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Why Eight States Are Suing Over ‘Reg BI’

Posted on September 12, 2019 by -

Which is greater: The SEC’s cynicism in using its sacred powers to protect the brokerage industry instead of the investing public, or the naïveté of eight state attorneys general in believing that they can bring the powerful brokerage industry to heel?

A U.S. District Court judge in the Southern District of New York has been asked to sort things out.

On Monday, the attorneys general of New York, California, Delaware, Maine, Oregon, New Mexico, Connecticut and the District of Columbia—all pro-Clinton in 2016—sued the SEC and asked the court to set aside the SEC’s recently passed Regulation Best Interest or “Reg BI.”

According to the complaint, Reg BI is wrong because it merely requires dually-registered financial advisers (who can sell securities on commission and give advice for an asset-based fee) not to put their own interests ahead of their clients’ when recommending products and doling out advice.

Instead, the suit says, the SEC should have carried out the directive of the 2010 Dodd-Frank legislation and created a regulation that required everyone selling securities or doling out financial advice to act as true “fiduciaries” and advise clients without regard to their own interests.

Wall Street is happy with Reg BI, as it should be. SEC chairman Walter “Jay” Clayton III, a 2017 Trump appointee, gave brokers and asset managers a best interest rule that understands their needs. In the Final Rule, Clayton wrote, “We have declined to subject broker-dealers to a wholesale and complete application of the existing fiduciary standard under the Advisers Act because it is not appropriately tailored to the structure and characteristics of the broker-dealer business model.” [Emphasis added.]

The ‘Merrill rule’ reclaimed

Reg BI affirms the status quo, which has been in place since before the Great Recession. In 2007, a federal appeals court panel reversed the so-called “Merrill rule,” which since 1999 had allowed brokers to earn asset-based fees from clients without registering as advisers or accepting a fiduciary responsibility—selflessness—toward their clients.

In response, “tens of thousands of brokers registered as Investment Adviser Representatives,” Ron Rhoades, a professor of finance at Western Kentucky and close observer of fiduciary legislation, told RIJ in an email this week. But many of them maintained their broker-dealer affiliations.

Their new “dual registration” allows them to accept asset-based fees under the selfless fiduciary standard and to accept commissions under the more self-interested suitability standard of conduct (akin to caveat emptor or “buyer beware”). In this way, brokers recovered the flexibility the 1999 Merrill rule had provided them.

“The SEC allows a person and firm to be both a salesperson (broker-dealer) and a fiduciary (investment adviser) at the same time, for the same client,” Rhoades said. “Typically the dual registrant has an ‘investment advisory’ account for part of the client’s assets on which AUM [assets under management] fees are assessed, while separate brokerage accounts exist for other assets of the client,” he said. “The SEC’s view is contrary to state common law, which generally holds that fiduciary status, once assumed, extends to the entirety of the relationship.”

Fred Reish, of the law firm of Drinker Biddle, told RIJ that this state of affairs will continue under Reg BI beginning on June 30, 2020, “except that ‘suitability’ will be replaced by ‘best interest.’

“Also, Reg BI will require that a dually registered adviser must select the account type through a best interest process when those rules apply. For example, the advisor would need to consider the account types at the broker dealer and those at the RIA and recommend the ‘best interest’ one,” Reish added.

“In theory that means that if an investor wants to buy-and-hold certain mutual funds, the advisor would use the broker-dealer. But if that same investor had a part of his investments that is advised and monitored on a continuous basis, the advisor would use the RIA,” he said.

“The dual registrants are supposed to make clear what role they are undertaking, and when they ‘switch hats,’ so to speak,” Rhoades told RIJ. “The reality is that clients think that their dual registrant represents their best interests and acting under a fiduciary duty of loyalty at all times.

“In two instances over the past year, I’ve heard from clients that they asked their dual registrant ‘Are you a fiduciary to me?’ Both replied ‘yes.’ But, in both instances, only a small amount was in investment advisory accounts.” The majority of their money was in brokerage accounts.

For the attorneys general who are suing the SEC, such ambiguity  only confuses investors, who don’t know which shell the fiduciary pea might be under at any given moment, or even that such a pea exists. While the SEC now requires all advisers to act in the best interest of clients—an apparent tightening of consumer protection—it leaves the definition of “best interest” up to the adviser—a loosening of consumer protection. The sum of that do-si-do is  zero; almost nothing has changed except that, in the view of the states, the expression “best interest” now means something closer to “suitable” than to “fiduciary.” They’d prefer that BI be closer to “fiduciary.”

Consumers betrayed

Most investors don’t want mere advice from their advisers. Advice is as common as cough drops. They can get advice from a brother-in-law, a neighbor or a robo-adviser. If truth be told, they pay advisers to protect them. How? By not letting them take on too much risk, by screening the fine print of contracts for them, and—ideally—by warning them before a crash. That’s what they hope they’ll get for the fees they pay.

That’s an unrealistic but natural expectation. Advisers have a more pragmatic view of their occupation. Whether they work for a financial services firm or own their own businesses, they’re trying to maximize their personal revenue. They want to grow their list of “A” clients ($1 million+), encourage their “B” clients, and minimize time spent with “C” clients.

I don’t think dually registered advisers try to deceive anyone by switching hats within or between clients. Rather, they believe they’re more productive if they can work on a fee-basis with high net worth clients, sell products on commission to mass-affluent clients, and mix the two strategies with clients who are in between.

In wording Reg BI as it did, the Clayton SEC supported that point of view. That’s the problem. Instead of protecting consumers, the SEC chose to keep them at a disadvantage in situations where, as the ones bringing the cash to the table, they deserve more control. The state attorney generals are suing the SEC over that betrayal.

© 2019 RIJ Publishing LLC. All rights reserved.

What active funds must do to survive: Cerulli

Posted on September 5, 2019 by -

Active mutual fund families have faced headwinds in recent years as a broad-based bull market has limited fund managers’ ability to outperform and both advisors and clients have demanded lower costs. From 2014 through 2Q 2019, active funds saw nearly $900 billion in net outflows, while passive funds brought in more than $1 trillion.

But new research from Cerulli Associates, the Boston-based global consulting firm, suggests that while asset classes may fall in and out of favor, active managers that emphasize their good reputations and provide support for top advisers should succeed.

Despite low-cost investment products waging a war of attrition on active mutual funds’ share of advisor assets, 37% of active mutual fund families with $5 billion or more in assets under management (AUM) experienced positive organic growth during the preceding five-year period ending 2Q 2019.

“Active fund families that have grown organically have shown that there is, in fact, a viable path to success,” said Ed Louis, senior analyst at Cerulli, in a release.

Cerulli divided the universe of active open-end fund families with $5 billion or more in AUM and segmented each into four tiers:

  • Giant Managers ($200 billion or greater in active mutual fund AUM)
  • Large Managers ($50 billion to <$200 billion in active mutual fund AUM)
  • Mid-Sized Managers ($20 billion to <$50 billion in active mutual fund AUM)
  • Boutique Managers ($5 billion to <$20 billion in active mutual fund AUM)

The 12 Giant managers control $6.9 trillion in active mutual fund assets; half grew organically over the past five years. One of the fundamental ways that successful Giant managers gained market share relative to their tier has been by pursuing a brand-forward strategy.

Brand-forward firms are those that have solidly entrenched themselves in the minds of advisors and end-investors as indispensable partners. This has been especially important following the financial crisis, which rocked the faith of investors—and consequently of advisors—in active management.

“Firm reputation is very important to advisors when choosing an asset manager —in fact, nearly half (46%) of advisors build firm reputation into their selection process,” said Louis. “Successful managers lean heavily on the loyalty they’ve fostered among advisors and rely on it as a core pillar to drive growth.”

