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By Another Name, Annuities Would Smell Sweeter

Even though most people like the annuity concept, more than half (53%) of Americans aged 44-75 expressed distaste for the word “annuity”, according to a survey from Allianz Life Insurance Company of North America.

Some 80% of 3,200 people surveyed preferred a product with four percent return and a principal guarantee over a product with an 8% return subject to market risk—thus answering the classic behavioral finance question, Would you prefer a 100% change of $50 or a 50% chance of $100. But they balk at the word, “annuity.”

“No other financial product offers guaranteed income for life. Government, financial planners and the industry need to re-educate the American public about what these products do and how they can help secure a stable retirement,” Allianz Life said in a release.

The study, titled Reclaiming the Future: Challenging Retirement Income Perceptions, found that   respondents had decades-old prejudices regarding annuities. Fifty-three percent first formed their opinion of annuities 10-20 or more years ago. Only 27% knew of innovations made with annuities during the past five to 10 years. Only 23% know that variable annuities allow contract holders to participate in market gains.

When people understand annuities, they’re very satisfied with them. According to the study, 76% of annuity owners are “very happy” with their purchase. More than half of owners like the product because it’s a safe, long-term investment vehicle (57%), a great way to supplement their retirement income (56%), and an effective tool to get tax-deferred growth potential (56%). Consumers ranked annuities second-highest (50%) in satisfaction among all financial instruments, beating mutual funds (38%), stocks (36%), U.S. savings bonds (35%) and CDs 25%).

© 2010 RIJ Publishing LLC. All rights reserved.

Vanguard and Hueler Partner to Provide Low-Cost Income Annuities

Vanguard and the Hueler Companies, two companies identified with low-cost retirement savings and income solutions, have teamed up to offer a web-based service that lets individual investors seek competitive quotes on income annuities from several major insurers for purchase in their rollover IRAs.     

The deal links Vanguard, a leading provider of jumbo 401(k) plans and a major destination for rollover money from other providers’ platforms, with Hueler, a relatively small Minneapolis firm whose CEO, Kelli Hueler, has virtually crusaded for making income annuities available to retirees at “institutional” prices five percent or more less than retail. 

Currently, on Hueler’s Income Solutions web-based platform, near-retirees in participating 401(k) plans can ask for competitive bids from participating companies, including Hartford Life, ING Life, Integrity Life, John Hancock Life, MetLife, Mutual of Omaha, Pacific Life, Principal Life, Prudential Insurance, and Western National Life. 

The timing of the announcement is significant. It comes a week ahead of Department of Labor hearings on in-plan income options. The hearings themselves mark the new phase of competition for rollover dollars that is heating up among asset management firms and insurance companies. 

Both Kelli Hueler, CEO of the Hueler Companies, and Steve Utkus of Vanguard Retirement Research Center, are scheduled to testify at the September 14-15 hearings.

Today, the two companies issued the following release:

Vanguard Annuity Access™, coupled with Hueler Companies’ Income Solutions® platform, is designed for individuals seeking a guaranteed stream of income in retirement to augment their investment holdings, workplace retirement plan, and Social Security benefits,” the companies said in a release.

“The service can be particularly attractive to retirement plan participants rolling their assets over to a Vanguard IRA (individual retirement account) as they retire. Prospective purchasers can obtain customized quotes on a real-time basis and evaluate competitively priced, directly comparable contracts from multiple companies.

Hueler Companies has been a leading provider of web-based annuity purchase systems since 2004. The firm now provides participants in more than 1,000 defined contribution plans access to income annuities as a tax-deferred rollover option for their retirement assets.

“Traditionally, annuities have been viewed as complex products that were sold and not bought. Vanguard Annuity Access brings the tools and transparency to the annuity-buying process, enabling self-directed individuals interested in a ‘paycheck for life’ option to make an informed decision,” said Tim Buckley, managing director of Vanguard’s Retail Investor Group.

Mr. Buckley added that the new annuity service complements Vanguard’s market-based options for retirees, which include systematic withdrawals from a diversified portfolio of low-cost Vanguard mutual funds, Vanguard Managed Payout Funds, and retirement income plans developed by a Certified Financial Planner™ (CFP) professional.

“The new Vanguard Annuity Access service is a powerful collaboration that brings together Hueler’s proven low-cost annuity platform with Vanguard’s trusted name,” said Kelli Hueler, CEO of Hueler Companies. “Now prospective annuity purchasers—both retirement-ready plan participants completing a rollover and transitioning individual investors—will benefit from an easy-to-use online resource supported by Vanguard’s licensed, non-commissioned annuity specialists.”

Income Annuities for DC Plan Participants Entering Retirement
Defined contribution plan sponsors are paying increased attention to retirement income strategies, with the goal of providing their participants with the education and tools they need to translate their lump-sum benefits into sustainable income. Since many sponsors are concerned that “in-plan” options such as income annuities will lead to added fiduciary responsibility and increased plan complexity, Vanguard Annuity Access will be offered to participants as an IRA rollover option.

