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Deja´ Voodoo

Having failed to “repeal and replace” the 2010 Affordable Care Act (“Obamacare”), US President Donald Trump’s administration and the Republican congressional majority have now moved on to tax reform. Eight months after assuming office, the administration has been able to offer only an outline of what it has in mind. But what we know is enough to feel a deep sense of alarm.

Tax policy should reflect a country’s values and address its problems. And today, the United States—and much of the world—confronts four central problems: widening income inequality, growing job insecurity, climate change, and anemic productivity growth. America faces, in addition, the need to rebuild its decaying infrastructure and strengthen its underperforming primary and secondary education system.

But what Trump and the Republicans are offering in response to these challenges is a tax plan that provides the overwhelming share of benefits not to the middle class—a large proportion of which may actually pay more taxes—but to America’s millionaires and billionaires. If inequality was a problem before, enacting the Republicans’ proposed tax reform will make it much worse.

Corporations and businesses will be among the big beneficiaries, a bias justified on the grounds that this will stimulate the economy. But Republicans, of all people, should understand that incentives matter: it would be far better to reduce taxes for those companies that invest in America and create jobs, and increase taxes for those that don’t.

After all, it is not as if America’s large corporations were starved for cash; they are sitting on a couple of trillion dollars. And the lack of investment is not because profits, either before or after tax, are too low; after-tax corporate profits as a share of GDP have almost tripled in the last 30 years.

Indeed, with incremental investment largely financed by debt, and interest payments being tax-deductible, the corporate tax lowers the cost of capital and the returns to investment commensurately. Thus, neither theory nor evidence suggests that the Republicans’ proposed corporate tax giveaway will increase investment or employment.

The Republicans also dream of a territorial tax system, whereby American corporations are taxed only on the income they generate in the US. But this would only reduce revenue and further encourage American companies to shift production to low-tax jurisdictions. A race to the bottom on corporate taxation can be prevented only by imposing a minimum rate on any corporation that engages in business in the US.

America’s states and municipalities are responsible for education and large parts of the country’s health and welfare system. And state income taxes are the best way to introduce a modicum of progressivity at the subnational level: States without an income tax typically rely on regressive sales taxes, which impose a heavy burden on the poor and working people. It is thus perhaps no surprise that the Trump administration, staffed by plutocrats who are indifferent to inequality, should want to eliminate the deductibility of state income taxes from federal taxation, encouraging states to shift toward sales taxes.

Addressing the panoply of other problems confronting the US will require more federal revenues, not less. Increases in standards of living, for example, are the result of technological innovation, which in turn depends on basic research. But federal government support of research as a percentage of GDP is now at a level comparable to what it was 60 years ago.

While Trump the candidate criticized the growth of US national debt, he now proposes tax cuts that would add trillions to the debt in just the next ten years—not the “only” $1.5 trillion that Republicans claim would be added, thanks to some growth miracle that leads to more tax revenues. Yet the key lesson of Ronald Reagan’s “voodoo” supply-side economics has not changed: tax cuts like these do not lead to faster growth, but only to lower revenues.

This is especially so now, when the unemployment rate is just over 4%. Any significant increase to aggregate demand would be met by a corresponding increase in interest rates. The “economic mix” of the economy would thus shift away from investment; and growth, already anemic, would slow.

An alternative framework would increase revenues and boost growth. It would include real corporate-tax reform, eliminating the tricks that allow some of the world’s largest companies to pay miniscule taxes, in some cases far less than 5% of their profits, giving them an unfair advantage over small local businesses. It would establish a minimum tax and eliminate the special treatment of capital gains and dividends, compelling the very rich to pay at least the same percentage of their income in taxes as other citizens. And it would introduce a carbon tax, to help accelerate the transition to a green economy.

Tax policy can also be used to shape the economy. In addition to offering benefits to those who invest, carry out research, and create jobs, higher taxes on land and real-estate speculation would redirect capital toward productivity-enhancing spending—the key to long-term improvement in living standards.

An administration of plutocrats—most of whom gained their wealth from rent-seeking activities, rather than from productive entrepreneurship—could be expected to reward themselves. But the Republicans’ proposed tax reform is a bigger gift to corporations and the ultra-rich than most had anticipated. It avoids necessary reforms and would leave the country with a mountain of debt; the consequences—low investment, stalled productivity growth, and yawning inequality—would take decades to undo.

Trump assumed office promising to “drain the swamp” in Washington, DC. Instead, the swamp has grown wider and deeper. With the Republicans’ proposed tax reform, it threatens to engulf the US economy. 

© 2017 Project Syndicate.

How About ‘Free-Based’ Index Annuities?

Financial products aren’t like other products. When you pay a premium for a four-piece Sage fly rod, you don’t get only three sections of the rod. If you buy a cashmere overcoat at Bergdorf Goodman, and pay extra for the polite service, the prestige brand and the store’s high-rent location, your overcoat isn’t less warm or well-tailored.

But when you pay extra for a financial product, then you’re getting a more or less flawed product. The amount you pay for distribution or service or advice effectively reduces its value to you. Financial products are unusual in this way.

Fee-based indexed annuities are a good example. These are indexed annuities that have no distribution costs—i.e., broker or agent commissions—baked into their crediting formulas. Fresh off the factory floor, so to speak, they have the potential, in up markets, to yield significantly more than commission-based indexed annuities.

Life insurers created these products in response to the DOL fiduciary rule. The rule made selling on commission to IRA clients more legally and administratively onerous, so many brokers and agents have migrated to a fee-based revenue model, where they earn a percentage of the assets they manage. The fee-based FIA lets them continue to sell FIAs within their new revenue if they choose. 

But will they? Will brokers-turned advisors keep selling FIAs, even without the incentive of a commission? Will traditional fee-based advisors start selling them, now that they don’t carry a commission? Will consumers demand them—or even learn that they’re available?

More to the point, if fee-based advisors sell these new products, how will they bill clients for them? So far, it appears that advisors at some brokerages are planning to charge their usual managed account fee for the tax-deferred client money that’s used to buy an FIA contract. I don’t think that’s appropriate, for these reasons:

  • FIAs are guaranteed products. Investment management is really about managing the risks of securities, particularly stocks. That’s where professional expertise comes in. FIAs are not securities, as the court decision on Rule 151A determined a few years ago. They aren’t risky at the client level, so there’s no risk management to charge for.
  • FIAs are packaged products. The risk management techniques and the insurers bake the costs of those techniques into the crediting method, even before any distribution costs are tacked on. By the time the product reaches investors, the cost of “advice,” in a sense, has already been deducted.
  • FIAs are general account products. The assets live at the life insurer, not at the brokerage’s custodian. Fee-based advisors don’t charge a fee on other general account products, like single-premium immediate annuities—which is a major reason why they don’t recommend them, even when they should—so why should they earn a fee on no-commission FIAs?

Instead, they should either charge a small one-time transactional fee on the sale or a much-reduced ongoing fee–as they might on a bond ladder or a fixed deferred annuity. If RIAs do try to charge the full rate, you can bet that some robo-RIA will undersell them. It certainly makes no sense to charge someone 10 times more for a $500,000 FIA than for a $50,000 FIA.