Meanwhile, Large fund families averaged a five-year compound annual growth rate (CAGR) of nearly 2%. Like the Giant managers, these firms tend to offer diversified product lines. They often have the resources to provide advisors and broker/dealers (B/Ds) with value outside of solely investment management. While nearly 40% of Large managers experienced net inflows, the segment’s growth was largely driven by a few top performers.

Only one-third of Mid-Sized and Boutique managers experienced positive organic growth over the trailing five years. Those able to generate positive flows effectively segmented advisor opportunities in the independent channels and equipped wholesalers with resources to interface with the more sophisticated investment process that top advisor teams employ.

“Effectiveness in both these areas is crucial for smaller fund families as top teams control the majority of the assets in this highly fragmented space,” Louis said.

Cerulli’s newly released report, U.S. Intermediary Distribution 2019: Capitalizing on Specialization, covers the distribution of retail asset management products through U.S.-based financial advisors.

© 2019 Cerulli Associates.

Mr. President, Please Stop Tweeting!

Posted on September 5, 2019 by -

Trump’s tweets are preventing him from achieving the 3.0% GDP growth he hoped for.  Their random nature is unsettling to business leaders whose confidence has been shaken.  As a result, investment spending has slowed.  Productivity growth should soon follow.

It is now hard to envision potential GDP growth quickening to 2.8%. A 2.3-2.5% pace seems more likely. That is not bad, but it could have been so much better.

To us, the issue is no longer about tariffs and trade and their possible impact on the economy. They might shave a couple of tenths of a percent from GDP growth next year, but they are not going to turn an otherwise healthy economy into a recession.

The issue is about Trump and his relentless tweeting. We have tried hard to separate our views about Trump, the man, from his economic policies. We wholeheartedly supported his tax cuts and his enthusiastic support of de-regulation. That action boosted business confidence, increased the willingness to invest, and seemed likely to raise potential GDP growth from 1.8% a couple of years ago to 2.8% by the end of this decade.

But his trade policy this past year and recent Fed-bashing are undoing some of the benefits from the tax cuts and the focus on de-regulation which boosted business confidence.

While we were not enamored with his initiation of a trade war with China, if the goal was to force China to change its business practices and play by the same rules as other countries then perhaps it was worthwhile.  But that goal came with a price – tariffs would reduce U.S. GDP growth slightly.

But the way he has chosen to implement trade policy has unnerved the business community. The haphazard imposition of tariffs one day followed by their removal or delay a day or two later is disquieting. Business leaders have no idea what to expect next.

A once high level of business confidence is beginning to fade, which means corporate willingness to invest is less now than it was a year ago. If investment slows, productivity growth (which has accelerated considerably) is likely to slow, which means that a pickup in potential growth to 2.8% will be difficult to achieve

Then there is Trump’s unprecedented Fed bashing. He has been pressuring the Fed to cut rates since the beginning of the year. He expected his tax cuts to produce GDP growth of 3.0%. Because that has not happened, he lays the blame squarely on the Fed.

On August 23 at the Kansas City Fed’s annual retreat Fed Chair Powell did not explicitly state that the Fed would initiate a series of interest rate cuts. Trump lashed out with, “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

Seriously? For years monetary policy has been based on the Fed’s assessment of the future path of GDP growth, inflation, and the unemployment rate.  In other words Fed policy should be “data dependent.” And it has worked well.  But that concept has been tossed into the garbage.

The current Fed story is that Trump’s tariffs are so likely to slow the pace of economic activity that there is a compelling case for lower rates now. The Fed claims that in a low-interest rate environment it must act sooner than in the past to prevent the economy from weakening.

Thus, the Fed springs into action to head off something that may or may not occur, despite any compelling evidence to suggest that a slowdown lies ahead.

First quarter GDP growth was 3.1%, second quarter growth was 2.0%, third quarter growth seems on track to be 2.3%, the unemployment rate is at a 50-year low of 3.7%, jobs creation is steady at 170,000 per month, consumer confidence is near a 15-year high, consumer spending is steady at a 2.7% pace, and the stock market reached a record high level on July 26.

Despite all of those signs of solid economic growth the Fed not only cut rates 0.25% on July 31, it hinted strongly that further rate cuts were likely by year-end. This makes no sense.

On March 20 not a single Fed official anticipated a cut in the funds rate by year-end. By June 19, eight of 17 FOMC committee members expected the funds rate to be cut by the end of the year, and seven of the eight anticipated two cuts rather than one.

What happened? Trump’s tweets. Trump significantly ramped up his anti-Fed rhetoric in June and the Fed has apparently capitulated to the political pressure. We never thought that would happen.

Once the Fed started talking about significantly slower GDP growth, the markets raised the recession flag. Short-term interest rates began to anticipate a 1.0% drop in the funds rate. In a slow growth environment inflation was likely to slow so long-term interest rates also declined.

Now, almost everybody seems to expect economic weakness and/or a recession in the months ahead. Trump started it by telling the Fed that it needed to cut rates by 1.0%. The Fed surrendered and started talking about how trade could significantly slow growth by year-end. The markets believed the Fed and began to price in substantially lower short-term and long-term interest rates.

It has become a self-reinforcing negative feedback loop – started by Trump. While that may be the consensus view, we still do not buy it.

What we don’t understand is his relentless Fed bashing. It is unwarranted. Prudent monetary policy has successfully guided the U.S. economy to the two longest expansions on record. The record-breaking expansion of the 1990’s lasted exactly 10 years. That record has now been shattered by the current expansion, which has surpassed the 10-year mark and is still going strong. That is no accident. The Fed has done a great job of producing steady growth.

But well-run monetary policy is now being threatened by Trump. If, as appears, Fed policy is truly being influenced by pressure from Trump, then we will have reckless monetary policy combined with fiscal policy that is out of control. Policy makers in Washington still pay no attention to a steady diet of $1.0 trillion per year budget deficits and an outstanding level of debt that is rising rapidly. In the long run that is a dangerous combo.

None of this suggests that a recession is imminent. It is not. But without some stability in monetary and fiscal policy, a pick-up in potential GDP growth to 2.8% – which was once within our grasp – will be difficult to achieve. Going forward, a potential growth rate of 2.3-2.5% seems more likely. That is still acceptable, but we could have done better. Mr. President, please stop tweeting!

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on September 5, 2019 by -

Sullivan to succeed Pelletier at Prudential

Prudential Financial announced this week that Andrew Sullivan will succeed Stephen Pelletier as executive vice president and head of U.S. Businesses, reporting to chairman and CEO Charles Lowrey, effective December 1.

Pelletier, 66, will retire after a 27-year career with the company, in which he led Group Insurance and Prudential Annuities, and founded Prudential’s international asset management businesses, now PGIM Global Partners. He will remain in an advisory role until April 1, 2020.

Kent Sluyter, current president of Prudential Annuities, will retire, following a 38-year career at Prudential, during which he has held various leadership positions, including president and CEO of Individual Life Insurance and Prudential Advisors.

The company also announced today three new appointments, effective December 1, to its U.S. Businesses executive team:

  • Phil Waldeck, current president of Prudential Retirement and pioneer of Prudential’s Pension Risk Transfer business, will succeed Andy Sullivan as head of the Workplace Solutions Group.
  • Yanela Frias, current head of Investment and Pension Solutions within the Retirement business, which surpassed $100 billion in pension and longevity risk transfer sales under her leadership, will be elevated to president of Prudential Retirement.
  • Scott Gaul, current senior vice president, Sales and Strategic Relationships, Prudential Retirement, will succeed Frias as head of Investment and Pension Solutions.
  • Dylan Tyson, current CEO of Prudential of Taiwan who, in a prior role, led the General Motors pension risk buyout transaction for Prudential, will become president of Prudential Annuities. His successor will be named upon receiving regulatory approval.