“More than 80% of retiring participants in Vanguard-administered DC plans leave their employer’s plan within three years, typically for an IRA rollover account. As a result, our plan-sponsor clients are interested in an “outside-the-plan” guaranteed income program,” said Barbara Fallon-Walsh, head of Vanguard Institutional Retirement Plan Services. “Many plan sponsors offer the Vanguard Financial Plan service for their participants aged 55 and older, which provides them with free access to a CFP who can help them with retirement income planning. Vanguard Annuity Access represents an additional service they can offer participants entering retirement.”

Vanguard provides recordkeeping and investment services to 3.5 million participants and 1,700 plan sponsors in more than 2,500 defined contribution plans.

Plain Talk about the Risks of Income Annuities
John Ameriks, head of Vanguard Investment Counseling & Research co-author of Vanguard retirement income research (including Generating Guaranteed Income: Understanding Income Annuities) encourages retirees to weigh the pros of guaranteed income versus the cons, which include loss of investment liquidity, the potential reduction in bequeathable wealth, and the risk of default of the underlying insurer.

Costs are another important consideration. The investment management, distribution, administrative and other costs associated with fixed annuity products are reflected in annuity quotes.  As a result, the “apples-to-apples” comparability of quotes at the time they are obtained is critical in evaluating whether contracts are competitive among their peers.

Vanguard Annuity Access is designed to provide competitive payments to investors, resulting from the meaningful competition among insurance companies on the Income Solutions platform and from the institutional, or group-rate, pricing of the annuities offered. The quotes should also be competitive because of the low transaction fee of 2% of the annuity purchase amount.

“For retirees who place a high value on having an additional lifetime income guarantee beyond Social Security and a pension—and are willing to accept the costs and risks of annuitization—low-cost income annuities can be an important part of a broader investment plan,” said Mr. Ameriks.

Fixed Deferred Annuities Also Available
The Vanguard Annuity Access service will also offer access to fixed deferred annuities with fixed interest durations ranging from three to seven years. These savings vehicles are designed for tax-sensitive investors wishing to supplement other forms of retirement savings, such as 401(k) plans and IRAs. A fixed deferred annuity lets clients earn a fixed interest rate on their savings for a set number of years. Both the interest rate and principal are guaranteed by the insurance company that issues the annuity.

© 2010 RIJ Publishing LLC. All rights reserved.

The Big Red Stag’s Mistake

Like many students of the variable annuity game, I have been watching The Hartford Financial Services Group’s recent public relations disaster closely. My first thought: what a terrible waste of brand strength. Even though The Hartford has struggled rather publicly through the financial crisis—it needed a $2.5 billion infusion from Allianz SE and $3.4 billion from Uncle Sam—its brand has held up pretty well.

But this latest incident could knock a few points off the Big Red Stag’s antlers. 

It could also snowball into more than just a public relations disaster. At a time when the Treasury Department is about to auction The Hartford stock warrants to recoup TARP money, and when the Securities and Exchange Commission is pondering the suitability/fiduciary standard for broker-dealer reps, a news story that raises questions about the financial stability of any insurer or the integrity of any reps could have wider implications. On Tuesday, in fact, the Connecticut insurance commissioner, Tom Sullivan, said he would look into the matter.

That may be why one industry observer told me that the issue is “very touchy” and that other variable annuity issuers “are watching it closely.”

If I read Darla Mercado’s recent stories in Investment News correctly, someone at Hartford Life Distributors mailed letters to owners of certain Hartford variable annuities—presumably including ones with underpriced living benefits that were sold during the pre-Crisis VA ‘arms race’—suggesting that they talk to their advisors about possibly exchanging those contracts for contracts with the insurer’s less risky-to-the-issuer Personal Retirement Manager income rider. (See RIJ’s article on the product.) The letter is signed by a vice president of product management at Hartford Life Distributors.

Late last month, at least some contract owners apparently received those letters before their advisors received similar letters from The Hartford giving them a heads-up about the communication with clients. That mix-up alone would be a violation of protocol, and a good way to jeopardize Hartford’s hard-won third-party distributor relationships. It’s an unwritten law that the client belongs to the advisor, not the carrier.

The company has explained that the client letters went to people whose contracts were out of the surrender period—if it were otherwise, this would be an uglier matter—and that such letters were not unusual. “The letters to advisors simply didn’t go out on time,” according to the insurer. I’ve seen both letters. They are brief and dry. To say that the letters “entice” owners to exchange contracts, as the Investment News article did, seems to me like an exaggeration.

I was told by one observer that such letters, especially to clients, are “not typically” sent out by VA issuers, however. That person also noted that both letters contain headlines that mention an “Exchange Program.” The use of the word “program” apparently triggers a requirement of SEC or at least FINRA approval. The implications of that, if any, aren’t clear.

