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Are fewer people seeking financial advice?

Posted on October 11, 2018 by -

Given the increasingly complex and critical nature of households’ use of financial services and the growing pressure that limits time in which to research and make good decisions, one might think that households’ use of professional financial advice would be increasing. In fact, however, the opposite is true.

After an extended period of good economic news—and right before recessions—people tend to believe that they do not need financial advice. Or, as the adage asserts, investors mistake a bull market for brains. Although it’s true that that immediately following a recession the proportion of households that seek financial advice increases, overall, the proportion of households doing so remains consistent at about 25%, give or take 5%.

Figure 1: Have Obtained Professional Financial Advice in the Past Two Years

When one uses age cohorts to deconstruct households that obtain financial advice, a disturbing pattern emerges. Since the Great Recession, older age cohorts (Boomers and Silent/Greatest Generation) are more likely than all households to obtain professional advice; younger cohorts (Gen Xers and Millennials) are less likely to do so. The divergence is not attributable to the increasing need for advice among older cohorts. During the decade before the Great Recession, little difference existed in the proportion of households—except Greatest Generation households—obtaining professional financial advice by cohort. If the pattern of decline continues, Boomers may be the last age cohort to obtain professional financial advice. Ultra-high-net-worth households will always be an exception to this pattern; use of professional financial advice among mass-affluent households is likely in jeopardy.

Figure 2: Likely to Obtain Professional Financial Advice in the Next 12 Months

Evidence of this disturbing downward trend: The proportion of households that say they are somewhat or very likely to obtain professional financial advice in the next 12 months continues to decline from a high of 50% in 2000 to a low of just below 30% in 2016. Overall, recessions seem to have no impact on this trend. In fact, following the most recent recession, Boomers are only somewhat more likely and Millennials are less likely to be thinking about seeking advice. Because Boomers are such a large cohort, some decline may not be readily apparent; the numbers may be blinding some institutions to this trend. By the time Boomers enter their later years—when financial planning declines because plans are set—a more precipitous drop-off may become obvious.

Why are the use of and the propensity to use professional financial advice declining? Given the complexity and importance of households’ effective use of financial products and services in order to survive and thrive in modern society, why is professional financial advice vulnerable?

MacroMonitor subscribers have access to this month’s Segment Summary, Households That Need Professional Financial Advice: An Opportunity?, an analysis of households (with at least $100k in financial assets) that have not recently obtained nor are likely to obtain professional financial advice. Subscribers may also request the underlying set of data for the Segment Summary. For more information, contact CFD.

Ohio National Hits the Trail

Posted on October 11, 2018 by -

Hell hath no fury like a financial advisor denied a promised trail commission on a significant book of variable annuity business.

Not long after Ohio National’s September 28 announcement that it would cease paying certain financial advisor their roughly one percent annual “trail” commission on perhaps hundreds of millions of dollars worth of sales of a no-longer-issued ONcore Lite and similar variable annuities, one of the affected advisors vented about it on the phone.

An opinion-maker in the $2 trillion variable annuity universe who requested anonymity, said he was astounded. But he was far from speechless.

“It creates a tremendous conflict of interest, because advisors are left to service the contract, with all the liability that goes with that, for no revenue. They’re creating suitability issues and a high probability that either the registered rep or the policyholder will engage in terrible behavior. FINRA needs to step in,” he said.

Ohio National’s move stings, he said, because the products in question had been highly popular and attractive (i.e., underpriced) and because it hurts advisors who were trying to get paid in a client-friendly way. That is, they accepted a trail commission from the issuer instead of the “heat” commission—a one-time up-front payment that gives the advisor minimal incentive to “service” the contract over the ensuing years.

“Those Lite products had the richest guaranteed minimum income benefits. My own money is in it. It had unlimited investment restrictions. You needed to maintain it carefully, because you could void the guarantee if you didn’t annuitize at the right time, but it was gold. It had a 6% withdrawal rate, net of fees. And if you got close to running out of your own money, you could annuitize the full benefit for life with 10 years certain.”

Variable annuities with lifetime income benefit riders are riddled with complex tradeoffs, not just for the contract owners, but also for the advisors. Depending on how advisors prefer to get paid (which depends on their licenses and business models), they may have several payment options: an upfront 7% commission, or a one percent trail commission, or no commission. If they choose the latter, they charge clients their usual comprehensive fee on the value of the assets in the mutual funds “inside” the insurance wrapper.

Now the advisors who took the trail are being punished. “It’s a terrible precedent. For last decade, advisors have been pounded from officials about upfront commissions. They wanted us align our interest with the client and stop churning. Now everybody will want to take the front-end commission. It will set the industry back a decade,” he said.

The crux of the matter is that, as long as those trail-fed contracts are in force, Ohio National may be collecting a 1.40% annual fee from the client but not transferring the agreed-upon portion of that fee to advisor. In addition, Ohio National is said to still be compensating its captive advisors (full-time employees) who sold the products in question.

A high-stakes game of chicken may be going on here. By its actions, Ohio National appears to hope that advisors will advise contract owners to cash-out of the product or exchange it for another one. That would relieve Ohio National of unwanted liabilities without the insurer making an expensive offer to buy out the contracts, which other variable annuity issuers in a similar position have done.

“[Ohio National] offered a buy-out earlier this year,” the advisor said. “But it was a dried-up carrot. Now they’re using a stick.” He said that when John Hancock and the Hartford got out of the variable business, they continued t pay trail commissions. And when AXA and ING, for instance, wanted to escape from certain contracts, they offered attractive buy-outs.

If Ohio National is playing chicken, the strategy carries obvious reputational risks, not to mention its negative impact on others. Contract owners may feel squeezed into abandoning products they like. Advisors, with no incentive to continue advising the client, could cease to do so, perhaps unethically. Without advice, contract owners could fail to use the contract properly and lose the guarantees they’ve been paying for.

There’s a larger context to this news item. The advisor told RIJ, “Ohio National has had a new president since August 22. He fired 25% of the staff. He let go 300 out of 1,300 employees. He got out of the variable business and, through a loophole in every contract, he’s trying to stop paying contractual compensation to advisors.”

In August, Chris Carlson, Ohio National’s vice-chairman of strategic business, replaced Gary “Doc” Huffman as CEO. In September, the Cincinnati-based life insurer announced that it would drop its annuity and retirement businesses and lay off 300 workers. On September 7, Standard & Poor’s downgraded Ohio National’s financial strength rating to an A rating (sixth of 21) from an A+ rating (fifth of 21), with a negative outlook.

Today, an Ohio National spokesperson gave RIJ this statement:

We recently announced a new strategy focused on growing our life insurance and disability income insurance businesses. As part of our strategic planning process, we completed a comprehensive evaluation of our entire business. Based on this evaluation, we’ve made the strategic decision to focus Ohio National to build on our strengths in life insurance and disability income insurance.

As a result of our focused strategy in life insurance and disability income insurance, we are no longer selling new annuity contracts and retirement plans, but will continue to service and support our significant block of existing contract owners. This focus will increase our organizational agility, and our laser-focused business mix enables greater long-term financial flexibility to invest in growth opportunities.

While the majority of our selling agreements are being replaced with a service agreement or service letter as a result of our new strategy, the steps we are taking allow for advisers to continue to service their clients’ needs as they do today. All advisors continue to have access to their client information and can continue to service them. Consistent with our more than 100-year history, we will continue to service and support all our existing annuity and retirement plan contract owners now and going forward.

Our arrangements with individual broker-dealers or categories of broker-dealers may differ due to a range of factors. While a vast majority of policies are unaffected, generally the changes made were to older generation products—those written prior to May 2010. We believe advisors do and will continue to act in the best interest of their clients.

Ohio National is only the latest life insurer to reduce its exposure to variable annuity risks. The stock market collapse in 2008 and the subsequent period of low interest rates made it difficult for many issuers to support products.

In the years that followed, some issuers “de-risked” their products (i.e., made the guarantees less generous), some bought back their riskiest products, and some left the variable annuity business. As supply has fallen, so have sales. The VA industry is now highly concentrated. Four life insurers—Jackson National, Lincoln Financial, Prudential Financial, and AIG—accounted for 40% of VA sales in the first half of this year.