Continuing in their current roles will be:

  • David Hunt, president and CEO of PGIM
  • Caroline Feeney, CEO of Individual Solutions Group
  • Jamie Kalamarides, president, Prudential Group Insurance
  • Salene Hitchcock-Gear, president, Individual Life Insurance and Prudential Advisors
  • Naveen Agarwal, senior vice president and chief marketing officer
  • Caroline Faulkner, senior vice president, Enabling Solutions
Three Jackson fee-based annuities join RetireOne platform

RetireOne, the web platform where Registered Investment Advisors (RIAs) who don’t take commissions or have insurance licenses can purchase annuities and life insurance, said this week that three of Jackson National Life’s fee-based annuities are now available on the platform.

The Jackson products are the Perspective Advisory II and Elite Access Advisory II variable annuities (VA) and the MarketProtector Advisory fixed index annuity (FIA). Elite Access Advisor is a flat-fee investment-only variable annuity and MarketProtector Advisory has no surrender penalties.

Perspective Advisory II, a no-commission version of the top-selling variable annuity contract in the US, offers a popular selection of lifetime income riders that have few restrictions on the advisor’s investment options, relative to other variable annuities with guaranteed lifetime withdrawal benefits.

Jackson’s operations team will support RetireOne’s advisors and their clients, complementing RetireOne’s Advisor Solutions Team.

Ascensus publishes ‘Inside America’s Savings Plans’

Ascensus, the large independent recordkeeper that partners with Vanguard to manage thousands of small and medium-sized 401(k) plans, health savings plans and college savings plans, has released a new report on how Americans are saving.

The report is available at the Inside America’s Savings Plans microsite.

Ascensus analyzed data from over 88,000 retirement plans, 4.6 million 529 college savings accounts, more than 280,000 consumer-directed healthcare accounts, and 20 ABLE (Achieving a Better Life Experience) plans for which it provided recordkeeping and administrative services as of 2018 year-end.

The firm also highlighted health savings account (HSA) industry data from Devenir, a provider of customized investment solutions for HSAs and the consumer-directed healthcare market. The report identifies the following patterns in tax-advantaged saving behavior:

Plan sponsors and savers see the value in automatic savings models:

401(k) plans with automatic enrollment and automatic escalation features saw an average plan-weighted participation rate of 81%, which was 10 percentage points higher than that in plans without automatic enrollment.

In 2018, 35% of 529 account owners had scheduled recurring bank contributions and 20% of ABLE accounts leveraged automatic savings methods. Approximately 6% of 529 account owners use payroll direct deposit.

According to Devenir, 26% of all HSA contributions came directly from an employer and 56% came from an employee through their workplace in 2018.

Digital tools have a positive influence:

Ascensus’ Retirement Outlook Tool allows savers to refine retirement savings goals. In 2018, 26% of first-time tool users were saving at an average rate of 8% within a few weeks of engaging with it. According to Ascensus’ partner Financial Finesse, people must save at the rate of 9% or more to be financial prepared for retirement.

The firm’s Ugift platform allows secure gifting to beneficiaries’ 529 accounts. The Ugift website allows users to establish gift-giver profiles and schedule recurring gifts to streamline the process. As of 2018 year-end, gift givers had established 26,284 online profiles and 10,438 recurring gifts. Overall, the Ugift program saw a 345% year-over-year increase in dollars gifted to 529 accounts.

Changing financial and market landscapes are influencing individuals’ savings strategies:

Ascensus’ 401(k) platform data highlights that individuals under 25 years old are saving at lower savings rates than those in older age groups. Of all retirement savers on our platform who are “on track” to meet their goals, 20% of them are between 25 and 34 (versus 3% for the under-25 age group).

The market downturn in 2018 had a minor impact on overall 529 account balances across all demographics, but this average balance still reached nearly $23,000 as of 2018 year-end. Account owners ages 55 to 64 and over 65, with average beneficiary ages of 17 and 13 respectively, had the second- and third-largest average balances of all age groups, both exceeding $22,000.

Healthcare expenses continue to increase exponentially, with the Employee Benefit Research Institute (EBRI) reporting that the average couple will now cumulatively need $399,000 for a 90% chance to cover their healthcare expenses in retirement. There are currently over 25 million HSAs held by savers across the U.S. with a combined $53 billion in assets.

Fidelity publishes 10th annual plan sponsor survey

Many plan sponsors believe their employees are falling short in their retirement savings, according to the 10th edition of Fidelity Investments’ Plan Sponsor Attitudes Study, whose results were announced this week.

While 62% of sponsors said their employees expect the plan to meet all of their funding needs in retirement, only 55% said they believe their plan participants are actually saving enough in the plan to retire. The study, which began in 2008, surveyed employers who offer retirement plans that use a wide variety of recordkeepers.

Nine in 10 plan sponsors reported that they have had employees work past their desired retirement date, according to the study, and 73% of sponsors acknowledged costs associated with those delays, including increased benefit costs (37%), reduced mobility for younger employees (33%), obstacles to strategic workforce planning (31%), and lower productivity (27%).

The top two reasons plan sponsors gave for hiring plan advisors were (1) to understand how well the plan is working for employees and how to improve it (27%), and (2) for help with the increasingly complicated process of managing a retirement plan (26%).
This year, the report said, three-fourths of sponsors reported making a change to their plan design or investment menu in the past two years. The top plan design changes were to increase the match (26%) or add a match (24%). The top menu change was to increase the number of investment options, consistent with last year’s study.

Sponsors appear to be reviewing plan performance more often, with a shift away from annual reviews (14% in 2019 versus 27% in 2018) to quarterly reviews (45% in 2019 versus 38% in 2018).
Fidelity research found that 36% of employees have less than three months of income saved in case of emergency and that absenteeism is 29% higher among employees who do not have enough emergency savings.

This year’s Plan Sponsor Attitudes Study found that more than half (56%) of sponsors said they offer financial wellness programs, and 59% saw them as very impactful for employees. Two-thirds of sponsors said that advisors discussed financial wellness programs with them, and plans with advisors were more likely to have them in place than those without advisors (57% versus 43% respectively).

Vanguard releases fund voting records

Vanguard has released its global 2019 Investment Stewardship Annual Report, which details company engagements and voting records of its mutual funds for the 12 months ended June 30, 2019.

In the report, Vanguard calls for greater diversity among boards of directors at public companies. Vanguard believes that diverse boards make better decisions, which can lead to better results over the long term.

Vanguard is asking boards of directors to publish their views on board diversity, disclose their board diversity measures, broaden their search for director candidates, and report progress against those outcomes. The report also addresses sustainability’s role in long-term investing and the importance of standardized risk disclosure frameworks.

Over the last year, Vanguard’s investment stewardship team voted on nearly 170,000 matters at 13,225 companies. The team also held discussions, known as engagements, with the boards and management teams of almost 900 companies representing 59% of Vanguard funds’ equity assets under management.

While all portfolio companies have the opportunity to engage with Vanguard, similar to previous years, the team primarily held engagements with companies that represent Vanguard funds’ largest holdings, as well as corporations facing governance issues. A full list of all of the companies Vanguard engaged with during the 2018-2019 proxy year is available on page 36 of the report.

Fleming moves to Lincoln Financial

Christopher Fleming has joined Lincoln Financial Group as senior vice president and head of Life & Annuity Operations, with a focus on enhancing the customer experience and improving internal operating efficiency. He will report to Jamie Ohl, executive vice president, president Retirement Plan Services, head of Life & Annuity Operations.

Fleming has more than 25 years’ industry experience. He joins Lincoln Financial from Fidelity & Guaranty Life, where he served as senior vice president, Operations and IT since 2011. Prior to that role, he was with ING for seven years, at AIG and at GE. Fleming earned a Bachelor of Science in Business Administration from the Ohio State University and is based in Greensboro, NC.

© 2019 RIJ Publishing LLC. All rights reserved.

We Deserve Better

Posted on September 5, 2019 by -

Welcome back from the Labor Day holiday.

