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Mixed forecast for active ETFs: Cerulli

Posted on December 12, 2019 by -

Non-transparent exchange-traded funds (ETFs) are gaining product development mindshare, but whether they prove an attractive distribution opportunity will depend on the products that firms choose to launch and the pricing strategies they pursue.

According to a new report from Cerulli Associates, U.S. Exchange-Traded Fund Markets 2019: Expanding Beyond Passive, the majority (80%) of ETF issuers estimate that non-transparent ETFs will gather between $1 billion and $100 billion by 2025, suggesting that these products will take time to gain traction.

The U.S. ETF industry continues to expand, but its growth rate has slowed. Assets grew at a compound annual rate (CAGR) of 15% over the five years ending in December 2018, but industry revenues grew only 11% annually on average over the same period.

Intense competition, particularly amongst the most commoditized products, has made launching passive ETFs less attractive to all but the largest firms. ETF issuers polled by Cerulli in 2019 were significantly more likely to report at least moderate impact on their firm’s margins due to industry fee compression (46% report moderate impact in 2019 vs. 25% in 2018).

As a result of both fee compression and product proliferation, ETF issuers are increasingly looking to develop more active products that can earn higher fee revenues. At the same time, traditional active managers are interested in entering the ETF landscape (active mutual funds overall have suffered outflows since 2015). But equity managers who want to conceal their holdings (to maintain strategy confidentiality) are wary of the transparency of the ETF vehicle.

Non-transparent ETF structures provide a solution for firms that want to offer active strategies in the ETF wrapper but not divulge holdings. According to Cerulli’s research, almost half of issuers state that they are currently developing (20%) or planning to develop (27%) non-transparent active ETF products. That would mean a momentous shift in a market where only about 2% of assets are currently actively managed.

Some of the largest asset managers are either signing non-transparent structure licensing agreements or launching their own. “Nontransparent active ETFs are a logical progression as the existing ETF market moves beyond passive exposures,” said Daniil Shapiro, associate director of product development at Cerulli Associates, in a release this week.

“It’s likely that more active products will provide a more lucrative battleground for ETF sponsors, with the average issuer reporting that they expect to earn a greater share of fees from more active offerings in several years,” he added.

Cerulli believes that non-transparent ETFs will gain traction, but that their adoption will be highly nuanced. Product choice and pricing will be the most significant challenges for asset managers to overcome. “Assuming that the non-transparent structures and associated infrastructure [support] their strategies, asset managers will have to decide whether their newly launched products should be clones, differentiated versions, or entirely different products when compared to their existing offerings,” according to Shapiro.

Concerns about over-saturating distribution partners and the cannibalization of existing products will affect their decisions. “Asset managers will find it difficult to offer their best products at an attractive price,” he said. “Low costs are a key success tenet for ETFs, so managers risk creating a self-fulfilling prophecy where launched products are slow to gain traction.”

© 2019 Cerulli Associates. Used by permission.

YTD annuity sales up 7.5% over 2018: IRI

Posted on December 12, 2019 by -

Combined sales of fixed and variable annuities sales fell 8.4% in the third quarter of 2019, to $55.7 billion from $60.8 billion in the second quarter of 2019, according to the Insured Retirement Institute (IRI), which used data reported by Beacon Annuity Solutions and Morningstar, Inc.

Sales were on par with year-ago levels, down 0.4% from total annuity sales of $55.9 billion in the third quarter of 2018. Annuity sales for the first three quarters of 2019 totaled $174.3 billion, up 7.5% from $162.2 billion for the same period in 2018.

Fixed annuity sales highlights
  • $30.1 billion – 2019 third quarter fixed annuity sales
  • 16% decrease from second quarter sales of $35.8 billion
  • 5% lower than 2018 third quarter sales of $31.8 billion
  • $101.8 billion – fixed annuity sales in the year-to-date period ending September 30, 2019
  • 1% increase over sales of $89.2 billion in the year-to-date period ending September 30, 2019
Variable annuity sales
  • $25.6 billion – 2019 third quarter variable annuity sales
  • Up 2.4% versus 2019 second quarter sales of $25.0 billion
  • 2% higher than 2018 third quarter VA sales of $24.1 billion
  • $72.5 billion – variable annuity sales in the first three quarters of 2019
  • Down 0.7% from 2018 sales of $73.0 billion in the first three quarters of 2018

According to Beacon Annuity Solutions, fixed annuity sales are off recent highs, but fixed indexed and market value-adjusted annuities are higher than in the same period last year. In other highlights:

  • $18.2 billion – fixed indexed annuity sales fell 9% from second quarter 2019 sales of $20.0 billion but rose slightly from 2018 third quarter sales of $18.0 billion
  • $4.1 billion – Book value annuity sales fell 43.3% from $7.2 billion in the second quarter of 2019 and were 41.0% lower than 2018 third quarter sales of $7.0 billion
  • $5.0 billion – Market value adjusted (MVA) annuity sales were down 3.8% from 2019 second quarter sales of $5.2 billion but up 22% from third quarter 2018 sales of $4.1 billion
  • $2.7 billion – Income annuity sales fell 18.1% from second quarter sales of $3.3 billion and were flat compared with third quarter 2018 sales of $2.7 billion

For the entire fixed annuity market, there were approximately $17.4 billion in qualified sales and $12.7 billion in non-qualified sales during the third quarter of 2019.

“The inverted yield curve, along with declining corporate bond yields, continued to apply downward pressure on overall third quarter fixed annuity sales,” said Beacon Annuity Solutions CEO Jeremy Alexander.

“In addition, fixed indexed annuities suffered from higher hedging costs due to market volatility. We anticipate next quarter sales to be flat with an upward bias given the steepening yield curve, as well as rising corporate bond rates and lower market volatility.”

According to Morningstar, variable annuity net assets fell in the third quarter on lower investment returns and negative net asset flows. Highlights included:

  • $1.95 trillion – Variable annuity assets fell 0.5% from $1.96 trillion in the second quarter of 2019.
  • Allocation funds held $796.8 billion in VA assets, or 40.9% of the total, falling below the $800 million mark.
  • Equity funds held $597.0 billion, or 30.7% of total VA assets.
  • Fixed accounts held $351.2 billion, or 18.0% of VA assets.

Net asset flows in variable annuities were a negative $21.4 billion in the third quarter, worse than negative $20.4 in the second quarter but better than outflows of $24.8 billion in the first quarter. Within the variable annuity market, there were $16.7 billion in qualified sales and $8.9 billion in non-qualified sales during the third quarter of 2019.

“Structured annuities continued to gain market share in the VA space,” said Michael Manetta, Senior Quantitative Analyst at Morningstar. “More than a decade after a significant stock market correction, this growth likely reflects investor interest in products that offer downside protection to the account value.”

© 2019 RIJ Publishing LLC. All rights reserved.

A Few of Our Best Income Strategies

Posted on December 12, 2019 by -

Bill Sharpe, the Nobel Prize-winning economist, once described retirement income planning as the most complicated financial problem he’s ever faced. There are “up to 100, 200 parameters that you’ve got to nail down before you can find an optimum strategy,” he said in a 2014 interview.

At Retirement Income Journal, we report on many of the different strategies that advisers can use to tackle this Rubik-ian challenge. We’re receptive to any approach, but we favor techniques that blend guaranteed sources of income and risky investments in the same retirement portfolio.

For today’s issue of RIJ, we’ve retrieved several of the best income-planning articles from our archives. (Synopses and links can be found below.) In each case, the adviser goes beyond the “safe withdrawal” method to design a customized, outcome-driven solution for the client.

Income plan for two well-funded therapists

“Andrew” and “Laura,” married psychotherapists in their early 60s with a combined annual income of $300,000, hoped to retire in a few years with an income of about $140,000, consisting of their Social Security benefits, Laura’s pension, and about $77,000 a year in withdrawals from their $1.24 million portfolio.

Their adviser, Bill Lonier of Osprey, FL, believed that such a high drawdown rate (6.2%) could exhaust their savings in only 18 years. He recommended that they build a 30-year ladder of Treasury Inflation Protected Securities for essential income and re-characterize $30,000 of their spending needs as “discretionary” (contingent on favorable markets) instead of “essential.”

To reduce Andrew and Laura’s “longevity risk,” Lonier advised them to buy a joint-life qualified longevity annuity contract (QLAC) with 10% of their investable assets. To give them an alternative source of cash during future market downturns, he also advised them to open (but not tap) a home equity line-of-credit.

Jim Otar’s Advice for ‘Andrew’ and ‘Laura’

When assessing new clients, Jim Otar, the creator of the Retirement Optimizer, categorizes them either as “green zone,” “yellow zone,” or “red zone” retirees. Green-zone retirees have enough assets to cover their expenses throughout retirement, come good markets or bad. Red-zone retirees will most likely run out of money unless they purchase income-generating annuities. Yellow-zone retirees require creativity on the part of their advisers if they hope to realize their goals and avoid misfortune.