Ironically, the news that Ohio National stopped paying intermediaries came only a week before a big media event in New York for the Alliance for Lifetime Income, which is trying to spruce up the image of the annuity industry and raise its popularity as a solution for Boomers without pensions (see today’s lead story). Ohio National is not a member of that non-profit, industry-funded organization.

Sheryl Moore, CEO of Wink, Inc., a provider of annuity data to life insurers, told RIJ, “I am surprised to hear that an insurance company has opted to discontinue paying trail commissions to a select portion of their salespeople on their living benefits. I have to wonder how this will affect the sales of their other products.”

Moore put a fine point on it: “I am saddened to hear that another insurance company is exiting the annuity business at a time when Americans need a guaranteed paycheck to insure their retirements more than ever.”

© 2018 RIJ Publishing LLC. All rights reserved.

Jackson joins Envestnet Insurance Exchange

Posted on October 11, 2018 by -

Jackson National Life Insurance Company will offer its suite of advisory annuities on the Envestnet Insurance Exchange, including Perspective Advisory II, Elite Access Advisory and MarketProtector Advisory, the company announced recently.

The Envestnet Insurance Exchange will be available through various tools and features within the advisor portal of the Envestnet Platform later this year. Financial advisors will need an insurance license to introduce insurance products.

Envestnet will be offering a service called Guidance Desk that will allow unlicensed RIAs access to the consulting and fiduciary services that would enable them to use the Insurance Exchange. This service is still in development.

The Envestnet Insurance Exchange connects select insurance carriers and established account processing vendors with Envestnet enterprise clients, allowing advisors to deliver cohesive and consistent holistic advice by incorporating insurance solutions into the wealth management process.
“The planning process will be much more seamless. There won’t be a separate experience for the insurance part. The whole annuity function will be integrated into Envestnet’s financial planning tool. The advisors will have an integrated annuity product selection tool sitting alongside their managed accounts,” Dev Ganguly, senior vice president and chief information officer at Jackson, told RIJ in an interview.

“When advisors create a goal-based financial plan combining other investments and annuities, customers benefit from having comprehensive solutions to support their desired outcomes,” he said. “Technology integration supports order entry; providing near straight-through-processing with the established annuity vendors. The advisor will be able to transfer funds [between variable annuity subaccounts] and digitally make withdrawals, with pricing that comes straight from the carrier. We’re planning on allowing electronic signatures.

“The fee-based RIA typically utilizes a platform rather than paper,” Ganguly added. “And the type of advisor who uses Envestnet is used to creating a financial plan, moving right into order entry, placement and expects post issue capabilities digitally.  If a certain product type, like variable annuities, does not fit that flow they’re reluctant to use it.

“There are also RIAs with no broker-dealer affiliation, limiting their capability to sell annuities. In those cases, Envestnet’s Guidance Desk will provide the services of a broker-dealer.

“Even if you look at our top broker-dealer relationships, where we distribute commission-based variable annuities, fee based annuities are not sold very much because of the limited capabilities of the platform to complete the sale. On the fee-based side, the integration between other investments and insurance is non-existent. By contrast, the Envestnet Insurance Exchange integrates everything, and so takes away a lot of the advisors’ objections to annuities.”

© 2018 RIJ Publishing LLC. All rights reserved.

Which annuities pay the most income? Cannex has a clue.

Posted on October 11, 2018 by -

There’s no easy response to the question, “Which annuities provide the highest guaranteed income?” But product appraisal tools introduced last year by Cannex, the Canadian-American annuity data shop, are designed to help advisors make something reasonably close to apples-to-apples comparisons.

A new report, “Guaranteed Income Across Annuity Products,” is based on a study conducted using those analytic tools. The report shows that even when different annuity contracts offer equivalent benefits “on paper,” they can still generate different amounts of monthly income for different clients. Individual payouts depend in part on gender, age when income begins, length of delay between purchase and when income begins, whether the contract is single or joint-and-survivor, and whether the income is inflation-adjusted.

“Using our quantitative tools to compare different types of annuities across products and providers on an apples-to-apples basis, the study reveals a complex story—the highest guaranteed income product varies significantly by client and when income begins,” said Tamiko Toland, head of Annuity Research at Cannex.

“There are many factors that go into the selection of an annuity. Income generation is not the only one, but it is central to their value proposition. Advisors need to rely on real analytics, not traditional perceptions or best guesses of how guarantees work to best serve their clients.”

For those seeking immediate income, single premium immediate annuities (SPIAs) usually provide the highest guaranteed income, the Cannex report says. But a variable annuity (VA) with guaranteed income may generate the highest annual payments under certain circumstances, such as when a man and wife of different ages buy a joint-and-survivor contract.

For people who can wait five or ten years after purchase to begin taking income from their contracts, fixed indexed annuities (FIAs) with lifetime income guarantees typically provide more income than either deferred income annuities (DIA) or deferred variable annuities with lifetime income guarantees.

This advantage stems in part from the fact that FIA owners sometimes don’t exercise their optional income riders, even after paying fees for them. That allows issuers to promise higher benefits to the people who stay. Unlike DIAs, FIAs with “living” income benefits are always liquid and can be cashed out, exchanged for another annuity, or left permanently in accumulation-mode.

For women, FIA income riders tend to pay more than DIA guarantees. The differential between a fixed indexed annuity and a deferred income annuity is greater for a woman because DIA benefit payments are based on gender-specific longevity expectations while FIA payments are not. The longer she waits to take income, the more a woman benefits from choosing an FIA over a DIA.

Based on a $100,000 premium investment in a DIA at age 65, a woman of average projected longevity would receive, after a 10-year deferral, around $11,700 in annual income at age 75. A man would receive about $12,900. By contrast, an FIA could generate as much as $14,313 of annual income regardless of gender.

“It’s often assumed that simple income annuities provide the highest guaranteed lifetime income compared to savings annuities such as FIAs or VAs,” said Gary Baker, president of Cannex USA. “This idea has become ingrained in the way we talk about income annuities in the planning process.

“As the industry leans towards a best interest standard for advisors, it is important for them to be aware that they should consider guaranteed income across all available products for clients with an income objective.”

The report draws upon Cannex’s quantitative annuity comparison tools. The tools enable financial institutions and advisors to evaluate the value of annuity guarantees based on the design of the benefit. In addition to looking at the minimum income guarantee, the tools arrive at an average income using a wide range of market performance scenarios.

For SPIAs and DIAs, projections include a death benefit and 100% spousal income continuity option, so full benefits are comparable to FIAs and VAs. For VA simulations, the asset allocation mix is 60% equity and 40% fixed income. The FIA performance is contingent on the crediting method and index; this research compares designs based on the S&P 500 Index.

By evaluating the performance of savings annuities in a range of market scenarios, the report highlights an additional important consideration when comparing guaranteed income benefits. The data reflects the trade-off between the level of guarantee and the upside potential in a rising market.

FIAs with the highest guarantee are less likely to experience a noticeable increase in income based on market performance. Those with lower guarantees are more likely to see greater upside potential. This applies to FIAs and to a lesser extent to VAs.

© 2018 RIJ Publishing LLC. All rights reserved.

Meet the Dare-Devils Who Own Annuities

Posted on October 11, 2018 by -

Even at 51, Elaine Larsen—sunflower-blonde, Southern-folksy, and right at home in a split-hem pencil skirt—is always the fastest, hottest woman in any of the racing-circuit towns that she and Chris, her husband and chief mechanic, decide to visit.

That’s because she drives a jet-powered slingshot dragster for Larsen MotorSports, a car that reaches record-setting speeds of 250 mph or more and internal temperatures of thousands of degrees while torching quarter-mile tracks in less than five seconds.

It’s a dangerous profession, and Larsen knows the cost of mortality risk. Her life insurance policy is suspended when she races; a 2011 crash left a titanium plate under her mane of yellow hair. But when she reached AARP age, the former Mennonite farm girl became aware of what the life insurance industry calls longevity risk. So she recently diverted 10% of her savings into a variable annuity with a lifetime income guarantee and a deferral bonus.

Elaine Larsen. Photo by Daryl LaBello

Larsen delivered a testimonial for annuities last week in a conference room at the W Hotel on Times Square in mid-town Manhattan. She was a star performer in a half-day publicity effort by the Alliance For Lifetime on what it styled “Protect Your Retirement Income Day.” The Alliance is the four-month-old 501(c)6 organization formed by two dozen life insurers, asset managers and related firms to reverse the troublesome trend in variable annuity sales and stimulate awareness of annuities in general.