Autumn is upon us, and more than leaves are falling. Since the Fed’s July 31 quarter-point interest rate cut, the payout from single premium income annuities has dropped significantly.

A contract paying $25,000 a year only months ago now pays $22,000. That’s frustrating; we (I’m speaking for the life insurance industry) were led to expect a return to pre-crisis rates by 2020. The president now wants rates to go lower to extend the expansion.

It’s true that rising rates could trigger a recession. But the president seems unconcerned that a falling rate has downsides too.

The behavior of the White House is characteristically brash. Tariffs were invented to protect specific domestic industries from cheap imports, not to intimidate a trade partner generally or to come at the unintended expense of domestic industries (like soybean farming). So his trade policy makes little sense.

Like Richard Nixon’s when he took the US off the gold standard in 1971, the president’s moves seem intended to improve his reelection chances. But even if luck favors us in the end, the country, and the annuity industry, needs and deserves better reasons than that from its leader.

© 2017 RIJ Publishing LLC. All rights reserved.

Be a ‘Succession Planter’ of Lifetime Income

Posted on September 5, 2019 by -

Every farmer or gardener appreciates the value of “succession planting.” That’s a cultivation method where plants are sown in staggered intervals, mature in orderly succession, and supply a continuous harvest. It’s a form of just-in-time food propagation.

Succession planting has a counterpart in the retirement income realm: the time-segmentation or “bucketing” method. Assets are purchased at retirement, assigned to a series of multi-year intervals, and “harvested” for income when each interval begins.

Last week, about 100 advisers, either fans of bucketing or curious about it, gathered in downtown Boston for Wealth2k’s annual IFLM (Income for Life Model) conference, sponsored by Securities America, WisdomTree, UpSellerate and Delaware Life.

Macchia

IFLM is a soup-to-nuts client management platform built around a bucketing tool. Wealth2k CEO David Macchia calls IFLM “a solution that provides everything a financial advisor needs to enter and succeed in the retirement income planning business.”

As an income-generation method, time-segmentation competes with the systematic withdrawal program (the “4%” rule) and the flooring method (using guaranteed income sources to cover all essential expenses) for advisers’ attention. It’s been called gimmicky, but some advisers swear by it, especially as a context for introducing annuities.

Simple and complex

The main attractions of the conference, for RIJ, were two time-segmentation case-studies presented by Zach Parker, first vice president of income distribution and product strategy at Securities America, a registered investment advisor (RIA) and broker-dealer that licenses IFLM under the name NextPhase.

In Parker’s first case study, he prescribed a hybrid of bucketing and flooring to create growth and income for a hypothetical 65-year-old newly-retired couple with $1.6 million in savings, an estate goal of $1.5 million and a first-year income need of $8,000 per month ($4,850 from investments plus $3,150 from Social Security and a small pension).

Following Securities America’s version of IFLM, called NextPhase, Parker advised the clients to put $500,000 into an income-generating annuity and to divvy up their remaining $1.1 million among six five-year segments—with a big chunk in the sixth bucket for bequests or long-term care. (See chart below, where we call this couple “Will and Amy.”)

In this particular plan—before filling the buckets—Securities America calls on these fictional clients to make two important decisions. The couple’s first decision requires picking a lifetime guaranteed income-generation vehicle. It can be a single premium income annuity, a deferred income annuity, a variable annuity with a guaranteed lifetime income benefit (GLWB) or a fixed index annuity with a GLWB.

After that, they need to make an even more important decision: whether to start income from the product immediately or in 10 years. Their choice will affect the amount of liquidity they enjoy in retirement, the fees they’ll pay, and how much money they’ll allocate to each bucket, and what their overall equity allocation will be throughout retirement. It won’t, however, affect their monthly income or their estimated legacy value.

The first two (of many) decisions

Regarding the first decision, Securities America recommends the FIA with GLWB. It generates the most income—either about $2,400 a month for life starting immediately or about $5,200 a month starting in 10 years. For several years now, FIAs have been beating VAs and SPIAs on income production. VA issuers have become risk-averse and offer conservative payouts. SPIAs still suffer from low interest rates and illiquidity. That leaves an FIA with a GLWB, with its generous commission, as the safest, obvious choice.

Regarding the second decision, the clients face a fork in the road. Either fork will lead them to same place, but one route will be more volatile than the other. If they start lifetime income right away, they’ll get $2,400 from the GLWB to go with their $3,150 in Social Security and pension income. Assets in the first two buckets will have to produce only $2,450 a month to boost their guaranteed monthly income to the desired $8,000.

Parker

If the couple delays annuity income until year 11, on the other hand, they’ll have no annuity income at all for the first 10 years. That will force them to draw about $5,000 a month ($60,000 a year) from their investments in each of the first 10 years (See Segments One and Two in the chart).

From an investment standpoint, the couple will end up with a much higher equity allocation over their lifetime if they choose to tap the GLWB at the beginning of retirement. During the first 10 years, in fact, they can allocate about $300,000 more in equities if they take immediate income from the FIA, while generating the same real $8,000 monthly income.

Here’s the computation. To produce a real $2,450 per month during the first 10 years, they’ll only have to put about $145,000 in the first bucket and $176,000 in the second bucket. The rest of money—$474,590—can go into the equity-rich third, fourth and fifth buckets.

To produce a real $5,000 per month during the first 10 years, they’ll need to put about $275,000 in the first bucket and $285,000 in the second bucket. That leaves only $272, 194 for the equity-rich third, fourth and fifth buckets—more than $200,000 less in equities. (Either way, about $276,000 goes into the sixth, most aggressive bucket.)

Funding the segments

What kinds of products are used to fund the segments? Securities America recommends either a five-year period-certain single premium immediate annuity or a ladder of bonds or certificates of deposit (CDs) for the first five-year segment. Of those options, he noted that a SPIA would be least time-intensive for the adviser.

For Segment Two, Parker suggested CDs, a bond ladder, a fixed-rate annuity, an FIA, a structured or “buffer” registered annuity, principal protected structured CDs, or an investment portfolio. Again, packaged annuities were deemed by Securities America to be the least time-intensive for the adviser. Efficiency and commissions become important for advisers working with mass-affluent retirees whose assets generate less fee income.

For Segment Six, which starts at age 90, Parker suggested either a variable annuity with a death benefit for legacy planning purposes, or an investment portfolio. By holding individual stocks in an after-tax account, the couple would minimize their beneficiaries’ capital gains tax exposure via the “step up” in basis at death. The $276,374 in this segment will have 25 years to grow. Over that time, at a 7% average growth rate, the couple’s legacy would reach a value of almost exactly $1,500,000.

Next week: A look at Zach Parker’s presentation of a bucketing plan for someone whose priority is to minimize taxes in retirement and at death.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on August 22, 2019 by -

Most RICP clients delay Social Security benefits

Two-thirds of financial advisers holding the Retirement Income Certified Professional (RICP) designation from The American College of Financial Services say their older clients are “moderately worried that the Social Security program will drastically cut benefits in the future,” the College said in a release this week.

Among those advisers, 46% are worried about the Social Security program drastically cutting their older clients’ benefits and 54% are not.

More than 8 in 10 (84%) of RICP-holding financial advisers with older clients say cutting Social Security benefits by 20% today would “drastically alter their clients’ lifestyles.” The majority of financial advisers surveyed believe there will be a change in the Social Security program for their older clients, the College said.

“On average, 81% of advisers’ clients are taking Social Security after age 65 with only 9% of their clients taking it at the earliest age,” said Colin Slabach, the new assistant professor of retirement planning and assistant director of The American College New York Life Center for Retirement Income. “This is drastically different from the national average, with 35% of men and 40% of women claiming their benefits at the age of 62.”

MassMutual boosts support for third-party administrators

Massachusetts Mutual Life Insurance Company (MassMutual) this week announced that it will enhance its field support and provide new digital tools for third party administrators (TPAs) that support 401(k)s and other defined contribution retirement plans.