Otar quickly identified Andrew and Laura as Green zoners, so he recommended no annuities or bond ladders for them. Instead, he took note of the fact that they owned two homes worth a combined $1.8 million (bringing their current net worth to more than $3 million). He suggested that they cover their expenses by spending $50,000 a year from their $1.24 million investment portfolio and their combined $72,000 in Social Security benefits (at age 70).

If equity markets performed badly and the couple appeared likely to live into their 90s, Otar, a Canadian who is now retired, suggested that they make up any shortage of liquidity by, for instance, selling one of their homes and moving into the other. In the meantime, he suggested that they put 58% of their investable assets into equities, 39% into bonds and 3% into cash.

Income plan for a couple with $750,000

Jerry Golden, CEO of Golden Retirement, a Manhattan-based advisory firm, was asked to create an income plan for the “M.T. Knestors,” a couple with $755,000 in savings. At 66, the husband intended to work for four more years and then claim Social Security benefits of $3,000 a month. His spouse, 60, was already retired.

In the first rough draft of a plan for the Knestors, Golden suggested that they receive retirement income from a combination of dividend stocks, annuities and systematic withdrawals from investments. He used $132,500 (the sum of 25% of each spouse’s IRA savings) to buy a QLAC that would provide income when each reaches age 85.

In addition, he recommended investing about $400,000 in a 50% stocks/50% bond portfolio to provide systematic withdrawal income for 15 years, until the QLAC income starts. For additional monthly income, he recommended putting about $170,000 of after-tax savings in dividend-bearing stocks. He allocated the remaining $56,000 in after-tax savings to an inflation-adjusted, joint-life, single premium immediate annuity (SPIA).

Safety First or Safety Last?

Are guaranteed monthly checks more important to retirees at the beginning of retirement, when systematic withdrawals and market volatility can combine to raise a client’s “sequence of returns” risk (the risk that a retiree will need to liquidate depressed assets for income)?

Or is guaranteed income more important at the end of retirement, when a history of good health habits can make a client vulnerable to longevity risk (the risk of outliving assets)?

In this hypothetical case, the clients, a 65-year-old married couple with $1 million in savings, only want to commit 25% of their savings to an income annuity. They’d also like to receive the income either early in retirement, when they plan to travel, or late in retirement, as a hedge against the risk of living longer than expected.

Their adviser points out that they could fund the first decade of retirement a 10-year bond ladder (or a 10-year period-certain SPIA) costing $250,000 and paying out about $28,000 a year, while spending up to $30,000 a year from their remaining savings of $750,000. Or they could use $250,000 to buy a deferred income annuity that pays $40,000 a year starting when they reach age 80, while taking withdrawals from their $750,000 in savings over the intervening 15 years.

In a presentation at the Investments & Wealth Institute Conference for retirement income specialists in 2018, advisers Dana Anspach, of Sensible Money, and Asset Dedication’s Brent Burns and Stephen Huxley, recommended using a bond ladder for essential income in the first 10 years of retirement and investing other money in an asset class with a history of benefiting from a 10-year time horizon, such as small-cap value funds. The choice of strategy might depend most on the client, and which gives him or her more peace of mind: protection from investment risk or protection from longevity risk.

Bill Sharpe’s ‘Lockbox Strategy’

In his proprietary ‘Lockbox’ software, Nobel laureate Bill Sharpe divides retirement into two periods. During the first period, starting at the retirement date, a retired couple takes withdrawals from an investment portfolio. In one of his examples, the first period lasts 19 years and consumes 64% of savings. In the second period, if the retirees are still living, they buy an income annuity with the remaining 36%. Each year of the systematic withdrawal period is represented by a “lockbox.”

Each lockbox contains a certain portion of Treasury Inflation-Protected Securities (TIPS) and a share in an investment portfolio consisting of ultra-low-cost total market stock and bond index funds.

“The idea is to provide the discipline to say to yourself, ‘I will only cash the number of shares in this year’s lockbox,’ he said in an interview. “Obviously, the lockboxes aren’t really locked. If you have an emergency, you can take money out. You still have the key.” The asset allocation depends on the client’s appetite or capacity for risk.

“For implementation, you’d buy a certain number of TIPS, and a certain number of mutual fund shares,” Sharpe told RIJ. “You build a spreadsheet with one column for the initial amount in TIPS and another column for the amount in a risky portfolio. Then you would multiply the number of TIPS and shares for each lockbox by their current values and figure out what they’re worth in each period. Once a year, you would sell off that year’s portions of the two at their current price. It’s an accounting/spreadsheet task.”

In the 20th year of retirement—i.e., at age 85, which roughly corresponds to the average life expectancy of an affluent 65-year-old American—the couple, if living, buys a joint-and-survivor fixed life annuity. For the sake of liquidity, flexibility, and cost-reduction, they might prefer to make the annuity purchase an option, rather than buying an immediate or deferred annuity at retirement.

© 2019 RIJ Publishing LLC. All rights reserved.

In Defense of ‘Buffered’ Annuities

Posted on December 12, 2019 by -

As the annuity industry celebrated record sales of structured, or “buffered,” index annuities last week ($12.5 billion in the first three-quarters of 2019, according to the LIMRA Secure Retirement Institute), the Wall Street Journal published a tepid review about the whole category of registered index-linked annuities.

The December 6 article, which called structured annuities “An Imperfect Solution to a Calamity,” was, like the low interest rate environment of the past decade, a bit unfair to annuity issuers. The two are related. (On the web, the article was titled, “What Nervous Investors are Buying to Feel Brave”.)

By reducing the fed funds rate to nearly zero in the Great Financial Crisis, the Fed pinched the annuity industry’s oxygen hose. That decision made sense at the time. Low rates helped support the prices of existing bonds, flooded banks with liquidity, and financed a stock market rebound.

But it occurred just as the market for guaranteed income products was blossoming and it greatly reduced the yields that life insurers use to make the benefits of those products attractive to retirees and near-retirees. In 2009, I asked the largest writer of single premium income annuities how long he thought the life insurers could endure such conditions. “Five years,” he said.

Don’t get me wrong. A rising stock market and easy credit helps the entire economy. And life insurers have found ways to survive the interest-rate drought. They’ve invested in BBB bonds and mortgage-backed securities. More to the point, they’ve relied increasingly on products that get their juice indirectly from the equities markets. As variable annuity subaccounts have grown (to $1.95 trillion), they’ve generated more asset-based fees. As stock indices have risen, index-linked annuities have enjoyed rising sales.

But this strategy plays to the strengths of asset managers, not to the strengths of annuity issuers. It also encourages journalists to frame annuities as over-priced investments or as inadequate protection. Which brings us back to the Journal’s article.

The column begins, “One of Wall Street’s hottest investments lets you participate in most of the gains on stocks while sidestepping some of the losses.” From this statement on, structured products are at a disadvantage.

First, Wall Street may create the structured annuity’s derivative strategies, but index-linked annuities are more likely to come from Des Moines, Minneapolis, Cincinnati, Philadelphia and Columbus. Second, structured annuities aren’t investments. They’re insurance products. Investments convey risk to people. Insurance products transfer risk to insurance companies. It’s burritos and hoagies. No comparison.

Third, the article says that structured annuities “encourage gun-shy investors to keep some money in the stock market.” Owners of structured annuities don’t have money in the stock market. They buy options on equity indices, and the options expire at the end of each term.

Further down in the story, we arrive at a more vital issue. Zweig notices something strange about the downside “buffer” that so many structured annuities offer. He’s right. It’s counter-intuitive. When this product type was first introduced eight years ago, the SEC, too, thought it strange (before approving it). In a structured annuity with a buffer (as opposed to a “floor”), the insurance company absorbs the initial 10% or 20% of losses while the contract owner absorbs the net loss beyond that. Yes, it exposes the owner, not the life insurer, to the tail risk.

This dour, man-bites-dog observation drives the headline of the story. (It also inspired the illustration that accompanies the story: A large man, standing waist-deep in the ocean, is wearing an inadequate, child-size life vest while a version of “The Great Wave” looms behind him.) The implied lesson for Journal readers is that structured annuities are the worst of both worlds—weak growth potential and weak protection—rather than the best of both worlds, as annuity issuers try hard to frame them.

But the article should have explained that there are versions of these products that offer “floors,” which resemble traditional insurance deductibles. A floor stops a contract owner’s losses at five, 10 or 20 percent. It might also have mentioned the reason why life insurers sell more buffered structured annuities than floor versions. (I could not find data on sales of the two.)

A buffer is cheaper to buy than a floor, which means that buffered annuities can afford higher caps than floor annuities. Investors like higher caps.  The last time I compared the caps on floor-based structured annuities with the caps on buffer-based structured annuities, the buffer caps were about 2.5 percentage points higher for each of the indices.

There’s other contextual information that the article might have provided. It might have compared structured annuities favorably with structured notes, their after-tax, non-insurance, derivative-driven cousins. It might have mentioned that structured annuities offer much more upside potential than fixed indexed annuities, which promise zero loss of principal if held to term.

