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‘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.

Why high returns leave Dutch DB plans unhappy

Posted on November 14, 2019 by -

Despite enjoying solid returns since the financial crisis, Dutch defined benefit pension funds are still tormented by low interest rates and expect lean years ahead, according to a report this week at IPE.com.

Citing a survey of the 100 largest DB plans by the Dutch financial daily Het Financieele Dagblad (FD), IPE reported average returns of 10% for the past 10 years; in the first three quarters of this year, the five largest pension funds reported returns of 15.1% to 19.1%.

For instance, the €1bn hairdressers plan (Kappers) averaged 10% growth during the past five years and posted the best result (2.3%) for 2018, the FD survey found. But ever-falling rates, which the funds use to discount their future liabilities, have undermined their funding ratios.

Gerard van de Kuilen, the pension fund’s chair, said Kappers’ funding ratio funding fell to 93.8% as of September 30, forcing the plan to contemplate benefit cuts in the absence of higher contributions.

The plan’s positive investment returns were due mainly to its 50% interest hedge of its liabilities through interest swaps and bonds, whose solid results were due to declining interest rates, he said, adding, “But this is something you don’t want.”

Van de Kuilen explained that, because of its young participant population, the liabilities of Kappers have a duration of no less than 34 years so that “a 1% drop of interest rates means a rise of liabilities of 17%.”

Similarly, the €459bn civil service plan ABP posted returns of more than 15% for the first three quarters of 2019, with equity, bonds and private equity yielding 21.9%, 11.4% and 11.1%, respectively, while real estate generated 16.2%, according to Diane Griffioen, the plan’s head of investment. But its funding ratio was only 91% as of September 30.

Simon Heerings, director of risk management at consultancy First Pensions, said most Dutch schemes face the same challenges. “Low rates generate insufficient returns relative to rising liabilities,” he said. “As the high returns are largely due to dropped interest rates, the rosy figures will in part disappear as soon as interest rates rise again.”

“I keep on seeing pension fund trustees and media referring to record returns and pension assets, but they deliberately ignore the liabilities side of the balance sheet,” observed Rob Bauer, professor of finance at Maastricht University.

Most Dutch pension investors expect much lower returns during the coming years, according to a survey among 10 fiduciary managers by Dutch consultancy Sprenkels & Verschuren.

Average returns for equity and credit would drop to 4%, 3% and 0%, respectively, for the next five years, the managers predicted. Part of this year’s returns reflected a rebound from losses incurred during the last quarter of 2018, said ABP’s Griffioen.

© 2019 RIJ Publishing LLC. All rights reserved.

 

SECURE Act still stuck in Washington gridlock

Posted on November 14, 2019 by -

The SECURE Act remains in limbo in the Senate, having failed to pass by unanimous consent as it did in the House last May. Senators Pat Toomey (R-PA), Ted Cruz (R-TX) and Mike Lee (R-UT) have placed holds on the bill, which contains reforms that the retirement industry has long lobbied for.

The bill would, among other things, make it easier for smaller employers to join open multiple employer plans, ease non-discrimination rules for frozen defined benefit plans and add a safe harbor for selecting lifetime income providers in defined contribution plans. It also increases the automatic-enrollment safe harbor cap to 15% from 10%.

Senators have added 10 amendments, with five from each party. The five amendments that Senate Republicans were:

  • Fixing a drafting error in the Tax Cuts and Jobs Act to ensure the full cost of store, office, or building improvements can be immediately expensed, as was originally intended (offered by Mr. Toomey).
  • Expanding 529 college savings plans to cover expenses of K-12 students and educational costs for home-schooled students (offered by Sen. Cruz).
  • Allowing individuals with terminal illnesses to take out money from their retirement plans early penalty free (offered by Sen. Richard Burr (R-NC).
  • Expanding the existing provision in the bill that allows 529s to be used for apprenticeship programs. Currently, the SECURE Act only allows for Department of Labor-recognized apprenticeships (offered by Sen. Mike Braun (R-IN).
  • Removing a SECURE Act provision that would provide pension funding relief for community newspapers (offered by Sen. Lee).

