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Expected Source of Retirement Income and Personal Savings, by Generation

Posted on October 24, 2019 by No Author -

Uncertainty at Both Ends of Retirement

Posted on October 18, 2019 by Kerry Pechter -

Uncertain lifespans are a well-known confounder of the best-laid personal retirement plans, for advisers and clients. Uncertainty about the retirement start date makes the planning process doubly hard.

Welcome to a newly identified of longevity risk: the front-loaded kind. The problem might seem too obvious to attract academic attention, but David Blanchett of Morningstar just won the Montgomery-Warshauer Award from the Financial Planning Association for his paper on it.

Blanchett, the head of retirement research at Morningstar, presented the 2018 paper to several hundred financial planners at the 2019 FPA annual conference in Minneapolis yesterday. The gist of his paper is a heuristic that he chooses to call “the Rule of 61.”

David Blanchett

“Individuals targeting a retirement before age 61 tend to retire later than expected,” Blanchett writes in the paper. “Individuals targeting a retirement age of 61 retire when expected; and those targeting a retirement age after 61 generally retire approximately a half-year early for each additional year of work planned past age 61.”

Along with all the other retirement risks that advisers need to anticipate for clients as they approach—sequence risk, market risk, inflation risk, health risk, and longevity risk, to name only a few—advisers should also factor in the likelihood that a client might retire two years earlier or later than they told you they would.

For a client who retires a few years earlier that expected—and who stops working earlier—the implications on his or her retirement savings target can be significant. Once you factor in a shorter saving period, a longer retirement, and a smaller Social Security benefit, an early retiree might need to save 25% more than expected to enjoy the same level of retirement security.

“If the “average investor” is assumed to be seeking a 4% initial withdrawal rate (i.e., a moderate success target) and wants to retire at age 65,” Blanchett wrote, “the impact of retirement age uncertainty would require approximately 25% more savings than suggested by traditional models (28.29% to be exact).”

Blanchett based his findings largely on the Health and Retirement Study, a long-term population study by the Rand Corporation, the Social Security Administration, and the Centers for Retirement Research. Participants in the study have been interviewed every two years since 1992.

His projections varied from person to person, he found, depending on several variables, including, health, gender, education, marital status, housing wealth, savings, occupation, income, and remaining years to retirement.

“Half of your clients will retire earlier than expected,” Blanchett told the planners. About 24% of those who retire early do so because they can afford to. About 10% retire to pursue other activities. The remaining 66% retire because of ill health, layoffs or the need to care for an ailing spouse, he said.

Ironically, those who can afford to retire early, such as highly educated professionals, tend to work longer and retire later, Blanchett pointed out. Those who need to work longer, who have earned and saved less prior to retirement, are often the ones who are forced to retire early because of poor health or job loss.

Advisers need to recognize that their clients don’t necessarily have control over their retirement date, and to plan accordingly. “Ignoring retirement age uncertainty can potentially have a significant (negative) impact on potential retirement outcomes,” Blanchett wrote. “Therefore, financial planners should consider showing clients the implications of an early retirement to potentially get them to save more than they would using a more traditional approach where retirement age is treated as certain.”

Global aging named as world’s most powerful trend

Posted on October 18, 2019 by Editorial Staff -

An aging population was identified as the most significant driver of global economies and the investment landscape over the next 30 years, according to a poll of institutional investors sponsored by Investcorp, Mercury Capital Advisors, IMD Business School and ICR.

The demographic shift was selected by 78% of institutional investors surveyed. Artificial intelligence (AI) and machine learning ranked second (69%) and climate change third (66%), followed by “urbanization and smart cities” (42%) and redefining global trade (40%).

A study based on the survey, “What’s Next? Investment Trends for the Future,” was released this week. Here are descriptions of the world-changing factors that investors identified:

Aging population. Nearly 8 out of 10 (78%) of investors polled cited an “Aging Population” as the top trend that will shape the global economic landscape. Participants were more likely to invest in this trend through private markets (62%) than public markets (26%), with more than half of the allocation to private markets manifesting itself via private equity (38%) and real estate (21%) based strategies. Participants believe that this trend will peak around the years 2030-2032.

AI and machine learning. Participants were more than twice as likely to invest in this theme through private markets (58%) than public markets (25%). Those who did invest through private markets preferred to deploy capital through venture capital (44%) and private equity (34%). Participants believe that this trend will peak around the years 2030-2032.

Impact of climate change. Climate change ranked as the third most significant trend. Participants were more likely to invest in the impact of climate change through private markets (48%) compared to public markets (27%).

Urbanization and smart cities. Among the top five trends identified, this theme counted the highest percentage of investor access via private markets (67%) and the lowest access through public markets (20%). Private markets allocation is relatively even among private equity (26%), real estate (25%), venture capital (25%) and infrastructure (17%).

Redefining global trade. Among the top five most important trends investors cited, redefining global trade generated the most equal representation of allocation between private markets (47%) and public markets (43%). This trend also saw private equity as the main private market asset class to deploy capital (45%). Participants believe that this trend will peak between 2023 and 2024, the earliest period among all topics surveyed.

The survey received responses from 185 investors representing more than US $10 trillion in AUM across a range of institution types including: pension funds, sovereign wealth funds, foundations, endowments, insurance companies, consultants, funds of funds and family offices.

Approximately 60% of the respondents were senior executives at their organizations, identifying themselves as CIOs, heads of investment groups, managing directors and partners. Two-thirds (66%) of survey participants managed portfolios with an alternative/private markets tilt, with the remainder (34%) having a traditional/public market tilt.

Investcorp is a $28.2 billion provider of alternative investment products, and IMD Business School is an executive education institution based in Lausanne, Switzerland. ICR is a communications firm and Mercury Capital Advisors has raised some $170 billion from institutional investors for its clients.

Honorable Mention

Posted on October 18, 2019 by Editorial Staff -

A new bond index fund from Fidelity

Fidelity Investments, a long-time specialist in actively managed mutual funds, has launched another index fund as part of its strategic adaptation to the ongoing trend toward low-cost passive investing. The new fund is Fidelity International Bond Index Fund (FBIIX), according to an announcement this week.

The new fund’s total net expense ratio is 0.06%. Like other Fidelity index funds, its total expenses are “lower than its comparable Vanguard fund,” the Fidelity release emphasized. The fund has no minimum investment. Fidelity now has $530 billion in index mutual fund assets under management as of August 31, 2019, the release said.

Nassau buys Foresters

Nassau Life Insurance Company will acquire Foresters Financial Holding Company, Inc. and Foresters Life Insurance and Annuity Company from The Independent Order of Foresters, Nassau Financial Group announced this week.

The transaction between the two New York-domiciled firms is expected to close in the first quarter of 2020 and is subject to customary closing conditions, including regulatory approval by the New York State Department of Financial Services.

Founded in 1962, Foresters Life Insurance and Annuity serves about112,000 policyholders and has $2.5 billion in assets. The company has offices in Edison, NJ and New York, NY. Goldman Sachs & Co. LLC served as financial advisor and Eversheds Sutherland (US) LLP served as legal advisor to Nassau.

Nassau Financial Group has combined assets of approximately $22.6 billion and capital of approximately $1.3 billion. Nassau was founded in 2015 with capital provided by Golden Gate Capital, a private investment firm with over $15 billion of committed capital.

Distribution expands for T. Rowe Price model portfolios

The T. Rowe Price Target Allocation Active Series Model Portfolios are now available to financial advisors through Morningstar’s Model Marketplace, the retirement plan and mutual fund company announced this week.

Model Marketplace, available through Morningstar Office Cloud, launched in May 2019 and serves as a centralized distribution platform for advisors, allowing users to research investment models, personalize strategies, and initiate trade instructions.

The Target Allocation Active Series Model Portfolios were first made available on the Envestnet Fund Strategist Portfolio (FSP) and Unified Managed Account (UMA) Programs.

The Target Allocation Active Series on Morningstar’s Model Marketplace consists of eight professionally managed, risk-based asset allocation models with both retail and institutional mutual funds that are designed to meet a wide range of investment objectives. The model portfolios use globally diverse T. Rowe Price equity and fixed income mutual funds as their underlying investments.

Portfolio managers Charles Shriver, Toby Thompson, Robert Panariello, Guido Stubenrauch, and Andrew Jacobs van Merlen manage the Target Allocation Active Series. Each portfolio manager is a member of the T. Rowe Price Multi-Asset team, which had $332.5 billion in assets under management as of June 30, 2019.