The Journal article closed with an aside that we in the annuity industry hear a lot. “Insurance companies and financial advisers make a lot of money selling these products,” it said. Yes, they make money. That’s why they’re in business. But they surely don’t make as much as the equity industry has made over the last decade, thanks largely to the same low interest rate environment that makes life tough for annuities.

© 2019 RIJ Publishing LLC. All rights reserved.

Prudential Joins the SIMON Platform

Posted on December 5, 2019 by -

Prudential is a late-comer to the fixed indexed annuity (FIA) party that’s been in progress for the past several years, but—perhaps for that reason—the carrier’s PruSecure FIA recently became the first FIA contract offered on the SIMON structured products platform.

Prudential is also an investor in SIMON, a virtual wholesaling platform for structured notes and index-linked annuities. The other investors include (since December 2018) leading structured notes manufacturers like Goldman Sachs, Barclays, Credit Suisse NEXT, HSBC, J.P. Morgan and Wells Fargo.

SIMON’s owners hope that wealth managers and investment advisers at participating broker-dealers (Raymond James is already on board) can use its platform to learn about, compare, back-test, select, and manage their purchases of index-linked products. The product manufacturers, who also sit on SIMON’s board, pay SIMON a fee based on sales flow.

Kathy Leckey

RIJ spoke recently with Kathy Leckey, vice president and head of Strategic Distribution, Individual Solutions Group, at Prudential Financial, about the timing of Prudential’s decision to join SIMON. [See the feature story on SIMON in today’s issue of RIJ.]

Just when SIMON came along, her company was in the process of reducing its reliance on its long-time cash cow, variable deferred annuities.

“We had 95% of our assets in variable annuities a few years ago, and we were happy to be focused on that business. But we want to diversify our mix. Our peers are doing the same thing. SIMON approached us to see if we had an interest. We had a lot of interest.

“We got into the FIA business before we started working with SIMON, but it became one more reason for us to diversify our product mix,” she said. “SIMON will help us distribute our fixed indexed annuity, and maybe eventually a structured annuity.”

“Our challenge is, ‘How do we make this complex product simpler? How do we get new producers [advisers] who wouldn’t have sold an annuity in the past?’ We decided that we needed to use technology to help tell the FIA story in a different way.”

SIMON appears to be one answer. “The people at SIMON found a way to make complex products simpler for advisers who haven’t sold indexed annuities before or for retail clients who are unfamiliar with them,” Leckey said. “They’ve created a platform that lets advisers customize their investment and gives them best-in-class education and training.”

Life insurers are still struggling to tell the annuity story to investment advisers, and they’re turning to digital platforms. “I call these platforms, ‘technology distribution,’” she said. “Others call it ‘non-traditional channels.’ Advisers don’t necessarily have time to read brochures. And you’re not sending paper anymore.

“We’re trying to get annuities to resonate with more advisers. Especially with the SEC Best Interest rule coming down, advisers need to have more holistic conversations about retirement income. But how do we tell our story in a more cohesive way? How do we explain not only the product but also the process. The process itself has to be better if it’s going to help sell our product.”

Of the capabilities on the SIMON platform, Leckey singled out its post-sale services for praise. As one feature available for structured notes and being built out for annuities, SIMON reminds advisers to revisit an in-force contract to determine if owning it is still in the client’s best interest.

“The client might be holding the product for up to seven or eight years,” she said. “He or she may not even remember why they bought it. There may be no tangible results to show them yet, but there still needs to be a conversation along the way. You want to have a more transparent process.”

In a sense, SIMON serves as a wholesaler that’s always present but never intrusive. “If the financial adviser has SIMON, he or she can turn on SIMON. The adviser may already be using SIMON on the structured notes side of the house. It’s different from a wholesaler coming and giving the adviser a pitch. Then, when a wholesaler and an adviser do meet, they won’t be coming cold to their meeting. They can have a different kind of conversation.”

© 2019 RIJ Publishing LLC. All rights reserved.

‘SIMON’ Makes Indexed Annuities Simpler

Posted on December 5, 2019 by -

Structured notes and indexed annuities don’t ordinarily mingle. Structured notes are after-tax securities built by investment banks for high net worth clients of wealth managers at wirehouses and private banks. FIAs are tax-deferred products built by life insurers for clients of insurance agents and advisers at independent broker dealers.

But on the SIMON platform, they do mingle. Backed by major financial institutions who issue structured notes—including Barclays, Credit Suisse, Goldman Sachs, HSBC, J.P. Morgan, and Wells Fargo—SIMON recently branched out to include indexed annuities, adding products from Prudential, its only insurance carrier investor.

There’s a certain logic to offering both types of products in the same place. Indexed annuities and structured notes are both “structured.” That is, both use derivatives to make guarded, time-limited bets on specific segments of the equity markets. Both are complex, opaque and both, at times, have drawn regulatory scrutiny. Both respond to the public’s demand for investments that are safer than stocks but yield more than bonds.

Jason Broder

“When we asked ourselves how SIMON could become a more holistic provider, the natural extension was to annuities—specifically indexed annuities,” SIMON CEO Jason Broder told RIJ. “SIMON will be a single place where an adviser can come for risk-managed solutions.” (SIMON’s structured notes business is called SIMON Markets LLC; the annuity business is called SIMON Annuities and Insurance Services LLC.)

SIMON’s head of distribution, Scott Beshany, calls it a “digital annuities marketplace,” that supports a bank’s structured note desk and a life insurer’s team of annuity wholesalers.

The first broker-dealer to integrate with SIMON has been Raymond James, which already used SIMON for structured notes. Prudential’s PruSecure is the platform’s first indexed annuity offering, and its first structured variable annuity (aka registered index-linked annuity, or RILA) offering is Great American’s Index Summit 6. More are expected to follow.

Democratizing structured products

In classic tech-startup fashion, SIMON is headquartered in a WeWork co-working space in Chelsea, a fast-changing, gentrified neighborhood on Manhattan’s lower west side. (The loft-style offices of Betterment, the $16 billion robo-advisor, are only a block away from SIMON.)

On an afternoon last September, several members of SIMON’s leadership team squeezed around a table in one of WeWork’s tiny conference rooms: Broder; chief operating officer Timur Kocaoglu; chief business development officer Joseph Giordano—all formerly of Goldman Sachs; and Beshany, a veteran of InCapital and BBVA Compass.

Broder, who previously led the Goldman Sachs Private Investor Products group, said that the idea for SIMON began in October 2012, when the financial services giant decided to spin its structured notes desk off as an independent web-based business, offering a virtual structured notes desk to broker-dealers, potentially expanding the market (about $48 billion in the U.S. in 2018).

“We saw an opportunity to take a model that required 30 or 35 professionals and scale that by using a technology platform. That’s how we set out to build SIMON,” Broder said.

But broker-dealers, not surprisingly, wanted a choice of notes from competing issuers. So Goldman Sachs invited other top-tier structured notes manufacturers to join the SIMON platform. Barclays, Credit Suisse HSBC, J.P. Morgan and Wells Fargo all invested and put their products on SIMON’s shelf in late 2018. Today, SIMON makes structured products from 15 financial institutions accessible to 30,000 advisers with more than $3 trillion in assets under management.

Enter indexed annuities

The idea for putting indexed annuities on the SIMON platform came up after Raymond James, a major distributor of annuities, started using SIMON for structured notes.

Scott Beshany

“SIMON had been going down the annuity path for some time,” Beshany told RIJ. “But Raymond James was the first among the firms in our existing distribution network for structured investments who wanted to see a mandate for annuities on our platform. Raymond James was the broker-dealer most integrated with the SIMON structured notes platform. Scott Stolz, the president of Raymond James Insurance Group, saw that it would be a big win for advisors in the annuity space if we could replicate our services for annuities.”

Annuities create a number of sales hurdles for wealth managers and investment advisers at broker-dealers. Advisers learn about products haphazardly, from one wholesaler at a time, and need specific training and certification to sell annuities. Different annuity providers use idiosyncratic vocabulary.

When their clients own an annuity, the adviser typically has to “hold it away” on a separate platform from investments. Over the three- to 10-year life of an FIA contract, an adviser may neglect to ensure that the contract still suits the owners. These time-consuming bottlenecks discourage many advisers from recommending annuities at all.

SIMON’s stated intention from the start has been to educate financial advisors around risk-managed solutions. To that end, it offers both general and product-specific education materials, it links advisers to the training they need, it allows advisers to back-test the performance of various products, and it alerts advisers to service the products after they’re sold.

The system documents all of these activities, helping advisers stay compliant with a regulatory burden that’s only expected to get heavier. “SIMON solves the same problems for structured notes that I have with annuities,” Stolz told RIJ. “For instance, one big NIGO [a “not in good order” application is one with errors that make it boomerang back to the adviser from the carrier] for us is not knowing if an adviser has had the training necessary to sell a certain type of product.”