Brokerage executives counter that they deserve to make a living. A living, yes—but not a killing. If they truly are fiduciaries, their way of making a living shouldn’t involve a zero-sum game with clients. Charging a full management fee on risky assets isn’t necessarily a zero-sum game, but doing so on an FIA comes dangerously close. (If advisors aspire to be professionals, like doctors or lawyers, they should charge by the hour, as other professionals do. But that’s another story.)

If fee-based advisors charge a managed account fee on FIA assets, then the financial industry will only have complied with the letter of the fiduciary rule. It won’t have embraced the spirit of the rule, which was to help 401(k) and IRA savers maximize their retirement income. If they did that, and charged little or nothing, fee-based FIAs would practically sell themselves. 

© 2017 RIJ Publishing LLC. All rights reserved.

Market value of U.S. retirement savings reaches $26.6tr in 2Q17

Total US retirement assets—which can also be thought of as part of the world’s outstanding financial liabilities—were $26.6 trillion as of June 30, 2017, up 1.9% from March 31, 2017. Retirement assets accounted for 34% of all household financial assets in the United States at the end of June 2017, according to the Investment Company Institute.

Much of this wealth is concentrated among a relative few. The wealthiest one percent of Americans owns 43% of U.S. financial assets, the top five percent (including the top one percent) own 73%, and the bottom 80% share only five percent of financial wealth, according to G. William Domhoff of the University of California at Santa Cruz.

Retirement assets generally rose in the second quarter of 2017.

  • Assets in individual retirement accounts (IRAs) totaled $8.4 trillion at the end of the second quarter of 2017, an increase of 2.3% from the end of the first quarter.
  • Defined contribution (DC) plan assets rose 2.2% in the second quarter of 2017 to $7.5 trillion.
  • Government defined benefit (DB) plans (including federal, state, and local government plans) held $5.7 trillion in assets as of the end of June, a 1.5% increase from the end of March
  • Private-sector DB plans held $3.0 trillion in assets at the end of the second quarter of 2017
  • Annuity reserves outside of retirement accounts were $2.1 trillion

Defined contribution plans

Americans held $7.5 trillion in all employer-based DC retirement plans on June 30, 2017, of which $5.1 trillion was held in 401(k) plans. In addition to 401(k) plans, at the end of the second quarter, $575 billion was held in other private-sector DC plans, $949 billion in 403(b) plans, $297 billion in 457 plans, and $526 billion in the Federal Employees Retirement System’s Thrift Savings Plan (TSP).

Mutual funds managed $3.3 trillion, or 65%, of assets held in 401(k) plans at the end of June 2017. With nearly $2.0 trillion, equity funds were the most common type of funds held in 401(k) plans, followed by $918 billion in hybrid funds, which include target date funds.

Individual Retirement Accounts

IRAs held $8.4 trillion in assets at the end of the second quarter of 2017. Forty-eight percent of IRA assets, or $4.0 trillion, was invested in mutual funds. With $2.2 trillion, equity funds were the most common type of funds held in IRAs, followed by $884 billion in hybrid funds.

Other developments

Target date mutual fund assets grew 4.8% in the second quarter, topping $1 trillion at the end of June 2017. Retirement accounts held the bulk of target date mutual fund assets. Eighty-seven% of these assets were held through DC plans (67%) and IRAs (20%).

© 2017 RIJ Publishing LLC. All rights reserved.

Wells Fargo led all banks in annuity fee income in 2Q17

Income earned from the sale of annuities at bank holding companies hit $1.59 billion in first half of 2017, up 4.4% from $1.52 billion in the first half of 2016, according to the Michael White Bank Annuity Fee Income Report.

Second-quarter 2017 annuity commissions rose to $797.3 million, up 4.7% from $761.4 million earned in the second quarter of 2016, but up only 1.1% from $788.5 million in first quarter 2017.

Wells Fargo & Company (CA), Morgan Stanley (NY), and UBS Americas Holding (NY) led all bank holding companies in first half 2017, with $380 million, $302 million and $174.7 million in annuity commission income, respectively.

Among BHCs with assets between $1 billion and $10 billion, leaders included First Command Financial Services (TX), Wesbanco, Inc. (WV), and First Commonwealth Financial Corporation (PA).

The MWA report benchmarks the banking industry’s annuity fee income each quarter. It uses data from all 5,787 commercial banks, savings banks and savings associations (thrifts), and 612 top-tier bank (and S&L) holding companies (collectively, BHCs) with over $1 billion in consolidated assets as of June 30, 2017. Insurance companies have been excluded.

Of the 612 BHCs, 286 or 46.7% participated in annuity sales activities during first half 2017. Their $1.59 billion in annuity commissions and fees constituted 17.5% of their total mutual fund and annuity income of $7.29 billion and 35.4% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $4.48 billion.

Of the 5,787 banks, 792 or 13.7% participated in first-half annuity sales activities. Those participating banks earned $379.8 million in annuity commissions or 23.9% of the banking industry’s total annuity fee income; their annuity income production was down 10.5% from $424.3 million in first half 2016.

Of 286 large top-tier BHCs reporting annuity fee income in first half 2017, 182 or 63.6% are on track to earn at least $250,000 this year,” said Michael White, president of MWA, in a release. “Of those 182, only 54 BHCs or 29.7% achieved double-digit growth or greater in annuity fee income for the quarter.

“That’s a decrease of nearly 13 percentage points from first half 2016, when 77 institutions or 42.5% of 181 BHCs were on track to earn at least $250,000 in annuity fee income and achieved double-digit growth or greater. Over one-half of the 182 BHCs saw declines in their annuity revenue, with nearly 40% of those experiencing double-digit declines.”

Nearly seven in ten (69.6%) of BHCs with over $10 billion in assets earned first-half annuity commissions of $1.53 billion, constituting 96.6% of total annuity commissions reported by BHCs. That was an increase of 5.6% from $1.45 billion in annuity fee income in first half 2016.

Among this asset class of largest BHCs in the first half, annuity commissions made up 17.2% of their total mutual fund and annuity income of $8.93 billion and 37.6% of their total insurance sales volume of $4.08 billion.

BHCs with assets between $1 billion and $10 billion recorded a 20.7% decline in annuity fee income, falling to $52.8 million in first half 2017 from $66.6 million in first half 2016. Those fees accounted for 13.2% of their total insurance sales income of $422.5 million.

Small community banks with assets less than $1 billion were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were First Federal Bank of Louisiana (LA), The Security National Bank of Sioux City, Iowa (IA), The Citizens National Bank of Bluffton (OH), Bank Midwest (IA), and Savers Co-operative Bank (MA).

These banks with less than $1 billion in assets generated $25.8 million in annuity commissions in first half 2017, down 15.5% from $30.6 million in first half 2016. Only 10.0% of banks this size engaged in annuity sales activities, which was the lowest participation rate among all asset classes. Among these proxy banks, annuity commissions constituted 17.9% of total insurance sales volume of $144.6 million.

