emerging-markets bond funds, led by PIMCO Emerging Local Bond Fund with inflows of nearly $3.6 billion over the trailing 12 months.

PIMCO and Vanguard led all fund families in terms of total inflows in July, taking in $5.9 billion and $4.9 billion, respectively. American Funds continued to see significant outflows with another $4.6 billion in redemptions in July.

Additional highlights from Morningstar’s report on ETF flows:

Inflows into emerging-markets ETFs helped make international-stock funds, which saw inflows of $4.6 billion, the most popular ETF asset class in July.

Vanguard Emerging Markets Stock VWO was the top asset gatherer within the international-stock asset class as well as the overall U.S. ETF universe, with $2.3 billion in net inflows in July.

Investors also expressed a renewed interest in single-country ETFs to gain precise international exposure while avoiding struggling Eastern European countries.

Commodity ETFs saw net outflows in July for the first month since February. Although iShares COMEX Gold Trust IAU gathered assets of $209 million during the month, the asset class saw redemptions of $1.8 billion, led by SPDR Gold Shares GLD with $1.4 billion in outflows.

ETFs in the long government and long-term bond Morningstar categories saw combined total net inflows of $1.1 billion, while short government and short-term bond ETFs experienced outflows of $446 million.

U.S. stock ETFs saw outflows of $91 million in July, as inflows into small-cap funds were not enough to offset outflows from large-cap funds. Investors added $2.3 billion to the iShares Russell 2000 Index IWM, bolstering ETFs in the small-blend category, whereas redemptions from SPDR S&P 500 SPY drove outflows from large-cap U.S. stock ETFs.

To view the complete report, please visit http://www.global.morningstar.com/julyflows10.

Transamerica Launches “Bridge” GLWB

Posted on August 17, 2010 by Editor Test -

Until now, no annuity issuer has targeted an important part of the retirement income market: retirees who need “bridge” income to pay their bills until they start receiving income from a pension or from Social Security.

This week, Transamerica appears to have addressed that market with the introduction of a living benefit rider called Income Link. During the payout stage, this rider delivers an income of between 5% and 10% a year for two or more years, before settling down to a steady 4% annual payout for life.

The rider, which might also suit people who expect to travel a lot during the first few years of retirement, seems to work the same way most other guaranteed lifetime withdrawal benefits do, except that the payout is front-heavy. Contract owners must be at least 55 years old, but no older than 81, to elect the rider.

“Most people are dealing with pots of money in retirement, where they exhaust one and turn the next one on. This product operates not only as the first pot, but also as a permanent long-term pot,” said Dave Paulsen, national sales manager, Transamerica. “This concept has been in the works for 16 to 18 months. We talked to all our main distributors and key partners, and they agreed that this market is underserved.”

Clients who choose Income Link cannot allocate more than 35% of their contract assets to equities, Paulsen said. But even that conservative stance gives clients far more upside than they would get if they decided to take systematic withdrawals from a short-term bond fund during the early retirement years—the strategy that Income Link is designed to replace.

The investment options are limited to sub-accounts based on Transamerica’s Asset Allocation/Conservative, Transamerica PIMCO Total Return, Transamerica Money Market, Transamerica U.S. Government Securities, Transamerica Foxhall Global Conservative and Transamerica Index 35, as well as an American Funds bond fund and a fixed account.

The rider fee is 90 basis points of the benefit base, with a maximum of 165 basis points. As is typical of this type of benefit, Transamerica has the flexibility to raise the fee whenever the client raises the benefit base by “stepping up” to the account value. On each contract anniversary, Income Link allows the contract owner to step up the benefit base to the highest value on any of the 12 preceding “Monthiversaries” of the date of purchase. Since the product is designed to provide near-term income, the rider does not include the “roll-up” that many firms use to discourage near-term withdrawals.

Transamerica’s VA fees range from 60 to 190 basis points, plus subaccount fees. Surrender charges range from zero to 9%, depending on share class, and a “fund facilitation fee” of up to 30 basis points may apply for certain subaccounts. There’s a $30 to $35 annual administration fee.

Income Link offers these payout rate options (Each percentage is reduced 0.50% for joint life contracts):

10% for two years, then 4% for life
9% for three years, then 4% for life
8% for four years, then 4% for life
7% for five years, then 4% for life
6% for six years, then 4% for life
5% for seven years, then 4% for life

Each percentage is 0.50% lower for joint life contracts.