“Sometimes the adviser hasn’t completed product-specific training, but there is no system in place to tell the advisor’s home office or the life insurer,” added Broder. “Now training can be linked and tracked on SIMON, and education is offered where the product is sold.”

SIMON’s flashiest tool for advisers who sell index annuities is a proprietary algorithm that helps an adviser to identify what has historically been the most optimal allocation among the four or five indices that are available within a given contract.

“We’ve heard that 50% to 60% of the money that goes into indexed annuities goes into the S&P 500 Index with a one-year point-to-point crediting method,” Beshany said. “Why is that the case? Is it the best performing allocation? The advisers are often left to figure that out on their own. Eventually you’ll have to explain your decision to the client. SIMON is giving the advisor the tools to help answer those questions”

Prudential’s PruSecure FIA, the first FIA on the SIMON platform, has five- and seven-year terms and indices linked to real estate (Dow Jones Real Estate), commodities (Bloomberg Commodities) and global (MSCI-Europe, Australasia-Far East) indices, as well as the S&P500 Index of large-cap U.S. stocks.

Competition and cooperation

Several companies have appeared this year to provide “technology distribution” services that automate traditional annuity wholesaling. Like SIMON, Halo Investing is a structured note platform that recently began adding index annuities. Last April, Chicago-based Halo received a chunk of investment capital from Allianz Life Ventures, which is owned by Allianz Life, the top seller of indexed annuities in the U.S. for more than a decade.

Halo claims to be the largest structured notes platform in the U.S. and one of the largest in the world, providing notes from 27 issuers, according to Jason Barsema, its co-founder and president. It expects to begin offering index annuities from Allianz Life and other carriers to independent RIA customers in 2020.

Jason Barsema

“Advisers want some level of protection for their clients, and whether you call it an annuity from a life insurer or a structured note from an investment bank, it’s the same type of product. They both suffer from the same problem: complexity and non-transparency,” Barsema told RIJ. “I think of everything as ski slopes. Annuities are good for the ‘blue’ and ‘green’ trails. Structured notes are for the black diamond and double-black diamond trails.”

SIMON and Halo use very different business models. Halo mainly serves RIAs (but plans eventually to pitch to broker-dealers). The firm has no manufacturers on its board, he said—not even Allianz Life—in order to eliminate a potential conflict of interest.

“We’re built for the buy-side,” Barsema said. “My co-founder [Halo CEO Biju Kulathakal], was a co-founder of Redbox, which distributes videos and games through kiosks. The message there was, ‘You have to take control away from the manufacturers. A market dominated by manufacturers isn’t democratic or independent. It’s not as competitive. We said, ‘We’ll be built for the buy-side.’”

“Expanding their offering with FIAs and structured annuities makes sense for both Halo and SIMON. It will help them serve the needs of investors whose appetite for risk might demand a similar, but more conservative risk management solution than structured notes,” said David Stone, CEO of RetireOne, an insurance and annuity back office for more than 900 RIAs.

Another platform that facilitates the sale of annuities is DPL Financial Partners, where RIAs can buy no-commission index annuities and life insurance assisted by insurance-licensed, index annuity-certified intermediaries who try to educate rather than sell, according to DPL founder David Lau, who was the first chief operating officer of Jefferson National Life (now Nationwide Advisory Solutions), which pioneered the successful marketing of no-load variable annuities to RIAs on the Internet.

“We’re more at the front-end of the annuity sales process,” Lau told RIJ. “We can make sure that an annuity is in an RIA’s financial planning software, but that’s not a deep integration. SIMON offers more help with product selection than we do, and they do a backend integration that’s goes deeper into the broker-dealer platforms and integrates products that would otherwise be held away.” Envestnet’s FIDx platform also offers annuities and insurance to RIAs.

Structured annuities are next

SIMON is in talks with more index annuity issuers. It is reportedly in the process of adding its first structured variable annuity, or RILA. Joe Maringer, national sales vice president of Great American Insurance Group, told RIJ this week that his Summit 6 product has joined the SIMON platform.

Structured annuities, or RILAs, which some call registered index-linked annuities, may be a more natural fit for wealth managers who are looking for a tax-deferred version of a structured note. Because RILAs expose investors to a marginal risk of loss—in the form of “buffers” or “floors”—they can offer more upside potential than FIAs, which offer principal guarantees if held to maturity. “SIMON will have more application on the structured annuities side,” Stolz said.

Broder has great expectations for SIMON, which in theory could eventually be available to any financial professional, at any wirehouse or broker-dealer in the U.S. “There are 310,000 financial advisers in the U.S.,” he told RIJ. “ We’d like to target all of them.”

© 2019 RIJ Publishing LLC. All rights reserved.

 

Investors flock to low-yield money funds

Posted on December 5, 2019 by -

The Federal Reserve cut rates at the end of October for the third time in 2019. Historically, rate cuts have pushed investors out of money market funds and into riskier assets, often in search of yield given how low rates are. On Oct. 31, the 10-year Treasury bond had a yield of just 1.74%, according to the Morningstar U.S. Fund Flows Report for October 2019.

But mutual fund and ETF investors continued cutting risk rather than adding it. They contributed $75.3 billion to money market funds in October while investing far less, $29.0 billion, in long-term funds. And even though the Fed’s target rate has now dropped 75 basis points since the end of July, money market funds collected $220.9 billion during the subsequent three months. Meanwhile, long-term funds collected just $57.2 billion.

Highlights from the Fund Flows Report include:

  • The Federal Reserve cut rates at the end of October for the third time in 2019, but despite lower yields, money market inflows still overwhelmed long-term inflows, $75.3 billion versus $29.0 billion.
  • Investors continue to cut risk, with taxable-bond and municipal bond funds the only long-term groups receiving significant inflows: $41.5 billion and $8.4 billion, respectively.
  • In another indication of risk-aversion, investors contributed $40.4 billion to the least-volatile quartile of long-term funds while pulling $14.3 billion from the most-volatile quartile.
  • S. equity funds had outflows of $14.8 billion, taking year-to-date outflows to $36.4 billion. Despite one of the longest bull markets in history, investors have contributed just $59.8 billion to U.S. equity funds over the past 10 years.
  • Vanguard had modest inflows of $9.9 billion, but its total open-end and exchange-traded fund assets passed $5 trillion. Vanguard’s 25.6% market share is greater than that of its next three biggest competitors combined.

© 2019 Morningstar, Inc. Used by permission.

Big BBB debt rollover is just three years away: A.M. Best

Posted on December 5, 2019 by -

By year-end 2022, $2.5 trillion of the debt of U.S. investment-grade corporations will mature, accounting for roughly half the U.S. investment-grade corporate bond market. Of those maturing bonds, 34% is rated BBB, according to a new AM Best Special Report.

“Given that these bonds must be refinanced or repaid by then, close attention should be paid in the next few years to the interest rate environment, credit spreads and ratings issued to bonds,” the ratings agency warned in a press release this week.

The Best’s Special Report, “U.S. Life/Annuity Insurers’ BBB Bond Exposures Continue to Grow,” notes that the U.S. life/annuity industry has increased its bond allocations to NAIC Class 2 Securities markedly over the last decade, to more than 34% of overall holdings from 27% in 2009, as current market trends remain attractive for BBB debt issuance.

The prolonged low interest rate environment remains conducive for debt issuance, and debt issuance by non-cyclical consumer-focused industries (e.g., pharmaceuticals, telecommunications, cable, utilities, technology, food and beverage and health care) has been growing.

But AM Best believes that the next downturn will be characterized more by ratings transitions than large-scale impairments, because those industries often remain resilient during economic downturns. Their stable cash flows could mitigate concern about BBB bonds’ greater sensitivity to credit deterioration.

Life/annuity insurers with higher BBB bond exposures are writing in very competitive lines of business, for which yield enhancement is important. These insurers have consistently held the highest percentage of Class 2 bonds (rated the equivalent of BBB+ to BBB-). Their allocation to Class 2 bonds remains weighted toward the BBB category, these holdings have declined in more-recent years to 43% in 2018 from 51% in 2013.

Allocations to the BBB+ and BBB- categories have increased by roughly similar percentages of the BBB drop, to 34.1% and 23.2%, respectively, in 2018, for life/annuity insurers. During the same 2009-2018 time frame, U.S. property/casualty and health segments also have increased the holdings of BBB debt to approximately 16% from the 8-9% range.

AM Best considers Class 2 bond exposures in the balance-sheet strength and operating performance assessments of its rating process. Liquidity risks also need to be considered, particularly as blocks of business age and policyholder behavior trends emerge from what was expected. As the products being sold become less interest-rate-sensitive, AM Best anticipates that the level of BBB holdings will drop off.

© 2019 RIJ Publishing LLC. All rights reserved.

Structured annuity sales up 61% in 3Q2019, YoY: Wink Inc.