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 4.9% in first half of 2017. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 13.0% of noninterest income.

© 2017 RIJ Publishing LLC. All rights reserved.

Honorable Mention

OneAmerica elevates web platform for tax-exempt retirement plans

OneAmerica has launched a new website (Tax-Exempt Center of Excellence) where plan sponsors can access educational resources and thought leadership news within the tax-exempt marketplace and get help in retirement planning. OneAmerica launched a similar tax-exempt site in 2016 for financial professionals.

The tax-exempt segment [403(b) plans] of the retirement industry accounts for about a third of OneAmerica’s book of retirement business, and 40% of new business for the companies of OneAmerica. The company has been serving that segment since the mid-1960s.  

OneAmerica is the marketing name for all OneAmerica companies. Their products are issued and underwritten by OneAmerica’s American United Life Insurance Company (AUL) unit. Two OneAmerica companies, McCready and Keene, Inc. and OneAmerica Retirement Services LLC, provide administrative and recordkeeping services. They are not broker/dealers or investment advisors.

Keshavan joins Voya as CIO

Santhosh Keshavan has been appointed Chief Information Officer (CIO) of Voya Financial Inc., effective September 25. Based in Windsor, CT., he reports to Maggie Parent, Voya’s EVP, Technology, Innovation and Operation.  

Previously, Keshavan served as CIO for Core Banking at Regions Financial, a U.S. bank-holding company based in Alabama. He has also held senior information technology positions at Fidelity Investments and SunGard.

Keshavan studied computer science at the University of Mysore in India and holds an MBA in Information Systems from the University of Alabama at Birmingham.

Home equity of seniors nears $6.5 trillion

Homeowners ages 62 and older in the U.S. saw their collective home equity increase 2.4% in the second quarter of 2017, to $6.42 trillion from $6.27 trillion in Q1 2017, the National Reverse Mortgage Lenders Association (NRMLA) reported this week.

The growth in housing wealth for retirement-aged homeowners was driven by an estimated 2.1%, or $162 billion, improvement in senior home values, and offset by a 0.8% increase of senior-held mortgage debt that equaled $12 billion, according to the NRMLA/RiskSpan Reverse Mortgage Market Index (RMMI).

The RMMI, which measures home equity held by older homeowners each quarter, rose to 230.17 in Q2 2017, another all-time high since the index was first published in 2000.

A 2015 research paper from the Ohio State University, Aging in Place: Analyzing the Use of Reverse Mortgages to Preserve Independent Living, shows that 14% of reverse mortgage borrowers took out the loan to pay ongoing health or disability expenses.

Real estate income fund pays third-quarter dividend

Bluerock’s Total Income+ Real Estate Fund has paid a third quarter distribution of $0.3882 per share, or 1.31% for the quarter, based on the share price of $29.58 for shareholders of record as of September 27, 2017 (A-shares). This distribution amount represents an annualized distribution rate of 5.25% based on the current share price.

Net assets under management for TI+ are approximately $780 million. Recent TI+ investments include contributions to seven institutional, private equity investments, including: Morgan Stanley, Principal, Invesco, and UBS.

TI+ currently maintains positions in 19 private equity real estate investments, with underlying assets valued at more than $144 billion (holdings are subject to change at any time and should not be considered investment advice).

TI+ aims to provide current income, capital appreciation, low correlation and low volatility relative to the broader markets. Since its inception in 2012, TI+ has generated higher risk-adjusted returns than major stock, bond and public REIT indexes, “while providing investors with access to institutional, private equity real estate previously unavailable to individual investors,” according to a release. 

New York Life announces new president of MainStay Funds

Kirk Lehneis has been appointed president of MainStay Funds and Chief Operating Officer of New York Life Investment Management, the global asset management business of New York Life, according to a news release this week.

Prudential in $1.3 billion pension risk transfer deal with International Paper

In another in a series of pension risk transfer (PRT) deals, Prudential Insurance has sold a group annuity contract to International Paper that will cover the paper manufacturer’s $1.3 billion in pension obligations to roughly 45,000 retirees and beneficiaries. 

The agreement with International Paper follows several other prominent Prudential PRTs, including those with General Motors, Verizon, Motorola, Bristol-Myers Squibb, The Hartford, Kimberly-Clark and JCPenney. 

Craddock named CRO at Mass Mutual

Massachusetts Mutual Life Insurance Company (MassMutual) has appointed Geoffrey J. Craddock as Chief Risk Officer, effective immediately.  He reports directly to Chairman, President and CEO Roger W. Crandall and joins MassMutual from its OppenheimerFunds, Inc. asset management affiliate.

Craddock replaces Brad Hoffman, who held the CRO position on an interim basis after Elizabeth A. Ward became Chief Financial Officer. As CRO, Craddock will be responsible for the Enterprise Risk Management function. Hoffman will continue to be a part of MassMutual’s Enterprise Risk Management team, reporting to Craddock.

Craddock began his career in the 1980s in a range of trading and brokerage positions with various investment banks in Europe, including Charterhouse Bank; Banque Indosuez; Donaldson, Lufkin & Jenrette; Paine Webber, and Phillips & Drew.

He joined OppenheimerFunds in 2008 as Director of Risk Management and was appointed OppenheimerFunds’ Chief Risk Officer in 2010. Before that, Craddock was Global Head of Market Risk Management for Canadian Imperial Bank of Commerce (CIBC). He holds an MBA from Cranfield School of Management and a BA/MA from Magdalene College, Cambridge, both in the UK. 

Firms partner to integrate 401(k)s with health savings accounts

Ubiquity Retirement + Savings, which provides 401(k) plans to small businesses on a flat-fee basis, will partner with HealthEquity, Inc., a large health savings account (HSA) non-bank custodian, to encourage employers and their employees to coordinate their contributions to both HSAs and 401(k)s.

“While 401(k)s and HSAs have benefited savers separately over the last several years, the market has failed, to this point, to produce a viable combination of the two accounts that can be easily accessed and managed by small businesses,” a press release from the two companies said.

Ubiquity and HealthEquity will offer contribution and investment strategies to employers while enabling employees to see their 401(k) and HSA balances from either platform. Ubiquity Retirement + Savings, founded in 1999, is headquartered in San Francisco with satellite offices from coast to coast.

© 2017 RIJ Publishing LLC. All rights reserved.

‘Rothification is a Stupid Idea’

Donald Trump’s tax cut plan, or rather a sketch for a draft of one, became public yesterday. It included a brief reassurance that tax incentives for retirement savings would not be sacrificed to pay for the cuts, but didn’t contain specifics on that topic.

Two days earlier, at the Insured Retirement Institute conference in Palm Beach on Monday, a panel of Washington veterans discussed the issues that preoccupy the thoughts of many of the annuity manufacturers and distributors who attended the meeting.

They worry that the administration might try to pay for tax relief for corporations and wealthy individuals by making the tax treatment of contributions to (and growth in) retirement plan accounts more like the treatment of Roth accounts. Income tax on contributions to traditional retirement accounts can be deferred until age 70½. Contributions to Roth accounts are taxable but withdrawals are generally not taxed.