The enhancements include the appointment of three TPA field support staff and the launch of a new website to provide tools and information for TPAs that work with MassMutual.

The website provides TPAs with information about MassMutual’s TPASmart program and how it supports their efforts, materials for TPAs to promote their capabilities, a fiduciary calendar for administering retirement plan regulatory requirements, and information about MassMutual’s TPA incentive program.

TPAs provide a wide range of support for retirement plans, including plan design, participant enrollment, administration and regulatory guidance. TPAs provide support for 66% of MassMutual’s retirement plans.

MassMutual’s three new appointments are:

Kathy Lake is TPA Market Director for the Southern Division. Previously, Lake was a Client Engagement Manager for MassMutual retirement plans. She has more than 20 years of experience in retirement education, sales and service center operations and has held management positions at Jackson National Life and The Hartford.

Lynette Golly is TPA Market Director for the Central Division. She joined MassMutual in 2015 after owning her own TPA firm for nearly 25 years.  Most recently, Golly served as Client Engagement Manager for MassMutual, supporting retirement plans and voluntary benefits.

Rob Ayers is TPA Champion, responsible for deepening and enhancing MassMutual’s relationships with payroll providers.  Ayers most recently was Managing Director of Benefits in MassMutual’s Worksite Solutions.  His experience also includes TPA Market Development and Managing Director in MassMutual’s Emerging Markets and more than 10 years in various sales roles, including with Merrill Lynch.

The new additions join Kellen Craig, who is based in Arizona and covers the Western Division, and Sean Miller, based in Enfield, Conn., who covers the Northeast Division.

DC plan participants ‘stay the course’: ICI

Only 0.9% of defined contribution (DC) plan participants stopped contributing to their accounts in the first quarter of 2019, according to the Investment Company Institute’s “Defined Contribution Plan Participants’ Activities, First Quarter 2019” report. The study tracks contributions, withdrawals, and other activity, based on DC plan recordkeeper data for more than 30 million participant accounts.

Other findings include:

  • 2% of DC plan participants changed the asset allocation of their account balances in the first quarter of this year, down from 5.1% in the first quarter of 2018.
  • 9% of participants changed the asset allocation of their contributions in the first quarter of 2019, down from 3.5% in first quarter of 2018.
  • 4% of DC plan participants took withdrawals in the first quarter of 2019, similar to the share in the first quarter of 2018.
  • 5% of DC plan participants took hardship withdrawals during the first quarter of 2019, the same share as in the first quarter of 2018.
  • 9% of DC plan participants had loans outstanding at the end of March 2019, down from 16.7% at the end of 2018.

ICI has been tracking DC plan participant activity through recordkeeper surveys since 2008. This update provides results from ICI’s survey of a cross-section of recordkeeping firms representing a broad range of DC plans.

© 2019 RIJ Publishing LLC. All rights reserved.

Deferred annuity sales up 6% in 2Q2019: Wink

Posted on August 22, 2019 by -

Total deferred annuity sales rose 6% in the second quarter of 2019 compared with the prior quarter, according to a preliminary version of the 88th edition of Wink’s Sales & Market Report. Highlights of the report included:

  • Indexed annuity sales were up 11% over the first quarter of 2019 and up nearly 14% over the second quarter of 2018.
  • Sales of traditional fixed annuities were down nearly 10% from the prior quarter but up more than 21% over the second quarter last year.
  • Multi-year guaranteed annuity (MYGA) sales were up 15% over the prior quarter and up 20% over the second quarter last year.
  • Structured annuity sales declined by 15% over the prior quarter but were up nearly 20% over the second quarter last year.
  • Aggregated non-variable annuity sales for the second quarter were down just over 1% from the prior quarter, and up over 16% from the year-ago quarter.

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

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. MYGAs have a fixed rate that is guaranteed for more than a year.

Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or sub-account. Variable annuities have no floor; their potential for gains or losses is determined by the performance of the sub-accounts. Subaccounts may be invested in an external index, stocks, bonds, commodities, or other investments.

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

© 2019 RIJ Publishing LLC. All rights reserved.

FIA sales break quarterly sales record (again): LIMRA SRI

Posted on August 22, 2019 by -

Fixed indexed annuity (FIA) sales were $20 billion in the second quarter of 2019, 14% higher than in the same period a year ago, according to the LIMRA Secure Retirement Institute (LIMRA SRI) Second Quarter U.S. Annuity Sales Survey.

“Despite declining interest rates, we are forecasting the current momentum of FIA sales to continue through the end of the year and expect sales of FIAs to exceed $70 billion for 2019,” said Todd Giesing, annuity research director, LIMRA SRI.

In the first six months of 2019, FIA sales were $38 billion, an increase of 18%, compared with the first six months of 2018. Fee-based FIA sales were $193 million in the second quarter. While this marks major growth for this market (188% over prior year), fee-based FIAs still represent less than 1% of the total FIA market, according to LIMRA’s release this week.

Total annuity sales were $63.9 billion in the second quarter, up 7% compared with the prior year results. This is the highest quarterly sales recorded since the first quarter 2009, and the third consecutive quarter where total annuity sales surpassed $60 billion, the survey showed. Year-to-date, total annuity sales were $124.8 billion, an increase of 11%, compared with results from the first half of 2018.

Fixed annuities represented 60% of the total annuity market in the second quarter. Fixed annuity sales have outperformed VAs sales in 12 of the last 14 quarters.

After two consecutive quarters of declines, VA sales were $25.8 billion, level with second quarter 2018 results. For the first six months of the year, VA sales were $48.6 billion, down 4%, compared with prior year results. Traditionally, VA sales are the strongest in the second quarter, the report said. LIMRA SRI expects increasing market volatility and falling interest rates to dampen VA sales for the remainder of the year. It forecasts total VA sales of under $100 billion for 2019.

Fee-based VA sales were $725 million in the second quarter. While this is down 15% from prior year, it is 10% higher than first quarter 2019 results. Fee-based VA sales represented 2.8% of the total VA market in the second quarter.

In the second quarter, registered index-linked annuity (RILA) sales were $4.14 billion, up 66% from prior year results. Year to date, RILA sales were $7.7 billion, 63% higher than results from the first half of 2018.

“While RILA sales have been driving overall VA sales growth recently – representing 16% of the total VA market – after two consecutive quarters in the $3.5 billion range, sales vaulted up,” Giesing said. “Heightened equity market volatility and the fact that major distributors have RILA products on the shelves helped RILA sales break through this plateau.”

Another record quarter for fixed annuities

Despite the decline in interest rates this quarter, fixed-rate deferred annuity sales rose 10% in the second quarter to $13.1 billion. In the first six months of 2019, fixed-rate deferred annuity sales totaled $28.2 billion, 35% higher than prior year results. But the impact of falling rates may simply be delayed.

“The 10-year treasury rate dropped nearly 50 basis points from the start of the second quarter,” said Giesing. “While we didn’t see significant impact on the fixed-rate deferred annuity market during the second quarter, there is usually a lag between interest-rate drops and sales declines. We anticipate sales to substantially drop in the third and fourth quarters.”

Single premium immediate annuities (SPIA) sales totaled $2.7 billion in the second quarter of 2019, up 8% from prior year. Year to date, SPIA sales were $5.5 billion, 20% higher than 2018.

“Traditionally, SPIA sales are strongly linked to interest rates. However, we see another dynamic coming into play,” Giesing said. “Over the past year, a growing portion of the assets invested in SPIAs are qualified assets. This is likely due to the rise in the number of individuals who are reaching the age for taking required minimum distributions, and choosing to convert a portion of their qualified assets into guaranteed income.”

Deferred income annuities (DIA) sales grew 26% in the second quarter, to $727 million. In the first six months of the year, DIA sales totaled $1.4 billion, 25% higher than prior year.