Most advisory firms not qualified to rely on their own research: Cerulli

Posted on October 18, 2019 by Editorial Staff -

While more than six in 10 advisers and 55% of all advisory practices rely on their own investment research and portfolio construction, only about 7% of those practices are at an optimal scale to do so, according to new research from Cerulli Associates.

The research, published in the 4Q 2019 issue of The Cerulli Edge—U.S. Advisor Edition, further reveals that these practices, otherwise referred to as Optimal Non-Users (i.e., non-users of prepackaged models), have similar structures, staff, and services.

Baseline criteria to be considered an Optimal Non-User of centralized models is a team-based environment, staffed appropriately with layers of stakeholders and asset-gatherers supported by the resources needed to customize portfolios, retain existing relationships, attract new clients, and build rapport with families’ beneficiaries and outside advisors.

Cerulli finds that firms with an average account size of $2 million and greater, and a minimum AUM floor of $250 million are candidates for the Optimal Non-User segment, but the practices that can genuinely customize portfolios skew closer to the $500 million range. Optimal Non-Users are exponentially more likely to reside within the wirehouse, hybrid registered investment advisor (RIA), and independent RIA channels.

Lastly, because of their scale, these practices value different offerings from distribution teams. They place greater value on competitive product information and commentary from portfolio managers compared with other topics, including client educational content, interactive tools, and practice management programs, that smaller practices crave most.

“Of all Optimal Non-User practice types, wealth managers are the most likely practice type to exhibit the defining characteristics,” said Donnie Ethier, director of wealth management at Cerulli, in a press release. “Not only do they offer the most advanced planning options, but they are also led by the industry’s most experienced and educated advisors, resulting in leadership that focuses on developing business scale.

“Third parties should evaluate their target practices to segment opportunities and design distribution strategies if they hope to engage these teams,” Ethier added. “Segmentation can also help wealth management executives evaluate their own teams and better assess which may be adequately prepared to work outside of home-office resources if they insist.”

Research Roundup

Posted on October 18, 2019 by Kerry Pechter -

Five recent working papers from the National Bureau of Economic Research offer intriguing insights into the economic implications and effects of an aging society. The papers are listed below (links and extended summaries follow):

“Retirement in the Shadow (Banking)” suggests that the main culprit in the financial crisis wasn’t all bad for retirement savers.
“Demographics and Monetary Policy Shocks” shows that interest rate fluctuations may impact older investors most.
“Population Aging and Structural Transformation” links the graying of America and our increasingly health care-driven service economy.
“A Retrieved-Content Theory of Decision-Making” asserts that there’s more to behavioral finance than “thinking fast and slow.”
“The Effects of Job Characteristics on Retirement” shows that psychological factors, in addition to economic factors, affect when, how, and why Americans retire.

“Retirement in the Shadow (Banking)” by Guillermo Ordoñez University of Pennsylvania and Facundo Piguillem of the Einaudi Institute for Economics and Finance. NBER Working Paper 26337, October 2019.

Here’s a puzzler for both actuaries and quants: Are recent gains in post-retirement life expectancy related to the expansion of securitization and shadow banking (defined as borrowing, lending, saving and investment activities that take place outside the regulated banking system)? If so, is that good or bad?

Guillermo Ordoñez of Penn and Facundo Piguillem of Italy’s EIEF (Einaudi Institute for Economics and Finance) explain that the need for higher returns among >65 savers in the U.S., who hold about one-third of total wealth in the U.S., created demand for the assets created and brokered by investment banks.

“When expecting to live longer, [investors] rely more heavily on intermediaries that use securitization, with riskier but higher returns,” the economists write. “[Our] model shows the potential of the demographic transition to account for a boom in credit and output, but only when it triggers a more extensive use of securitization and shadow banking.”

In terms of national output, aging and securitization combined to create a significant net gain, they claim. “The gains from operating with shadow banking from 1980 to 2007 were in the order of 60% of 2007 GDP. Further, even if we blame the great recession exclusively to the operation of shadow banks, its cost was in the order of 14% of 2007 GDP… In short, our model suggests that there were net gains to having shadow banks, even if it were true that they single handedly generated the recent crisis.”

They leave open the question: Were the causers of the crisis also the winners?

“Demographics and Monetary Policy Shocks,” by Kimberly A. Berg (Miami U.), Chadwick C. Curtis (U. of Richmond), Steven Lugauer (U. of Kentucky), and Nelson C. Marks (Notre Dame). NBER Working Paper 25970, October 2019.

Anecdotally, working-age people ignore news of upticks or downticks in the Fed funds rate but retirees pay closer attention to CNBC and The Nightly Business Report. In this paper, four economists explain why retirees might be relatively more engaged by monetary policy changes.

Older people tend to be wealthier, their income often fluctuates with the value of their financial capital, and Fed interest rate policy directly affects that value. Using data from the Survey of Consumer Finances, the economists “point out that They point out that older households are more likely to be retired, and to be financing their consumption from investment income or from the sale of accumulated assets than their younger counterparts.

“Older households are also much more likely to hold long-term assets, whose values are sensitive to changes in interest rates. Thus an increase in interest rates—a shift toward a more contractionary monetary policy—would reduce wealth by more for older than for younger households. This wealth effect in turn leads to lower consumer spending.”

“Population Aging and Structural Transformation,” by Javier Cravino, Andrei A. Levchenko, and Marco Rojas, all of the U. of Michigan economics department. NBER Working Paper 26327.

Over the past 35 years, Americans have gradually been spending more of their income on services and less on goods. Between 1982 and 1991, we spent about 63% of our money on goods (cars, furniture, clothes, etc.) and the rest on services (health care, utilities, dining out). Between 2002 and 2016, the balance shifted to 57% on goods and 43% on services.

An increase in the relative prices of services (like high-tech health care) vs. the prices of goods (like Chinese-made apparel) accounted for about two-thirds of that shift. But the aging of the U.S. population caused about 20% of it, according to this paper by three U. of Michigan economists. They believe that the impact of aging on the consumption of services will be even stronger in the decades ahead.

“Changes in the US population age distribution accounted for about a fifth of the increase in the share of services in consumption expenditures observed between 1982 and 2016,” they write. “According to our quantitative model, population aging plays a much larger role than changes in real income in accounting for the structural change observed in the US during this period.”

The rising percentage of the population over 60 and their larger consumption of health seem to be the key factors.

“Households 65 and older accounted for 10.4% of total expenditures in 1982, and 19.8% in 2016, a 90% increase. The share of expenditures that goes to households 80 and older nearly tripled, going from 1.2% to 3.4%. The counterpart of this increase is the decline in the share of expenditures that goes to households 30 and younger, from 47.3% to 31.6%.”

Moreover, “The largest disparity (between spending on services by young and old) arises in health expenditures, where the consumption expenditure share of the 60-65 (80+) age group is 5.6 (15.3) percentage points larger than that of the 25-30 age group.” The service consumption expenditure share for those ages 80+ is 15.3 percentage points higher than the younger group.

“A Retrieved-Context Theory of Financial Decision-Making,” by Jessica A Wachter and Michael Jacob Kahana of the U. of Pennsylvania. NBER Working Paper 26200, August 2019.

A new etiology of behavioral finance is proposed in this paper by a finance professor and a psychology professor at Penn. Jessica A. Wachter and Michael J. Kahana challenge Daniel Kahneman’s Nobel Prize winning idea that cognitive biases such as loss aversion and narrow framing explain apparently irrational decisions.

Instead, they point to human learning and memory as the hidden determinants in financial decision-making. They hypothesize, for instance, that investors panicked in 2008 because the Lehman Brothers bankruptcy revived traumatic memories of the Great Depression, and not because their financial security was threatened.

“Our hypothesis is that the financial crisis was a psychological event caused by the failure of Lehman Brothers. The actual realization of an important financial institution failing in the absence of insurance reminded investors of the Great Depression. Some felt that they had—literally—returned to the Great Depression,” they write.

“Investors experienced what the memory literature refers to as a jump back in time. Once this feeling entered the discourse, it proved hard to shake. Subsequent events showed that in fact there was no Great Depression. This was only revealed, though, over time. Somehow, what emerged from the crisis and recession was not a feeling of relief but rather a renewed emphasis on the fragility of the financial sector and the possibility that a Great Depression might in fact occur.”

The authors go on to explain the mechanism behind their hypothesis. “Three major laws govern the human memory system: similarity, contiguity, and recency:

Similarity refers to the priority accorded to information that is similar to the presently active features
Contiguity refers to the priority given to features that share a history of co-occurrence with the presently active features
Recency refers to priority given to recently experienced features.