After purchasing a Transamerica variable annuity, the owner can start Income Link and elect a payout option and an income start date. The elections can be altered if no income payments have been received yet. Once payments start, they have to be taken as systematic withdrawals, according to a monthly, quarterly, semi-annual or annual schedule.

Transamerica sells about 60% of its variable annuity sales through the independent advisor channel. The company was the 11th largest seller of VAs in the U.S. in the first quarter of 2010, up from 14th a year earlier, with sales of $794 million and a market share of 2.54%. “We’ve had double-digit growth year-over-year since 2006,” Paulsen said, noting that, “We don’t expect Income Link to cannibalize our current living benefit offerings. We expect it to be additive.”

Indexed Annuity Sales Rebound

Posted on August 17, 2010 by Editor Test -

Indexed annuity sales totaled $8.3 billion in the second quarter of 2010. That was 0.1% lower than the same period in 2009 but up 22.8% from the first quarter of this year, according to AnnuitySpecs.com’s Indexed Sales & Market Report. The report was based on data from 43 issuers representing 99% of indexed annuity production.

“With CD rates at 1% and fixed annuities crediting a mere 3.65% on average, it is no wonder that this was the second-highest quarter in terms of indexed annuity sales,” said Sheryl J. Moore, president and CEO of AnnuitySpecs.com.

Allianz Life maintained its lead sales position with a 19% market share. Aviva repeated in second place, followed by American Equity, Lincoln National and North American Company. Allianz Life’s MasterDex X was the top selling prodct for the fifth consecutive quarter. Jackson National Life dominated sales of indexed annuities in wirehouses for the third consecutive quarter.

For indexed life products, second quarter sales were $165.8 million, an increase of more than 16% from the previous quarter and 25% over the same period in 2009. The survey was based on data from 33 carriers representing 100% of production.

“This quarter’s sales are reflective of increased consumer interest in these products, as a result of record-low interest rates on interest-sensitive insurance products. We have never had a greater level of interest in the indexed life market from highly rated insurance companies. Indexed life is finally transitioning from a niche product to mainstream insurance,” Moore said.

Aviva held the top sales position, with a 18% market share. Pacific Life, Penn Mutual, AEGON Companies and Minnesota Life followed, in that order. The top product was Pacific Life’s Pacific Indexed Accumulator III. Over 80% of sales utilized an annual point-to-point crediting method. The average target premium paid was $7,036.

VA Sales Up Sharply in Q2: LIMRA

Posted on August 17, 2010 by Editor Test -

Variable annuity (VA) sales increased 11% in the second quarter of 2010, as compared to the prior year, to reach $35.5 billion, according to LIMRA’s U.S. Individual Annuities Second Quarter 2010 Sales Report, which represents 96% of the market.

VA sales were 10% higher than sales in the first three months of 2010. For the first six months of 2010, VA sales improved 8% compared to the first half of 2009, totaling $67.9 billion.

“After five consecutive quarters where VA sales were lingering in the $31-33 billion range, we are finally seeing signs of recovery as VA sales jumped more than $3 billion in the second quarter,” said Joe Montminy, assistant vice president for LIMRA’s annuity research. “Most companies in the top twenty experienced VA sales growth this quarter—whereas last year we saw growth concentrated with the top five carriers.”

Fixed annuity sales continued to decline in the second quarter, down 26% compared to the second quarter of 2009, when total fixed annuity sales were much stronger. However, compared to the first quarter, fixed annuity sales improved 13% to $21.5 billion in the second quarter of 2010 and $40.5 billion year-to-date.

After a slight drop in the first quarter of 2010, second quarter indexed annuity sales matched the record levels hit in the second quarter of 2009. Market volatility and the low interest rate environment continued to drive sales of indexed annuities, which reached $8.2 billion in the second quarter.

Book value annuity sales dropped 43% in the second quarter of 2010, totaling $8.1 billion but improved 7% from the first quarter. Second quarter MVA sales of $1.6 billion were down 54% from second quarter 2009. Fixed immediate annuity sales were $2.1 billion and structured settlement sales reached $1.5 billion in the second quarter of 2010.