The Alliance has enlisted several other professional daredevils—a Californian who dives with sharks, a volcanologist, a lady smokejumper, and an MD who makes house calls at coastal villages in Panama—who own annuities to embody its “Retire Your Risks” slogan. The message: Smart, brave people are less afraid of dying too soon than of living too long.

This approach also levers the ad meme used by brands like TAG Heuer and Dewar’s: Glamour by association. Detroit-based ad agency Campbell Ewald, which has worked for Travelocity, Cadillac and Kaiser Permanente, created the theme. The New York public relations firm Peppercomm manages the multi-channel campaign. For its executive director, the Alliance picked Jean Statler from Statler Nagle, a Washington, DC-based communications firm.

“If you look at the annuities market, since 2013 you see a decline or a flattening out at a time when more people are entering retirement,” Statler told RIJ. “The 24 companies in the Alliance are committed to a two-year campaign. We’re trying to make a big impact in a small period of time. We have an index of protected income that will come out this year and next. We’ll have ROI measures. Those will allow the companies to decide whether to continue or not. But at this point we’re already 10 months into it. We just had a board meeting. Nineteen of the 24 companies were there. Nobody thinks it’s time to take the foot off the accelerator.”

Until now, the annuity industry has lacked a collective association for educating consumers about its products and its value proposition. Individual companies have invested heavily in consumer advertising, such as Prudential’s mid-decade “Bring Us Your Challenges” and “Race for Retirement” campaigns with Harvard happiness guru Dan Gilbert. The Insured Retirement Institute (IRI, which replaced the National Association for Variable Annuities a decade ago) promotes annuities, but mainly as a lobbying organization.

The Alliance focuses “more on direct messages to consumers and, also to advisors, and they are not an advocacy organization like IRI,” IRI spokesman Dan Zielinski told RIJ.  “We invited the Alliance to participate at our recent annual meeting to give an overview of their activities to date, which was well-received among our members. IRI also shared a substantial amount of research material to the Alliance to help them get started and to shape their own projects.”

The Alliance for Lifetime Income members includes Goldman Sachs, JP Morgan and Franklin Templeton, along with most of the largest life insurers. Milliman, which builds risk management components that go inside annuities, also belongs. MassMutual is there, but three other big “mutuals” are not.

Those firms—New York Life, Northwestern Mutual and Guardian—are in a somewhat different league. They are mutually-held by their customers, specialize in relatively simple, bond-based annuities, and employ captive sales forces. Their annual income annuity sales are relatively tiny. The Alliance’s members are mainly publicly-held companies that issue complex annuities involving equities, bonds, and/or derivatives. They use broker-dealers and insurance wholesalers for distribution. It’s two different worlds, to some extent. Nonetheless, the absence of three leaders in income products from an organization representing “lifetime income” is noteworthy. Statler said she will be meeting with those companies.

Larsen’s jet-car on the track.

The Alliance’s program encompassed several events over a five-hour period. It began with an early morning press conference where C-level life insurance executives from big variable annuity issuers fielded questions from Wall Street Journal, Bloomberg, and Investment News reporters.

It’s rare to see denizens of the annuity stratosphere descend to earth, but four of them appeared together on a single panel at a single media event: Jana Greer of AIG, Dennis Glass of Lincoln Financial, Barry Stowe of Jackson National and Stephen Pelletier of Prudential Financial. (Their combined annuity sales in the first half of 2018 were $27.12 billion or about one-third of all annuities sold in the US during that period. They accounted for $20.16 billion in variable annuity sales, or about 40% of total VA sales.)

Michael Finke, dean and chief academic officer of The American College, economist Ben Harris, a former Joe Biden aide, and attorney Seth Harris, a former official in the Clinton Labor Department, flanked the panel and offered comments. They, along with insurance company analyst Colin Devine, are formal advisors to the Alliance.

At the press conference, the Alliance showcased its Protected Income Index, which uses survey data to track the percentage of Americans ages 25 to 74 with guaranteed sources of retirement income besides Social Security. (People with such resources skew older and higher-income.) The Alliance also announced its RISE (Retirement Income Security Evaluation) Score calculator, which anyone can use to generate a retirement readiness score from 0 to 850, the same scale used to express credit scores. Scores are based on a consumer’s savings levels, demographic characteristics, and sources of retirement income. People can raise their scores by adding annuities to their portfolios. The calculator is expected to be available by the end of this year.

From the press conference, interested parties drifted over to the blue Alliance for Lifetime Income trailer parked outside the Old Navy store on Broadway Plaza between 44th and 45th Sts., competing with Time Square’s immense digital billboards and, on every street corner, with double-decker bus-tour pamphleteers, for the attention of selfie-taking tourists and preoccupied locals who tried to navigate the swirling crowds.

The trailer (click for brief video) labeled with the words “Protect Your Income. Retire Your Risks,” contained three video booths. Three visitors at a time could enter the trailer, don VR goggles and see what it looks like to ride a jet car, touch noses with sharks or venture close to the vents of an active volcano.

“The idea is to drive home the theme of “Retire Your Risk” from the Alliance ad campaign – i.e., you take risks in your work or day-to-day life or profession but should not risk your retirement,” Matt Conroy, Peppercomm’s director of media strategy, told RIJ.

The Alliance must have invested aggressively to get original VR footage for this attraction, but traffic through the trailer seemed tepid. (Times Square might be the worst place on the planet to try to get attention, given all the competition for eyeballs.) The Alliance has since sent the trailer on a national tour. It was parked at Philadelphia’s Barnes Foundation Impressionist art museum yesterday. It will be towed to Newark, NJ (home of Prudential), to Nashville (where Jackson National relocated from Denver), and then to TIAA Bank Field in Jacksonville, FL.

Seth Harris (l) and Michael Finke outside the Alliance trailer in New York.

Wait, there’s more. From Times Square, Alliance advisors and guests from overlapping or sympathetic organizations (the American Council of Life Insurers, WISER, the National Association of Insurance and Financial Advisors, the Defined Contribution Institutional Investors Association) returned to the W Hotel for a buffet lunch at the hotel’s Blue Fin restaurant.

After lunch, in the restaurant’s meeting room, NBC financial reporter and “HerMoney” podcaster Jean Chatzky pitched friendly questions about the ironic pairing of high-risk lifestyles and low-risk retirement products to three panelists: Larsen, Ben Harris, and James Moskito, the CEO of Ocean Safaris, a San Francisco Bay area adventure diving company. Moskito, like Larsen, is one of the Alliance’s annuity testimonial givers.

Chatzky, whose speaking fees start at $25,000, confessed that she drives a Volvo station wagon. She asked Larsen, who drives a Corvette when not piloting a jet-powered dragster, about “the role of risk in her life.”

“I still live my life at full-throttle, a quarter mile at a time,” said Larsen. But after a crash broke her skull, kneecap, ankle and molars, she began to think about the long-run. “I said, ‘If I use a parachute when I race, why didn’t I have a backup plan for my life? My fire suit only keeps me safe for five seconds.’

“My financial advisor talked to me about how I wanted to live in retirement. He said, ‘You want to live fast and fiery even when you’re no longer racing, right?’ Then he said, ‘Let’s put a little piece of your money aside and put it in annuity. You can take a little more risk with your other money, but let’s get you safe first.’

“I’m 51,” Larsen said. “The annuity has allowed me to look at the next stage of my life with a new attitude. It’s allowed me to relax. I’m not looking at the downside of things. I’m looking at what I can do next. When you’re running a business it’s hard to look up from what you’re doing and prepare for the distant future. Now I’m doing the grown-up thing. There’s no finish line for me.”

© 2018 RIJ Publishing LLC. All rights reserved.

Red Bulls and Blue Bears

Posted on October 5, 2018 by -

Election night 2016: Red balloons rose at Trump Tower, tears fell in Chappaqua. The next day, and in the following weeks, extreme emotions overflowed into the financial markets as exuberant Republicans bought equities and dismayed Democrats shifted into bonds.

The cumulative effect was numerically slight—an estimated market-wide $3.3 billion decrease in demand for equities in the first six months post-election—but for the four MIT-Sloan School researchers who measured and analyzed it, the detection of politically-driven trading cast fresh doubt on conventional wisdom about investor behavior.