All three “laws” exhibit universality across agents, feature types, and memory tasks and thus provide a strong basis for a theory of economic decision-making.” The researchers do not believe that the crisis revealed an inherently fragile shadow banking system overdosing on leverage; rather, it reflected investor over-reaction.

“The Effects of Job Characteristics on Retirement,” by Péter Hudomiet, Michael D. Hurd, Andrew Parker and Susann Rohwedder, RAND Corporation. (NBER Working Paper 26332).

Older Americans would be almost twice as agreeable to working longer if employers offered them flexible work hours, according to a survey conducted by the RAND Corporation. Analysts there found that “the fraction of individuals working after age 70 would be 32.2% if all workers had flexible hours, while the fraction working would be 17.2% if none had the option of flexible hours.”

The survey revealed a strong preference among Americans for making a clean break from employment; that is, for retiring “directly and completely” from a full-time job. About half preferred to retire this way. Almost a quarter preferred to ease into retirement with a part-time job, while 8% preferred a period of self-employment before retirement, and a little over 10% said they preferred to work “forever.”

Women were more inclined to a part-time job or self-employment before full retirement, and they were less likely to prefer never retiring. Part-time employees and self-employed workers were more likely than full-time employees to prefer the gradual pathways.

Stress, heavy physical and cognitive job demands, the option to telecommute, and commuting times also influenced attitudes toward working at an older age. The survey showed people would like preretirement jobs to be less cognitively and physically demanding and more sociable compared to their current jobs. Most workers said they worry about their health and the demands of their jobs when they think about their future work trajectory, but relatively few worried that their employers would not retain them.

“Standard theory ignores psychological factors, but our results suggest that they may be useful to understand heterogeneity in the population that is not explained by standard economic variables,” the RAND researchers concluded.

Differences in Expenditures between Young and Old Adults

Posted on October 18, 2019 by No Author -

Joint venture eyes distressed annuity books

Posted on October 10, 2019 by Editorial Staff -

Värde Partners, a private equity firm, and Agam Capital, creator of an insurance solutions platform, are forming a joint venture to pursue “the acquisition, reinsurance and management of life and retirement businesses globally,” according to a release this week.

The joint venture will “price and manage complex insurance products with embedded market and actuarial risks, on a global basis” and “serve as a turnkey solution for financial modeling and enterprise risk management” for life insurance companies.

Värde Partners plans to invest $500 million in complex life insurance, annuity, and reinsurance assets, marking the expansion of its private equity strategy into insurance. Elena Lieskovska, partner and head of European Financial Services at Värde Partners, said:
“Given the current landscape of historically low interest rates and fundamental regulatory and accounting changes, we believe the opportunity across the $23 trillion life insurance industry is huge. Life insurance companies are increasingly seeking risk mitigation solutions for legacy blocks of liabilities with multi-dimensional risks. This is particularly true for complex annuity products, such as those with high guarantees or exposure to certain market risks, which typically attract a higher capital charge.”

Agam’s Co-Founders, Avi Katz and Chak Raghunathan said his platform “is designed to price, analyze and manage complex insurance products with embedded capital market risks.” The platform uses “machine learning, predictive data analytics and cloud computing to evaluate and assess complex insurance liabilities” including “integrating transaction modeling with actuarial cash flows.”
Värde Partners is a $14 billion global alternative investment firm that employs a value-based approach to invest in corporate and traded credit, real estate, mortgages, financial services, real assets and infrastructure. Its investor base includes foundations and endowments, pension plans, insurance companies, other institutional investors and private clients. The firm has headquarters in Minneapolis, London and Singapore.
Agam is a New Jersey-based insurance solutions provider, founded by Abraham Katz and Chak Raghunathan, senior executives from Apollo Global Management and Aflac Inc.

“While traditional insurance solutions have been aimed at enhancing asset yield to support a liability structure, Agam has focused its efforts on building technology for risk management with integrated analytics. Agam’s expertise is to develop solutions for complex cash flow streams through greater hedging optimization and meaningfully lower operating costs,” the executives said in the release.

Honorable Mention

Posted on October 10, 2019 by Editorial Staff -

Lincoln launches two new fee-based annuities for RIAs

Lincoln Financial Group has introduced two new products for registered investment advisors (RIAs): A single premium immediate annuity (SPIA), Lincoln Insured Income Advisory, and a deferred income annuity, Lincoln Deferred Income Solutions Advisory.

Both are commission-free, allowing fee-based advisers to charge an asset-based fee instead. Lincoln said its annuity sales in the fee-based space have increased more than 150% year-over-year as of June 2019.

Tad Fifer, vice president and head of RIA Annuity Distribution, Lincoln Financial Distributors, said in a release, “We are offering a broad portfolio of solutions for RIAs who choose to include annuities as part of their clients’ retirement plans. Income annuities can help secure life-long or period-certain cash flow with the potential for higher income payout than other available options.”

Over the past year, Lincoln said it has established technology integrations with Orion, eMoney, Envestnet/Tamarac, Redtail and others. These data integrations are designed to make it easier for advisers to incorporate annuities into their clients’ financial planning strategies.

The company also recently implemented a more seamless tax treatment of advisory fees taken from certain non-qualified fee-based annuities. This new treatment affects Lincoln’s fee-based and RIA variable, fixed and indexed variable annuity products (non-SPIA/DIA).

The treatment follows a Private Letter Ruling Lincoln received from the Internal Revenue Service, allowing fee-based advisors to deduct fees related to investment advisory services provided for Lincoln annuity contracts without triggering a taxable event for their clients, assuming certain conditions are met.

Broadridge to buy Fi360

Broadridge Financial Solutions, Inc., a part of the S&P 500 Index, has entered into a purchase agreement to acquire Fi360, Inc. Fi360 is a leading provider of fiduciary-focused software, data and analytics for financial advisors and intermediaries across the retirement and wealth ecosystem.

Fi360 also provides the accreditation and continuing education for the Accredited Investment Fiduciary (AIF) Designation, the leading designation focused on fiduciary responsibility.

The acquisition is expected to close in November. Raymond James & Associates is acting as financial advisor to Fi360 in the transaction. Terms of the transaction were not disclosed.

Broadridge’s acquisition of Fi360 is intended to enhance its existing retirement solutions by providing wealth and retirement advisors with fiduciary tools that complement its Matrix trust and trading platform. The acquisition will also strengthen Broadridge’s data and analytics tools and solutions suite.

“The shift to fee-based advice and imminent regulatory changes, including the SEC’s Regulation Best Interest, are increasing the scrutiny on firms to ensure that they are demonstrating prudent advisory practices,” said Michael Liberatore, head of Broadridge’s Mutual Fund and Retirement Solutions business. “Our goal is to help firms stay ahead of this evolving regulatory landscape.”

Fi360 provides analytical and reporting software that helps investment professionals document investment processes and evaluate products. The software enables broker-dealers to automate compliance procedures and identify at-risk assets.

The company’s online and in-classroom training and ongoing annual designations are designed to help retirement, wealth and other investment professionals serve their clients’ best interests. Fi360 has awarded the AIF Designation to over 11,000 advisors since 2003.

SEC forms Asset Management Advisory Committee

The Securities and Exchange Commission today announced the formation of its Asset Management Advisory Committee.The committee was formed to provide the Commission with diverse perspectives on asset management and related advice and recommendations.

Topics the committee may address include trends and developments affecting investors and market participants, the effects of globalization, and changes in the role of technology and service providers.

The committee is comprised of a group of non-governmental experts, including individuals representing the views of retail and institutional investors, small and large funds, intermediaries, and other market participants.