Total annuity sales were down 7% in the second quarter compared to the second quarter of 2009 to $57.0 billion. However, total annuity sales grew 11% over the first quarter, marking the first quarterly increase in total annuity sales since the fourth quarter of 2008. Year-to-date, total annuity sales totaled $108.4 billion.

Broadbridge Acquires NewRiver for $77 Million

Posted on August 17, 2010 by Editor Test -

Broadridge Financial Solutions, Inc. has agreed to acquire NewRiver, Inc., a provider of electronic investor disclosure solutions, for approximately $77 million. NewRiver’s work force, located in Andover, Massachusetts and New Delhi, India, will become part of Broadridge’s Investor Communication Solutions division.

The merger agreement has been approved by the Boards of Directors of both companies and the transaction is expected to close in August subject to customary closing conditions. The acquisition is expected to be accretive to Broadridge’s earnings per share in fiscal year 2011.

NewRiver, founded in 1995, pioneered the first electronic prospectus. Its regulatory disclosure communication solutions allow customers to control compliance risk and costs. Its clients include mutual funds, variable annuity insurers, retirement plan administrators and brokerage firms. NewRiver has been a supplier to Broadridge for nearly 10 years.

The acquisition accelerates Broadridge’s e-strategy while strengthening its industry-leading compliance communication capabilities, the company said in a release. “Broadridge’s integrated e-delivery and hard copy fulfillment capabilities, combined with NewRiver’s database of content and its FundPOINT compliance and productivity tool, will assist financial institutions in meeting their compliance and oversight requirements.”

“Broadridge’s acquisition of NewRiver is a natural strategic fit, as evidenced by the success of the joint solution we extended the industry last year in response to the SEC’s Summary Prospectus rule,” said Russell Planitzer, NewRiver’s Chief Executive Officer. “More importantly, our combined creative thinking and expertise brings new levels of sophistication and innovation to electronic disclosure,” he said.

Why the Wealthy Should Buy SPIAs

Posted on August 17, 2010 by Editor Test -

In the 1983 novel, “Eleni,” a man asks his elderly grandfather, who had been a local gallant during his youth, to explain the secret to his success with women. The grandfather replies: “By knowing who wanted me.”

The same wisdom might may apply to selling income annuities. Success may depend more on the receptivity of the buyer than the determination of the seller.

A doctoral candidate at the University of Virginia has now added to the world’s store of knowledge about marketing immediate income annuities by publishing a highly detailed paper that explains who is or isn’t likely to be receptive to one, and why.

The findings that researcher Svetlana Pashchenko describes in her paper, “Accounting for Non-Annuitization,” won’t shock you. She determined that most people don’t buy income annuities because they already have “pre-annuitized wealth” in the form of Social Security benefits, private pensions or government transfers like Medicaid or welfare.

No surprise there. Social Security “crowds out” private annuities. But Pashchenko broke some new ground in assessing seven obstacles to income annuity purchases and assessing their relative weight for people with different income levels.

Only the relatively wealthy can afford an income annuity, she found. And there are two potential reasons why they would buy one. (Marketers may want to jot these down.)

First, those who worry about future medical expenses might buy an annuity to fund them. “Uncertain medical expenses increase demand for annuities because health expenditures are increasing with age: the state of being old and alive coincides with the state of being old and having to pay high medical costs. Thus, insurance against longevity risk and insurance against medical costs uncertainty compliment each other,” the paper said.

Second, those in good health, as a group, may find that adverse selection actually makes annuities cheap for them.

It’s well-known that people who buy annuities tend to live longer than those who don’t, and that drives up the cost for the average person. A middle-income person in bad health, for instance, will tend to overpay for an income annuity by as much as 35%, Pashchenko estimated. Even a healthy poor person tends to pay 25% extra for an income annuity, because low incomes are associated with shorter lifespans, regardless of current health status.

But healthy people in the fourth and fifth (the two highest) wealth quintiles pay 5.3% and 13.1% less, respectively, than their actual life expectancies would call for, Pashchenko wrote. Apparently, enough members of the general population buy income annuities to make them a bargain for those with the lowest mortality risk—the healthy rich.

“Since mortality is negatively correlated with permanent income, this means that in the pooling equilibrium, higher income quintiles will face better prices and thus get an implicit subsidy from low income quintiles,” the paper said. Is that fair? Probably not. But it appears to be true.