© RIJ Publishing LLC. All rights reserved.

 

Wide variation seen in British target date funds

Posted on August 22, 2019 by -

There are “huge” variations in outcomes between the default funds offered by leading British defined contribution (DC) providers, according to a report in IPE.com, citing research from the UK workplace savings company Punter Southall Aspire.

The firm’s findings were based on an analysis of the growth and consolidation phases of the standard default investment options of nine leading providers in the market as at 31 March:

  • Aegon Asset Management
  • Aviva Investors
  • Fidelity
  • Legal & General
  • Royal London
  • Scottish Widows
  • Standard Life Investments
  • Zurich

For the growth and consolidation phases, the funds analyzed by Punter Southall Aspire varied across many elements: design and construction, investment risk and volatility, asset allocation strategy, return benchmarks, management, “glidepaths” towards retirement, and performance.

Christos Bakas, DC investment consultant at Punter Southall Aspire, said: “We urge employers to monitor the performance of their pension funds more closely, as default doesn’t mean standard, and not all funds are created equally.”

In the growth phase, allocations to equities, bonds and other asset classes varied “dramatically” between the default funds, depending mainly on the targeted risk levels and the range of investment tools used, the survey showed.

Over the last three years, the Zurich Passive MultiAsset fund performed best (11.3%), although with higher volatility risk (8.4%) than the other defaults. The Standard Life default fund performed worst (5.4%), but with volatility (5.2%) than the other funds analysed.

Punter Southall Aspire also found that providers with their own asset management arm – Royal London, Standard Life, Fidelity, Aviva, Legal & General – tended to develop more diversified and sophisticated default offerings. But diversity and sophistication also brought higher costs.

With respect to equity allocations, the initial allocations, the changes to allocation and the at-retirement allocation are different for almost every default strategy and depend mainly on the risk levels being targeted and the range of investment tools used,” said Punter Southall Aspire, noting that Legal & General did not implement a risk-reducing strategy as members approach retirement and “would argue that it’s difficult to predict when members will retire and in fact many members don’t know when they will retire.”

© 2019 RIJ Publishing LLC. All rights reserved.

Kitces’ XY Planning Network adds its 1000th adviser

Posted on August 22, 2019 by -

XY Planning Network (XYPN), the registered investment advisor (RIA) and third-party asset management platform (TAMP) whose advisers offer financial planning services to Gen X and Gen Y investors for a monthly subscription fee, announced its 1,000th advisor-member this week.

Luis Rosa, who was recently featured on the cover of InvestmentNews’ 2019 “40 Under 40,” is the founder of Build a Better Financial Future. Rosa immigrated to the US from the Dominican Republic in 1991, joined the financial services industry in 2001, and recently opened his own fee-only planning practice.

The 1,000 members in the Network, whose median age is 39, comprise more than 5% of all state-registered RIAs delivering financial planning services across the country. XYPN claims that its new advisor lapse rate is less than 6% in the first year (and decreases further in subsequent years as their businesses grow), compared with an industry-wide attrition rate of 70% over the first three years.

“Our turnkey financial planning platform now provides more than 1,000 advisors the support they need to start, run, and grow their own advisory firms, from the technology tools to the compliance support needed to do real financial planning for their clients, with a real community of fellow fiduciary financial planners, while allowing them to maintain real independence…with a focus that allows us to charge a fraction of what broker-dealers cost to provide similar services,” said Michael Kitces, co-founder of XY Planning Network, in the release.

© RIJ Publishing LLC. All rights reserved.

A Second Structured Annuity Offers Income

Posted on August 22, 2019 by -

The number of life insurers offering a variable or “structured” index annuity with a lifetime income benefit has suddenly doubled. CUNA Mutual Group’s new Zone Income Annuity has joined Allianz Life’s Index Advantage Income contract, raising the number of products in this micro-niche to two.

Investors and advisers who like the risk-reward proposition of the structured index annuity (aka registered index-linked annuities or RILAs) and wish they could pair it with an income rider have had only the one option until now. Other companies have avoided attaching income riders to structured annuities, in part because they’re still digesting the living benefit risk they took on a decade ago when selling more than a trillion dollars worth of variable annuities with generous guaranteed lifetime withdrawal benefits (GLWBs).

A structured index annuity works like a fixed index annuity, except that the upper limits (caps) on returns are higher because the client agrees to accept some risk of loss. The new CUNA Mutual annuity appears to differ from Allianz Life’s Index Advantage Income in allowing the client to take extra risk (and get more upside potential) even after income begins.

Zone Income offers a 10% floor on losses, as opposed to the more common 10% buffer in this type of product. A buffer shields the contract owner from the first 10% of losses in a contract year. A floor shields the contract owner from a loss in excess of 10% in a year. Zone Income has only one term length—six years—and a starting surrender penalty of 9%.

Contract owners can get exposure to the S&P500 Index of large-cap domestic stocks, the MSCI-EAFE Index of developed country stocks, or the Russell 2000 Index of small-cap domestic stocks, or they can invest in a fixed rate account. Here are the current rates (to August 25, 2019):

The money that’s dedicated to each index option then has to be split between a Secure Account and a Growth account, in 0% to 100% deciles. Each combination has its own upside cap and its own downside floor. For the S&P500, a 50/50 Secure/Growth split would have a cap of 8.8% and a floor of -5%.

“Our belief is that people like a known risk rather than an unknown risk,” said Martin Powell, CUNA Mutual Group’s head of annuity distribution. “So we allow the client to dial the risk up or down. They can take a -2.5% floor one year and move to zero the next year. It also helps advisers with their compliance requirements.”

The income benefit

As for Zone Income’s lifetime income rider, the client invests a lump sum at a certain age, and is assigned a certain base withdrawal rate (such as 4.5% for a single person age 60 to 64). The starting benefit base (the amount by which the withdrawal rate will be multiplied to determine the annual payout) is the purchase premium. For every year the client delays taking income, the withdrawal rate goes up by 0.30 percentage points. Unlike a deferral bonus that increases the benefit base—a characteristic of benefit riders of a decade or more ago—a withdrawal-rate bonus doesn’t raise contract fees. The benefit base can increase over time as the account value grows, but it cannot go down.

For instance, a couple that bought the Zone Income Annuity when both were age 60 would have a starting withdrawal rate of 4%. If they waited five years to take their first withdrawal, their lifetime withdrawal rate would have risen by 30-basis points per year to 5.50%. (A single person’s withdrawal rate would be 0.50% higher.) There’s an annual 0.75% contract fee and a 0.50% income rider fee.

“We give you both the step-up in account value each year [if there’s a gain], and the 30-basis point increase in the withdrawal rate,” said Elle Switzer, director, annuity product development at CUNA Mutual Group. Her company has the risk budget to attach a living benefit to its RILA because it doesn’t have a big book of living benefit business, and the risks associated with one, left over from historical VA sales.

Allianz Life’s Index Advantage Income contract, which launched in August 2018, works a bit differently. The minimum benefit base is not locked in until income payments start, rather than at the purchase date as in the Zone Income product. At 5.20%, Index Advantage Income’s base withdrawal rate for a couple at age 60 is much higher than Zone Income’s. With deferral credits of 1.8 percentage points, the withdrawal rate rises to 7.0% after a five-year wait.

There’s a trade-off, however. After income starts, all of the money in Index Advantage Income moves into the equivalent of a fixed indexed annuity contract and stays there. The Zone Income contract owner, by contrast, can continue to enjoy much higher caps than the Index Advantage owner during the payout phase, and potentially achieve a higher annual income. Index Advantage has a 1.25% annual contract fee and a 0.70% income rider fee. It has a single six-year term and the surrender penalty starts at 8.5%.

© 2019 RIJ Publishing LLC. All rights reserved.