The retirement industry opposes that shift, as did members of the panel at the IRI conference.

“Rothification is a stupid idea that will not die,” said Seth Harris, an ex-deputy Secretary of Labor in the Obama administration. “It’s bad policy that’s there just to fund a corporate tax cut. The tax cut will have to be paid for, and the other pay-fors are just as ugly. But the Roth 401(k) is a horrible idea.”

Another panelist, Sean Cassidy, vice president of federal government affairs for Voya Financial, described one possible scenario.

“We’re looking at the potential impact of Rothification. The Camp draft proposal (written by former House Ways and Means chairman Dave Camp, R-MI) of 2014 proposed a 50/50 model where the first $9,000 in contributions is tax-deferred and the next $9,000 is on a Roth basis. That idea is currently in play, but now they’re asking, ‘How low can we draw the tax-deferred line? At $3,500? $2,500?”

The retirement industry, which relies on tax deferral to incentivize plan participants to save, believes that a weakened form of tax deferral would hurt the industry and hurt retirees.

“My company is concerned about the behavioral response. Will people stop saving at the tax-deferred limit?” Cassidy said, noting that the retirees don’t necessarily feel commonality with the industry. “Politically, it’s sensitive. The voting public is shedding no rears for the life or annuity industry,” he added.   

A highly technical but important problem, Cassidy explained, is that tax deferral for retirement savings appears on the annual federal budget as a conspicuous twelve-figure expense, with no precise accounting for the income taxes that retirees will eventually pay when they withdraw the savings.

“Congress looks at tax deferral as an expenditure,” he said. “They put it on the same list as true deductions like the mortgage interest deduction. We’re saying, bring the money [the future income tax paid on withdrawals from 401(k)s and IRAs] into the 10-year budget window [where it would be netted against current expenditures].

The panelist, moderated by TV journalist Candy Crowley, also commented on the Obama Department of Labor’s fiduciary rule, with its requirement that advisors act in their clients’ best interests when handling retirement savings. It’s expected that the Trump administration will delay action on the rule until July 2019.

The annuity industry, assuming Hillary Clinton would be president and continue Obama retirement policies, has already done much to adapt to those policies, even as it continues to oppose them. It has spent tens of millions on new products, training, technology and compliance procedures—which may never be rolled back, regardless of what the Trump administration does.

“The battle over the best interest exemption is over,” Harris said. “The new battle will be over who is in charge. If Labor strikes down the DOL rule, then the SEC and the National Association of Insurance Commissioners will become important. Then the debate will be, ‘What is the enforcement policy?’

“But if you’re all breathing a sigh of relief over the 18-month delay, that would be a mistake,” he added. “It’s just breathing room. The SEC hasn’t produced a rule in seven years; it’s not going to produce one in 18 months. It will be up to the industry to push the SEC and DOL and NAIC into a room and give them clear guidance about what you want. But I think you’ll get a regime that’s more acceptable to industry than what we have now.”

But with so much uncertainty in the Labor department, where budgets are reportedly being slashed and no deputy Labor secretary for employee benefits has even been nominated, progress might be difficult. “There’s DOL fatigue on Capital Hill,” Cassidy said. “The legislative staff turns over and then the next wave needs to be educated about the issues. It’s like pushing string.”

All three panelists—former Oklahoma Republican congressman J.C. Watts was the third—agreed that confusion reigns in official Washington today, and that the main source of dysfunction is President Trump himself. “There’s no plan, no strategy. He just acquiesces to things and then backs away and gets outraged if he loses,” said Cassidy.

Watts agreed. “I don’t think there’s a strategy [behind what Trump does],” he said. “To him, people are just actors on a stage and he has to control the script. He will always position himself to lead the parade if he wins and blame somebody if he loses.”   

© 2017 RIJ Publishing LLC. All rights reserved.

To increase sales of active funds, bundle them with passive: Cerulli

Asset managers need to better align their product development plans with the processes that financial advisors use when constructing portfolios out of various funds, investment vehicles and assets classes, according to new research from Cerulli Associates.  

“Asset managers are looking to provide asset allocation to differentiate themselves,” said Brendan Powers, senior analyst at Cerulli, in a release. “Asset managers must be able to shift and reshape as the industry does. As advisors’ needs are changing, so must the product lines.”

With product commoditization and platform consolidation is making it tougher for standalone products to compete, 58% of asset managers are offering asset allocations that consist entirely of their own underlying strategies, Cerulli found. Firms with multi-asset-class capabilities may want to combine active and passive funds within quantitative or strategic beta strategies as way to increase sales.

“These capabilities can be offered at a lower cost compared to active, with upside potential over the index,” the release said.
Asset managers need to recognize where active management has advantages over passive (e.g., municipal bond, emerging markets equity), and where passive management holds an advantage (e.g., U.S. equity), Cerulli noted.

Cerulli’s latest report, U.S. Product Development 2017: Advisor Product Demand in a Model-Driven Environment, provides tactical data for understanding advisor product use, continued coverage of active versus passive, and advisors’ increased reliance on investment models.

© 2017 RIJ Publishing LLC. All rights reserved.

As risk premium shrinks, so does investors’ risk appetite

Experienced investors understand that the risk premium isn’t a constant, and that it gets smaller as price/earnings ratios rise. That may help explain recent investor behavior. 

In August, investors put $8.5 billion into U.S. equity passive funds, down from $10.8 billion in July 2017. On the active front, investors pulled $23.0 billion out of U.S. equity funds, compared with $19.6 billion in July, according to Morningstar’s latest monthly asset flow report.

(Morningstar estimates net mutual fund flow by the change in assets not explained by performance and net ETF flow by the change in shares outstanding.)

The report for August said:

  • Taxable bond was the lead fund category, with $27.5 billion in net flows. For the first time since May, active taxable-bond flows surpassed passive, by $14.1 billion to $13.3 billion.
  • The four Morningstar Categories with the highest inflows in August were: Intermediate-term bond, foreign large blend, multi-sector bond, and diversified emerging markets. Large blend did not make the top five categories, as interest in U.S. equities waned.  
  • PIMCO led in active flows with $4.1 billion, followed by Vanguard with $1.4 billion.
  • The two active funds with the highest inflows were the same in August as they were in July: PIMCO Income, with flows of $3.1 billion, followed by Oakmark International with $911.0 million in flows.
  • On the passive front, Vanguard was the top fund family, with inflows of $19.3 billion, followed by BlackRock/iShares, with inflows of $9.9 billion, and Fidelity, who is benefiting from multiple rounds of fee cuts.
  • The passive funds with the highest inflows were Vanguard Total Stock Market Index Fund ($6.2 billion) and Vanguard Total International Stock Index Fund ($2.5 billion).  
  • BlackRock High Yield Bond had the highest outflows in August of $1.4 billion.
  • Growth funds from Fidelity, T. Rowe Price, and American Funds also suffered large outflows as investors kept avoiding U.S. equity and growth stocks.