Pashchenko also found that income annuities can increase the consumption levels of those wealthier owners by almost nine percent. “For a retiree in good health and in the highest income quintile the loss of opportunity to invest in annuities is equivalent to 8.9% of consumption,” she wrote. “For people in good health and in high income quintiles the opportunity to have access to the annuity market is very valuable.”

Pashchenko presented her paper August 6 at the 12^th annual conference of the Retirement Research Consortium in Washington, D.C. In concluding her presentation, she conceded that she had not entirely solved the “annuity puzzle.” Despite all the headwinds that she identified and quantified, she calculated that income annuity sales should be about three times higher than they currently are.

The table below, from Pashchenko’s paper, shows seven factors associated with demand for income annuities, along with their impact on demand among lower income groups and higher income groups. Note that “Medical expenses” and “Adverse selection” are the only positive drivers of demand, and only among the upper income quintiles.

Source: Pashchenko, Svetlana, “Accounting for Non-Annuitization.” Federal Reserve Bank of Chicago, WP 2010-03.

Which Are the Hottest VA Brands?

Posted on August 13, 2010 by Kerry Pechter -

The names “Prudential” and “MetLife,” in that order, come most quickly to the minds of investment advisers and registered reps when they’re asked to name a variable annuity provider, according to the 2010 Advisor Brandscape survey from Cogent Research.

That’s not surprising. Prudential and MetLife were the top two sellers of variable annuities in the U.S. in the first quarter, according to Morningstar, with over $4 billion in sales each and a combined market share of 28.5%.

In Prudential’s case, a relentless advertising push, a well-differentiated product with rich living benefits, and an enhanced wholesale force helped make it the most recognizable name in variable annuities. The company scored well in the two biggest drivers of adviser loyalty: range of products and long-term sub-account performance.

Newark, NJ-based Prudential spent $85 million on measured media in 2009 and $18 million in the first quarter of 2010, according to Kantar Media. MetLife, the second most recognizable annuity brand, spent $56 million on consumer and business-to-business advertising in 2009, according to Nielsen.

“Prudential does have very high ad awareness,” said Meredith Lloyd Rice, senior project director for the 2010 Advisor Brandscape report, which was based on a survey of 1,560 registered advisors—independents, brokers and RIAs—last spring. Non-subscribers to the report can purchase a copy from Cogent Research. In the past, VA issuers have used the Brandscape study to find out if their scores reflect their advertising, marketing and wholesaling efforts.

“The campaign for its HD6 [variable annuity living benefit] seemed to resonate with advisors. In a regression analysis of ‘loyalty drivers,’ we found that ‘range of variable annuity product features’ was the most important loyalty driver for Prudential,” she said.

In mid-June, Prudential signed a deal for two new image-building TV ads for telecast during morning shows, network news shows, and prime time syndicated shows, along with billboard ads in 15 major markets. The company also bought home-plate signage during television broadcasts for eight Major League Baseball teams.

Cogent’s study, which also gathered advisors’ opinions about mutual funds, exchange-traded funds (ETFs), and employer-sponsored retirement plans, added to evidence that some annuity providers have thrived in the “flight to strength” since the financial crisis while others have lost momentum. Companies that maintained rich living benefits, despite the high fees involved, have fared better. Companies that bet the crisis would spark demand for simpler, less expensive riders haven’t done as well.

After Prudential and MetLife, Jackson National, Lincoln Financial, Nationwide, Pacific Life, and Sun Life received the highest combined ratings for awareness and “favorable impressions” from advisors. John Hancock and the Hartford also received high brand ratings, but both have lost ground because of unpopular product design (John Hancock) or questions about financial strength (Hartford).

Last January, Sun Life purchased naming rights to the Miami Dolphins stadium, in a five-year deal worth $7.5 million. That and other promotional moves appear to be paying off. “An impressive story is building for Sun Life Financial, which holds a position a bit further back in the pack. The firm enjoys stronger consideration and favorability, but has yet to translate this momentum into a deeper sense of advisor loyalty, despite best-in-class performance on several key client experience attributes,” the Cogent report said.