Worse case scenario: The letter to clients could foster speculation that The Hartford is worried about the risks associated with contracts still on its books, which leads to questions about its financial stability. The letter also allows speculation that the original contract may have been less than suitable for the client, which raises questions of advisor integrity or competence. 

Those are not questions that anyone in the insurance or brokerage industries wants anyone to be asking. The annuities industry, which two years ago had to deal with the NBC Dateline fiasco involving indexed annuities, doesn’t need another image-flaying scandal. Neither does The Hartford.

A few weeks ago, in Cogent Research’s Advisor Brandscape 2010 research study, the reputation of The Hartford’s variable annuity business was still very high among advisors. The company’s VA sales had fallen to 18th place at the end of the first quarter of this year—perhaps by design, as CEO Liam McGee suggested in statements last spring—but it still ranked as high as third in brand imagery, trailing only industry leaders MetLife and Prudential.    

Advisors don’t necessarily see the Hartford as an innovator, the study showed, but 34% of advisors considered the company a “leader in the VA industry.” Regional broker/dealer reps in particular held it in high regard. Bank advisors ranked it second among VA issuers in terms of “good value for the money” and third overall in “offers the best retirement income products.”

But the trend has been negative. From 2009 to 2010, the company slipped from fourth place to seventh place in brand equity score. And while it still ranked first in advisor market penetration, with 44% of advisors listing it among their VA providers, it lost ground in the percentage of advisors who considered it their primary VA provider. 

Starting in late 2009, the variable annuity market has split starkly into those companies who are truly committed to the product and those who, post-Crisis, had serious doubts about the wisdom of selling long-term equity puts. Prudential, MetLife, and Jackson National are committed. The Hartford, John Hancock and ING have had second thoughts. Tellingly, the leaders have stuck with generous income riders while doubters switched to simpler products with lower fees and more modest promises. The public, and advisors, prefer the generous products.

It’s somewhat ironic that The Hartford wanted to get investors out of the type of product that’s justifiably more popular—because of its richer terms—than the one that it’s trying to lure investors into. In hindsight, the company might have capitalized on the good will established by those rich promises rather than trying, it now appears, to renege on them. Failure to accept a sunk loss is a mistake that behavioral finance experts warn amateurs to avoid.   

It is my understanding that, accounting issues aside, even the most generous-looking lifetime income guarantees don’t represent a loss for the issuer unless or until the contract owner(s) are still alive when the account value (as a result of allowable withdrawals and/or poor market performance) goes to zero. Of course, there may be a method to this madness that escapes me or that The Hartford isn’t sharing.

There’s no need to scold The Hartford here, because Bob MacDonald, the former CEO of ITT Life, a one-time Hartford subsidiary, did a thorough job of it on his blog this week. MacDonald, a legendary and controversial figure who built an equity-indexed annuity empire at Allianz Life of North America in the first half of this decade, writes:

“It is obvious that despite all that has happened to the success and good name of Hartford over the past few years, the management of the company is still highly capable of consistently making decisions that are not in the best interests of the company. Clearly the CEO, who has no insurance experience, has demonstrated his inability to change the environment of self-destruction at Hartford.

“Knowing the past actions of Hartford management and its current arrogant attitude toward customers and the distribution system, one could rightfully question ever buying or selling a product of the Hartford. It seems – as I have suggested previously – the only way to save Hartford from itself is for the company to be acquired by another insurance organization that can clean house and return Hartford to the great company it once was.”

That type of righteousness will probably be tough for the folks at Hartford to hear, knowing that it comes from the mischievious author of books with titles like Beat the System and Cheat to Win

The Hartford’s letter-gate problem might merely reflect one company’s or one executive’s idiosyncratic error—or, to be polite, the appearance of error. And, in ordinary times, the whole mess might vanish overnight. But these aren’t ordinary times. Investors are nervous, markets are volatile, a potentially game-changing election is coming up, and the reputation of the financial services industry is under examination. A cap-gun could set off a panic.

© 2010 RIJ Publishing LLC. All rights reserved.

Meet Meir Statman

Economists once assumed, perhaps for the sake of sheer convenience, that the typical investor was a paragon of rationality, always able to apply his or her highest, most objective reasoning abilities to financial decisions.

Now we know that an assortment of psychological, biological, and cultural factors, mediated by ineffable hormones and neurotransmitters, shape the way we measure risk and reward and how we spend our money.

These mental and physical factors are the subject of the new book, What Investors Really Want (McGraw Hill, 2010), by Meir Statman, the Glenn Klimek professor of finance at Santa Clara University near San Jose, California. As the following excerpts show, the book draws on a wide range of evidence and reveals the complexities of behavioral finance in language that’s accessible to almost anyone.

Take, for instance, Statman’s description of an experiment where researchers tested children’s ability to delay gratification–a process linked to financial behavior. The children were promised an extra marshmallow if they were able to wait patiently for a teacher to return to their playroom after a short absence:  

“Imagine yourself as a four-year-old at a nursery school. A teacher escorts you into a room and together you play with some toys. Then the teacher says that you would play again with these toys some more later but asks you to sit for now at a table on which there is a bell.