To view the complete report, please click here.

© 2017 Morningstar, Inc.

 

How wholesalers should adapt to disruption: DST

At the Insured Retirement Institute annual conference in Florida this week, one of the break-out sessions was dedicated to the future of the annuity wholesaling. Called “Evolution or Extinction,” it focused on disruptions in the advisor world that, in turn, are disrupting the wholesaling world. 

A new series of reports from DST Research, Analytics and Consulting, coincidentally looks at investment product distribution, which faces some of the same challenges. The series, “Prevailing in a Changing Distribution Landscape,” includes material that:

  • Examines the imbalance of asset managers’ current business models and the industry trends challenging them
  • Provides a framework to assess the firms’ preparedness
  • Outlines steps to modernize sales team structures and compensation programs

“Increased regulatory scrutiny and fee compression have forced the industry to consolidate to achieve better economics,” said Steven Miyao, head of DST Research, Analytics and Consulting, in a release. “The largest distributors are overhauling their platforms to put potentially more than $3 trillion of assets in motion.”

Because advisors make investment decisions on only 36% of all broker-dealer AUM (research analysts and algorithms govern the other 64%), distribution teams should:

  • Work with their firms’ business intelligence teams to identify and avoid advisors who outsource their investment decisions.
  • Use segmentation to identify advisors who can be influenced, and whose needs for products and services align with the asset manager’s capabilities and goals. 

Team and territory structures

As advisor business models evolve (45% of advisors plan to conduct more fee-based business in 2017), advisors are becoming harder to reach (in-person meetings are down 16% and call volume is down 27% since 2011). In terms of sophistication and skills, it’s more important than ever to match the right wholesaler with the right advisor. 

Compensation models

Compensation models for distributors must become more aligned with the asset managers’ business strategies. Variable commissions based on gross sales, which represented 35% to 49% of total compensation for external salespeople in 2016, don’t necessarily drive the metrics, such as holding period, that determine profitability.

Relationship management

As much as $3.3 trillion in actively managed assets are in funds with Morningstar Ratings of 1, 2, or 3 stars. These underperformers are most at risk for being eliminated from product shelves. This will demand the services of a dedicated relationship manager who can focus on retention activities.

For more information on DST’s “Prevailing in a Changing Distribution Landscape” research, contact Myra Bartalos, head of Marketing for DST Research, Analytics and Consulting, at [email protected]

Economic conditions lift interest in retirement plans: Nationwide

Amid the nation’s ongoing debate about whether states should offer public-option workplace savings plans or if all employers should be required to offer access to such plans, a new survey by Nationwide suggests that small business owners want to promote retirement readiness among their employees.

According to Nationwide’s third annual survey of more than 1,000 business owners across the country with up to 299 employees, a tight labor market, competition for good employees and confidence about the economy are causing more business owners to start offering retirement plans or enhance the ones they have.

Half of business owners who offer a 401(k) plan intend to increase retirement plan contributions, with 55% percent of them citing rising sales or revenue as the reason. Of business owners who currently don’t offer a plan but intend to offer one in the near future, 36% say it’s because they expect sales revenue to increase in the next 12 to 24 months. Additionally, 30% of business owners plan to introduce retirement benefits as a result of continued economic improvement.

Among business owners who offer retirement benefits, 85% of Millennials plan to increase contributions to their employees’ 401(k) plans, compared to 31% of Boomers and 49% of Gen X business owners.  Millennial business owners are also more likely to feel they should provide retirement benefits, with 70% of them stating agreement versus 47% for all business owners. Only 39% of business owners believe their employees are on track to retire, and 72% of business owners surveyed think the U.S. is facing a retirement readiness crisis.  

Nationwide commissioned a 20-minute, online survey by Edelman Intelligence among a sample of 1,069 U.S. small business owners in May 2017. Small business owners are defined as having between 1-299 employees, 18 years or older and self-reported being a sole or partial owner of their business.    

© 2017 RIJ Publishing LLC. All rights reserved.

‘Tell Ken Fisher To Stuff It’

A highlight reel of the Insured Retirement Institute conference in Palm Beach, Fla., this week would surely feature Julius Caesar “J.C.” Watts, the former Oklahoma Sooners quarterback who in 1995 became the first black U.S. congressman elected south of the Mason-Dixon Line since Reconstruction.  

Appearing on a panel discussion about politics, Watts recalled how, weeks after he was elected, his car was stopped for no apparent reason in Norman, Okla., and blocked by six police cruisers. After making his point, he deftly ended the story on a note more patriotic than angry and drew an explosion of applause from the audience of annuity industry executives.

Racial themes rarely intrude at annuity conferences, but we live in interesting times. TV journalist Candy Crowley, the panel moderator, had asked Watt to assess the furor over Donald Trump’s remarks (“Get the SOBs off the field”) about NFL players who kneel for the national anthem. Watts took the question and ran for daylight—lifting a ready-made anecdote about racial profiling from his own 2016 memoir, “Dig Deep.”

Suitably enough, this year’s IRI conference was held at The Breakers in Palm Beach, not far from the president’s own exclusive Mar-a-Lago club. It marked the 25th anniversary of the organization, which began as a trade group called the National Association of Variable Annuities. CEO Cathy Weatherford has been its leader since 2008. At the conference, she announced her intention to retire at the end of 2018 after a ten-year run.

Regulatory limbo

The DOL rule, tax reform, and the tribulations of the annuity business were the main topics of conversation during the panel discussions, breakout sessions and cocktail receptions, as executives from major life insurance companies and brokerages mingled among the palms on the very sand bar and in the very hotel where the Florida real estate boom reached its 1920s peak.   

Despite their outward deference to the spirit of the Obama DOL rule, many of these executives are “angry,” I heard anecdotally, both at the Obama administration’s attack on their annuity sales model and at the Trump administration’s apparent inability to work out the controversies over the rule in a timely manner.

Anger is understandable; the industry has been whipsawed by the federal government. They spent tens of millions of dollars and thousands of hours on internal changes to comply with the rule—only to find that many changes may turn out to be unnecessary. Meanwhile, uncertainty over the fate of the rule has chilled the market for annuities, costing them untold billions of dollars in lost product sales.

The DOL set out to break the influence of manufacturer-paid commissions on advisors’ product recommendation to clients. That has been happening, and will probably continue to happen. It has had disruptive implications up and down the annuity supply chain, at least where third-party distributors are involved.

“We don’t control our compensation rates anymore,” lamented Bill Lowe, president of Sammons Retirement Solutions, which wholesales Midland National Life annuities. “We used to set the compensation levels. Today, [brokerage] firms say, ‘Here’s what you will pay.’ The paradigm has shifted. There’s been a complete flip in who sets the compensation rates.”

He’s referring to new policies at brokerages like Raymond James, which sells Midland National’s no-commission fixed indexed annuities (FIAs). For instance, Raymond James is setting one advisor comp for all brands of three-year indexed annuities, one for all five-year annuities and one for a seven-year annuities, as Raymond James’ senior vice president Scott Stolz told RIJ. Midland must retool its products accordingly.