Overall, however, allocation of assets to variable annuities by advisors dropped 20% in 2010, compared to the previous year, as average allocations declined to 8% from 10%. Among registered investment advisors (RIAs), allocations declined to only 2% in 2010 from 6% in 2009. Among those advisors who use variable annuities, the average allocation is 12% of assets.

“A two-year uptick in the use of and allocations to variable annuities has ended and some of the products recent ‘foul weather’ friends, particularly RIAs, appear to have already returned to their previous ambivalence toward these products,” Cogent Research said. Among RIAs the average assets under management (AUM) devoted to variable annuities fell by more than half, from $28.9 million in 2009 to $13.7 million today. When RIAs do buy variable annuities, some apparently do so only to exchange a client’s high-cost contract to an ultra-low-cost contract, like Jefferson National’s.

Variable annuities tend to be most popular in the independent channel, where 52% of advisors use them and allocate an average of 16% of client assets to the product. Advisors who manage less than $25 million in client assets are most likely to use them in their practice. Independent advisors represent 23% of all advisor-managed assets but 44% of advisor-managed variable annuity assets.

“What emerges across all these categories is a picture of an experienced Independent planner with a smaller book of business who is comfortable with the VA story and has found a niche for them within his or her practice,” Cogent said.

Advisors are not as nervous about the financial stability of issuers as during the depth of the crisis in 2009, nor are they talking as much about “splitting tickets” among providers to diversify risk. Instead, they are “once again seeking out those providers with a performance story to tell,” while also looking for guarantees that offer security “in the post-meltdown investment environment,” the Cogent researchers said.

Advisor Brandscape showed that, for the first time, more than half (54%) of all advisors describe their compensation as “fee-based.” Because of that, Cogent said “VA providers should build solutions that are simple, low-cost, and priced to “fit” into the growing advisor asset-based platforms.” The average advisor client is 57.7 years old has about $690,000 in investable assets.

Retirement Assets Reach $16.5 Trillion 1st Quarter: ICI

Posted on August 11, 2010 by Editor Test -

The value of Americans’ retirement savings grew in the first quarter of 2010, to $16.5 trillion on March 31, 2010 from 16.1 trillion at the end of 2009, according to a new report from the Investment Company Institute.

The 33-page report, The U.S. Retirement Market, First Quarter 2010, also showed that retirement savings now account for about 36% of all household financial assets in the U.S., up from about 15% in 1980.

The study also showed:

• IRAs held $4.3 trillion at the end of the first quarter of 2010, up 2.1 percent from year-end 2009. Forty-six percent of IRA assets, or $2.0 trillion, were invested in mutual funds.

• Americans held $4.2 trillion in all employer-based defined contribution (DC) retirement plans, of which $2.9 trillion was held in 401(k) plans, on March 31, 2010. Those figures are up from $4.1 trillion and $2.8 trillion, respectively, on December 31, 2009.

• Mutual funds managed $2.2 trillion of assets in 401(k), 403(b), and other DC plans at the end of the first quarter, up from $2.1 trillion at year-end 2009. Mutual funds managed 52 percent of DC plan assets.

• Assets in target date mutual funds grew 9.8 percent in the first quarter. Lifecycle mutual funds managed $281 billion at the end of the first quarter of 2010, up from $256 billion at year-end 2009. Eighty-four percent of assets in lifecycle mutual funds were held in retirement accounts.

A separate ICI report, Defined Contribution Plan Participants’ Activities, covers nearly 24 million employer-based DC retirement plan accounts as of March 2010. The report’s findings include:

Low levels of withdrawal activity moved even lower. Only 1.2 percent of DC plan participants took withdrawals in the first quarter of 2010, compared with 2.7 percent in the first quarter of 2009. The share of workers taking hardship withdrawals dropped as well, to 0.4 percent from 1.2 percent in 2009’s first quarter.

Fewer participants stopped making contributions in the first quarter of 2010. Only 1.1 percent of DC plan participants stopped contributing in the first quarter of 2010, compared with 2.7 percent in the same quarter of 2009.

Most DC plan participants stayed the course with asset allocations during the first quarter of 2010. Four percent of DC plan participants changed the asset allocation of their account balances; 4.5 percent changed the asset allocation of their contributions.

Loan activity edged up but remained in line with historical numbers. As of March 2010, 17.0 percent of DC plan participants had loans outstanding, compared with 16.5 percent of loans outstanding at year-end 2009.

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