To those researchers, authors of “Belief Disagreement and Portfolio Choice” (NBER Working Paper 25108), Democratic investors didn’t seem to behave rationally. In theory, they too could see that Donald Trump’s tax and regulatory policies might lift the stock market, and would invest accordingly.

But they didn’t, even though it would have been in their economic best interest. In the year after the election, the Dow Jones Industrial Average grew 28.5%, from an already record-breaking base.

The study was based on trading activity by individual retirement account holders at an unnamed major financial institution. Their average household income was $101,600 and the median was $78,000. The average investor in the study had $156,500 in investable wealth, of which 81% was in retirement accounts. The researchers did not include the wealthiest or poorest 10% of the population.

“Our main finding is that (likely) Republicans increase the exposure of their investments to the US stock market relative to (likely) Democrats following the election. Democrats increase their relative holdings of bonds and cash-like securities. This result is not driven by differences in returns but by active trading over a six-month horizon following the election, and the relative change in equity shares is more than twice as large among previously active investors,” the paper said.

Maarten Meeuwis, Jonathan A. Parker, Antoinette Schoar and Duncan I. Simester, all of the MIT Sloan School of Management, co-authored the paper.

In an email to RIJ, Schoar wrote, “We provide evidence that people with different political affiliations take different portfolio actions that are not driven either by the different effects of the election on their own economic circumstances, such as cities and towns or jobs or tax burdens, but instead actively trade assets in response to the changes in their relative views about the national economy.”

Ironically, “Republicans report becoming relatively more optimistic about the national economy after the election, but they do not report becoming relatively more optimistic about their own economic situations,” the researchers wrote.

In most theoretical models of financial markets, participants typically agree about the probability of different states of the world, the researchers wrote. But, in practice, they showed, different people have different “models of the world,” and make investment decisions on that basis.

The researchers were somewhat surprised, and even troubled, by the finding “that people save and invest and react differently to public events not because of their own situations (like their age, their city, their job prospects), but because they fundamentally take different views from others,” Schoar told RIJ.

“This finding is worrisome, in that people should take into account that they may be wrong and so learn from the behavior of others and from objective information, which is the foundation for most asset valuation models and asset management advice.”

Another of the paper’s authors, Jonathan Parker, told RIJ, “Most investment advisors give the advice: Keep your politics out of your portfolio. The downside of disagreement is that people are not pooling risks and diversifying as much as they could.” We vote in different directions, he noted, but “with stocks, we can all bet in the same direction. We don’t have to bet against each other at all.”

The findings were based on the review of data provided by a large unidentified investment institution, which provided the researchers with “anonymized” information about individual client trading behavior before and after the election. One of the authors was a paid consultant to the financial institution.

Likely political affiliation was determined using publicly available data on individual campaign donations during the 2015-2016 election cycle, aggregated to the zip code level. The researchers restricted attention to contributions from individuals to political action committees with at least $20 million in donations and associated with the two main parties or with their presidential nominees.

The wealthiest and poorest 10% were excluded, and only one retirement investor (RI) per household was included. The survey included heads of households between the ages of 25 and 85 in retirement saving accounts (excluding defined benefit plans and Social Security).

The sample captured 40% of the US population and 47.3% of retirement wealth. According to the study, the richest 10% of Americans own about 50% of U.S. retirement wealth, which the Investment Company Institute estimates at $16.9 trillion in IRAs and defined contribution plans ($28.2 trillion if public and private defined benefit plans and annuities are included).

The $3.3 billion shift in overall portfolio allocations was small, the researchers wrote, because they observed differences at the zip code level, which would include both Republicans and Democrats, and because there is very little active trading in retirement accounts. The changes in asset allocation were larger among households that actively re-allocate their wealth.

© 2018 RIJ Publishing LLC. All rights reserved.

Do Spectacular Earnings Justify Spectacular Stock Prices?

Posted on October 5, 2018 by -

The US stock market, as measured by the monthly real (inflation- adjusted) S&P Composite Index, or S&P 500, has increased 3.3-fold since its bottom in March 2009. This makes the US stock market the most expensive in the world, according to the cyclically adjusted price-to-earnings (CAPE) ratio that I have long advocated. Is the price increase justified, or are we witnessing a bubble?
One might think the increase is justified, given that real quarterly S&P 500 reported earnings per share rose 3.8-fold over essentially the same period, from the first quarter of 2009 to the second quarter of 2018. In fact, the price increase was a little less than equal to earnings.

Of course, 2008 was an unusual year. What if we measure earnings growth not from 2008, but from the beginning of the Trump administration, in January 2017?

Over that 20-month interval, real monthly US stock prices rose 24%. From the first quarter of 2017 to the second quarter of 2018, real earnings increased almost as much, by 20%.

With prices and earnings moving together on a nearly one-for-one basis, one might conclude that the US stock market is behaving sensibly, simply reflecting the US economy’s growing strength.

But it is important to bear in mind that earnings are highly volatile. Sudden sharp increases tend to be reversed within a few years. This has happened dramatically more than a dozen times in the US stock market’s history.
Earnings are different from most other economic variables, because they are defined essentially as the difference between two series: revenues and expenses. Rapid growth in earnings for a few years can thus easily be followed by a return to the long-term trend or even subpar levels. In fact, S&P 500 reported earnings per share were negative during the fourth quarter of 2008, partly owing to financial-crisis-induced write-offs. Of course, that episode didn’t last (and its significance has been questioned).

Market participants ought to know that they shouldn’t overreact to earnings growth, but they sometimes forget if popular narratives mislead. Consider an example from a century ago. Although real S&P Composite annual earnings rose 2.6-fold in just two years, from around trend in 1914 to a record high in 1916, stock prices rose only 16% from December 1914 to December 1916. Why didn’t the market respond as it has recently?

From newspaper reports at the time, one can glean some clues. Most important, people attributed the increase to sudden panicky demand for US goods from Europeans and others at the beginning of World War I. When the war ended, then, profits would return to normal. Moreover, widespread anger over high war profits while men were being conscripted to risk their lives led many people, not just Americans, to start advocating for “wealth conscription.” This forgotten term, which dropped out of usage following World War II, referred to heavy taxation on sudden increases in profits. Indeed, the US first imposed a punitive tax on corporate profits above prewar levels when it entered the war in April 1917.

But stock price movements haven’t always been as rational as they were in 1916. Market reaction to earnings increases was much more positive in the “roaring twenties.” After the end of the 1920-21 recession, real annual earnings, which had been depressed by the downturn, increased more than fivefold in the eight years to 1929, and real stock prices increased almost as much – more than fourfold.

What was different about the 1920s was the narrative. It wasn’t a foreign war story. It was a story of emergence from a “war to end all wars” that was safely in the past. It was a story of the liberating spirit of freedom and individualistic fulfillment. Unfortunately, that spirit did not end well, with both stock prices and corporate earnings crashing catastrophically at the end of the decade.

There was then a period, from 1982 to 2000, when real stock prices increased 7.5-fold while real annual earnings only doubled. The end of this period has been called the dot-com boom or Internet boom, but most of the price growth preceded the tech- driven “new economy” narrative, and declining inflation helped throughout. By 2003, however, both real earnings and real stock prices fell by almost half.

Then, from 2003 to 2007, during a period of gradual recovery following the 2001 recession, real corporate earnings per share almost tripled. But the real S&P 500 less than doubled, because investors apparently were unwilling to repeat their mistake in the years leading to 2000, when they overreacted to rapid earnings growth. Nonetheless, this period ended with the financial crisis and another collapse in earnings and stock prices.

That brings us to the current boom in earnings and prices. Apparently, investors believe that this boom is going to last, or at least that other investors think it should last, which is why they are bidding up stock prices in a dramatic response to the earnings increase.

The reason for this confidence is hard to pin down, but it must be rooted in the public’s loss of healthy skepticism about corporate earnings, together with an absence of popular narratives that tie the increase in earnings to transient factors. Talk of an expanding trade war and other possible actions by a volatile US president just does not seem strongly linked to talk of earnings forecasts – at least not yet.

A bear market could come without warning or apparent reason, or with the next recession, which would negatively affect corporate earnings. That outcome is hardly assured, but it would fit with a historical pattern of overreaction to earnings changes.

© 2018 Project Syndicate.