SEC Chairman Jay Clayton has appointed Edward Bernard, Senior Advisor to T. Rowe Price, as the initial committee Chairman. Other committee members include:

John Bajkowski, President and Chief Executive Officer, American Association of Individual Investors
Michelle McCarthy Beck, Chief Risk Officer, TIAA Financial Solutions
Jane Carten, Director, President, Director, and Portfolio Manager, Saturna Capital
Scot E. Draeger, President-Elect, General Counsel, and Director of Wealth Management, R.M. Davis Inc.
Mike Durbin, President, Fidelity Institutional
Gilbert Garcia, Managing Partner, Garcia Hamilton & Associates
Paul Greff, Chief Investment Officer, Ohio Public Employees Retirement System
Rich Hall, Deputy Chief Investment Officer, The University of Texas/Texas A&M Investment Management Co.
Neesha Hathi, Executive Vice President and Chief Digital Officer, Charles Schwab Corp.
Adeel Jivraj, Partner, Ernst & Young LLP
Ryan Ludt, Principal and Global Head of ETF Capital Markets and Broker/Index Relations, Vanguard
Susan McGee, Board Member, Goldman Sachs BDC Inc.
Jeffrey Ptak, Head of Global Manager Research, Morningstar Research Services
Erik Sirri, Professor of Finance, Babson College, and Independent Trustee, Natixis Funds, Loomis Sayles Funds, and Natixis ETFs
Aye Soe, Managing Director and Global Head of Product Management, S&P Dow Jones Indices
Ross Stevens, Founder and Chief Executive Officer, Stone Ridge Asset Management
Rama Subramaniam, Head of Systematic Asset Management, GTS
John Suydam, Chief Legal Officer, Apollo Global Management
Mark Tibergien, Managing Director and Chief Executive Officer of Advisor Solutions, BNY Mellon | Pershing
Russ Wermers, Dean’s Chair in Finance and Chairman of the Finance Department, University of Maryland’s Smith School of Business, and Managing Member, Wermers Consulting LLC
Alex Glass, Indiana Securities Commissioner (non-voting)
Tom Selman, Executive Vice President, Regulatory Policy, and Legal Compliance Officer, FINRA (non-voting)

The committee will be formally established on Nov. 1, 2019 for an initial two-year term, which can be renewed by the Commission. The Commission will announce further details about the committee in the near future.

Schwab to offer Pacific Life fee-based investment-only variable annuity

Pacific Odyssey, Pacific Life’s no-commission variable annuity for fee-based advisers who charge clients a percentage of assets under management, is now available to independent Registered Investment Advisors through Schwab Advisor Services.

In addition to the fee charged by their advisers, owners of the contract would pay a 0.30% annual expense ratio on the separate account investments and 0.15% annual mortality and expense risk charge.

The free death benefit promises return of the account value at the contract owner’s death, according to a release from Brian Woolfolk, FSA, MAAA, senior vice president of sales and chief marketing officer for Pacific Life’s Retirement Solutions Division.

Through the Schwab Annuity Concierge Service for Advisors, advisers get free assistance with contract fulfillment from insurance-licensed phone reps, the release said.

Schwab Advisor Services, Charles Schwab Insurance Services and Pacific Life are separate, unaffiliated firms.

Mesirow, Financial Soundings partner on 401(k) managed account service

Mesirow Financial today announced the launch of Mesirow Financial Precision Retirement, a participant managed account program that is designed to enhance financial wellness and offer professional portfolio management for retirement assets.

Mesirow Financial Precision Retirement combines retirement planning advice and reporting, proactive dynamic messaging to achieve targeted outcomes, and Mesirow Financial’s custom portfolio construction expertise, said Michael Annin, Head of Investment Strategies at Mesirow Financial, in a release.

Mesirow Financial partnered with fintech provider Financial Soundings to leverage its proven Retirement Planning Insights program and expand upon the offering to include participant managed account functionality. Financial Soundings has a history of increasing the utilization of employee retirement benefits and improving retirement readiness scoring, said Steve Maschino CEO & President of Financial Soundings

Mesirow Financial Precision Retirement enables plan sponsors to offer online advice based on a participant’s unique situation, the ability to model what-if scenarios, and on-demand reporting.

More investors see a recession approaching: Allianz Life

Fully half of Americans now fear the onset of a major recession, according to the latest Allianz Quarterly Market Perceptions Study. “Consumers are increasingly anxious about the effects of market volatility on their finances,” according to the Q3 findings from Allianz Life.

Increasing numbers of respondents also say they worry that a “big market crash” is “on the horizon” (48% in Q3 compared with 47% in Q2 and 46% in Q1), said Kelly LaVigne, vice president of Advanced Markets, Allianz Life, in a release.

Among Millennials, 56% say they are worried about a recession being right around the corner, compared with 51% of Gen Xers and 46% of boomers. Millennials are twice as likely as Boomers however to say they are “comfortable with market conditions and ready to invest now” (47% of Millennials and just 17% of Boomers).

The share of respondents who say it’s important to have some retirement savings in a financial product that protects from loss has been trending down (66% in Q3 compared with 72% in Q2). But the share of respondents who favored putting some money into a financial product that offers modest growth potential with no potential loss is up (24% in Q3 compared with 18% in Q2).

Fraternals are feeling hazed: AM Best

Companies in the fraternal segment of the U.S. life insurance industry are struggling to stay competitive, given their limited financial resources and difficulties in growing membership, according to a new AM Best report.

The new Best’s Market Segment Report, titled, “U.S. Fraternals Face a Difficult Growth Environment,” said that the segment’s premium growth was relatively flat in 2018 and has been that way for most of the last decade. AM Best believes fraternal insurance companies must embrace newer technologies or risk falling behind.

Net premiums written (NPW) for the 44 U.S. life fraternal companies covered in this report have hovered around $10 billion in each of the past eight years. The fraternal population has tried to compete by guaranteeing higher minimum interest rates on its individual annuity business. But that elevates the fraternals’ risk profiles and pressures operating results.

Still, in 2018 the fraternal segment recorded an 85% increase in net income to $1.6 billion, allowing for consistent growth in the fraternal segment’s capital and surplus, the report said. The segment has extra capacity even though its financial flexibility tends to be limited.

Many fraternals also have broadened their target market to include more religious affiliations or demographic groups. If Millennials become even more socially-conscious and community-focused, the idealism of fraternals may appeal to them. The report notes that AM Best focuses on premium growth, as opposed to membership numbers, as a key component of operating performance.

Consolidation may be more difficult for fraternals, owing to their differing charters. Regarding technology, AM Best foresees that only the largest fraternal societies are likely to be first movers on innovation owing to their limited resources, especially as the insurance industry technology moves toward a world of data analytics and real-time health monitoring devices. Some organizations may enter into run-off, as they struggle to keep up.

France reforms retirement

Posted on October 10, 2019 by Editorial Staff -

This summer, France began shaking up its retirement savings system, enacting a new pension law and new regulations in an effort to make it easier for its citizens to save for retirement and to stimulate investment in the domestic economy, according to a report in IPE.com.

Natixis, BNP Paribas, Amundi are among the French asset managers who are launching products in the expanded defined contribution space.

On October 1, a new savings vehicle, called the Plan d’Epargne pour la Retraite, or PER, became available within defined contribution (DC) plans. PER comes in three flavors: PERin for individuals, and two group versions (universal PER and categorical PER), which companies can combine into a single plan.

All three variants enable participants to choose an annuity, a lump sum (but only from voluntary contributions), or a combination of the two when they retire.

Members have the option of withdrawing some of their own contributions prior to retirement to buy a primary home. The default investment option is based on “lifestyling,” it is now easier to change providers, and tax incentives on voluntary contributions have been standardized.

The new plans are expected to compete with traditional French savings products such as life insurance and bank savings accounts. Life insurance is seen in France as a liquid medium-term savings product. Pension products are less liquid, allowing an asset allocation consistent with a long-term horizon and giving better long-term performance. Life insurance is generally invested in guaranteed assets, and real returns are poor because of the current low interest rates.

“Pension products will be invested in lifecycle funds, with some rules fixed by law,” said Laure Delahousse of the French asset management association, AFG. “They will be allowed to invest broadly in stocks, the proportion of stocks decreasing when the retirement date approaches.

“The investment horizon will now be much longer than for some of the current products. This will clearly open the door to riskier assets such as listed equities, but also new frontier asset classes such as illiquid real assets like infrastructure,” said Estelle Castres, executive managing director, head of insurance channel and GKIC Group, Natixis Investment Managers (NIM).

“Besides focusing on real assets, we are also working with our affiliates and clients on ESG/energy transition products in the new PER or FRPS format. This therefore aligns the government mission of funding the real economy and ESG/climate change issues in the long term, along with retirement savings under the PACTE law,” she added.

“Default investments will include a manager-guided fund or target fund, or—as in current life insurance contracts—a general account (fonds euro) and unit-linked offer. For the PERin, savers will be able to transfer their current life insurance contract into the new PACTE law version with a tax incentive, and by 2022 those will be ring-fenced.”

Xavier Collot, director of employee savings and retirement at Amundi, said, “We expect providers to transform current products into PERs, to expand voluntary contribution opportunities and tax deductibility, and to equip companies that have no supplementary retirement plan. The reform also allows investment into new asset classes such as real estate and private equity in order to increase diversification and potentially increase yield.”