The brokerage tail is wagging the life insurer dog, in effect. Raymond James is also reducing the compensation it will accept for selling structured variable annuities, which have lower guaranteed floors but higher caps than FIAs.

“We’re telling the structured product people that you have to take the money you save on commissions and put it back in the product,” Stolz said. (For FIAs at Raymond James, the differences in commissions are based on the number of years that the client can be expected to own the product, Stolz said.)

‘Tell Ken Fisher to Stuff It’

Variable annuities were a frequent topic of discussion. Once the fiery chariot of the annuity industry, it has been suffering not just declining sales but negative net flows. Life insurers, led in recent years by Jackson National Life, still sell about $100 billion worth of VA contracts each year. But the category’s future is unclear.

One wirehouse executive envisioned major product changes. “I see the unbundling of the insurance and the investments in the variable annuity. Putting those investments into an insurance wrapper creates complexity. You can unbundle it so that the client knows exactly what they’re spending on what,” said Ben Huneke, managing director and head of Investment Solutions at Morgan Stanley Wealth Management.

Bill Lowe of Sammons, which distributes indexed annuities, noted that VAs have become expensive relative to the limited upside they now offer. “Why are sales of the VA with the guaranteed lifetime withdrawal benefit declining? Because we’re asking for risk-transfer pricing in that product but were not transferring customer risk,” he said. That is, investments inside most VAs are now so risk-dampened, that they provide little or no more upside than indexed annuities despite their higher fees. “It’s all one indexed market now,” Jeremy Alexander of Beacon Research told RIJ.

One VA veteran struck an optimistic chord. “The DOL issue is a wonderful opportunity,” said Bob Saltzman, the retired CEO who in 1994 pioneered variable annuity sales at Jackson National Life.

“The fee structure of variable annuities will drop to the level of mutual funds, and you’ll have the opportunity to sell an investment with no tax event,” he said in his IRI Hall of Fame induction speech Monday night. “It will better than mutual funds. You’ll be in a position to tell Ken Fisher to stuff it very soon.”

Weatherford begins a long goodbye

Amid the commotion of the conference, IRI president and CEO Cathy Weatherford announced that she would retire at the end of 2018. On the brink of the financial crisis in September 2008, she took over a narrow-focus trade group called the National Association of Variable Annuities, welcomed all kinds of annuity manufacturers and distributors into the fold and turned it into a robust lobbying organization.   

Weatherford, a former Oklahoma insurance regulator, persevered in the face of low interest rates, departures of several firms from the VA business, and an unsympathetic Obama administration, whose DOL rule was aimed precisely at her organization’s members’ business models. In a short speech, she assured her members that there would be a smooth succession, but she didn’t indicate who her successor might be. 

© 2017 RIJ Publishing LLC. All rights reserved.

Trump Tax Plan Revealed

The nine-page tax reform framework that the Trump administration released Wednesday referred only briefly to the treatment of retirement savings. There was no sign that the current tax deferral regime would change, but the document left the door open to future adjustments.

Here’s what it said about retirement: “The framework retains tax benefits that encourage work, higher education and retirement security. The committees are encouraged to simplify these benefits to improve their efficiency and effectiveness. Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.”

The document, entitled, “Unified Framework for Fixing Our Broken Tax Code,” also contained these proposed federal tax law changes:

“Zero tax bracket”   

The framework doubled the standard deduction to: $24,000 for married taxpayers filing jointly, and $12,000 for single filers. To simplify the tax rules, the additional standard deduction and personal exemptions for the taxpayer and spouse are consolidated into this larger standard deduction. These changes create a larger “zero tax bracket” by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual.

Individual tax rate structure    

Under current law, taxable income is subject to seven tax brackets. The framework aims to consolidate the current seven tax brackets into three brackets of 12%, 25% and 35%. Typical families in the existing 10% bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and additional tax relief that will be included during the committee process.

An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers. The framework also envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.

Enhanced child tax credit and middle-class tax relief

The framework repeals the personal exemptions for dependents and significantly increases the Child Tax Credit. The first $1,000 of the credit will be refundable as under current law. In addition, the framework will increase the income levels at which the Child Tax Credit begins to phase out. The modified income limits will make the credit available to more middle-income families and eliminate the marriage penalty in the existing credit. The framework also provides a non-refundable credit of $500 for non-child dependents to help defray the cost of caring for other dependents.

Individual Alternative Minimum Tax (AMT)

The framework repeals the existing individual AMT, which requires taxpayers to do their taxes twice. The nonpartisan Joint Committee on Taxation (JCT) and the Internal Revenue Service (IRS) Taxpayer Advocate have both recommended repealing the AMT because it no longer serves its intended purpose and creates significant complexity.

Itemized deductions   

The framework eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions.    

Death and generation-skipping transfer taxes

The framework repeals the death tax and the generation-skipping transfer tax. 

Tax rate structure for small businesses

The framework limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%. The framework contemplates that the committees will adopt measures to prevent the re-characterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate. 

Tax rate structure for corporations

The framework reduces the corporate tax rate to 20%—which is below the 22.5% average of the industrialized world—and aims to eliminate the corporate AMT, as recommended by the non-partisan JCT. The committees also may consider methods to reduce the double taxation of corporate earnings. 

“Expensing” of capital investments   

The framework allows businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years. This policy represents an unprecedented level of expensing with respect to the duration and scope of eligible assets.

Interest expense

The deduction for net interest expense incurred by C corporations will be partially limited. The committees will consider the appropriate treatment of interest paid by non-corporate taxpayers.

Other business deductions and credits

The current-law domestic production (“section 199”) deduction will no longer be necessary. In addition, numerous other special exclusions and deductions will be repealed or restricted. The framework explicitly preserves business credits in research and development (R&D) and low-income housing, however.    

Territorial taxation of global American companies

The framework will replace the existing worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake). The framework treats foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years. 

Stopping corporations from shipping jobs and capital overseas

To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies. 

   

Bob Reynolds’ & the Future of 401k

Many of us dream about improving the U.S. retirement system, but few of us are as well positioned to influence its direction as Robert Lloyd Reynolds, CEO of Great-West Financial. Reynolds has just published a new book, “From Here to Security: How Workplace Savings Can Keep America’s Promise.”

The book combines industry advocacy with public policy recommendations. Reynolds, 65, is the former Fidelity Investments vice-chair who, since 2014, has consolidated Great-West Retirement, Putnam Investments and J.P. Morgan Retirement Services into Empower, now a top-five 401(k) recordkeeper with an industry-leading eight million participants and about $400 billion in assets under management.

Reynolds, a florid, physically imposing West Virginian, is also one of the industry’s opinion leaders. As for opinions, he’s a passionate cheerleader for the $7 trillion 401(k) business—though his book concedes its flaws. As for leadership, it’s notable that three House Ways and Means Committee members, two Senate Finance Committee members and a former deputy Treasury Secretary endorsed the new book.