According to a report in Pensions & Investments website, Sen. Patty Murray, D-Wash., objected, saying the amendments offered are “not in the interest of working families and will kill any chance this bill has of becoming law. She asked Toomey to modify his request to consider the House version of the bill, to which he declined.

Sen. Rob Portman (R-OH) urged his colleagues to pass the SECURE Act. “For the past 5 1/2 months some of us have been trying to get this legislation done. I think it’s time for us to move forward with these reforms.”

© 2019 RIJ Publishing LLC. All rights reserved.

Fidelity adds USAA SPIA to its annuity platform

Posted on November 14, 2019 by -

The USAA Single Premium Immediate Annuity (SPIA) has joined to The Fidelity Insurance Network, a platform at the Fidelity Investments website where investors can compare and choose from a curated shelf of annuities. It is the first USAA annuity to be offered on Fidelity’s platform.

Other SPIAs on the platform include SPIAs enables individuals to convert a lump sum into guaranteed income for life or a predetermined set period of time. Additionally, the product offers:

  • The ability to protect beneficiaries.
  • An inflation adjustment option that increases payments up to 3% each year to help address the steadily rising cost of living.
  • A one-time withdrawal feature to help address certain financial emergencies.

Fidelity has offered simpler, high value annuity products for more than 30 years, the investment company said in a release. Its insurance platform also includes fixed and variable annuities.

“Our role is to help investors make informed decisions in the context of a holistic financial plan, and annuities, when designed and used appropriately, can help investors address key financial needs, including tax efficient retirement savings to supplement 401(k)s and IRAs, and pension-like guaranteed income in retirement,” a Fidelity spokesman told RIJ yesterday.

“Fidelity offers access to both Fidelity annuity and insurance products, as well as well-known third-party carrier products. As one of the leading insurance and annuity providers in the country, the addition of USAA products helps us enhance our annuity selection.”

© 2019 RIJ Publishing LLC. All rights reserved.

‘Top of Mind’ Wealth Management Platforms

Posted on November 14, 2019 by -

Life is so frantic today—thanks to devices and software that help us compress more activity into tinier increments of time—that people are too busy to look for investment advice from sources other than friends, family, or familiar brands like Fidelity, Charles Schwab and Vanguard.

So says the latest edition of The Cerulli Edge—Retail Investors Edition, from Boston-based Cerulli Associates, the global consultants.

“Widely reported investor satisfaction with their current financial providers, combined with demanding and distracted lifestyles, leave well-known wealth managers in a position of strength,” the report said. “Unaided awareness is one of the most crucial metrics in understanding a firm’s significance in the lives of potential consumers.”

In short, brand strength is king. As a retail consultant once said to me, “What makes a great brand? It’s a promise kept over and over and over.” As a Vanguard institutional executive once told me, “I tell new hires, ‘Just don’t screw it up.’” He meant nothing more complicated than “Don’t mess with success.”

Vanguard, Schwab and Fidelity have been building their brands since the 1970s, after the stock market bottomed out in the recession of 1974. While others were moaning about the death of stocks, their leaders recognized (along with Warren Buffett) that the only direction for the market was up.

Each grabbed a niche—Vanguard in low-cost indexing, Schwab in discount brokerage, and Fidelity in retirement plans and actively managed mutual funds—and never let go. Each steadily reaped the Zeitgeist of demographics (40 years of Boomer savings), financial deregulation, massive money creation (thanks to federal deficit spending), the resulting asset value inflation, and the federally-subsidized (via tax deferral) 401(k) system, which brought “Main Street to Wall Street.”

Each of their highly visible leaders—Vanguard founder Jack Bogle, Fidelity fund manager Peter Lynch, and Charles Schwab himself—gave their firms trustworthy public faces. Until recently, one of their few brand-strength peers from the 1970s was PIMCO, whose voluble co-founder, Bill Gross, rode the bull market in total bond returns—created by the long descent from Fed chairman Paul Volcker’s double-digit interest rates—until falling yields could no longer support the fees associated with his actively managed bond funds.