New robo-advice platform launches in Britain

Posted on October 5, 2018 by -

Wealthsimple, a UK fintech firm backed by the parent of Great-West Financial, has introduced the Wealthsimple Pension, a “self-invested personal pension” (SIPP) that allows people to aggregate their retirement accounts and other investment accounts on a single platform.

The firm is backed by Power Financial Corporation, the parent of Great-West Financial, Empower Retirement and Putnam Investments.

Wealthsimple’s clients can get access to globally diversified low-fee portfolios, with no minimum account size. The platform also offers unlimited access to human advisers at no cost beyond the basic annual expense ratio, which is 0.7% (70 basis points) for accounts with assets under £100,000 ($129,000) and 0.50% (50 basis points) for accounts over £100,000.

According to Toby Triebel, CEO Europe, Wealthsimple, the Wealthsimple Pension is designed for people creating a retirement account for the first time, or for those who want to consolidate existing retirement accounts.

At launch, the Wealthsimple Pension will offer the following features and functions:

  • No account minimum
  • Globally diversified portfolio, automatic re-balancing
  • Transfer fees covered
  • Funding through direct debit or one-off payment
  • Fast account opening; no paperwork
  • Facilitation of employer contributions to a Wealthsimple Pension
  • Socially Responsible Investing portfolios
  • Unlimited access to human advisers

Wealthsimple, which is available to investors of any age or net worth, claims to have 100,000 users managing £2billion in savings. The fintech company currently offers services in the U.S., the U.K., and Canada. Power Financial Corporation (TSX: PWF) sector in Canada, the United States and Europe. http://www.wealthsimple.com.

© 2018 RIJ Publishing LLC. All rights reserved.

Master trusts face tighter regulation in the UK

Posted on October 5, 2018 by -

As Congress moves closer to approving a change in US pension law that would allow the creation of open multiple employer defined contribution plans (OMEPs) in this country, UK pension officials are tightening regulation of these provider-sponsored plans, called “master trusts” in the UK.

IPE.com reported this week that 30 “master trusts” in the UK have stopped or are preparing to stop offering services because they can’t comply with stringent new government regulations, the Pensions Regulator (TPR) announced this week.

Another 58 providers—including well-known retirement plans offered by NEST (the government-sponsored National Employees Savings Trust), the People’s Pension and NOW: Pensions—have six-months in which to prove to the government that they have “fit and proper” staff, sufficient financial reserves and “robust” systems, processes and protections.

Here in the US, the House of Representatives recently passed The Family Savings Act of 2018. It includes a provision to allow unrelated employers to join defined contribution plans, known as OMEPs or Pooled Employer Plans (PEPs), that private retirement plan service providers would create and operate.

‘Too small to be viable’

OMEPs represent a deregulation of the 401(k) industry, and similar deregulation in the UK has raised concerns.

“The success of automatic enrolment has led to rapid growth in master trusts. Authorization and supervision is vital to ensure 10 million savers can have confidence that their retirement savings are safe,” said Nicola Parish, executive director for frontline regulation at TPR.

“Some master trusts are too small to be economically viable, while in other cases there have been claims of malpractice,” said Malcolm McLean, senior consultant at Barnett Waddingham. “We should welcome, therefore, a new regime which seeks to stabilize a market that may be dangerously out of control and hope and expect TPR will be able to weed out all schemes that fall short of the minimum standards required.”

Joel Eytle, pensions legal director at DLA Piper, said the new regulations would place “a much more active and onerous obligation” on TPR to oversee master trusts and ensure ongoing compliance with the new law.

“The concerns are whether the regulator will have sufficient resources to effectively police the regime, and whether the obligations on master trusts will prove too onerous and deter entrants to the market,” Eytle said.

“It will also be important for traditional multi-employer schemes with participating employers who are not in the same corporate group to take legal advice on whether they would be classified as a master trust, as this would mean that they would now need to be authorized under the new legislation.”

Consolidation expected

Sharon Bellingham, senior consultant at Hymans Robertson, said the authorization regime would drive consolidation among DC master trusts.

“It doesn’t take much crystal ball gazing to see that the consolidation already happening will gain pace,” she said. “Looking ahead, it’s pretty interesting to think about [how] the market might look like 12 months from now – survival of the fittest and most committed, who might ship out ahead of the new authorization regime and who might try but not make it.”

In April, the People’s Pension – one of the UK’s biggest master trusts with more than 4m members – acquired Your Workplace Pension, a £20m (€22.5m) DC fund. The same month, the Salvus Master Trust acquired the smaller Complete Master Trust, boosting its assets above £100m.

© 2018 RIJ Publishing LLC. All rights reserved.

TIAA VA joins RetireOne annuity platform for RIAs

Posted on October 5, 2018 by -

TIAA-CREF Life Insurance Company’s investment-only, zero surrender-charge, no-commission variable annuity is now available for sale on RetireOne’s new insurance purchasing platform for registered investment advisors and other fee-based financial advisors, RetireOne announced this week.

TIAA Life will also add its no-load fixed annuity, which has 10 guarantee period options, and a no-load single premium immediate annuity, to the RetireOne platform, the release said. Other insurers with annuities already on the platform include Allianz Life, Nationwide, Ameritas, Great-West, and Transamerica.

As the RIA channel continues to grow, annuity issuers are naturally drawn in that direction. Now that new RIA insurance platforms like RetireOne are opening up (as RIJ reported in a September 6 lead article), RIAs who aren’t licensed to sell insurance themselves can recommend no-commission annuities to their clients through the platform. Other platforms include DPL Financial and Envestnet Insurance Exchange.

The platform’s licensed agent (ARIA Retirement Solutions, in this case) executing the sale for a fee, and the RIAs can then charge their regular management fee on the assets in the annuity. So far, several annuity insurers have joined the platforms as an avenue to RIAs; and at least one observer, Gary (“The Annuity Maestro”) Mettler, has indicated discomfort with this novel arrangement for the indirect sale of insurance products by unlicensed RIAs.

Before no-commission annuities came along as an adaptation to the now-aborted Department of Labor fiduciary rule past, an RIA without an insurance license who advised an annuity to a client would have had to send the client to a licensed insurance agent, who would charge a commission; the RIA would lose the assets under management. By using the platforms, RIAs keep that business. The platform sponsors hope for a surge in annuity purchases by RIAs, expecting them to use annuities in response to the longevity risk concerns of Boomer retiree clients.

RetireOne positioned the TIAA Life product as something that advisors could exchange for any high-fee variable annuities that their clients already own, or as a vehicle for tax-deferred investing. Variable annuities are unique in that clients can contribute almost any amount of after-tax money to them and then let the money grow tax-deferred until withdrawal. The gains aren’t taxed until they’re withdrawn, when they are taxed at ordinary income rates.

“Working with TIAA Life to offer their variable annuity was a priority for us. We want our platform to include access to the lowest-cost solutions that offer real client value. One of the most attractive features of TIAA Life’s product is the decremental pricing structure. In year 11, the M&E charge drops to 10 basis points,” said RetireOne CEO David Stone in the release.

Insurance policies are sold for RetireOne’s participating RIA advisors by Aria Retirement Solutions, Inc. doing business in California as Aria Insurance Solutions, Inc. (San Francisco, CA), a licensed insurance agency (CA License #0H44773).

© 2018 RIJ Publishing LLC. All rights reserved.

Society of Actuaries posts resources for actuaries, retirement planners

Posted on October 5, 2018 by -

The Society of Actuaries (SoA) has announced its new Aging and Retirement Strategic Research Program, which offers a website where retirement income practitioners might find practical information to inform their planning chores for clients.

The program includes research topics dealing with a variety of retirement risks and plans, living longer, long-term care, and annuities.  The full program and the wide variety of SoA research can be found here.

https://www.soa.org/strategic-research/aging-retirement/

A key aspect of the launch is the release of a new series of reports examining financial challenges and perspectives on retirement planning across the Millennial, Gen X, Late Baby Boomer, Early Baby Boomer and Silent generations.  This inaugural study from the program builds on prior research focused on the societal impact of aging populations and solutions for mitigating retirement risks.

The first two special topic reports in the series were issued this week. They cover: (1) Financial priorities and behaviors, and their influence on retirement plans across generations, and

(2) Difficulties in gaining financial security for younger generations.

You can read more about this study at: https://www.soa.org/research-reports/2018/financial-perspectives-aging-retirement/

“This new concept is the first of five Strategic Research Programs that have been developed through the SoA’s Strategic Plan over the past two years,” an SoA release said.