Posted on December 5, 2019 by -

Total sales for all deferred annuity products in the third quarter of 2019 was $55.2 billion, a decline of 5.2% from the previous quarter, according to the 89th edition of Wink’s Sales & Market Report, issued November 26.

Total variable deferred annuity sales—including structured annuities and conventional variable deferred annuities—were $25.9 billion in the third quarter, up 3.4% from the previous quarter.

“Some may be surprised to see that variable-type products are increasing in sales where fixed product types are not,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink, Inc., in a release. “This is due to sales of structured annuities, the rising star of deferred annuity offerings.”

Sales of structured annuities, or registered index-linked annuities (RILAs), were $4.7 billion in the third quarter, up 15.8% from the previous quarter and up 60.7% from the third quarter of 2018. These products feature downside “buffers” or “floors” that reduce but don’t eliminate risk of loss. Depending on the contract, gains are linked to the growth of the S&P500 Index or other market indices, dividends excluded.

“Structured annuity sales continue to set records,” Moore said. “It is no wonder that we continue to see companies enter this line of business each quarter.” She noted that, almost nine years after structured annuities were introduced, their sales are now roughly equal to sales of FIAs in 2004, nine years after they were launched.

AXA US, the originator of structured annuities, ranked as the top seller of this product type in 3Q2019, with a market share of 27.2%. The Brighthouse Life Shield Level Select 6-Year was the top-selling structured annuity contract for the seventh consecutive quarter, for all distribution channels combined.

FIA sales drop 5%

Indexed annuity sales for the third quarter were $18.6 billion; down 5.1% from the previous quarter and up 5.5% from the same period last year. Indexed annuities protect against loss of principal when held to the end of their surrender periods. Their gains are linked to the performance of a market index, such as the S&P500 Index (dividends excluded).

“This was the second strongest quarter ever for indexed annuity sales, despite continued low interest rates and pricing challenges as a result of the market,” Moore said.

Allianz Life retained the lead in sales of indexed annuities, with a market share of 12.5%. Athene USA ranked second, followed by AIG, Nationwide, and Jackson National Life. Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity, for all channels combined, for the twenty-first consecutive quarter.

Jackson National Life ranked as the top seller of deferred annuities (fixed and variable), with a market share of 10.3%. Its Perspective II variable annuity was the top-selling deferred annuity and the top-selling variable deferred annuity for the third consecutive quarter. AIG, Allianz Life, Lincoln National Life, and Nationwide made up the rest of the top five deferred annuity issuers.

With a market share of 14.4%, Jackson National Life was also the top seller overall of variable deferred annuities. AXS US took second place, followed by Lincoln National Life, Prudential and Brighthouse Financial.

Total sales of non-variable deferred annuities, including fixed indexed annuities (FIAs), traditional fixed-rate annuities, and multi-year guaranteed annuities (MYGAs), were $29.2 billion in the third quarter of 2019, down 11.8% from the previous quarter and down 1.9% from the same period last year.

AIG was the top seller of non-variable deferred annuities, with a market share of 9.7%. Allianz Life moved into second place; its Allianz 222 indexed annuity was the top-selling non-variable deferred annuity, for all channels combined, for the 14th consecutive quarter. Jackson National Life, Athene USA, and Global Atlantic Financial Group filled out the top five sellers of non-variable deferred annuities.

Sharp drop in fixed-rate contracts

Traditional fixed annuity sales in the third quarter were $785.1 million; down 20.1% from the previous quarter, and down 13.6% from the same period last year. Traditional fixed annuities offer a fixed rate of return, guaranteed for one year.

Modern Woodman of America ranked as the top seller in fixed annuities, with a market share of 12.3%. Jackson National Life ranked second, followed by Global Atlantic Financial Group, Great American Insurance Group, and OneAmerica. Global Atlantic’s Life ForeCare contract was the top-selling fixed annuity for the second consecutive quarter, for all channels combined.

Sales of MYGAs in the third quarter were $9.7 billion, down 21.7% from the previous quarter, and down 13.0% from the same period last year. AIG was the top seller of MYGAs, with a market share of 13.1%. New York Life ranked second, followed by Global Atlantic, Jackson National Life, and Delaware Life. Jackson National’s Jackson RateProtector 3-Year contract was the top-selling MYGA for the quarter, for all channels combined.

Variable annuity sales in the third quarter were $21.2 billion, up 1% from the previous quarter. “It isn’t surprising to see an increase in variable annuity sales, given the recent market behavior,” Moore said.

Jackson National Life was the top seller of variable annuities, with a market share of 17.7%. Prudential ranked second, followed by Lincoln National Life, AXA US, and Nationwide. Jackson National’s Perspective II Flexible Premium Variable & Fixed Deferred Annuity was the top-selling variable annuity contract for the third consecutive quarter, for all channels combined.

Sixty-two indexed annuity providers, 50 fixed annuity providers, 68 multi-year guaranteed annuity (MYGA) providers, 11 structured annuity providers and 47 variable annuity providers participated in the survey.

Wink currently reports on indexed annuity, fixed annuity, multi-year guaranteed annuity, structured annuity, variable annuity, and multiple life insurance lines’ product sales. Sales reporting on additional product lines will follow at some point in the future.

© 2019 RIJ Publishing LLC. All rights reserved.

Wink, Inc. releases annuity sales data

Posted on November 28, 2019 by -

Deferred annuity sales for the second quarter of 2019 were up 6% over the previous quarter, according to the latest Wink’s Sales & Market Report.

Indexed annuity sales increased by 11% over the prior quarter and were up nearly 14% over the same period last year. Sales of traditional fixed annuity declined by nearly 10% over the prior quarter but rose more than 21% over the same period last year.

Multi-year guaranteed annuity (MYGA) sales increased by 15% over the prior quarter and were up nearly 20% over the same period last year. Structured annuity sales declined 15% from the prior quarter but were up nearly 20% over the same period last year.

Variable annuity sales increased nearly 17% over the prior quarter. (This is the second quarter that Wink has collected variable annuity sales. Additional comparisons will be available in future quarters.)

Based on Wink’s preliminary sales data, aggregated variable annuity sales for the second quarter increased nearly 17% over the prior quarter. Aggregated non-variable annuity sales for the second quarter were down just over 1% from the prior quarter, but up over 16% compared with the same period a year ago.

“Indexed annuity sales set a new record in the second quarter, beating their previous record in 4Q2018 by nearly 3%,” said Sheryl J. Moore, author of Wink’s Sales & Market Report. “Sales of variable and structured annuities increased nearly 20% each. It is a great time to be offering annuities with growth based on an outside benchmark,” she commented.

Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500. Traditional fixed annuities have a fixed rate that is guaranteed for one year only. MYGAs have a fixed rate that is guaranteed for more than one year.

Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccount. Variable annuities have no floor, and potential for gains/losses that is determined by the performance of the subaccounts that may be invested in an external index, stocks, bonds, commodities, or other investments.

These preliminary results are based on 94% of participation in Wink’s quarterly sales survey representing 97% of the total sales.

© RIJ Publishing LLC. All rights reserved.

Buttigieg’s plan to close the 401(k) coverage gap

Posted on November 28, 2019 by -

Democratic presidential candidate Pete Buttigieg has released an economic white paper with ideas for improving the retirement security of Americans. The reforms include measures to refinance Social Security, shrink the retirement plan “coverage gap” at small firms, and remove obstacles to the provision of home-based long-term care.

The 37-year-old mayor of South Bend, Indiana, led a public opinion poll last week in Iowa, site of the first (and largely symbolic) Democratic primary on February 3, 2020. Buttigieg surged ahead of Senators Elizabeth Warren (D-MA) and Bernie Sanders (D-VT) and former vice-president Joe Biden.

The main dish on his menu of reforms is an opt-in “Public Option 401(k)” at companies without retirement savings plans. The Buttigieg plan would borrow elements of the SIMPLE IRA, the auto-IRAs created in California and Oregon, and existing 401(k)s to ensure that any full-time “middle-earning American worker” can save at least $500,000 for retirement.