Scott Smith, director of advice relationships at Cerulli, explained why these three firms have proven to be the fittest survivors in the financial service game.

“Fidelity achieves an unmatched level of unaided awareness among affluent investor respondents, with an average of 50% citing the firm when asked to name a provider in the space,” he writes in The Cerulli Edge.

“The firm’s extensive advertising, combined with its presence as a retirement plan provider for millions of participants, make it the most formidable brand in the wealth management segment,” Smith wrote.

In early 2009, as the financial crisis bottomed, then-Fidelity chief marketing officer Jim Speros, his internal ad team, and the Boston ad firm Arnold Worldwide conceived of an animated green navigation line, like those found in GPS systems, that would lead investors back to success. Fidelity still uses the award-winning concept. According to MediaRadar.com, Fidelity spent over $100 million in 2018 on print, digital and television advertising.

“Though frequently not the first to enter developing segments, once [Fidelity] has decided to do so, the move is usually decisive, which bodes well for the firm’s ability to maintain its premier position among investors, advisors, and retirement plan sponsors,” Smith wrote.

Charles Schwab is the name that 33% of affluent investors surveyed mention when asked to name a provider in the investment space, according to Cerulli. In ad-speak, that’s called a “strong unaided awareness level” within the target market.

“Schwab makes a concerted effort to increase awareness levels through a variety of ongoing ad campaigns, highlighting the firm’s strengths,” Smith wrote. “The firm often takes a leading position in advancing investor-focused initiatives.”

The “Talk to Chuck” ad campaign that began in 2005 featured its CEO and helped humanize the company. “It’s a bit of a risky move,” Marc E. Babej, a brand and corporate strategy consultant, told a New York Times advertising columnist at the time about the campaign. “‘Talk to Chuck’ sounds like, ‘We love you, man.’

“But it stands to get attention,” and “if Chuck becomes an icon for the company, in a ‘What would Chuck do?’ way, it would help set Schwab apart in the marketplace.” It did, and it continues to.

By contrast, Vanguard has done relatively little advertising or marketing. Bogle, who died last January, was philosophically averse to spending current customers’ money to court new customers. Yet 23% of investors surveyed cited Vanguard when asked to name a company in the investment space. (I worked at Vanguard from 1997 to 2006.)

“By opting out of the more active marketing options used by Fidelity and Schwab, Vanguard consigns itself to a somewhat reduced awareness level, but this has little downside for them,” according to Smith. “The firm has been an early leader in the low-cost investing movement. Even though other providers have made efforts to match, or beat, Vanguard’s initiatives, the firm maintains an unmatched public perception as a low-cost provider.”

“Costs matter,” Bogle was famous for saying. He tried not to let investors forget that even a modest-seeming 1% annual expense ratio can reduce lifetime savings by 25% or more. According to one of his biographers, Bogle was not born a discounter. Instead, after the 1974 crash, he decided that coaxing traumatized investors back into mutual funds would require ultra-low prices as well as optimism about the future of the economy.

Jack Bogle

In the decades that followed, he was pre-disposed to pass the savings from rising economies of scale back to his customers. He had the liberty to do so. Vanguard was not simply a private company, with no army of common stock shareholders or Wall Street analysts to please, but a marketing-and-back-office cooperative owned by its member mutual funds, which are in turn owned, technically, by their shareholders. (Indeed, Vanguard’s internal transfer-pricing arrangement, which provided services to the funds “at-cost,” would lead in 2014 to accusations of tax evasion by a former employee. No regulatory agency bothered to prosecute.)

Though a formidable competitor not inclined to doubt his own instincts, Bogle was quite modest about Vanguard’s achievements. He gave much of the credit for the company’s success to the 401(k) system, the information technology revolution, and the Boomer retirement wave.

Bogle did not own Vanguard. No one does. Even insiders are hard-pressed to articulate its precise ownership structure. As an observer once said, “Vanguard just seems to float out there in non-Euclidean space, like the Eye of Providence floating above the pyramid on the back of a dollar bill.”

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