BNP Paribas also have products on the launchpad. The company has retooled its core lifecycle funds to fit with PACTE law requirements. It is also “reinforcing accumulation/decumulation strategies, making them greener and introducing innovative investment management solutions such as ‘isovolatility’ funds in collective schemes (which ensure that volatility remains at a certain level).”

The future marketplace in France for ‘fonds de retraite professionelle supplémentaire’ (FRPS)—supplementary pension funds—is relatively quiet.

The FRPS framework allows providers to manage both individual and occupational arrangements. Although Aviva France, Malakoff-Mederic and Sacra are planning new vehicles, other providers have not shown the same enthusiasm.

The Pfau Phenomenon

Posted on October 10, 2019 by Kerry Pechter -

Wade Pfau’s arrival as a retirement income guru became clear to me during a presentation held long ago in the Merton Miller Forum at Dimensional Fund Advisors’s modernist headquarters on Bee Cave Road in the brown hills west of downtown Austin, Texas.

Pfau wasn’t present at that session (part of a Retirement Income Industry Association (RIIA) conference), which focused on BlackRock’s CoRI planning tool. But, during the Q&A period, one of the advisers in the room raised his hand and said to the speaker, “I hear you, but Pfau says…”

For me, that was Pfau’s tipping point. For others he may have arrived earlier. Armed with a Princeton Ph.D. in economics, Pfau, 42, has steadily gained respect over the last decade as an academic on whom advisers and annuity issuers can rely for firm evidence that the most efficient way to fund personal retirement is to blend investments and annuities.

His now-solid reputation is based on producing prize-winning articles for the Journal of Financial Planning and other adviser publications, directing The American College’s Retirement Income Certified Professional (RICP) program, and logging a lot of miles on the adviser conference circuit.

And, not least, by writing books on retirement income planning. Two years ago, the self-effacing Iowan self-published How Much Can I Spend in Retirement: A Guide to Investment-Based Retirement Income Strategies. He followed it with Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement.

[In the interest of full disclosure: Pfau’s books have been offered as premiums for new full-year subscribers to Retirement Income Journal.]

Safety-first

Now Pfau has published the book I’ve been waiting for: Safety-First Retirement Planning: An Integrated Approach to a Worry-Free Retirement. It pulls together everything advisers need to know about the various kinds of income-generating annuities and how they fit into a retirement income plan.

“Safety-first” retirement planning simply refers to a belief in funding all of one’s essential expenses in retirement—the core liabilities—with guaranteed sources of income like Social Security, pensions and, if those two don’t cover the essentials, with an annuity that produces guaranteed income for life. Excess savings can be invested in risky assets.

This idea is not new. In fact, during my stint in retirement product marketing, I asked my boss to summarize our official position on single-premium immediate annuities, and that’s essentially what he told me. It’s a concept that Pfau’s predecessors and peers—Zvi Bodie, Harold Evensky, Moshe Milevsky, Joe Tomlinson, Steve Vernon et alia—would not dispute, especially where “constrained” (i.e., strapped) retirees are concerned.

In fact, “safety-first” planning strongly resembles the “floor-and-upside” methodology behind the Retirement Management Analyst designation developed by Pfau, Michael Zwecher and others under the guidance of Francois Gadenne a decade ago at the (late, great) RIIA.

But Pfau, perhaps in part because of his Princeton stamp-of-approval, has arguably pierced mainstream independent advisers’ resistance to this general concept (and to annuities) to a degree that others have not. Most advisers, indeed, are still quite attached to the “4%” safe withdrawal rule (which is really a preserve-and-grow-principal philosophy that works best for high net worth retirees).

His diligent and thorough calculations, explanations, and Monte Carlo simulations give advisers—especially advisers unfamiliar with insurance products—the intellectual confidence they need to recommend annuities to clients entering retirement.

Advisers, it seems reasonable to say, are risk-takers, and the fear-driven risk-reduction aspect of annuities (not unlike the risk-reduction aspect of index investing years before) alienated them. His charts and graphs have shown that annuities are justifiable on the basis of greed and not just on fear.

More specifically, he has articulated the proposition that by replacing the bond allocation of a total return portfolio with income annuities, you can get higher yields than bonds, while allowing the retiree to take more risk with his or her equity allocation. The result is higher utility, as Pfau writes on page 277 of the new book:

“All income annuity participants, both the short-lived and long-lived, can enjoy a higher standard of living while they are alive than they would have otherwise felt comfortable with by taking equivalent amounts of distributions from their investments.”

‘Safety First’ Income Plans, Per Wade Pfau

Posted on October 10, 2019 by Kerry Pechter -

Wade Pfau, Ph.D., who directs the Retirement Income Certified Professional (RICP) designation program at The American College, recently spoke with RIJ about his new book: ‘Safety-First Retirement Planning.” It’s a follow-up to his two previous self-published books, about investment-based retirement planning and reverse mortgages.

The new book explains the synergy that can be achieved—in terms of reduced risk and increased consumption in retirement—by more or less substituting income annuities (or the income benefits of deferred variable and indexed annuities) for the bond portion of a retirement portfolio. I asked Pfau which type of annuity vehicle he recommends for retirees. There is, of course, no black-or-white answer.

“Any form of risk-pooling is better than none,” Pfau told RIJ. “The starting point would be to look at the level of income you could get from a life-only SPIA (single-premium immediate annuity), and then compare it with the income from a variable annuity (VA) or a fixed index annuity (FIA).

Wade Pfau

“Then you have to ask if you’re willing to accept their lower level of starting guaranteed income [offered by VAs and FIAs], and whether their upside potential is enough to offset that. Psychologically, some people might be more comfortable with the deferred VA or FIA because they don’t want to give up liquidity.

“With the VA, too, if the product makes them feel more comfortable about investing in stocks, they might be more comfortable with the fees in those products.” (Note: All annuities have fees. But the fees of VAs are more explicit and visible than the fees of indexed and immediate annuities, most of which are reflected in the price or payout rate of the product.]

Even among those who have accepted annuities as part of a retirement income strategy, tactics are still widely debated. For instance, some advisers recommend a bucketing-like strategy that uses, perhaps, a guaranteed period-certain or life-contingent income annuity for the early years of retirement and keeps stocks simmering on the back burner (the better to control sequence risk, which involves the negative impact of a major downturn in stocks during the first five years of retirement on portfolio sustainability).

Others invert that strategy and recommend spending from an investment portfolio in the first five or 10 years of retirement and buying a deferred income annuity (DIA) that doesn’t start paying out until age 80 to 85 (the better to control longevity risk at the lowest cost).

What does Pfau think? First, he says, “I’m not a big fan of bucketing. It’s probability-based.” But if he had to choose between using guaranteed income products first or last, he would put them first.

“A reasonably strong case can be made for starting income right away,” he said, speaking by phone from an American College conference in San Diego. “While it’s true that the longer you wait, the harder it is to beat the yield of an annuity with other safe investments [because the mortality credits become a larger factor in the payout as the annuity cohort shrinks over time]. But even at age 65, the implied longevity yield of the annuity is already good enough. To beat it, you have to take more risk.

“So I’d put the insured income first and put stocks at the back end. Longevity insurance [another term for DIAs] is better than nothing, but if you buy longevity insurance and take income from an investment portfolio at the beginning of retirement, then you’re opening yourself up to sequence risk.

“Also, if you follow the strategy of combining of longevity insurance with a 20-year bond ladder, you will probably be selling stocks to buy the annuity. But you really should be selling bonds to buy the annuity. When you sell bonds to buy the annuity, then any level of partial annuitization should improve your long-term outcome.”

Many advisers say that immediate income annuities aren’t attractive at current interest rates. But Pfau doesn’t consider low rates a deal-breaker for SPIAs. On the contrary.

“For someone who has retired, the case for an income annuity actually becomes stronger with low interest rates,” Pfau said, “because mortality credits are not impacted by rates.” He also doesn’t believe that low rates are necessarily a signal that stock prices are destined to rise in the future.

Rather, he subscribes to the precept that if equity returns are equal to the risk-free rate plus an equity risk premium then, all else being equal, a lower real risk-free rate will presage lower equity returns.

To assume that equity returns will go higher when real interest rates go down forces you to assume that the equity risk premium will be higher in the future, he reasons. “So I’m not comfortable building that into my analysis,” Pfau said.

“The problem with bucketing strategies,” he added, “is that they don’t explain how [the transitions between buckets] should work. So you can end up creating more risk for the plan rather than less. Even if you use an automatic bond ladder where you have ten years of bonds and buy a new bond every year, you’re still creating interest rate risk.”