Here are brief descriptions of the elements of the Buttigieg Public Option 401(k):

  • Under the baseline savings plan, if participants contribute 1.5% of pay into a “Rainy Day Account,” the employer would contribute an additional 3% of pay into the worker’s “Retirement Account.” Workers can make additional contributions to either account, reduce their contributions, or opt out at any time.
  • Participants in the Public Option 401(k) can access their Rainy Day Account funds at any time, for any reason, and with no penalty. Retirement Account funds must be saved until old age, taking withdrawals only for disability, unemployment, family medical emergencies, a house down payment or educational expenses. These “safety valve withdrawals” will be capped for high earners.
  • The Public Option 401(k) will be available at large employers first. Employers who already offer a defined benefit pension or a defined contribution plan with a “sizeable employer match or otherwise successful and generous retirement package instead.” will be exempt from offering the Public Option 401(k).
  • Like current SIMPLE plans, the Public Option 401(k) will have a special maximum contribution. Workers can take their Public Option 401(k)s from job to job and retain their opt-in choice from a previous job.
  • Public Option 401(k)s will be invested in broad-based funds with near-zero fees, like those in the federal government’s Thrift Savings Plan.
  • Retirement Account contributions will be defaulted into life-cycle balanced index funds. Other low-cost, safe options will be available. Rainy Day Account dollars will be invested in money market funds.
  • The Public Option 401(k)’s Retirement Account will have the same tax benefits as a 401(k) plan, either traditional or Roth.
  • To create a plan, an employer will go to a designated website, click a few buttons, and start contributing to the worker’s Public Option 401(k) via bank transfers or their payroll provider.
  • Workers will be able to roll their prior 401(k)s into their portable Public Option 401(k) when they switch jobs; at retirement, their savings can be in one place. A portion of rollover amounts can go to the Rainy Day Account.
  • The Public Option 401(k) builds on similar programs in California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, and Vermont. States can keep their existing programs if they prefer.

© 2019 RIJ Publishing LLC. All rights reserved.

Annuities and the Charles Schwab Deal

Posted on November 27, 2019 by -

Caught between tectonic forces—Wall Street’s demand for higher profitability and Main Street’s demand for lower fees—what’s a publicly held brokerage giant to do? For Charles Schwab, the answer was to scale up by acquiring rival TD Ameritrade this week in all-stock deal worth $26 billion.

But what, if anything, will the ensuing consolidation of discount brokerage platforms mean for companies that issue or distribute annuities–especially those who want to sell more annuities to Registered Investment Advisors (RIAs)?

To annuity market researcher Sheryl Moore, CEO of Wink, Inc., the deal spells new opportunities for the life insurers who put annuities on those platforms. “The ability to get your annuity product in front of consumers that have investments, but no annuities? It is like gold. This is like the keys to the kingdom for any insurance company on [the combined] platform.”

But Dennis Gallant of Aite Group, the financial industry research firm, was less sanguine about annuities. “I thought TD Ameritrade had the more robust annuity platform,” he told RIJ. “We’re not talking a large volume of annuity usage by RIAs on either platform.

“There may be an opportunity for carriers not there now to get on the Schwab platform. But there’s also a chance that Schwab will review all the annuity providers and trim the list. Shelf space is getting narrower and those products or companies with little assets may be left out,” Gallant said.

Similar annuity shelves

Both Schwab and TD Ameritrade have offered annuities to retail and advisory customers for several years. Schwab offers variable annuities (VA) with guaranteed lifetime withdrawal benefits (GLWB), fixed index annuities (FIA), single premium immediate and deferred income annuities (SPIA and DIA) and fixed deferred annuities (FA), according to its website.

In the VA category, Schwab offers the OneSource Choice Variable Annuity with GLWB from Great-West Financial and a Retirement Income Variable Annuity from Pacific Life. Both feature annual mortality and expense risk fees as low as 65 basis points and investment expenses around 60 basis points.

Schwab also offers Pacific Index Choice FIAs with six, eight and 10 year terms, SPIAs from Brighthouse, Guardian, MassMutual, Nationwide, Pacific Life and New York Life and, in the DIA category, New York Life’s Guaranteed Future Income Annuity II and Pacific Life Secure Income. The platform offers fixed deferred contracts from New York Life, MassMutual and Midland National.

TD Ameritrade has had an annuity desk since 2012. This past September, it added its first FIA: the Pacific Index Foundation contract, which has an optional GLWB. According to its website, it also offers other annuities but doesn’t specify the contracts. The website also gives annuity owners an opportunity to exchange their contracts.

Notably absent from Schwab’s platform are major annuity issuers like AIG, Jackson National, Lincoln Financial, and Prudential. “There is definitely a pattern there,” Moore told RIJ. “If you look at who is already at Schwab, you’re talking about life insurance companies that have been mutually-owned, that have traditionally had career or captive-agency distribution, and that tend to be more conservative than most of their peers.

“The companies not on that list are stock companies that primarily distribute through independent agents or advisers. They offer multiple products through multiple distributions” and offer proprietary products to favored distributors, she added.

TD Ameritrade does offer annuities from at least one publicly held company, Lincoln Financial. But all of its other annuity providers are either foreign-owned or mutual, including Protective (Great-West), Transamerica, Jackson National, Pacific Life, New York Life, MassMutual, and Integrity Life (Western & Southern Life).

Platform competition

What about the ripple effects of the Schwab-TD Ameritrade deal on the technology platforms that have recently sprung up to serve RIAs?

Mark Forman, senior managing director of RetireOne, told RIJ, “We work with many advisors who use TD Ameritrade or Schwab, so we see ourselves as enhancers of their experiences with those platforms. Honestly, we don’t come up against their annuity desks at all. We really don’t see ourselves as competitors with Schwab since they don’t seem to be active in their outreach or engagement with advisers. Additionally, neither firm has the depth or breadth of fee based solutions of a dedicated fee-based annuity platform like RetireOne.”

David Lau, the founder of the DPL Financial Partners (and before that, of Jefferson National, now Nationwide Advisory Services), said he competes with both Schwab and TD Ameritrade, but doesn’t offer exactly the same value proposition.

“We provide RIAs with education on annuities and how to use them properly. The Schwab and TD desks are more reactive and service advisers when the advisers reach out to them. We educate advisers on how to integrate annuities into their practice’s technology—primarily their portfolio management systems and planning software,” Lau said.

“At the same time, we work with carriers to service the RIA industry, helping with anything from product design and features to technology support. We direct them on how to support fee billing, to create account hierarchy (how to add advisers to policies rather than just agents) and to connect data feeds into the proper RIA technologies.

“I am mainly concerned with creating a viable marketplace for fee-based annuities. This will enable fiduciary advisors to deliver better outcomes for clients in retirement. I like to say that DPL helps RIAs operationalize the studies of retirement income researchers like Wade Pfau, David Blanchett and Michael Finke,” Lau told RIJ.

Schwab Institutional remains the largest RIA custodian with $1.55 trillion in assets under custody, followed by Fidelity with $932 billion, TD Ameritrade with $506 billion, and Pershing with $219 billion, according to Cerulli sizing models. The top four custodians—Schwab, Fidelity, TD, and Pershing—collectively hold 80% of the RIA channels’ $4 trillion in advisory assets, according to research analyst Marina Shtyrkov in Cerulli’s wealth management practice.

Deal specifics

According to a Schwab release this week, the acquisition will give Schwab about 12 million new client accounts, $1.3 trillion in client assets, and about $5 billion in annual revenue. The added scale is expected to result in lower operating expenses as a percentage of client assets (“EOCA”), and “help fund enhanced client experience capabilities.”

The combined firm is expected to serve 24 million client accounts with more than $5 trillion in client assets. Together, the two firms recently generated total annualized revenue and pre-tax profits of approximately $17 billion and $8 billion, respectively. The new company would be the second biggest in the U.S. by self-directed customer assets, behind Fidelity, which holds about one-third of that market, according to Cerulli Associates, a research firm in Boston. With TD Ameritrade, Schwab would control about 27% of it.”

According to a Schwab release, “the deal is expected to be 10-15% accretive to GAAP EPS [earning per share] and 15-20% accretive to Operating Cash EPS in year three, post-close. Focusing on expenses, current estimates are for approximately $1.8 to $2 billion run-rate expense synergies, which represents approximately 18-20% of the combined cost base. Some of the expense synergies the combined firm expects to realize will come from elimination of overlapping and duplicative roles. Additional synergies are expected to be achieved through real estate, administrative and other savings.”

The integration of the two firms is expected to take 18 to 36 months, following the close of the transaction. Schwab named Senior EVP and COO Joe Martinetto to oversee the integration initiative, assisted by a teams from Schwab and TD Ameritrade.

The corporate headquarters of the combined company will eventually relocate to Schwab’s new campus in Westlake, Texas, where both companies have facilities and employees. Schwab was founded in San Francisco and has maintained a longstanding commitment to the Bay Area, which will continue.

A small percentage of roles may move from San Francisco to Westlake over time, either through relocation or attrition. Schwab expects to continue hiring in San Francisco and retain a sizable corporate footprint in the city.

© 2019 RIJ Publishing LLC. All rights reserved.

‘RILA’ Sales Boost Annuities Market: SRI

Posted on November 21, 2019 by -

Variable annuity (VA) sales were $26.5 billion in third quarter 2019, six percent higher than third quarter 2018, according to the Secure Retirement Institute (formerly LIMRA SRI) Third Quarter U.S. Annuity Sales Survey. This represents the highest quarterly VA sales results since third quarter 2016.

Year-to-date VA sales were $75.1 billion, level with results from the same period in 2018.

“For the second consecutive quarter, VA sales registered strong growth, driven primarily by the remarkable growth in registered index-linked annuity (RILA) products, which represent nearly 20% of the VA market,” said Todd Giesing, research director, SRI Annuity Research.