Upcoming programs will focus on Actuarial Innovation and Technology; Mortality and Longevity; Health Care Cost Trends; and Catastrophe and Climate.

More highlights and research sessions from the Aging and Retirement Strategic Research Program will be introduced at the SoA Annual Meeting in Nashville, October 14-17, 2018.

https://www.soa.org/prof-dev/events/2018-annual-meeting/#

© 2018 RIJ Publishing LLC. All rights reserved.

Guess What: America Is Rich

Posted on October 5, 2018 by -

Do you still wonder where the Federal Reserve found the trillions of dollars it needed to bail out the banking industry back in 2008? Or how the nation could be “broke” but afford a massive corporate tax cut? Or how Uncle Sam could carry a $20-plus trillion national debt and still enjoy low borrowing costs?

Ten years after the financial crisis, a surprising number of people continue to brood over these questions. Seeking answers, about 400 of them gathered last weekend at the New School of Social Research in lower Manhattan for the Second International Conference of Modern Monetary Theory (MMT).

You may have heard MMT (if you’ve heard of it at all) described as a “heterodox” school of financial thought, one embraced by utopians, social activists, and economists at universities that are not the Ivy League, Stanford or the University of Chicago. Judging by the people that the conference attracted, it’s moving closer to the mainstream.

Speakers and audience members included academics from Harvard and Cornell, ex-bankers and bond traders, a harp manufacturer from Indiana, a state senator from Minnesota, and former Treasury officials. A few people came from as far as Canada, Spain, Italy and Australia, because MMT is a version of macroeconomics that applies to any country with a sovereign currency. One person, evidently a student, was wearing a black “Deficit Owl” t-shirt. MMTers sometimes call themselves deficit owls to distinguish themselves from deficit “hawks.”

Maybe because some its advocates aren’t shy about calling for a reduction in Wall Street’s power over credit creation (and over elected officials), MMT is inherently linked to an agenda of significant social change. It attracts members of advocacy groups like RealProgressivesUSA, ImHoppingMad.com, and the American Monetary Institute filled the New School auditorium. MMT offers a theoretical path to one of their most pressing goals: The creation of guaranteed (not “make-work”) government-paid jobs, with health insurance, and the end of involuntary unemployment.

The financial media, always trying to ‘follow the money,’ have taken more notice of MMT in recent years. A sympathetic journalist from Bloomberg News, and even one from buttoned-down Barron’s, served as moderators of panel discussions. Reporters from liberal (The New Yorker) and conservative (Breitbart News) outlets filtered in. It was not hard for the journalists to find people who wanted to talk to them. During breaks, coffee, bagels, muffins and Danish pastries were served and conversations spilled out onto W. 12th St., in the heart of the West Village. (On Friday night, conference-goers crowded into a neighborhood tavern appropriately called Shades of Green.)

Although its name implies that MMT is a theory, the movement’s creators (credit for conceiving MMT usually goes to Randall Wray, Warren Mosler and Bill Mitchell) consider it an accurate description of our financial system. For a number of reasons, however, the gist of MMT isn’t easy to convey. (Here’s an MMT blog.)

Joe Weisenthal, a conference panelist (and host of Bloomberg TV’s “What’d You Miss?”) likes to say that, in MMT’s view, the US dollar is analogous to frequent flier miles. An airline can issue as many bonus miles as it wants. Its only constraint is its supply of seats, flights, and airplanes. It can use techniques like putting expiration dates on bonus miles or raising the prices (in miles) of seats to maintain a desirable balance between supply and demand.

The US government, according to MMT, finances itself is a similar way. Using the alchemy of the Federal Reserve and the banking system, it can create as many dollars as people need. Unlike a household, or even like a state government, it isn’t credit-constrained. It is limited only by the supply of things that can be purchased in dollars (not just in the US but wherever dollars are accepted). It taxes dollars out of existence not to fund its expenditures, but to control inflation. That, at least, is my understanding of it.

MMT economist Stephanie Kelton on Bloomberg TV.

Here’s where I think many people run into conceptual trouble with MMT. We ordinarily assume that we “make” money by working or investing, and that the Internal Revenue Service (as some argue) “confiscates” taxes from us. MMT turns that view upside down, saying that the government spends dollars into the economy and taxes dollars out of it. In the MMT universe, Margaret Thatcher was wrong when she said that socialism doesn’t work because “eventually you run out of other people’s money;” the US and UK governments, by definition, have their own money.

This concept of creating and destroying money doesn’t make sense as long as you still think of “money” as a tangible item with intrinsic value, like those “Walking Liberty” silver dollars that an uncle gave me for my 13th birthday. Like matter, it may seem, real money can neither be created nor destroyed. That may been true for certain kinds of money at certain times, but it’s not true for the money we use now.

Today we use credit-money. A commercial bank creates deposits out of thin air by making a loan, and when the loan is repaid that money vanishes again. Through an analogous feat of double-entry accounting, according to MMT, the government can create money for its own account at the New York Fed without taking money from anyone else. The budget deficit simply measures how much more the government spends into the economy than it takes out in a year. The national debt represents the world’s savings in dollars and will never have to be repaid, merely serviced.

Some readers may be getting a bit uncomfortable at this point in the story. Mainstream economists tend to bridle at the mention of MMT, whose proponents dismiss macroeconomic orthodoxy regarding unemployment and inflation or government crowding-out of private investment. But a growing number of insiders have accepted its validity, even saying that they “knew it all along.” (Alan Greenspan, for one, acknowledged the validity of its central premise in this video.) Stephanie Kelton, an MMT economist at Stonybrook University on Long Island, travels extensively, speaking about MMT at financial conferences (e.g., Morningstar’s Investor Conference) and on television. She’s been an economics advisor to the Democratic side of the Senate Finance Committee and has advised Bernie Sanders.

Most of those who attended the conference at the New School last week seemed to find MMT to be liberating and empowering, and understandably so.  It tells them that the US can afford to spend much more on social insurance, schools, infrastructure, environmental repair and clean energy than it does today. If dollars are not a scarce commodity, then almost anything seems possible. Politicians may or may not cooperate (given our ethnic and rural/urban divides), but lack of money per se needn’t be a deal-breaker.

© 2018 RIJ Publishing LLC. All rights reserved.

Fed increases benchmark interest rate to between 2% and 2.25%

Posted on September 27, 2018 by -

The Federal Reserve’s chairman, Jerome H. Powell, said on Wednesday that the American economy was experiencing Citing the current economic environment “a particularly bright moment” for the US economy, Fed chairman Jerome H. Powell announced this week that it would raise its benchmark interest rate and anticipates future increases.

The decision to raise rates to a range between 2% and 2.25% was not intended to stifle growth, Powell said, according to the New York Times. President Trump told the media that the increase reflects a strong economy but that he is “not happy” with higher rates because they increase the country’s borrowing costs.

The Fed’s decision, announced after a two-day meeting of its Federal Open Market Committee, which sets monetary policy, represents the eighth time that the Fed has raised interest rates since the 2008 financial crisis, and the third time this year. Another increase is expected in December.

The Fed described economic conditions as “strong.” It predicted that growth this year could top 3%, before slowing in coming years. Unemployment remains low, inflation remains around the 2% pace the Fed regards as optimal, and the pace of investment has increased, it said.

The Fed did not describe its monetary policy as “accommodative,” but Powell said that monetary policy remained accommodative at the moment.

© 2018 RIJ Publishing LLC. All rights reserved.