In addressing the question of which is better—a fixed or inflation-adjusted income annuity—he said, “I don’t think it’s necessary to build inflation protection into the annuities. For a lot of people, spending needs will decrease with age. Or they can revisit the question and make an additional purchase of annuity income.

“The other issue involves sequence risk. If you don’t buy the inflation-protection, a SPIA will cost less. That means you won’t need to withdraw as much from your liquid investments to cover your discretionary needs. The lower withdrawal rate compensates for the impact of inflation.”

I asked Pfau about the “annuity puzzle”: Why don’t more people who don’t have pensions buy them?

“Part of it can be explained by how the tax laws work in the US,” he said. “Under those laws, annuities became used as a tax deferral tool. Because of that, annuity and pension have evolved to mean two different things. Also, annuities are complicated,” he added. In the new book, he observes that Americans already have a lot of inflation-adjusted, joint-and-survivor annuitized wealth in the form of Social Security.

More importantly, “People think that annuities are too expensive in part because they have a hard time understanding how much they can spend from a given asset base. They’re not comparing [SPIA payouts, which are about 6% a year] to the level of spending that investments can support,” Pfau said.

He was referring to the fact that a 65-year-old can spend only about 4% a year from a balanced portfolio without fear of running out of money. Yet the 4% “safe withdrawal” rule remains the most popular retirement income-generating strategy among financial advisers.

Fidelity’s brokerage claims industry price leadership

Posted on October 10, 2019 by Editorial Staff -

Fidelity Investments, whose 21.8 million accounts make it America’s largest brokerage firm, said this week that it is the only firm to offer zero commissions for online U.S. stocks, exchange traded funds (ETFs) and option trades, automatically direct retail investors’ cash into higher yielding alternatives available for new brokerage and retirement accounts, and provide best execution practices with zero payment for order flow for stock and ETF trades.

The commission changes take effect on October 10, 2019 for individual investors and will be available on November 4, 2019 for registered investment advisors, a Fidelity release said.

“Vanguard now appears to be the last major discount broker to charge commissions to trade U.S. stocks,” according to a report in Barrons today, which refers to the pricing pressure created by Robinhood on E*Trade, Charles Schwab, TD Ameritrade, Fidelity and Vanguard. “Vanguard charges $7 to $20 a trade for investors with less than $500,000 in assets with the firm; trades cost $2 a pop for accounts of $500,000 to $1 million and are free on a limited basis above that level.”

Fidelity now claims that:

It is the only online brokerage firm to automatically direct investors’ cash into higher yielding alternatives available for new retail brokerage and retirement accounts as well as providing product choice, without any minimum requirements.
Its buy and sell order execution practices provide price improvement of $17.20 on average for a 1,000-share equity order, while the industry average is just $2.89, for aggregate client savings of more than $635 million in 2018.
It receives no payment for equity order flow from market makers, allowing us to provide better execution quality for customers.
It is the only brokerage firm to report quarterly price improvement savings and other execution statistics voluntarily using the Financial Information Forum (FIF) Rule 605/606 Working Group standards.
It displays the amount a customer has saved on each trade, as well as statistics on order execution and price improvement, and offers a tool that investors can use to calculate their potential price improvement savings.
It offers zero expense ratio index mutual funds, zero minimums for account opening, zero investment minimums on Fidelity retail and advisor mutual funds and 529 plans, zero account fees, and zero domestic money movement fees.
Its stock and bond index funds and sector ETFs have total net expenses lower than comparable funds at Vanguard, the Malvern, PA-based, investment manager that has historically claimed to be the investment industry’s low-cost leader and is Fidelity’s long-time rival in mutual funds and institutional retirement services.

Federal judge dismisses adviser suit against ONL

Posted on October 10, 2019 by Kerry Pechter -

In a legal setback for financial advisers who filed a federal class-action suit against Ohio National Life for halting payments of promised variable annuity trail commissions, a federal judge in Ohio last week granted the life insurer its motion for a judgment in its favor.

A copy the decision in the case, Lance Browning v. Ohio National Life Insurance Company, et al (1:18-cv-763) U.S. District Court for the Southern District of Ohio, Western Division can be found here.

It was a whipsaw moment for the affected advisers, some of whom have had upwards of $1 million in trail commissions withheld. Last June 28, a state court judge had denied the insurer’s request, saying that its agreements to compensate broker-dealers—LPL Financial in this case—for variable annuity sales included the advisers individually as rightful parties to the agreements.

Adviser hopes rose on that ruling, then fell on October 4 when U.S. District Judge Susan Dlott reversed the state magistrate’s decision and dismissed the advisers’ claims on the grounds that Ohio National’s compensation agreement did not extend past the broker-dealer, and, moreover, that the Securities & Exchange Commission, via FINRA Rule 2320, bars life insurers from paying commissions directly to registered representatives of broker-dealers.

Advisers are, not surprisingly, angry. “Under Ohio state law, which is supposed to govern the contracts, a beneficiary of a contract has the same rights as the signer of the contract. That’s why the case moved forward,” said an adviser who asked not to be named because he is still a party to a suit over the trail commissions.

“Judge Dlott said FINRA doesn’t allow payment of commissions to reps, and that the broker-dealer had no obligation to pay the rep,” he added. “That’s not true. The rep agreement says that LPL was obligated to pay the reps as beneficiaries of the contract.”

This lawsuit is one of several against Ohio National by advisers or broker-dealers. The controversy partly reflects the fact that the variable annuities were very rich a decade ago. The richness produced immense sales, but the products were unsustainable for the carriers.

According to court filings cited by Yahoo Finance last March, Ohio National and its subsidiaries sold more than $10 billion in new variable annuities between 2012 and 2018, with between 50,000 and 75,000 independent broker-dealers being paid regular commissions until the insurer unilaterally terminated its contracts with them last year.

Many major VA issuers either got out of variable annuity business entirely or made their contracts more conservative. After staying in the game for years longer, Ohio National finally got out last December. It didn’t cancel its VA contracts—it can’t—but it did stop paying commissions to reps where it believed that its broker-dealer contracts allowed.

The controversy also reflects the fragmentation of the advisory community (or, as life insurers look at it, their retail distribution channels) and the varied relationships between advisers and broker-dealers. Under Ohio National’s agreement with Morgan Stanley, the wirehouse’s employee-advisers continue to receive trail commissions.

But at least some of the independent advisers who dealt directly with Ohio National wholesalers, and who each selected his or her own combination of upfront or trail commission, regard their broker-dealer as simply a pass-through of their rightful compensation. For them, FINRA 2320 is largely a regulatory formality required for compliance.

“Advisers are the primary beneficiaries of the broker-dealer contracts,” the adviser said. “We are supposed to get 75% to 95% of the [sales compensation]. The broker-dealer just gets a minimal amount. Under Ohio law, if you are a beneficiary of a contract you have a right to get paid under the contract. And the reps are third-party beneficiaries.”

But Judge Dlott described the advisers as mere “incidental beneficiaries” without “enforceable rights” under the broker-dealers’ contracts with Ohio National. Therefore the reps can’t “assert claims for breach of the Selling Agreement or for promissory estoppel against Ohio National.”

LPL advisers, represented by the Columbus law firms of Meyer-Wilson and Carlile Patchen & Murphy Law, sued Ohio National in federal court as a class. Individual broker-dealers are said to be filing their own lawsuits against Ohio National, but any judgments in those cases may apply only to broker-dealers and not to advisers. If those cases are settled and their proceedings sealed, they won’t affect adviser-driven litigation.

Members of SEC’s New Asset Management Advisory Committee

Posted on October 9, 2019 by No Author -

Income-producing funds from New York Life

Posted on October 3, 2019 by Editorial Staff -

Given the Fed’s recent pivot from tightening to loosening, risk-averse investors and retirees must continue to scrounge for income, sometimes in non-obvious places.

Short-duration high-yield bonds, taxable municipal bonds, taxable municipal bonds, and dividend-paying equities are all potential sources of excess yield, according to a new white paper from New York Life, which doesn’t issue index annuities but which has MainStay mutual fund for each of those asset sub-classes.

The white paper, “New York Life Investments Guide to Generating Income,” offers income-producing alternatives to the insurer’s own fixed annuities. The Fed lowered the Fed funds rate a quarter point in July and another quarter point in September.

“Given the current interest rate environment and bouts of volatility driven by trade rhetoric, geopolitical risk, and Fed uncertainty,” the white paper said, “there is a need to think outside the Barclay’s Aggregate Bond Index for income solutions.”