“One of the things that is driving the growth in the RILA market is the adoption of Guaranteed Lifetime Benefit (GLB) riders. In the third quarter, RILA sales with GLB riders increased more than $500 million. In the third quarter just under 15% of RILAs were sold with a GLB a sharp increase from just three percent in the prior quarter.”

RILA sales were $4.8 billion in the third quarter, 62% higher than third quarter 2018. In the first nine months of 2019, RILA sales were $12.5 billion, up 63%, compared with prior year sales.

Fee-based VA sales were $785 million in the third quarter—slightly down from the prior year but up almost eight percent from the second quarter. Fee-based VAs represent just three percent of the total VA market.

Total annuity sales increased 1% in the third quarter to $59.4 billion. Year-to-date, total annuity sales were $184.2 billion, an increase of eight percent, compared with the prior year.

Despite an unfavorable interest rate environment, fixed annuities continued to represent the majority of the annuity market with 55% market share in the third quarter, which is down four percentage points from the prior quarter. Fixed annuity sales have outperformed VA sales in 13 of the last 14 calendar quarters.

Interest rates continued to fall in third quarter 2019, negatively affecting fixed annuity product sales. The 10-year Treasury rate fell 35 basis points during the quarter, ending the period at 1.68%. This is down 98 basis points from the beginning of the year.

After two consecutive record-breaking quarters, third-quarter fixed annuity sales were $32.9 billion, down three percent from third quarter 2018. Yet, because of the strong sales in the first half of 2019, total fixed sales were $109.1 billion in the first three quarters, up 14% from the prior year.

Fixed indexed annuity (FIA) sales were $18.6 billion, three percent higher than third quarter 2018. Year-to-date, FIA sales were $56.6 billion, 13% higher than the same period in 2018.

“Following a record-breaking quarter for FIA sales, market conditions dampened demand for FIAs,” noted Giesing. “Given the low-interest-rate environment and the impact it had on cap rates to accumulation-focused products, we expect to see a greater portion of FIA sales to shift to guaranteed income products in the next several quarters.”

Fee-based FIA sales were $159 million in the third quarter, more than double sales in the third quarter of 2018. However, this is a 30% drop in sales from the first quarter 2019 results. Fee-based FIA products still represent less than 1% of the total FIA market.

Fixed-rate deferred annuity sales dropped 14% in the third quarter to $9.9 billion. Again, strong sales in the first half of the year balanced the declines of the third quarter. Year-to-date, fixed-rate deferred annuity sales totaled $38.1 billion, up 18% from last year.

Single-premium immediate annuity (SPIA) sales fell to $2.3 billion in the third quarter, down four percent from the prior year. In the first nine months of 2019, SPIA sales were $7.8 billion, an 11% increase from the prior year.

Deferred income annuity (DIA) sales were $590 million in third quarter 2019, seven percent higher than prior year results. However, this was 19% lower than DIA sales in second quarter 2019. In the first nine months of the year, DIA sales totaled $2 billion, 19% higher than the prior year.

The third quarter 2019 Annuity Industry Estimates can be found in LIMRA’s Fact Tank.

To view the top 20 rankings of total, variable and fixed annuity writers for third quarter 2019, please visit Third Quarter 2019 Annuity Rankings. To view the top 20 rankings of only fixed annuity writers for third quarter 2019, please visit Third Quarter 2019 Fixed Annuity Rankings.

The Secure Retirement Institute’s Third Quarter U.S. Individual Annuities Sales Survey represents data from 94% of the market.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on November 21, 2019 by -

DPL Financial Partners expands insurance platform for RIAs

DPL Financial Partners, a web platform where registered investment advisors (RIAs) can buy annuities and life insurance from a variety of carriers, said now serves 300 RIA firms, up from 200 last April, according to a press release issued this week.

DPL’s member firms represent more than 2,600 individual advisors who work with an estimated 320,000 households with combined assets under advisement of $130 billion, the release said. DPL is also allowing firms to join DPL as “lifetime” members and plans to hire a dozen more personnel by the end of 2019, the release said.

RIA members range in size from boutique practices with less than $50 million in assets to national firms with hundreds of advisors and billions in assets. Firms typically join the network on an annual renewal basis, but the firm is currently rolling out the lifetime membership option.

The DPL platform has added five new insurance carrier partners this year, bringing the total number of carriers on the platform to 17 and the number of commission-free annuity and life products to 31, the release said. DPL is based in Louisville, KY.

DPL was created by David Lau, a co-founder of Jefferson National Life, which distributed investment-only variable annuities to RIAs. Jefferson National was acquired by Nationwide in 2017 and relaunched as Nationwide Advisory Services.

  1. T. Rowe Price now closer to issuing active ETFs

The Securities and Exchange Commission (SEC) has granted preliminary exemptive relief to T. Rowe Price to offer semi-transparent exchange-traded funds (ETFs).  T. Rowe Price can now bring to market ETFs that employ the firm’s actively managed investment approach.

The semi-transparent structure, which is an alternative to the daily portfolio disclosure structure used by conventional transparent ETFs, would allow T. Rowe Price to deliver its active strategies in an ETF wrapper without disclosing information that could be harmful to the interests of fund shareholders.

  1. Rowe Price has negotiated with the SEC about the potential launch of semi-transparent active ETFs for several years and first filed for exemptive relief in 2013, according to a press release. More regulatory steps must take place before the firm can launch any ETFs.
  2. Rowe Price is still determining which investment strategies may be available as semi-transparent ETFs, though it will begin by offering certain U.S. equity strategies.

Due to regulatory requirements for daily portfolio transparency, most current ETFs are based on passively managed strategies. By contrast, T. Rowe Price’s active ETFs will enable investors to pursue alpha beyond a passive index.

Financial literacy low among African-Americans

In a test administered by the TIAA Institute and the Global Financial Literacy Excellence Center at George Washington University, African-Americans answered 38% of the Personal Finance (P-Fin) Index questions correctly compared with 55% among whites, according to a report based on the test results.

The report, “Financial Literacy and Wellness among African-Americans: New Insights from the Personal Finance (P-Fin) Index,” was released this week. The results left open the question of whether low financial literacy was a cause or an effect (or both) of low average wealth and income among African-Americans relative to whites.
African-Americans scored highest on “borrowing” matters, with 47% of these questions answered correctly, on average. They scored lowest on “insuring,” with 32% of questions answered correctly. African-American financial literacy was lower than that of whites in all areas but “comprehending risk,” where they scored similarly.

“The nation’s 44 million African-Americans account for 13% of the U.S. population and have a significant impact on the economy, with $1.2 trillion in purchases annually, the TIAA-GFLEC report said.

“Yet the financial well-being of African-Americans lags that of the U.S. population as a whole, and whites in particular. The reasons for these gaps are complex, but one area of importance in addressing them is increased financial literacy.”

Regarding the possible cause of the disparity between whites and blacks, the report suggested that low socio-economic status was a cause as well as a result of low financial literacy.

“The financial literacy gap between African-Americans and whites can be partially, but not completely, attributed to underlying demographic differences between the two groups. Financial literacy is consistently correlated with various demographics in the adult population as a whole. In general, financial literacy is lower among females, younger individuals, those with less formal education and those with lower income,” the report said.

TIAA and the GFLEC stressed the link between financial literacy and financial wellness among African-Americans. Financially literate people “are more likely to plan and save for retirement, to have non-retirement savings and to better manage their debt; they are also less likely to be financially fragile,” their press release said.

“African-Americans make up 13% of the U.S. population and constitute a critical segment of our economy. Yet financial literacy gaps exist across this demographic group regardless of gender, age, income level, or degree of education,” said Stephanie Bell-Rose, Head of the TIAA Institute. “It is imperative that we continue to shed light on this challenge in order to better map a course for financial success.”

“Given the strong link between financial literacy and financial well-being, increased financial knowledge can lead to improved financial capability and behaviors,” said Annamaria Lusardi, Academic Director of GFLEC and Denit Trust Endowed Chair of Economics and Accountancy at GWSB, in the release.

The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) assessed financial literacy across these financial activities: earning, consuming, saving, investing, borrowing, insuring, understanding risk and gathering information. The report was authored by Paul Yakoboski, senior economist at the TIAA Institute; Annamaria Lusardi, academic director at GFLEC, GWSB; and Andrea Hasler, assistant research professor in financial literacy at GFLEC, GWSB.

© 2019 RIJ Publishing LLC. ALl rights reserved.

Longevity Insurance with an Inter-Generational Twist

Posted on November 21, 2019 by -

Is there a market for a deferred income annuity (DIA) contract that middle-aged people can buy digitally, with monthly contributions of under $250, that will pay them an income if and when one of their parents reaches a ripe old “trigger age”?

MassMutual and its subsidiary, Haven Life, are betting that mass-market Gen-Xers and Millennials with aging parents present just such a market. They’re making the product affordable by using digital-only distribution and delaying the earliest income age to 91.