Regulation, Kavanaugh, Trump & the Indexing of Capital Gains

Posted on September 27, 2018 by -

The issue of government regulation promulgated by unelected officials is central to many of today’s political and policy debates. It has surfaced in the confirmation battle over Supreme Court nominee Brett Kavanaugh, a strong critic of regulatory actions that are unsupported by legislative or constitutional authority. And we see it in the Trump administration’s contradictory regulatory initiatives: Aggressive deregulation when it comes to environmental law paired with enthusiastic administrative efforts to reduce taxes on capital—absent clear legislative authority.
While the nation’s regulatory wave crested four decades ago, long before President Trump, the pattern has always been inconsistent. President Jimmy Carter jump-started  the modern deregulatory push by cutting red tape for everything from airlines to home-brewed beer. Every president since has laid claim to at least part of the antiregulatory mantle. Yet, every recent president, including Trump, has also attempted to achieve policy goals through administrative power.
The current administration has been especially enthusiastic about using regulations to achieve tax policy ends. Senior White House advisers have asserted that Treasury and IRS can issue regulations to provide for the indexing of capital gains. The president himself has asked Treasury to liberalize the treatment of required distributions from retirement plans. Both share a common goal: to cut taxes on returns to wealthholders without enacting a statute.
In truth, presidents and political parties favor regulation mainly when it when it advances their own agenda, regardless of the number of pages it adds to the Federal Register. Interestingly, both presidents Trump and Obama have turned to administrative and regulatory initiatives in frustration when they felt they could not achieve their policy goals with Congress. And, when it comes to the sausage they do seek and get from Congress, their anti-regulatory fervor falls by the wayside; witness all the regulation that IRS still struggles to issue around the Tax Cut and Jobs Act of 2017.
But what are the criteria by which an affirmative decision to regulate should be made? In theory, they are two-fold: benefits should exceed costs and the actions should be constitutionally and legislatively allowed.
Using regulation to interpret the law can simplify life for taxpayers by providing rules surrounding the large number of possible transactions and arrangements into which they may enter. Such a requirement is often implicitly, if not explicitly, allowed by the legislation itself. While the law may not pass the benefit-cost test, regulations to taxpayers on how to be law-abiding usually does. Though the line between interpretation and exercising authority ceded in legislation is never perfectly clean, the Treasury and IRS have always viewed their guidance as mainly interpretative.
Yet, most administrations, not just the current one, often are tempted to wade into technical tax issues about which they have limited knowledge. A strong Treasury Secretary or Assistant Secretary can constrain such efforts, sometimes by making clear that meddling is unnecessary and potentially politically dangerous.
Extending to administrative agencies non-interpretative, legislative-type authority raises more complicated benefit-cost and statutory authority questions.
The Constitution explicitly requires that the President, not the Congress, “take care that the laws be faithfully executed.” Even if it didn’t, Congress has neither the time nor the expertise to execute laws, and implementation inevitably requires discretion. Anyone who has ever sat at a congressional drafting session knows how much Congress leaves unspecified in legislative language. Long before a tax bill becomes law, congressional staff have begun consulting with Treasury and other agencies over how to fill in the inevitable gaps in the statute.
Bottom line: Think twice before generalizing about the costs or benefits of regulation or even its constitutional basis. And remember that the political and ideological arguments for or against regulation, particularly as something good or bad in and of itself, tend to be selective and supported by weak legal and economic reasoning. Mostly, though, remember that the best way to avoid bad regulation or rule making is to avoid bad law making.

© 2018 Urban Institute.

Ten most popular ‘former’ 401(k) providers

Posted on September 27, 2018 by -

More first-wave boomers and Gen-Xers have chosen to keep their retirement assets in a former employer’s plan for at least five years, according to a new Cogent Report. “That’s welcome news for plan providers looking to keep assets in-house,” a Cogent release said this week.

“But with a significant decrease in overall satisfaction among former plan participants this year, plan providers must take heed that investment performance is not the only factor that retains client assets,” according to the release that accompanied DC Participant Planscape, an annual Cogent Reports study by Market Strategies International-Morpace.

Nearly half (46%) of former plan participants did not take any action with regard to rollover options in 2017 and 43% intend to leave their assets in-plan this year. Participants report staying in-plan because they are content with the investment performance and choice of investment options and have no intention of moving their assets unless absolutely necessary.

According to the report, the firms earning the highest level of former participant satisfaction, and thus those best positioned to retain assets in-plan, are:

  1. Vanguard
  2. Fidelity Investments
  3. Voya
  4. Charles Schwab
  5. TIAA
  6. T. Rowe Price
  7. Merrill Lynch/Merrill Edge
  8. Prudential Retirement
  9. Nationwide
  10. MassMutual
    (Source: Market Strategies International. Cogent Reports. DC Participant Planscape. July 2018.)

“The secret to success for plan providers is to find the right balance between maintaining high satisfaction with former participants who decide to leave their assets in the plan while at the same time being ready to cross-sell with rollover IRAs and other investment services,”s said Linda York, senior vice president at Market Strategies-Morpace, in a release.

Cogent Reports conducted an online survey of a representative cross section of 4,986 DC plan participants from April 30 to May 18, 2018. Survey participants were required to be 18 years or older, and contribute at least 1% to a current plan and/or have $5,000 or more in at least one former plan.

© 2018 RIJ Publishing LLC. All rights reserved.

On the Case: Plan for A Couple with $750K

Posted on September 27, 2018 by -

Every retirement income plan has to start somewhere, and Jerry Golden begins by asking clients to use his online widget to calculate their “Income Power.” That’s the level of guaranteed monthly lifetime income they could squeeze out of their savings if they used all of it to buy a ladder of commercial deferred income annuities.

Jerry Golden

“The starting point is ‘Income Power,’” Golden, the CEO of Manhattan-based Golden Retirement, told RIJ in a recent interview. Income Power can be calculated for a single investor, a couple, or even include a beneficiary. If the clients think they can retire on that income, plus Social Security and pensions (if any), then Golden starts building a more specific retirement income plan for them. The Income Power number is a benchmark, not an plan.

For this latest installment of our series of retirement income Case Studies, RIJ asked Golden to use his proprietary income planning process to create an income plan for a real but anonymous mass-affluent married couple, whom we’ll call the M.T. Knestors. The husband is 66 years old. He intends to claim Social Security in four years and then work part-time. Mrs. Knestor is 60 years old and already retired. They have two grown, self-supporting children.

The M.T. Knestors

Here is the client data (shorn of specific asset allocations or products) that we sent to Golden Retirement:

Based on their $755,000 in assets, this couple’s Income Power is $2,900 per month at the start of the husband’s retirement, according to Golden’s software. With inflation adjustments, it rises to $4,900 after 15 years, when Mr. Knestor reaches age 85. But if this number isn’t part of the income plan, as noted above, why is it so important?

If deemed acceptable by the client, the Income Power number tells Golden if his clients have roughly enough savings not only to cover their monthly expenses in retirement, but also to offset inflation risk and longevity risk. If the couple considered their Income Power number too small to meet their expected retirement expenses, Golden would advise them to save more, retire later, reduce expenses, work part-time in retirement, or leverage their home by downsizing or borrowing against it.

Unless the Income Power number is high enough, creating a satisfactory plan would likely be a challenge. That’s why it’s important.

Jerry’s ground rules

After clients accept their Income Power as a good starting point, Golden can submit their specifics to his process. While every plan undergoes multiple changes during implementation, and each client will choose different sets of products, Golden’s general principles for creating a retirement income plan are:

Keep at least 65% of the portfolio in liquid investments. Golden believes that, as a general rule, no more than 30% to 35% of the assets should be annuitized. The client should think of the annuity purchase as part of the allocation to fixed income.

Purchase a qualified longevity annuity contract (QLAC). As a general rule, Golden recommends using 25% of each spouse’s tax-deferred savings (up to $130,000 each) to buy a deferred income annuity that begins no later than age 85. The QLAC provides late-in-retirement income to cover basic expenses plus supplement late-life health care costs if needed.

Invest remaining tax-deferred assets in a balanced portfolio. Golden recommends a systematic withdrawal program, based on conservative growth assumptions, that will exhaust the qualified assets between the date of retirement and the date when the QLAC income begins. (Favorable performance can either increase or extend withdrawals. See below.) He doesn’t believe in limiting withdrawals to the minimum required amount. The typical mass-affluent retiree, unlike high-net-worth retirees, needs the income and is less concerned with the tax consequences, Golden told RIJ.

Increase withdrawals according to market returns. The clients can increase their income by 1%, 2%, or 3% per year, depending on whether equity returns are 4%, 6%, or 8%, respectively.

Invest taxable assets in dividend-paying stocks. The logic here is to draw down dividends as a supplement to monthly income while preserving the stocks for late-life expenses or bequests. These investments will potentially be eligible for the step-up in basis at death, and the capital gains tax relief that comes with it. To reduce risk, Golden recommends investing part of this allocation in high quality corporate bonds.

Buy an immediate income annuity if necessary. If the dividends, systematic withdrawals and QLAC income don’t produce adequate monthly income, Golden says, the client should consider using part of the savings to buy an immediate life annuity to make up the difference. When advising clients, he calls the immediate life annuity the plan’s “belt” and the QLAC its “suspenders.”