Before going farther, let me say that I welcome almost any book that, like this one, calls for introducing guaranteed income options into defined contribution plans. “Lifetime income solutions, in plans and beyond, strike me as the holy grail of the next generation of workplace savings in America,” Reynolds writes.

“Done right, this could enable DC plans to match, or even surpass, the reliable incomes that traditional pensions once provided.” (Empower sells Great-West Secure Foundation, a guaranteed lifetime withdrawal benefits, to Empower plan participants. Reynolds also told RIJ this week that he’s interested in indexed annuities as participant options.)

But that’s not the main reason this book is timely. Reynolds and other leaders of the retirement industry are currently concerned that, if and when Congress and the White House mucks around with the U.S. tax code this fall, legislators might try to generate new tax revenue (to pay for tax cuts) by trimming back the blessing of tax deferral on

Allianz, Aegon et al Inject New ‘Variable’ into Dutch DC Biz

The €10bn pension fund of Dutch telecom giant KPN disclosed this week that it would allow its plan participants to choose a new kind of distribution option for their defined contributions to the plan: Payouts that fluctuate with the performance of the underlying investments.

That’s a relatively new development in the Netherland’s retirement system. It was only a year ago that the Dutch parliament passed legislation enabling defined contribution (DC) pension fund participants to opt for variable benefits after retirement—also known as drawdown plans—instead of a fixed annuity.    

As IPE.com reported, most Dutch plans have not introduced a variable benefit option. Only a handful of retirees has opted for them. The fund for the postal workers (Pensioenfonds PostNL) and the fund for construction workers (BpfBouw), have said they won’t. Participants in such plans must turn to insurers like Aegon, Nationale Nederlanden, Delta Lloyd and Allianz if they want variable payout arrangements instead of fixed annuities at retirement.

The four providers have designed products that differ considerably, with Aegon offering the highest risk profile, investing 66% of the available pension capital in risky assets during retirement. For Aegon, the high equity allocation is deliberate. “Participants often have additional DB pension entitlements of at least as much as their DC capital,” said Frits Bart, director of policy.

“We consider these to be a risk-free investment. In addition, people have benefits from the state pension, which often represents an equivalent value and can also be seen as risk-free. In our opinion, people need the 66% risk assets in their investment mix as part of their variable payment plan in order to benefit from continued investing.”

The three other providers choose to emphasize the security aspect of their plans. At Delta Lloyd, the risky asset allocation is linked to a participant’s risk tolerance and can be 15%, 30% or 45%. The variation in benefits solely depends on the risk asset holdings. Participants purchase fixed annuities with the remainder of their pension assets.

Delta Lloyd says it will calibrate the risk profile once every five years, and subsequently adjust benefits if necessary. Participants can also indicate if they want their risk profile reviewed, but the provider will adjust the ratio between fixed and variable payments only once a year.

Nationale Nederlanden’s variable benefit product invests 35% in a multi-asset fund with an allocation of almost 20% to fixed income and other liquid assets.

Participants bear longevity risk in some plans but not others. The variable benefits of the Aegon and Allianz products will decrease if life expectancy continues to rise, but the Delta Lloyd and Nationale Nederlanden plans insure against this.

Allianz offers a combination of fixed (75%) and variable (25%) benefits, with a risk assets allocation of 7.7%. Allianz’s riskiest investment variant has purely variable payments and the maximum risky asset allocation is 31%. After 20 years of variable benefits, Allianz customers will no longer be exposed to investment risk.

“At that time, the assets available for variable payments would have shrunk so far that investing no longer adds value for them,” says Bram Overbeek, head of products and markets for life and income at Allianz Benelux. “That’s why we will set the benefits at a fixed level by then. We want the man in the street with DC benefits to relax after he has retired. We don’t want people running unacceptable risks and therefore we have aimed at shock-proof and gradual changes without too much risk.”

Nationale Nederlanden customers will receive fixed benefits from age 85. Delta Lloyd says it will gradually reduce the investable part of the assets to zero over a nine-year period after age 85. Delta Lloyd is the only provider that will smooth both positive and negative income shocks over a standardized period of five years.

Jeroen Koopmans, managing director at the consultancy LCP Netherlands, said variable benefits could be attractive for many. “A comparison of quotes for fixed and variable benefits shows that the variable benefits will be considerably higher in the first year. The difference could be 20%, or even 35%,” he said.

“If you start at 35% plus, you could afford negative returns for some years. But it could also turn seriously wrong, with benefits ending up lower than fixed payments. If equity markets were to drop 25%, a participant with Aegon would lose more than 16% of their pension assets,” he said. Aegon said it discloses the risks of its product in its literature.

One hurdle for wider practice of the new variable option in the Netherlands is that existing DC funds are geared towards de-risking ahead of retirement, thus reducing the level of risky assets on the assumption that retirees will buy an annuity. This is set to change, however. Aegon, for example, says it will come up with a solution for that inconsistency later this year.

The insurer ASR says the lifecycle options in its DC plans will be adapted for continued investing from 2018, and is developing a product for this purpose.

Allianz has recorded the greatest interest for variable drawdown products, with a take-up rate of one in five. At €300,000 against €95,000, the average purchase price for variable benefits is much higher than for fixed annuities. Similarly, Aegon reported a purchase price of twice as much on average. However, its take-up for variable benefits is lower at just 10%. For Nationale Nederlanden the figure is 5-10%. Delta Lloyd declined to provide details.

Overbeek noted that the variable option could lose its attraction if interest rates and annuity payout rates rose in the future. “Taking risks must pay off. If interest rates rose to 7% or 8%, few would opt for continued investing,” he said.

The KPN plan said it decided to offer the variable option because 8,000 of its participants accrued pension rights under defined contribution arrangements when they worked for Getronics, an information and communications technology firm whose pension KPN acquired in 2007. 

© 2017 IPE.com.  

How to attract IRA asset transfers: LIMRA SRI

Yeah, we know about rollovers. But what about IRA asset transfers?

With some $8 trillion in IRAs, there’s plenty of interest among brokers in attracting IRA assets from other custodians. But how volatile is the IRA transfer market? What is IRA owner behavior with respect to transfers? What does it take to put their assets into play?

It turns out that IRA owners aren’t very fickle. New research from LIMRA Secure Retirement Institute suggests that only about 9% of IRA owners have moved their accounts from one broker or custodian to another in the past two years. And retirees, who have the biggest accounts, are least likely to change horses.

Indeed, the IRA custodial relationship gets stickier with age. Far fewer retirees than workers (18% vs. 82%) executed IRA transfers in the past two years. People ages 45 and older were significantly less likely than people ages 40 to 44 (29% vs. 11%) to move their IRAs recently. Gender-wise, men were much more likely than women to do so (63% vs. 37%).

Of those who moved their accounts, people with the largest IRAs—as common sense might suggest—were the most likely to seek lower fees when changing custodians. For IRA owners in general, however other factors mattered more, indicating that fees aren’t everything. “IRA companies that focus heavily on their low-cost offerings may be missing a substantial portion of the IRA-to-IRA transfer market,” an SRI release said.