“The teacher shows you two marshmallows and says that he or she must leave for a while. If you wait until the teacher comes back, you can have the two marshmallows. You can ring the bell at any time you want to call the teacher back, but if you ring the bell you’ll get only one marshmallow, not two. Would you be able to resist the urge to ring the bell before 15 minutes is up?

“Children who resist the temptation to ring the bell have better self-control than children who ring the bell, and differences in self-control have profound consequences in life, including financial life. Children who exercised sufficient self-control to resist the temptation of the marshmallow grew up to be more academically and socially competent, verbally fluent, smart, attentive, able to plan, and able to deal with frustration and stress. They also scored higher on the SAT.”

Aside from psychological processes, there are also physiological processes for some of our financial decisions, Statman writes. He cites research showing that people who eat turkey and other foods high in tryptophan, an amino acid that is a chemical precursor of serotonin, a neurotransmitter that affects mood and activity levels, are less likely to act on impulse than people who eat high-carbohydrate foods. 

“People who had the traditional Thanksgiving dinner exhibited lower impulsiveness, reflected in a lower willingness to buy a Dell Home Inspiron personal computer on Black Friday, than people who had pizza, quesadilla, lasagna, pasta, burrito, salmon, or noodles,” he writes.

Along with the link between impulsivity and neurotransmitters, a physiologic link has been found between a certain region of the brain and the reaction to prices in certain people, Statman’s research shows. He describes an experiment where people were given an MRI while seeing a product, then its price, and then being asked whether they would like to buy it or not:

“Seeing the price caused greater activation in the insula among people who decided not to buy the product than among people whose choice to buy. The insula is a brain region associated with painful sensations such as social exclusion and disgusting odors.”

Some of our behavior is more easily traced to cultural influences, rather than physiological or psychological ones. For instance, “More than 32% of Japanese parents plan to leave a greater amount to the child who takes care of them in old age, while only 2.5% of American parents plan to do so,” Statman writes. “More than 7% of Japanese parents plan to give more to the oldest son or daughter and almost 7% plan to give more to the child who continues a parent’s business, while such plans are almost absent among American parents.”

Whether culturally-instilled or psychological, Statman’s book shows that the fear of poverty affects virtually all of us on a deep level, and freedom from that fear appears to be a blessing that’s as satisfying than wealth. That’s one of Statman’s principal arguments in favor of owning income annuities or choosing to annuitize a defined benefit pension. 

“Freedom from the fear of poverty improves our mental health as riches do,” he writes. “Retirees who have at least some of their income in the form of pensions or annuities have greater freedom from the fear of poverty than retirees who draw income from their savings, concerned that they might outlive their money.

“Retirees with pensions or annuities were more satisfied with their life in retirement than retirees with similar incomes from sources other than pensions or annuities. Retirees with pensions or annuities also had fewer symptoms of depression than retirees without such pensions or annuities.”

Even the sense that we are poor compared to other people can drive us to make somewhat risky, and even desperate decisions, the research shows. As Statman puts it, “We are driven to gamble when we are reminded that we are poor.”

He describes an experiment where people waiting at a bus station were paid “$5 in single dollar bills to complete a questionnaire. One version of the questionnaire, given to half the people, was designed to make them feel adequate, with incomes in the middle of the income range. It asked whether their annual incomes were less than $10,000, between $10,000 and $20,000, and then, in increments, to the top category of more than $60,000.

“The other version of the questionnaire, given to the other half, was designed to make them feel poor. It asked whether their annual incomes were less than $100,000, between $100,000 and $250,000, and then in increments to the top category of more than $1 million.

“Next, the experimenters showed each person five $1 lottery tickets and asked how many they wished to buy. People who were made to feel poor bought more lottery tickets than people who were made to feel that their incomes were adequate.”

© 2010 RIJ Publlshing LLC. All rights reserved.

“What Investors Really Want”

When managing his own savings, the behavioral economist Meir Statman practices what he teaches. If his emerging markets equities fund loses value, for instance, he doesn’t panic and go to cash. Nor does he “rebalance” by shifting assets from bond to stocks.    

More likely, he would move the depreciated stock fund into a similar stock fund to capture the tax-deductible loss (without engaging in a wash sale). He wouldn’t touch his bond money, which he regards as protection against future poverty.

“I’m very risk-averse with downside money,” he told RIJ recently. “I think that the idea of looking at the portfolio as a whole, and having the same risk tolerance for all of your money, is wrong. I wouldn’t recommend any change based on a prediction of what stocks will do, or on the belief that stocks were cheap.”

The Glenn Klimek professor of finance at Santa Clara University’s Leavey School of Business in Silicon Valley, Statman has just published What Investors Really Want (McGraw Hill, 2010). His book combines personal anecdotes and academic research in an amiable narrative that emanates tolerance for our all-too-human financial foibles.