“Income allocation” is more important than “asset allocation.” Golden sees the client’s portfolio through the prism of income. He expects to allocate 25% to 40% of the client’s assets to the purchase of annuities, with the rest of the assets producing systematic withdrawals (from qualified accounts) and interest and dividends (from after-tax accounts).

The Knestors’ income plan

Based on these principles, the first draft of Golden’s plan (it may be amended and re-amended during future meetings) for the couple appears below. He used $132,500 (the sum of 25% of each spouse’s IRA savings) to buy a QLAC that would provide income when each reaches age 85. (The clients can adjust the start dates as they deem appropriate.)

Golden recommended putting the remaining pre-tax savings of about $400,000 in a 50% stocks/50% bond portfolio to provide systematic withdrawal income for 15 years, until the QLAC income starts. For additional monthly income over the entire retirement period, he put about $170,000 of the after-tax savings and put it into dividend-bearing stocks. He allocated the remaining $56,000 in after-tax savings to a small immediate, joint-life, inflation-adjusted income annuity. (In subsequent meetings, the couple could shift money from the high-dividend stocks to the immediate annuity, if they wanted more current income.)

Here’s the income chart that resulted from the allocations above:

 

This plan keeps most (75%) of the couple’s savings in liquid form (which will help them meet their goal to leave money to their children), while ensuring that more than half of their monthly income (including Social Security) is inflation-adjusted and guaranteed for life. The QLAC also acts a buffer against medical expense risk in late life. Overall, the plan delivers both upside potential and downside protection.

Perhaps because he has an insurance background, Golden is risk-conscious and doesn’t believe in the usual steps that many investment advisors take when creating an income plan, such as prescribing a systematic withdrawal plan based on the 4% rule solely against a portfolio of securities.

“Our fundamental approach is that asset allocation is all wrong for retirement income planning,” Golden told RIJ. He believes that Monte Carlo simulations, such as those that predict a 90% chance that a portfolio will last to age 90, are often based on market returns that most clients won’t experience because they sell stocks during a slump. “The biggest risk is persistency risk,” he said. “It’s wrong to assume that the client will be in the market every day between now and age 90. That’s just flawed.”

Scaling up the business

Golden finds new retail clients through his luncheon seminars, which he fills by sending email invitations to lists of executives in the New York-New Jersey-Connecticut area. His website and his blogposts also attract new clients, many of whom are already amenable to guaranteed income products and some of whom have already used his widget to calculate their Income Power. He also does targeted advertising in Kiplinger.com, where his articles are published in the Wealth Management section.

“We talk about minimizing risk,” Golden said. “Our income headline is ‘More Income, Less Market Risk, that’s what we want them to hear. The income annuity is just a tool. If we said we were going to create a 30% annuity plan, we’d lose people. When all is said and done, we look at the allocation and we see if we can meet the income goal by staying 65% liquid.”

Few people can match Golden’s level of expertise in the retirement income field. Over a 40-year insurance career, he’s been an actuary, home office executive, product developer, advisor and serial entrepreneur. At AXA-Equitable (now AXA US), he developed the first guaranteed minimum income benefit (GMIB) rider on a variable annuity. For MassMutual, he invented an income generation tool for advisors and retirees called the Retirement Management Account, or RMA.

Now, as a kind of capstone project, Golden is trying to scale up Golden Retirement and its Income Power methodology, which combines algorithms with human advice. So far he’s been bootstrapping his own web and software efforts. Eventually he’ll decide either to grow organically, license his technology to advisors, look for venture capital, or sell his mousetrap to a big financial services company.

“We know that we can drive interest and find high value prospects,” Golden said. “But then do we keep the clients ourselves and build up our own call center? Or do we send leads to third-party advisors? Or do we license our technology to various advisor platforms, or to larger institutions? We’re going through that decision-making process right now.” The opportunity for advisors to do well and do good by helping Boomers turn savings into sustainable income is, in his view, virtually unlimited.

© 2018 RIJ Publishing LLC. All rights reserved.

 

 

Transparency, low-cost will guarantee a market for clean-shares: Cerulli

Posted on September 27, 2018 by -

The September 2018 issue of The Cerulli Edge—U.S. Monthly Product Trends Edition analyzes mutual fund and exchange-traded fund (ETF) product trends as of August 2018. This issue also provides special coverage on share class trends, including the future of clean shares, the effects of fee compression, and asset managers’ priorities.

Highlights from this research:

  • Despite the death of the Department of Labor Conflict of Interest Rule and lack of clarity around the inclusion of sub-transfer agent (sub-TA) fees, clean-share mutual funds will likely have a place in the intermediary market due to greater fee transparency and lower cost. Asset managers will need to work hand-in-hand with their distribution partners to rework the payment flow of certain asset-based fees (e.g., 12b-1 fees, sub-TA fees) that will no longer be included in clean shares.
  • August was another successful month for passive mutual funds and ETFs, as these strategies collectively witnessed assets increase 2.2% to just less than $7.3 trillion. However, total mutual fund assets only grew 0.9% in August, finishing the month with approximately $15.4 billion. ETF asset growth topped 2.0% again in August, reaching nearly $3.7 billion. Flows were an impressive $24.9 billion.
  • A key trend emerging within the industry is managers trying to find a way to deliver institutional pricing levels to retail investors. This sentiment is reflected in a recent Cerulli survey revealing that 55% of managers currently place a high priority on fee modification, a significant uptick from 41% of managers prioritizing this in 2017. Despite the general desire for modification, significant roadblocks have stood in the way of tangible innovation, with managers instead opting to continue reducing expense ratios rather than develop entirely new solutions.

© 2018 Cerulli Associates.

Enjoy Today’s Income Plan

Posted on September 27, 2018 by -

In this week’s issue of RIJ, we present the first draft of a retirement income plan created by Jerry Golden of Golden Retirement for an anonymous couple with about $750,000 in savings. We think that you’ll find it interesting.

Many RIJ readers may recognize Golden’s name. (What last name could possibly be more appropriate for a retirement expert?) As an actuary, advisor, executive, and entrepreneur, he’s been a seminal figure in the retirement industry.

Some two decades ago, at AXA-Equitable, he developed the first guaranteed minimum income benefit—an option to convert a variable annuity to an income annuity with a guaranteed floor. A decade ago, he created the Retirement Management Account, a process for the gradual conversion of liquid assets to income annuities, and sold it to MassMutual.

The plan that Golden presents here, while still in the rough-cut stage of development, reflects his core beliefs about income planning. For instance, he likes qualified longevity annuity contracts, or QLACs. These are the deferred income annuities, purchased with qualified savings, whose value (up to 25% of qualified savings or $130,000 per person) can be excluded from the calculation of required minimum distributions until as late as age 85.

Aside from offering modest tax benefits, he says, QLACs provide future income, at a steeply discounted price, that can be applied, if needed, to assisted living or long-term care expenses. Golden acknowledges that QLACs aren’t popular with most advisors. That’s because most advisors focus on selling products, he says, and QLACs “are part of a planning sale, not a product sale.”

Golden believes in “income allocation,” not “asset allocation.” The plan we present today is also noteworthy for its diversification of income sources. During the middle years of retirement, the plan produces monthly income from immediate annuities, through systematic withdrawals from a total return portfolio, and from dividend-paying stocks. During the later years, QLAC income joins the mix.

As a general rule, he recommends annuitizing between 20% and 40% of savings and keeping the rest liquid. His system is quite distinct from “safe withdrawal rate” methods, from “bucketing,” and from “floor-and-upside” techniques. As you read his plan, note that none of the clients’ money is allocated to money market accounts and none is set aside for appreciation only. All of the allocations produce either current or future income.

Golden Retirement provides direct advice to clients, using a proprietary process. Golden meets prospects through luncheon seminars and through his website. He publicizes his business through ads and articles in Kiplinger’s magazine. He foresees a point where he won’t personally be able to handle the volume of incoming business. He’s already considering licensing his process to other advisors or to sell it to an institution. Even after some 40 years in the retirement industry, he still thinks like an entrepreneur.

We hope you enjoy Golden’s solution for the “M.T. Knestors.” You can expect more case studies like this one in future editions of RIJ.

© 2018 RIJ Publishing LLC. All rights reserved.