Short-duration high-yield bonds

If you’re looking for an investment with more kick than short-term bonds but less risk than high-yield bonds, this category offers a compromise.

“Historically, short-duration high yield has underperformed the broader high-yield market during periods of price appreciation and outperformed during market sell-offs when spreads widened. In a period of market volatility, we believe short-duration high-yield bonds compare favorably to investment-grade alternatives, offering a potentially higher yield with less interest rate risk.”

Taxable municipal bonds

This category, an alternative to corporate bonds, consists of high-quality taxable bonds that are used for infrastructure. “Deteriorating U.S. infrastructure requires $4 trillion of capital in order to be restored to a state of good repair,” the white paper said.

“With only about 55% of the funding in place, municipalities and public-private partnerships will be expected to pay for the remaining approximately $2 trillion over the course of the next 10 years. Because of IRS limits to the amount of tax-exempt debt municipalities can issue, we believe that taxable municipal bonds will provide most of this new financing.”

Insured municipal bonds

Troubled municipalities can add a layer of insurance to their bonds to make them more attractive to investors. “This type of bond, as represented by the Bloomberg Barclays Municipal Insured Bond Index, have offered a higher total return over the past five years when compared to traditional municipal bonds.

Insured municipal bonds also have had attractive upside/downside characteristics, as they have captured essentially all the upside in the market, while participating in only about three-quarters of the downside,” New York Life said.

Dividend-paying equities

In this go-to category for income seekers, New York Life recommends the stocks that have consistently grown their dividends over the years. “Equity income strategies that focus on shareholder yield and companies that generate free cash flow tend to be lower risk than pure dividend-paying stocks,” the white paper said.

“Stocks that consistently increase their dividends have outperformed all other stocks over the past five decades. From March 1972 through the end of 2018, dividend growers have offered a very attractive annualized compound growth rate of 12.5%.”

Below are links to descriptions of these New York Life’s offerings, all with minimum investments of $15,000:

MainStay MacKay Short-Duration High-Yield (MDHAX, MDHIX). The expense ratio 1.05%, and there’s a 3% load for investments of $100,000 or less. Its largest sector exposure is in telecommunications.

MainStay MacKay Infrastructure Bond Fund (MGVAX, MGOIX). The expense ratio is 0.85%. There’s a 4.5% load for investments of $100,000 or less.

IQ MacKay Municipal Insured ETF. The expense ratio is 0.30%. The top holding is Detroit Michigan Sewer Disposal Revenue bonds.

MainStay Epoch U.S. Equity Yield Fund (EPLPX, EPLCX). The expense ratio 1.07%. The sales load ranges from 5.5% for investments under $50,000 to 2% for investments of $500k to $1 million.

Honorable Mention

Posted on October 3, 2019 by Editorial Staff -

Foreign central banks lower exposure to U.S. dollar

Appetite for the U.S. dollar has been shrinking to unprecedented levels among the world’s central banks, reflecting their fear of uncertainty in U.S. economic policy and the American political landscape, said the head of research with Global Markets, EMEA, and International Securities at Mitsubishi UFJ Financial Group, Inc. (MUFG), at a recent press event in New York.
The U.S. dollar’s share of currency reserves held by central banks around the world—as reported to the International Monetary Fund—has been declining since 2017 toward record lows. Central banks hold reserves in different currencies primarily to support their liabilities, and occasionally to support the values of their countries’ respective currencies.

“The U.S. dollar is still the world’s foremost reserve currency, but central banks appear to be reducing their exposure to it in a sustained manner,” Halpenny said. “The recent decline in the value of their dollar reserves is all the more striking given that the dollar has actually strengthened for most of 2019. This means central banks are diversifying away from the greenback fast enough to offset its rising value.”

Halpenny cited U.S. political and economic-policy uncertainty as likely reasons for central banks to trim their dollar exposure. “The U.S. administration’s shifting positions on trade—especially with China—have created confusion as economic officials of other countries attempt to formulate a response,” he said. “Additionally, as we approach the 2020 U.S. Presidential election with no clear victor in sight—and with the country’s two major political parties far apart from each other on geopolitical and economic-policy issues—the road ahead looks very ambiguous.”

Halpenny pointed to capital-flow data from the U.S. Treasury Department indicating that banks have been net sellers of U.S. Treasury bonds for four years now. In the 6-month period leading to the end of July, 2019, central banks from around the world sold $124 billion worth of bonds. They sold $180 billion in all of 2018, $149 billion in 2017, and $332 billion in 2016.

“The dollar’s position as the world’s most dominant reserve currency allows the United States to enjoy lower interest rates, increased investment, cheaper consumption, and the ability to borrow and spend well beyond what other nations can afford,” Halpenny said. “However, a continuation of the current trend among central banks could erode this enviable position.”

SOA seeks papers on retirement strategies, offers $10k award

The Society of Actuaries announces an essay competition focused on helping pre-retirees and retirees, by exploring innovations and ideas that:

(1) Identify retirement risks

(2) Plan for and maintain a secure retirement.

Essays should address new developments in tools, products and/or strategies not constrained by whether they currently exist. To the extent a concept is not feasible in the current market, authors are encouraged to identify what changes are needed for such concepts to become a reality.

A $10,000 award has been allocated for this call for essays. The review committee will select the leading essays and determine how to allocate the award money.

Deadlines:

November 18, 2019: Submission of essays

December 31, 2019: Awards announcement

For more information, contact Steven Siegel, Sr., Research Actuary, Society of Actuaries, at [email protected].

New FIA from Nassau Re

Nassau Financial Group this week announced its entry into the accumulation-focused fixed indexed annuity (FIA) space with its inaugural product, Nassau Growth Annuity.

The product introduction marks Nassau’s latest initiative in its insurance and annuity businesses. The company’s incubator, Nassau Re/Imagine, is active in the Hartford, CT region’s insurance and insurtech industry.

Nassau Growth Annuity “enables us to offer a full suite of fixed annuities to the underserved middle market,” said Phil Gass, chairman and CEO of Nassau Financial Group, in a release. “To date, we have attracted 12 insurance-related startups” to the Hartford area.
The new product offers exposure to either the S&P 500 Composite Stock Price Index or the Smart Passage SG Index, an exclusive new index sponsored by Société Générale.

A More Impeachable Offense

Posted on October 3, 2019 by Kerry Pechter -

Do President Trump’s tweets about U.S. monetary policy have a measurable effect on that policy, on the behavior of market participants, or on the direction of market indices? Analysis of “tick-by-tick fed funds future data and a large collection of Trump tweets criticizing the conduct of monetary policy” by three economists suggests that the tweets do have an effect.

In a new working paper from the National Bureau of Economic Research, Howard Kung and Thilo Kind of London Business School and Francesco Bianchi of Duke, present “market based evidence” that President Trump’s tweets influence “expectations” about monetary policy.

“These collected tweets consistently advocate that the Fed lowers interest rates,” they write. “Identification in our high-frequency event study exploits a small time window around the precise time stamp for each tweet. The average effect of these tweets on the expected Fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps.”

The authors of the paper conclude that “market participants believe that the Fed will succumb to the political pressure from the President, which poses a significant threat to central bank independence.” (See chart from paper below.)

This figure reports the federal funds upper limit target together with four event types: All FOMC meetings, the inauguration of Donald Trump on the on the 20th of January 2017, the nomination Jerome Powell for the Fed Chair position on the 1st of November 2017, and the first critical Tweet by Donald Trump which promotes lower interest rates on the 16th of April 2018.

The authors wrote, “the tweets do not simply affect expectations about the timing of changes that markets were already anticipating, but instead move market expectations about the stance of monetary policy.”

“One of the reasons behind the interest rate cut in July was that markets were anticipating a cut, and not following through would effectively be a stance of contractionary monetary policy,” the paper said. “Therefore, even if the Trump tweets only have a direct impact on market expectations, they can still indirectly affect policy due to how the Fed factors in market expectations when deciding on monetary policy.”

Market participants may no longer believe that the Fed operates independently of the White House, the paper said. Instead, the market may believe that this White House and perhaps future White Houses will keep interest rates ultra-low in order to sustain the bull market in stocks.

President Trump is currently the subject of a congressional investigation into the implications of his telephone conversation last July with the president of the Ukraine. The transcript of the call appears to show the president encouraging the Ukraine president to investigate a potential Trump political rival, former vice president Joe Biden, at a time when the White House was holding up the delivery of U.S. military equipment to the Ukraine.