Most investors want at least a glimmer of hope for future riches and they want to avoid falling into poverty, Statman believes. In the jargon of the Street, they want upside potential and downside protection. Evidence of this is easy to find, he says.

It can be seen in the universal popularity of lottery tickets. It can also be seen in the way investors buy hybrid investments, like balanced funds, equity-indexed annuities and variable annuities with lifetime income guarantees. It can also be seen in the chronically low sales of fixed income annuities, which offer no opportunity for growth.     

At the same time, people struggle with self-control as they seek to balance the desire to spend now with the desire to save for the future. “We deal with this by creating rules,” he said. “One rule is to spend in income but never dip into capital. Another rule is to spend only four percent of wealth in retirement. Payout mutual funds serve a psychological purpose, he said, by make dips into capital “invisible” to the owner. 

“People are aware of their problem with self-control and look for ways to deal with it,” said Statman, who was born in Germany in 1947 to Polish parents who had fled the Nazis in 1939. After five years on a collective farm in Siberia, followed by the limbo of a Displaced Persons camp, they emigrated to Israel, where Statman grew up. He came to the U.S. for graduate study in the early 70s.

“The desire not to be poor and to become rich still exist when people are retired,” Statman told RIJ, “and that is the bane of immediate annuities, which are presented as ‘We are going to take all your money and give you a few thousand dollars a month.’

“But that deprives me of any chance of becoming rich. Advisors and annuity designers should be saying, ‘Let’s put a portion of your money into an annuity to supplement Social Security. You’ll be protected from the downside and still have money to put into growth stocks.’ That really is the ideal scenario.”

Most people aren’t as rational about money as economists once assumed or as hopelessly innumerate as some behavioralists paint them, he says. “Ninety-eight percent of us are normal. Sometimes we are stupid and sometimes we are smart. The question is, how can we raise the ratio of smart behavior to stupid?”

While the financial services industry has a pretty good grip on the public’s desire for upside potential and downside protection, it lags behind other industries in understanding that people often think of mutual funds or wealth management services the same way they think of automobiles or watches—as expression of themselves.

 “Money is just a way station to what you do with that money. Both standard and behavioral finance seem to regard investing as neutral or unique. Investment products and services are like other products and services.

“You might describe Vanguard, for instance, as a company that sells good merchandise at a good price. But investing at Vanguard also makes me proud that I’m smart enough not to waste my money. Vanguard is an expression of me just the way my Toyota is an expression of me. I could buy a Lamborghini, but I’d feel like a phony.”

People invest in active funds instead of index funds for a good reason, Statman said. “Only 20% of stock investors invest in index funds. Knowing what we know about performance, you might say that people who invest in actively managed funds are stupid. But you wouldn’t call people who buy Rolex watches stupid just because Rolexes don’t tell time any better than Timex watches.

“If you ask people in the watch business, they won’t deny that they’re appealing to a sense of status or beauty. But money managers wouldn’t admit that that’s what they do,” he said.

“People invest in active funds because active funds give them the hope of being rich. Some say you shouldn’t pay for hope. But people pay for hope all the time. Look at lottery tickets. An advisor might tell you not to buy lottery tickets. But I’d say, go ahead and buy one once a week. You’ll lose your money, but for $52 you’ll have hope for an entire year,” he said.

But to take advantage of the craving for hope—i.e., greed—is foul play, Statman claims. If active fund managers were more candid, he says, they’d drop the pretense that they merely seek alpha through securities analysis. They make bets in order to outperform their peers. They advertise their good quarters, but bury the results of their bad bets, fostering an impression that active funds are consistent outperformers.

To counteract such stealth, Advisors should act as financial physicians for their clients, Statman said. An advisor should help people make smart, practicable choices, he said, creating a plan that accommodates their hope for upside and fear of ruin without over-indulging them.

“A good advisor will let people spend five percent of your money on frivolity, but make sure they don’t spend their serious money on lottery tickets,” he said. “I am passionate about the need for advisors to be their as financial physicians, because people do stupid things when they’re on their own.”

© 2010 RIJ Publishing LLC. All rights reserved.

Response to Last Week’s FIA Article

David Babbel writes to comment on RIJ’s article in the August 25 issue on fixed income annuities, which reviewed a paper that he co-authored with Jack Marrion and Geoffrey VanDerPal:

I appreciated your thoughtful review of our recent article on "Real World Index 
Annuity Returns" in your August 25th, 2010 edition of the Retirement Income Journal.

It was accurate and expressed a healthy skepticism in your final paragraph, that
referenced the final paragraph in our article about the levers included in index
annuities, which can be changed by the insurer at its discretion.

[We] should have added to that sentence that although the insurer does have discretion
to change certain contract parameters, such as the
cap levels or participation rates, it does not have unfettered discretion to alter
them, because the contracts themselves have minimum guaranteed levels for both, as
well as state minimum nonforfeiture value schedules, that will always ensure a
return of zero or greater.