Their product is called “AgeUp.” It will be issued by MassMutual and distributed by Haven Life Insurance Agency, a MassMutual in-house fintech startup. Haven Life acquired the web technology for the service by purchasing Quilt, a Boston-based insur-tech firm. For a product fact sheet, click here.

Quilt had developed a Betterment-style website model (colorful, lots of white space, with ultra-simple navigation, a child’s-play calculator and minimal client inputs). Its success in selling term life and other insurance products online got MassMutual’s attention. Now the insurer, the in-house distributor, and the in-house tech partner are collaborating on AgeUp.

Blair Baldwin

“There are three things that make AgeUp unique: the longer deferral period, the financial availability, and the fact that we split the parties of the contract, so that the contract owner is the adult child and the parent is the annuitant,” said Blair Baldwin, general manager of the AgeUp product and founder of Quilt.

MassMutual will not be the first to enter the market for multi-premium, digitally-distributed DIAs. Nationwide and Blueprint Income have been in it for several years. Others, like Kindur, have jumped in more recently. But AgeUp has a very different spin.

AgeUp’s target customers are people in their 30s, 40s, or 50s with household incomes of $50,000 to $100,000. They’re far-sighted enough to recognize that they might have to support a parent in extreme old age. But they can’t afford long-term care insurance for the parent or a big-premium DIA for themselves.

Most other DIAs require the income to start by age 85. AgeUp pushes the start age to 91 to achieve higher mortality credits from longevity risk pooling, which allow mass affluent to buy more income than if payments started earlier. Baldwin, a graduate of Harvard College and Harvard Business School, pointed out to RIJ that the mortality credits at 91 are significantly greater than at, say age 89.

In this scenario, the Millennial or Gen-X child would own the contract, and the parent would be the annuitant. The anticipated monthly payment would be $25 to $250, with a maximum premium of $6,000 per year, according to Baldwin. The product would be available with and without a cash refund feature.

Here’s an example easily calculated at the AgeUp website. If the purchaser were 45 years old and the parent 70 years old, and the child contributed $250 a month for 20 years (a total purchase premium of $60,000), the purchaser would receive an income of about $2,300 a month until the parent died.

Adding a cash refund would reduce the monthly income to about $1,400. In that case, the death of the parent before age 91 would trigger a refund of the paid-in principal to the contract owner or to the owner’s beneficiary if the original contract owner has died. In the example above, adding a cash refund would reduce the monthly payout to just $1,400.

“[We’ve found that] about half of the people would rather skip the cash refund and pay a lower monthly income for the same amount of income and about half would rather have the return of premium guarantee and take about half as much future income,” Baldwin said.

The contract ends with the death of either the contract owner or the annuitant. If the parent is still alive but the original contract owner has died, the contract owner’s beneficiary cannot continue the contract by making subsequent monthly payments. If the contract owner became terminally ill, however, he or she could transfer ownership to another person, and the new owner could continue the product, Baldwin said.

One benefit of having the child serve as the contract owner, Baldwin said, involves Medicaid. As long as the income stream from the annuity doesn’t belong to the parent—who might already be a Medicaid client—then it doesn’t interfere with the parent’s ability to qualify for Medicaid. “This was a conscious product design,” Baldwin told RIJ. “For parents who are that old, the kids are probably managing their money anyway.”

“I co-founded Quilt in 2015, and we were on the property & casualty and life & health side. We wanted to do some innovative product development work in insurance, but we had no manufacturing capability,” he said.

“When the opportunity popped up for us to join Haven Life and MassMutual, they gave us an open-ended challenge: Take a totally fresh look at annuities and create a new annuity product that resonates with the underserved middle market. And it had to be all digital—no advisers—a pure-play digital product.”

To drive consumers to the AgeUp website, Baldwin and Haven Life have launched a media blitz. Baldwin said an ad campaign to people in their 30s to 50s is planned for social media sites Facebook and Instagram.

AgeUp was recently approved for sale in 44 states, Washington, D.C. and Puerto Rico, with plans to reach even more of the population by the end of 2020. In 2020, another version of the product will allow people in their 60s and 70s to buy AgeUp for their own future expenses. In that product, the contract owner and annuitant will be the same person.

© 2019 RIJ Publishing LLC. All rights reserved.

RIA consolidators face a $2.4 trillion opportunity: Cerulli

Posted on November 21, 2019 by -

The total available market for registered investment advisor (RIA) acquisitions over the next five to 10 years is $2.4 trillion in assets under management (AUM), according to Cerulli Associates, the Boston-based global consulting firm.

The $2.4 figure is based on the assets currently managed by advisors on the brink of retirement ($1.6 trillion), by breakaway advisors ($469 billion), and by growth-challenged RIAs ($348 billion).

“The major RIA consolidators currently manage a total of $308 billion today, so $2.4 trillion represents a massive growth opportunity,” said a Cerulli release this week.

One driver of RIA consolidation is an impending succession crisis among advisors. About one-third of advisors in the RIA channels plan to retire in the next 10 years, and many lack a succession plan.

“Succession planning resources are decentralized in the independent channel, meaning the largest, well-capitalized RIAs are best positioned to match advisors to a like-minded successor, help navigate the process, and provide capital to fund the transition,” said Marina Shtyrkov, research analyst at Cerulli, in the release. “More than 80% of advisors who are currently affiliated with an RIA consolidator see it as a succession exit strategy.”

As the RIA channel continues to take market-share from broker/dealers (B/Ds) by attracting advisers with the prospect of independence, the assets managed by those breakaway advisers present another growth opportunity for consolidators.

“Consolidators provide the safety net of operational support, strategic guidance, and economies of scale, while also allowing advisors to retain flexibility and gain more control over their practice than they have in the B/D channels,” Shtyrkov added.

On the other hand, breakaway advisers worry about losing clients when they leave a B/D and about the cost and responsibilities associated with operating their own RIA. Roughly half would rather join an existing independent firm than start their own, according to Cerulli.

Struggling RIA firms create more acquisition opportunities. Large and small RIAs face growth-related challenges, including “time constraints, increasing costs, technology integration, compliance hurdles, accommodations for increased staff headcount, and reallocations of management responsibilities.”

“By delivering turnkey resources, strategic guidance, and expertise, consolidators allow advisors to focus on what they really care about, such as growth and working with clients,” Shtyrkov said.

Large RIA consolidator firms are well-positioned to seize this opportunity. “[They] couple the fiduciary appeal, adviser-first culture, and flexibility of the RIA model with the up-to-date technology, sophisticated marketing power, reliable back-office support, and preferred pricing,” the Cerulli release said.

Cerulli divides RIA consolidators into three categories: RIA-branded platforms, financial acquirers, and strategic acquirers. The consolidators themselves “are an attractive opportunity for private equity investors and asset managers,” Cerulli said.

© 2019 RIJ Publishing LLC. All rights reserved.

Eagle Life adds new income-focused FIA with roll-up

Posted on November 21, 2019 by -

Eagle Life Insurance Company, a subsidiary of American Equity Investment Life, has added the Eagle Select Income Focus fixed index annuity (FIA) contract to its lineup of Eagle Select FIAs. The contract, which is distributed through broker-dealers and banks, emphasizes lifetime income through a living benefit with a multiplier in case of disability.

According to the product brochure, the living benefit includes two deferral bonus options, which adjust the “Income Account Value” (IAV) on which the monthly payout is based. There’s a free 5% (simple interest) annual increase in this benefit base that lasts 10 years or until income begins, whichever is sooner, and a 10% (simple interest) annual increase that has an added fee equal to one percent of the contract value. If the contract value is higher than the benefit base when income begins, the contract value will be stepped up to the benefit base or IAV.

With the Fed’s three 25 basis-point rate reductions in Fed funds rate in the past year, annuity benefits have dropped. In the case of the Eagle Select Income Focus contract, at age 65, the payout rates are 4.4% of the IAV for a single life contract or 3.78% for a joint life contract. So, for example, a 55-year-old couple paying a $100,000 income could withdraw 3.78% of $150,000 ($5,670) at age 65 under the free living benefit and 3.78% of $200,000 ($7,560) under the option with a 1% fee.

For comparison, a single-premium immediate joint-life annuity for a 55-year-old couple with a $100,000 premium would pay out $7,068 per year. Adding a cash refund or a 10-year period certain feature would reduce the payments by $7 or $14 a month, respectively.

The new contract, now available, offers clients a lifetime income benefit rider with “Wellbeing Benefit” option. If a contract owner becomes unable to perform two out of six activities of daily living, he or she can use the option to enhance income payments for up to five years. The enhancement is 200% for a single life contract owner and 150% each for the two owners of a joint life contract.

The option doesn’t require confinement in a nursing home and no annual fee is applied to the contract. Contract owners can make multiple premium payments without adding more years to the seven-year surrender period. Starting in year two, contract owners can make withdrawals of up to 10% of the contract value penalty-free.

© 2019 RIJ Publishing LLC. All rights reserved.