High-end advisors shifting to holistic planning: Cerulli and IWI

Posted on August 15, 2019 by -

The sea change in the business models of top advisors toward holistic advice and asset-based fees has been substantiated by a recent survey of the members of the Investments & Wealth Institute (formerly IMCA). The institute and Cerulli Associates conducted the survey.

Ten years ago, fewer than one in five Institute advisors operated in one of the independent advisory channels, the survey showed. Today, 45% of Institute advisor members are independent, either working in an independent RIA firm (23%), in an independent broker/dealer firm (9%), or in a dually-registered or hybrid firm (13%).

IWI members are nearly twice as likely to report operating in a primarily fee-based practice relative to the industry average (62% vs. 38%, respectively). By 2020, members expect brokerage assets to make up just 10% of their client assets.

The survey also found that more than three-quarters (78%) of Institute members’ clients receive comprehensive or targeted financial planning advice. This is 10 percentage points higher than other industry advisors and is projected to rise another 7% by 2020.

The survey was based on data that Cerulli Associates collected from Investments & Wealth Institute members. The Institute serves more than 12,700 members and certificants, up 20% since 2016. Membership includes wealth managers who provide investment consulting, financial planning, and wealth management services to retail clients, high-net-worth clients, and institutional clients.

Almost 40% of Institute advisors serve a core market of households with more than $2 million in investable assets, and the average assets under management for Institute members is four times greater than the average advisor.

© 2019 RIJ Publishing LLC. All rights reserved.

IRS Makes Annuities RIA-Friendlier

Posted on August 15, 2019 by -

Fee-based financial advisers now have one less reason not to recommend annuities to clients, thanks to the private letter rulings (PLR) that at least four life insurers—Nationwide, Lincoln Financial, Prudential and Great American—recently received from the Internal Revenue Service.

The company-specific rulings, long-sought by annuity issuers, allow the owners of non-qualified annuity contracts to direct the issuers of their deferred annuities to pay advisers a fee (up to 1.5% per year of the contract value) directly from the contract assets to the adviser without generating a tax bill for the client on the amount distributed.

Over the past decade, tens of thousands of agents, brokers and advisers have abandoned the commission-paid business model, or have left the big wirehouses to strike out on their own as investment adviser representatives (IARs) of registered investment advisers (RIAs). The “RIA market” refers to intermediaries who may wear different hats at different times when handling different products. Annuity issuers want to be ready for a variety of business models.

Maringer

The RIA market is far from monolithic. “We look at the fee-based market as three camps,” said Joe Maringer, national sales vice president for Great American. “You have the registered reps or insurance agents who have recently moved to the advice side but are familiar with annuities. The second camp includes dually registered advisers at independent broker-dealers (IBDs) like Raymond James, Commonwealth or LPL. It’s been reported that, since 2017, more than 50% of IBD revenue comes from asset-based fees.

“Last but not least, you have the independent wealth management groups like Dynasty, Hightower, or Focus Financial that serve advisers who have broken away from wirehouses to hang out their own shingle,” he told RIJ. “We can bring in a fee-based index annuity and show them a better risk-profile, higher-yielding alternative to fixed income investments [i.e., bonds]. They are the longest reach for us because they haven’t had much exposure to insurance products. But they manage trillions of dollars. There’s also a fourth camp at super-regional banks, but bringing insurance into the advisory business is evolving more slowly there.”

It’s not clear yet how many other life insurers have asked or will ask the IRS for the same dispensation, or how many have already received it. The ruling removes what life insurers say was one reason why so many fee-based advisers don’t recommend annuities.

Here’s the essence of Nationwide’s PLR: “The fees [that the annuity issuer] deducts from the contract’s cash value and remits to the advisor will not be treated as an ‘amount received’ by the owner of the contract.” The distribution is recognized as distinct from an annuity payment or a random distribution.

Annuities in IRAs (“qualified annuities”) already enjoyed this tax treatment. “Historically, you had a split where, in the qualified annuity world, the IRS took the position that advisory fees were part of the retirement account and could come out tax-free,” said Craig Hawley, Nationwide Advisory Services, which requested and received the PLR.

Hawley

“But in the non-qualified annuity world, the IRS regarded taking out fees the same as if you were taking money out of the annuity to buy a car. That created tremendous friction for a customer receiving advice on a non-qualified annuity,” he added. Now the same rules on distributions of fees apply to qualified and non-qualified annuities.

Nationwide serves about 6,500 RIAs; it gained about 4,000 of those customers in 2017 when it bought Jefferson National, which built a $4.7 billion business selling low-cost, no frills variable annuities to RIA clients for use as tax deferral vehicles.

The PLR allows advisors to deduct up to 1.5% per year of the value of the annuity contract per year. It stipulates that advisors may use the annuity as a source of only those fees related to managing the annuity itself. It didn’t want to create a loophole by which advisors could take all of their annual fee from the annuity tax-free.

Lincoln Financial Group received the same PLR, and released the following statement: “Lincoln is pleased with the favorable decision from the IRS and believes this new ruling will make it easier for investment advisors to incorporate non-qualified annuity solutions as part of their planning strategies.”

A press release from Great American Life this week said it “was a key player in a coalition of insurance carriers that rallied for the change. Freeman Durham, Divisional vice president and senior counsel, Great American Insurance Group–Annuities, [said], ‘We have been working with the IRS and other companies to achieve this change since 2017.’”

Obstacle by obstacle, life insurers are trying to remove the barriers that can discourage fee-based advisors from recommending annuities. Those obstacles may be philosophical, regulatory, legal, technical, and/or compensation-related. They augment clients’ own reservations about annuities—mainly about their illiquidity.

Many fee-based advisors don’t sell any commissioned products, so life insurers have built no-commission products. Since such advisors prefer using one Internet platform for all their chores, life insurers have embedded annuities into platform technology. Since fee-based advisors don’t necessarily have insurance licenses, platforms make agents available to help close annuity purchases.

One of the remaining problems involved taxation of advisor compensation on non-qualified annuity contracts. If the advisory fee came out of contract and the owner of the contract received a Form 1099 from the IRS the following January for a taxable distribution, the owner might call the advisor for an explanation and instructions on dealing with it.

“As we were growing our advisory business, that was what we heard from investment advisor representatives,” said Hawley. “They told us it was hard to adopt the product because there was so much friction to getting paid.”

The life insurers have requested this dispensation from the IRS before, but without success. The Trump administration’s 2017 tax reform bill made the problem a bit worse by disqualifying advisory fees as itemized deductions from taxable income. “While it is fair to say the most recent tax reforms likely caused the friction to increase, this friction existed far before these reforms,” Hawley told RIJ.

But, despite the tax bill, the Trump administration turned out to be more receptive to the annuity industry’s case than the Obama administration had been.

“We have periodically gone to the IRS, and made the argument that there’s a retirement crisis and that we should incent the advisors [to use annuities],” Hawley added. “The IRS recently became more open to it.”

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on August 15, 2019 by -

Nationwide digitizes, customizes annuity client kits

To improve efficiency and save paper, Nationwide has created digital client kits that are instantly accessible to advisors online and have information tailored to the specific annuity products and features that the advisor and client want, the company said in a release this week.

Traditionally, printed kits contain detailed information on all the riders and features the product has available. Today’s typical annuity client kit contains multiple brochures that explain all the features and benefits available with the product. A single brochure might run 12 to 24 pages. The client might only select one or two features but receives information on all the options.

The new digital kit enhances the customer’s experience by enabling the advisor to deliver information specific to the client’s situation.

“Advisors and their clients don’t always need all of the materials. So we developed this customizable solution so advisors can select specific materials to explain their recommendation to their client,” said Tiffany Grinstead, Nationwide’s vice president of life insurance and annuities marketing. “They can choose literature for the exact death benefit, living benefit and investment choices, instead of giving their clients a death benefit guide that has all four options available in the overall product and every investment choice.”