Moreover, and more importantly, the insurers face the
discipline of the market. If they try and credit less than a competitive and fair
rate for FIA writers, they will face the dissatisfaction of their consumers, the
rancor of the agents, the cost of lapsation, and the hesitancy of agents to ever put
future clients in such products. This would essentially be the death knell of their
future business.

Therefore, consumers have at least three layers of protection—
contractual minimums, state minimum nonforfeiture values, and competition enforced
by both consumers and, more importantly, agents (because they are more aware of what
other companies are offering)—which should assuage the risk aversion of many.

Britain’s Annuity Muddle

In the United Kingdom, an estimated six out of ten people are settling for retirement income that is up to 30% lower than possible because they don’t shop around for the best annuity rate when they retire and convert their savings to income. The situation sheds light on the decisions U.S. consumers might face if 401(k) companies were to offer competing income options.   

The financial secretary to the British Treasury, Mark Hoban, is reported to have asked the Association of British Insurers (ABI) to explain why so few people use the ‘open market option,’ which allows new retirees to transfer their money from the asset management company where they accumulated their savings to another provider with a higher annuity rate.

In the first half of this year, only around 40% of retirees took advantage of the open market option. The rest settled for the annuities offered by the companies with which they had built up their “pension pots,” potentially missing out on hundreds of pounds of extra pension.

Douglas Baillie, a Perth-based adviser who this year launched the online service comparemyannuity.co.uk, believes there are several reasons why more people do not shop around for a better annuity. “There is a lack of awareness generally about the open market option and pension companies are not as forthright about it as they should be. Although they are obliged to mention it to policyholders as they approach retirement, they tend to bury it in the small print at the end of a six-page letter.

“Also when companies spell out the choices under their policy, they only write down the pension which they offer, or the alternative of a tax-free cash lump sum plus a reduced pension. What they really should be doing is including a third choice telling policyholders they can buy a possibly better pension elsewhere and how they can go about it.”

Another specialist comparison service was launched this week by fairinvestment.co.uk.

Questioned by The Herald, the ABI refused to comment beyond saying: “The ABI and its members are committed to making the process of shopping round for an annuity as straightforward as possible.”

However, David Trenner of Intelligent Pensions in Glasgow is skeptical. He says: “Why is it that the ABI even allows companies which don’t want to sell competitive annuities to continue doing so, even though they are clearly in breach of their duty to treat customers fairly? The answer is that the ABI is a trade body so it can hardly turn round to the likes of companies such as Scottish Widows or Friends Provident and tell them what to do.”

“Take the example of a 65-year-old woman who may have saved for 30 years with the Scottish Widows and built up a pension fund of £60,000,” Trenner said. “If she was retiring today she could be offered an annuity of £3300 per annum, when she could get £3748 just by switching to Aviva. Why would she want to take a lower pension for the rest of her life just because she has saved with a particular company?

People with health problems or lifestyle issues, such as smoking, may be able to get even better annuity rates, but not all pension companies offer specially enhanced annuities so their customers may be even more disadvantaged. Baillie recently managed to improve the pension of one of his customers, who was in poor health, by a massive 60%, though the normal uplift is more in the region of 20%.

Advisers receive a 1% commission when they arrange an annuity on your behalf, or they may ask for a fee. If you have only a small pension pot, it may be uneconomic for an adviser to put in the work required and the fee may be disproportionate. However, you can do some shopping around for free by visiting the Financial Services Authority’s annuity comparison tables at www.moneymadeclear.org.uk.

© 2010 RIJ Publishing LLC. All rights reserved.

Record Sales for Indexed, Income Annuities in 2Q: Beacon

U.S. sales of fixed annuities were an estimated $19.4 billion in second quarter 2010, according to the Beacon Research Fixed Annuity Premium Study. Sales were up 18% from first quarter 2010. Compared to the unusually strong second quarter of 2009, results fell 30%.

Estimated year-to-date sales of $35.9 billion were 43% below those of first half 2009, which were the largest since the Study began in 2003. Sales figures do not include structured settlements or employer-sponsored retirement plans.

Estimated second quarter 2010 sales of indexed and income annuities were the highest in the Study’s 8-year history. Results for all four product types improved relative to the previous quarter. Income annuities advanced 31%, MVAs were up 29%, indexed annuities increased 25%, and book value annuities grew 6%. Compared to second quarter 2009, income and indexed annuities also were ahead – by 10% and 0.4%, respectively. But MVA sales fell 57%, and book value results dropped 48%.

Estimated second quarter and year-to-date sales, by product type:

Product Type     2Q Sales            YTD Sales

Indexed                  $8.2 billion        $14.9 billion             

Book value             $7.2 billion        $14.1 billion

Fixed income        $2.4 billion         $4.2 billion  

MVA                        $1.5 billion         $2.7 billion

Relative to first half 2009, income annuity results improved 2%.  Sales of the other product types declined. MVAs fell 73%.  Book value annuities were down 57%.  Indexed annuities dropped 3%.