Given the remoteness of the Ukraine question, however, and the ambiguities of the transcript, a large part of the American public hasn’t recognized the content of the telephone call as an “impeachable” offense. And it may not be, except perhaps to those who see it as a last straw in a parade of unethical actions, including the president’s acquiescence to foreign interference in the 2016 election, that were driven mainly by his personal political and financial interests.

It could be argued that the president’s efforts to badger or maneuver the Fed chairman into lowering interest rates to boost the stock market and burnish Trump’s economic record for the sake of political gain would be a clearer abuse of presidential power—especially to those who have welcomed the gradual rise in rates since 2015.

Asset managers need to design ‘vehicle-agnostic’ products: Cerulli

Posted on October 3, 2019 by Editorial Staff -

Asset managers say that their product plans for the next 12 months are spread across mutual funds (27%), exchange-traded funds, or ETFs (25%), and separate accounts (29%), but they also include other vehicles (18%), such as collective investment trusts (CITs), private commingled funds, and interval funds, according to Cerulli Associates.

[Note: An interval fund is a closed-end fund whose shares don’t trade on the secondary market. Instead, the fund periodically offers to buy back a percentage of outstanding shares at net asset value (NAV).]

As asset managers seek to deliver a more vehicle-agnostic approach to product development, they must consider a number of factors in developing their roadmap to success, said Cerulli’s latest report, U.S. Product Development 2019: A Roadmap to Vehicle Proliferation.

“Increasing cost-awareness and a more stringent focus on fiduciary responsibility is causing mutual fund providers to prioritize development and distribution of other vehicles over the mutual fund,” the Boston-based global consulting firm said in releasing the report this week, noting that asset managers are trying to deliver a “more vehicle-agnostic” approach to product development.

Asset managers should enable clients “to consume a strategy in the wrapper of their own choosing, but this may not always be the best approach due to structural barriers and overall feasibility,” said Cerulli associate director Brendan Powers in the release.

As asset managers expand their vehicle offerings, he added, they should consider “the strategy they are seeking to distribute, their primary client target markets in which it will be distributed, and any changing demand from the client segments within those markets.”

In building a new vehicle, firms shouldn’t get caught up in deciding whether to clone an existing vehicle or create a different one, Cerulli cautioned. Instead, Powers said, firms base their new vehicle design on their capabilities and customer demand.

Even as the asset management industry moves toward vehicle-agnostic delivery of investment capabilities, Cerulli sees operational obstacles to vehicle proliferation.

“One of the most glaring is the sourcing, use, and harvesting back of seed capital,” said Matt Merritt, product development analyst at Cerulli, in the release. Product rationalization, fee compression, and the increased use of passive products are all compressing their budgets, so asset managers need to scrutinize the “lifecycle of seed capital” more than ever.

Making Income Rise as Health Declines

Posted on October 3, 2019 by Kerry Pechter -

Pilates lovers, vegetarians and never-smokers are not the only people who should, can, or do buy life-contingent income annuities. People in poor health can get attractive annuity payouts by purchasing so-called impaired or “medically underwritten” income annuities.

Such purchases are rare in the U.S., to be sure. Only Mutual of Omaha offers a single premium income annuity with an impaired option, and its sales in this niche are slim. (Genworth dropped its offering last May when it suspended intermediary-sold products.)

But sales of impaired annuities aren’t entirely theoretical. Russell Wild, a fee-only planner in Philadelphia, has helped guide two clients—both older men in poor health without spouses, children or other legacy concerns—through the annuity purchase process, in part by showing them that the heightened yield from an impaired annuity would lighten the necessary withdrawal rate from their liquid investments.

A 7.32% annual yield

Russell Wild

One such client was a 68-year-old optometrist with a 50/50 portfolio of no-load funds from Vanguard and State Street Global Advisors that was worth about $700,000. “For a portfolio of that size I usually recommend 12 or 13 funds and ETFs,” said Wild, who is the author of Investing in ETFs for Dummies (Wiley, 2015) and other financial books.

“He was planning to retire that year because he had had several heart operations. He’d been in and out of the hospital,” said Wild, who worked with the client on an hourly fee basis, as he often does. “I thought that he might qualify for a ‘medical markup’ on an annuity, so I sent him to immediateannuities.com for a quote.” When the client called the agent, Wild was on the call too.

After submitting a sheaf of medical records to Mutual of Omaha for review, the client’s actuarial age was adjusted upwards by six years, to age 74. In other words, he received the same payout rate as a 74-year-old man. The annuity income plus Social Security would be more than the $50,000 that he was still earning by working part-time.

The client wanted $60,000 a year. “So we decided to use $300,000 of his IRA money to buy an impaired life annuity with a starting payout of $1,830 a month and a 2% annual cost of living adjustment (COLA), for a 7.32% yield. I suggested he take Social Security at age 69, which would give him another inflation-adjusted $2,650 a month.”

After an underwriting process of about six weeks, the client bought the annuity. The combined Social Security and annuity income was $53,764. To reach the desired $60,000, he would draw just over $6,000 a year from the $400,000 that remained in mutual funds and ETFs. The annual withdrawal rate on the 70% equities/30% fixed income funds would be about 1.6%.

[At today’s rates, a $300,000 immediate life-only fixed income annuity for a 74-year-old man pays about 22% more per month than would an identical annuity for a 68-year-old man, according to immediateannuities.com.]

“When I mention annuities to a client, the first thing I say is, ‘This is not a variable annuity,’” Wild told RIJ. “That puts them at ease. People are aware that annuities can have high commissions and are not always in the best interests of clients. I emphasized the simplicity of a SPIA contract. For comparison, I researched the income figures without the mark-up.

“But I was still on-the-fence myself about whether to recommend the annuity. My client could have withdrawn about five or six percent of his savings for life, which I thought wouldn’t be more than 20 years,” he told RIJ. Regarding the annuity inflation rider, Wild said he wasn’t “wed to having an inflation-rider or no inflation rider.”

A 12.63% annual yield

In a separate case, Wild arranged the sale of an impaired annuity to a 77-year-old widower who had recently been in and out of the hospital with various ailments. After reviewing his medical records, Mutual of Omaha rated his age at 82. “That made a substantial difference in price, because the mortality curve is steeper at that age. So we were looking at a 13% yield,” Wild said.

At the time, the client’s $600,000 portfolio was conservatively allocated to 40% stocks and 60% bonds. He already owned an income annuity paying $1,440 a month. He received an additional $2,505 a month from Social Security. To reach a desired income of about $90,000, he needed about $40,800 more per year. He could have achieved that by withdrawing about 6.8% a year from his portfolio.

Wild thought 6.8% “was pushing” the limits of safe withdrawal from a $600,000, so they explored the idea of taking pressure off the withdrawal rate by buying a medically underwritten annuity. They used $100,000 from the client’s own IRA and $100,000 from an IRA he inherited from his late spouse.

The impaired annuity would produce $2,105 per month or $25,260 each year for a yield of 12.63%. To reach his income goal (above the two annuities and Social Security), the client would need to withdraw only about $16,000 from his remaining $400,000 portfolio, for a withdrawal rate of just 4% a year.

Wild said the impaired annuities helped his clients cover all their basic living expenses at a reduced cost, and that the chance still exists that they will outlive actuarial expectations. “I know a woman with stage four breast cancer,” he told RIJ. “Doctors told her she’d be dead in six months. That was 10 years ago.”

The underwriting process

Mutual of Omaha’s Ultra Income SPIA is the product that Wild’s clients purchased. The contract itself is not built for health-compromised clients, but “income enhancement is available for impaired risks,” according to contract information provided to RIJ by the insurer. The underwriting process works as follows:

The producer completes the SPIA quote application, choosing “rated-age SPIA.”
The application and pertinent medical information are emailed to the home office. Medical information should include at least 12 months of pertinent medical records. For example, if the client has a history of heart disease and cancer, include cardiology and oncology records.
The application and medical records are reviewed by a Medical Director. Based on his or her review, the Medical Director assigns a rated age. The rated age reflects the life expectancy of the applicant based on their age, sex and medical condition. For example, a 65-year-old male applicant might have a heart condition that makes his life expectancy the same as a 70-year-old male’s. The rated age in this example would be 70.
The rated age is reported back to the producer, who runs a new illustration using the rated age to determine the annuity payout for the selected income option and presents this to the client. Continuing the example above, the illustrated payout for a 70-year-old male would be higher than that for a 65-year-old male. The difference between the annuity payout for the rated age and the annuity payout for the actual age is the income enhancement provided for by the impaired risk underwriting process.
If acceptable to the client, the producer then submits the rated age quote with the formal application for final review and issuance of the policy.

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