Most advisors prefer to integrate the annuity they are offering into their own folder or package of materials. This new approach makes it easier for advisors to present an annuity as part of their own sales process.

The digital tool lets Nationwide identify which firm(s) the advisor is appointed with and the state licensing information they’ve provided Nationwide. This can reduce errors that can hinder or delay the business submission process.

“It lets us know things like if the advisor needs National Association of Insurance Commissioners (NAIC) training or suitability support,” Henderson said. “Advisors tell us they want to compile exactly what their clients need and present it as part of their materials. Our new digital kits are designed to make it as easy as possible for advisors to share their recommendation with clients.”

The digital client kits are now available with Nationwide Destination B, Destination Navigator, Destination All American Gold, Destination Freedom+, and Nationwide INCOME Promise Select. Eventually all Nationwide annuity kits will be available in a digital format. Advisors can contact their wholesaler for a sample digital kit.

Envestnet sued by software vendor

A new $100 million lawsuit against Envestnet, and an acknowledgement by Envestnet’s CEO that his firm’s revenue may drop temporarily, have caused analysts to cut their short-term earnings and revenue estimates for the giant cloud-based turnkey asset management platform, according to news reports this week.

The plaintiff, Financial Apps, which once provided Chicago-based Envestnet with credit-decisioning analytics for a lending platform, accused Envestnet and subsidiary Yodlee of committing a “multi-year scheme” to “steal FinApps’ valuable proprietary information… in order to unlawfully develop software products that compete with FinApps.”

Bergman has denied the charges. He told analysts on his company’s 2Q2019 earnings call Aug. 7, “We believe the vendor’s allegations are false and without merit, and we will respond appropriately and defend ourselves vigorously.” He warned analysts that his firm’s revenue will suffer as it looks to replace Financial Apps.

The lawsuit, filed on behalf of Financial Apps by Kasowitz Benson Torres LLP on July 26 in U.S. District Court for the District of Delaware, estimated damages to FinancialApps at “no less than $100 million.”

Bergman noted some dissatisfaction with Financial Apps, saying that Envestnet’s Data & Analytics business “experienced shortcomings in the technology provided by” that vendor, who “we relied on to deliver certain credit decisioning analytics to our banking customers.” The vendor, whom he didn’t refer to by name, “suspended service, causing a disruption that affected several clients and prospects,” he added.

Bergman said he still sees credit decisioning analytics as a “big opportunity,” but warned: “Our revenue will be negatively impacted at least through the remainder of this year, as we work to develop a new solution with a new provider.”

Analysts revised revenue forecasts for Envestnet downward, but expected the damage to be temporary. Peter Heckmann, a D.A. Davidson senior research analyst, lowered his 2019 and 2020 revenue forecasts for Envestnet by 3% to 4%. He dropped his 2019 adjusted EBITDA forecast by 1% to $193 million and his 2020 adjusted EBITDA forecast by 6% to $233 million. He also lowered his 2019 adjusted earnings per share (EPS) forecast by three cents to $2.10 and 2020 adjusted EPS by 12 cents to $2.54.

Despite the setback, Heckmann said Envestnet was “well positioned to benefit from the trend of financial advisors migrating from large brokerage firms (wirehouses) to independent operations where they immediately require robust back-office systems.”

William Blair analyst Chris Shutler similarly lowered his 2019 adjusted EPS estimate for Envestnet by four cents to $2.11 and lowered his 2020 estimate 11 cents to $2.55. But he added in his note, “We believe this issue is likely temporary.”

Jefferies analyst Surinder Thind said in a research note that he viewed “any stock weakness as a buying opportunity” for investors. He predicted Envestnet will “continue gaining market share given its scale, industry leading position, and expanding product offerings.”

In a news release announcing the FinApps lawsuit against Envestnet, Kasowitz Benson Torres said the complaint also alleges that Yodlee “licensed FinApps’ proprietary software for a new platform known as ‘Risk Insight’ and falsely represented to FinApps that it intended to forge a long-term strategic partnership with FinApps, when instead, defendants’ sole intention was to misappropriate FinApps’ proprietary technology and trade secrets while defendants secretly entered into agreements with third parties to deliver credit risk software and services that rely on the stolen technology.”

In June, Envestnet launched an Insurance Exchange that will help financial advisors create plans that combine annuities and life insurance with investment products in a more integrated and seamless way.

Ascensus acquires ‘prevailing wage’ benefits specialist

Ascensus, the retirement, education and health care benefits provider, said that is has acquired Beneco, a provider of bundled retirement and health & welfare benefits administration solutions in the prevailing wage market, from Alpine Investors.

Beneco offers a full suite of recordkeeping, third-party administration, and benefit plan consulting services, will immediately become part of the FuturePlan by Ascensus line of business.

Beneco is headquartered in Scottsdale, AZ. Waller Helms Advisors served as the exclusive financial advisor to Beneco and Alpine Investors for the transaction.

Ascensus is the largest independent recordkeeping services provider, third-party administrator, and government savings facilitator in the United States.

© 2019 RIJ Publishing LLC. All rights reserved.

Storm Warning? Let an Annuity By Your Umbrella

Posted on August 15, 2019 by -

Financial advisors’ cell phones must have been ringing with anxious client calls last night. Yesterday’s 3% drop in the S&P 500 Index undoubtedly made a lot of people nervous. And, if the advisors followed their training, most of them probably told a lot of people to “Stay the course,” as Jack Bogle liked to say.

“We’re prepared for days like this,” the advisors will say. “Trying to time the market never works. If you sell now, how will you know when to get back in?”

Clients want to believe that their advisors are getting paid, in part, to warn them before an equity crash happens, and to tell them when to get out of stocks. But advisors do not necessarily believe this to be part of their job.

For advisors who sell annuities, market tremors are known to stimulate business. After a bit of volatility, older investors in particular show more interest in taking profits out of the market and parking them somewhere safe.

These older investors may never have heard about annuities before. But when they start looking for an asset that offers higher yields than bonds, that’s where their inquiries may lead them. Crises are excellent opportunities for advisors to educate clients about annuities.

Structured annuities, officially known as registered index-linked annuities (RILAs), should logically enjoy a burst of sales right now. People who still have more than half of their money in stocks are probably risk-tolerant enough to like the -10% floor or buffer and generous upside potential that these products offer. Such clients won’t need to step all the way down in risk to a fixed index annuity.

As for pension-less people who are about to retire, and who will need monthly income very soon, yesterday’s volatility might even nudge them into selling some of their highly appreciated stocks and buy an income stream. It could be a deferred income annuity, a single premium immediate annuity, or even a period-certain annuity.

In my opinion, the low interest rate environment shouldn’t necessarily be a barrier to buying an income annuity. Stocks are high in part because interest rates are low. Income annuities aren’t as expensive as they look if you believe that you’re buying them with inflated equity profits.

In the real world, I’ve never heard of an advisor using that rationale to sell income annuities. Before accepting that argument, equity investors would have to admit that luck, tax cuts, share buybacks and a Wall Street-friendly Fed are responsible for about half of their paper wealth. They’re not likely to do that.

In any case, the tea leaves don’t look ominous enough (yet) to justify panic. As of last week, Steve Slifer of NumberNomics believed that there’s not much to fear. Here’s what he said in his August 9 report:

“In our view the markets should stop worrying about a recession — something that is not going to happen. Thus, any pullback in the stock market should be viewed as a buying opportunity rather than the beginning of a downturn. The S&P 500 certainly feels like it has fallen precipitously in the past couple of weeks, but the reality is that it is only 4.0% below its recent record high level.”

“Furthermore, long-term interest rate levels should be viewed by corporate leaders (and perhaps the U.S. government) as an opportunity to raise needed cash at the lowest level in years. This is not adding up to a recession scenario in our book.”

© 2019 RIJ Publishing LLC. All rights reserved.