Credited rates fell during second quarter, with top rates on multi-year guarantee annuities dropping from more than 4% to 3.75%. However, the fixed annuity advantage over Treasury rates increased, and the market apparently was expecting lower rates in the future. Both factors boosted fixed annuity sales quarter-to-quarter. But although the yield curve flattened, fixed annuity sales by guarantee period changed surprisingly little.

“The spread between fixed annuity and Treasury rates has widened since second quarter, and the flight to safety has intensified.  These conditions suggest a potential quarter-to-quarter sales increase of about 10%,” said Jeremy Alexander, CEO of Beacon Research.

“Actual results will depend on the capacity and willingness of issuers to write new business, of course. Longer term, we also expect rising demand to support growth in fixed annuity sales. The public will be more risk-averse for some time to come, there is wide recognition of the need to save for retirement, and the value of tax deferral seems likely to increase.”  

There were no quarter-to-quarter quarter changes in top five company rankings, which were as follows:

Total Fixed Annuity Sales (in $thousands)

New York Life                                    1,740,520

Allianz Life                                         1,680,253

Aviva USA                                           1,613,045

Western National Life (AIG)          1,293,876

American Equity Investment Life  1,046,737             

By product type, Western National replaced New York Life as the quarter’s dominant issuer of book value annuities.  American National led in MVA sales, replacing Hartford.  New York Life remained number one in income annuities, and Allianz continued as the leading indexed annuity issuer.

Four of second quarter’s top five products were also bestsellers in first quarter, though some rankings shifted. The Allianz MasterDex X, an indexed annuity, continued as the leading product. The New York Life Lifetime Income Annuity rose from fifth to second place. American Equity’s top indexed annuity, Retirement Gold, came in third again. The New York Life Preferred Fixed Annuity moved from second to fourth place. New Directions, an indexed annuity issued by Lincoln Financial Group, joined the top five in fifth place. Second quarter results include sales of some 425 products.

Rank      Company                  Product                                        Product Type

1            Allianz Life                      MasterDex X                                    Indexed

2            New York Life                NYL Lifetime Income Annuity     Income

3            American Equity           Retirement Gold                              Indexed

4            New York Life                NYL Preferred Fixed Annuity       Book Value

5            Lincoln Financial          New Directions                                 Indexed                                               

Three of these annuities also led distribution channel sales. All three were repeat performers, with MasterDex X the top independent producer product, the New York Life Preferred Fixed Annuity the bestseller in banks, and the New York Life Lifetime Income Annuity the leader in captive agent sales. In wirehouses, Pacific Life’s Pacific Explorer was the new sales leader. The NYL Select Five Fixed Annuity replaced another New York Life product in the large/regional broker-dealer channel. Among independent broker-dealers, MassMutual’s RetireEase income annuity led sales for the second quarter in a row.

Channel                      Company                    Product                                    Product Type

Banks and S&Ls            New York Life               NYL Preferred Fixed Annuity  Book Value           

Captive Agents              New York Life                NYL Lifetime Income Annuity Income                                                    

Independent B-Ds        MassMutual                  RetireEase                                     Income           

Ind. Producers              Allianz Life                    MasterDex X                                  Indexed

Large/Regional B-Ds   New York Life               NYL Select 5 Fixed Annuity       Book Value           

Wirehouses                   Pacific Life                     Pacific Explorer                             Book Value

© 2010 RIJ Publishing LLC. All rights reserved.

All-Star Cast Expected for DoL Hearing on In-Plan Income

The U. S. Department of Labor’s Employee Benefits Security Administration (EBSA) has released the agenda for the upcoming joint hearing with the Department of the Treasury on lifetime income options for retirement plans.

So far, 44 organizations, including major insurance companies, asset managers, consulting firms and trade groups, have asked to have their representatives testify. Scheduled to appear are several well-known figures in the retirement income industry, including David Wray of the Profit Sharing Council of America, Mark Warshawsky of Towers Watson, Kelli Hueler of Income Solutions, Vanguard’s Steve Utkus, Christine Marcks of Prudential Financial and many others.

Accompanying the agenda are copies of the witnesses’ requests to testify and testimony outlines. The hearing will begin at 9 a.m. (EST) on September 14 and 15, 2010 in the Labor Department’s main auditorium, 200 Constitution Avenue, NW in Washington, D.C.

A live webcast of the hearing will be available on EBSA’s Web site at www.dol.gov/ebsa.

The agenda and requests to testify are available on EBSA’s Web site at www.dol.gov/ebsa. Individuals planning to attend the hearing should provide contact information by email to [email protected] and arrive at least 15 minutes prior to the start of the hearing to expedite entrance into the building.

© 2010 RIJ Publishing LLC. All rights reserved.

ING Launches Newest Phase of its ‘Numbers’ Campaign

ING has rolled out ‘Life in Numbers,’ a new television commercial that represents the next phase of a two-year-old marketing campaign focused on motivating consumers to prepare for retirement and their financial future. The August 30 launch also coincides with ING’s elevation of a redesigned public website.

The ad will air on major broadcast and cable outlets during coverage of professional Grand Slam tennis in the U.S. In addition, the spot will run along with ‘Gazillion,’ a previous ad, on financial news stations and during network coverage of high-profile sporting events throughout the fall season, including professional golf and professional and collegiate football.

To complement the television commercial, ING will run targeted digital display ads on popular web sites. The media effort will include banners ads on finance sites, a paid search campaign and custom retirement planning news feeds on the www.INGYourNumber.com web tool.

Both television and digital advertising will drive interest to ING’s recently transformed public website, www.ing.com/us. The redesigned site provides a streamlined experience for all audiences seeking customized life stage products and services. Consumers starting out, raising a family or preparing for retirement can follow a simple and clear path to desired information, such as customer accounts, products offerings and ING’s self-service tools and calculators.

To view the commercial, visit http://ing.us/about-ing/newsroom/tv-commercials/life-numbers-tv-ad.

The ‘Life in Numbers’ spot portrays a series of key moments in one man’s life. As upbeat music plays, the main character rapidly enters and exits through doors to several different scenes in his life, stopping briefly to interact with someone or something along the way—at his job; on his wedding day; after the birth of a child; in his family’s new home; with his adult kids and their children.

Much of the commercial is filmed from an overhead perspective, offering only a glimpse of the framework within which these scenes are playing out—an oddly shaped hallway here, a curved partition there, and an occasional wall with the color orange.

In the final shot, the camera pulls back to reveal that all these events have taken place within the character’s retirement number, which has been on his desk at work all along. The young man looks down with satisfaction, and then caps the number with an orange lid. A narrator explains how life is full of little twists and turns, but that ING can help and that the first step is finding your number.

Past commercials have featured people carrying bright orange retirement numbers as they go about their daily lives. An interactive web tool, www.INGYourNumber.com, enables consumers to calculate their number. In 2009, the advertising evolved to reflect the volatile market conditions and emphasized the importance of protecting that number. This past February, ING unveiled a spot called ‘Gazillion,’ which communicated the importance of proactive planning and using your number as a strategy to prepare for future goals.

 © 2010 RIJ Publishing LLC. All rights reserved.

The Hartford Aims for Bigger Share of Mid-Sized DB, DC Market

The Hartford Financial Services Group, Inc. announced new sales and marketing initiatives, led by Denise Diana, aimed at capturing more of the mid-size 401(k) defined contribution and defined benefit retirement plan market—plans with $10 million to $100 million in assets.

As vice president, Retirement Plans Mid-Market, Diana will create a new team of middle market specialists to support financial advisors, Registered Investment Advisors and consultants, and identify mid-market development opportunities, the company said in a release.

“The Hartford has been building its considerable capabilities to serve the middle market for some time, including three strategic acquisitions that expanded our scale and core competencies,” said Sharon Ritchey, executive vice president and director of The Hartford’s Retirement Plans Group.

In September, The Hartford is launching a series of forums for advisors that will unveil new research on retirement plan sponsors’ and participants’ evolving needs, and new approaches in meeting them.

The forums, “A Dose of Reality: Strong, No Sugar,” will consist of practice management modules and insights into The Hartford’s new middle-market initiatives. The seminars will take place in Boston, Atlanta, Irving, Texas, and San Francisco. Diana and other executives from The Hartford’s Retirement Plans Group will be on hand.

Diana has 20 years of experience in the insurance industry, most recently from Transamerica where she was vice president of business development. She has also held key leadership positions at Prudential Retirement and CIGNA.  She is a graduate of Bryant College where she earned a BS with a concentration in marketing, and holds FINRA series 26, 7 and 66 licenses, and a Connecticut Life and Health Producer license.

© 2010 RIJ Publishing LLC. All rights reserved.

My Tailor, My Fiduciary

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. 

© 2010 RIJ Publishing LLC. All rights reserved.

Why We Need The Fiduciary Standard

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.

© 2010 RIJ Publishing LLC. All rights reserved.

Imperfect Harmony

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.)

© 2010 RIJ Publishing LLC. All rights reserved.

A Snapshot of U.S. Household Debt

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.

© 2010 RIJ Publishing LLC. All rights reserved.

Dutch Pensioners in a Panic

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.”  

© 2010 RIJ Publishing LLC. All rights reserved.

New SALB Launched By Investors Capital Corp.

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.  

© 2010 RIJ Publishing LLC. All rights reserved.

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

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. 

© 2010 RIJ Publishing LLC. All rights reserved.

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

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.

© 2010 RIJ Publishing LLC. All rights reserved.

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.