By the same token, companies that do not (or cannot) compete on fees alone should highlight their brand and overall customer services, SRI advised. They should emphasize the prestige of their brand or mind their customer service manners more astutely.

Predictably, people who moved their IRAs to companies where they already did business cited “relationships” as their top reason for choosing their new custodians. People who moved their IRAs to firms where they had no prior relationship listed “recommendations” as the determining factor in their selection. 

Referrals evidently matter, especially with men. Sixteen percent of IRA owners said they changed to a firm recommended by a family member or friend. Nearly a third of men (32%) said a recommendation played a role in their decisions to move their assets compared with about one in four women (24%). 

In other findings by LIMRA SRI:

  • A company’s investment choices and services are more important to younger IRA owners than older IRA owners (12% vs. 7%). 
  • 10% of IRA owners ages 60 and older who switched firms said the new company offered to help them throughout the transfer process. 
  • Half of older IRA owners (ages 50-75) who transferred their retirement assets from one investment firm to another discussed the decision with an advisor. Of those, 60% said the advisor’s intervention was the most influential factor in the decision to move their money.
  • Nearly a third of IRA owners ages 40-49 said they discussed their decision with call center reps from one of the companies. Of those, 22% said the decision to move their money was most influenced by the call center rep from their former IRA firm.

“Companies should ensure that their representatives are well-versed on the features offered by their company and are able to share these with clients when they call,” the release said.

LIMRA members can read the full report by visiting: Money in Motion: Understanding the Dynamics of Rollovers, Roll-ins, and IRA Transfers (2017).

© 2017 RIJ Publishing LLC. All rights reserved.

MassMutual aims to compete harder for defined benefit business

To help beef up its share of the shrinking U.S. defined benefit (DB) pension market, MassMutual has introduced a new diagnostic tool to help DB plan advisors, consultants and sponsors assess DB plan health and, ideally, find ways to raise assets and reduce liabilities.

PensionSmart Analysis, as the new tool is called, is available to DB plan sponsors through financial advisors and consultants who serve the pension recordkeeping, investments and actuarial marketplaces, MassMutual said in a release this week.

“The tool… creates a ‘persona’ that details the plan’s current status, funding level or health, service structure, and a comparison to pension plans sponsored by other employers in the same industry.” It can also help advisors and consultants identify local plans that could use a checkup, the release said.  

Private and public DB pension plans in the U.S. had $8.6 trillion in assets and $4.2 trillion in unfunded liabilities as of March 31, 2017, according to the Investment Company Institute.  

According to the release, the PensionSmart Analysis tool can:

  • Diagnose plan health based on funding levels, administrative efficiencies and expense savings, communications to participants.
  • Examine, assess and recommend new funding, investment and de-risking strategies.
  • Evaluate different investment “glide path” options to help sponsors match funding with liabilities.   
  • Help advisors and consultants identify local DB plans that might benefit from a health analysis. The tool displays information on the sponsor, type of plan, size of the pension in assets and number of participants, funding level, status and service model.

© 2017 RIJ Publishing LLC. All rights reserved.

A few big IBD deals, lots of smaller RIA deals: Fidelity

So far in 2017, $136 billion in assets changed hands among independent broker-dealers (IBDs) as a result of five merger/acquisition deals, while $80 billion was spread across 82 deals between RIAs (Registered Investment Advisors) during the same time period, according to a new report from Fidelity Clearing & Custody Solutions, a unit of Fidelity Investments.

The report, “Insights from Independent Broker Dealers,” the latest in the Fidelity Wealth Management M&A Series, reveals that fewer, but bigger M&A transactions are changing the IBD channel. A press release about the report didn’t name the firms involved.

Large IBD acquirers (firms with $10 billion+ in assets) drove the five IBD deals to-date and are helping to shape the IBD channel into a concentration of a small number of large firms. The top ten IBD firms now manage 65% of all broker-dealer assets and 48% of all broker-dealer advisors, the report said.

What’s driving M&A in the brokerage and RIA worlds? Costs are rising as broker-dealers invest in technology, advisor education and oversight to comply with regulations. Lower advisor productivity is straining bottom lines: Average assets per IBD advisor are $32.9 million, whereas advisors at independent RIAs manage $66.6 million.

Drawing upon  interviews with executives at Large IBD Acquirers, the report shows how M&A enables IBDs to:

1. Refine their growth strategies. The report found that two models are emerging in today’s IBD landscape – large firms with scale and focused firms with a distinct value proposition to serve a niche.

2. Balance size and culture. Post-acquisition, large IBD Acquirers are standardizing practices and procedures to improve efficiencies, while also maintaining advisor independence and choice. The report found that the large firms are focused on advisor engagement, management continuity and productivity improvements.

3. Strengthen value propositions. Large IBD Acquirers are creating additional value to appeal to firms looking to sell and to retain advisors post-acquisition through four key strategies:

  • Leverage technology as a strategic advantage: The race for technology has IBDs investing in their platforms to improve the advisor and client experience.
  • Reinforce advisor independence: A range of operating models supporting both fee- and commission-based business provides IBD advisors with the choices they need to stay in the channel.
  • Ease the transition: Taking lessons learned from the past, firms help retain advisors by creating a positive first impression with a smooth onboarding process.
  • Help acquired advisors grow their businesses: Investing to help advisors expand their books of business strengthens ties with the home office, while creating more consistency in productivity levels across the firm.

4. Mitigate operating and regulatory risk. Reducing risk is top-of-mind for Large IBD Acquirers as they evaluate acquisition targets and the advisors affiliated with them. The report found that many Large IBD Acquirers are experienced buyers with well-defined strategies and thorough vetting processes, and they will decline deals that pose potential risks to their culture, sales record and firm value.

For more information, read Insights from Independent Broker-Dealers, the latest report from the Fidelity Wealth Management M&A series.  

© 2017 RIJ Publishing LLC. All rights reserved. 

Honorable Mention

Advisors recommend closed-end funds for income: Nuveen

Overall closed-end fund (CEF) usage has increased significantly since 2013, according to a study focused on financial advisors and their use of CEFs released today by Nuveen, the investment management arm of TIAA. When looking for new sources of income, more than half (57%) of all advisors recommend CEFs as an investment option.

Nuveen’s study monitors trends in the CEF space, specifically tracking usage among the financial advisor community, which has increased since the inaugural study in 2013, and remained steady from 2016. Nearly two-thirds of advisors (62%) currently use CEFs in client portfolios – up from roughly half (51%) in 2013. Closed-end funds remain an attractive investment option as financial advisors are reportedly recommending the funds to clients seeking income and diversification opportunities for income portfolios.

Of those advisors who reported increasing CEF usage over the past year, the top two reasons include the attractive yield and return on investment as well as helping clients generate more income in their portfolios. Nine out of 10 advisors (91%) say clients ask about income producing investments – such as CEFs and other fund types. Increasing income remains the top reason for using CEFs in investment portfolios, according to 62% of the financial advisors surveyed who use CEFs.

Dubick & Associates conducted the latest version of the study of financial advisors’ closed-end fund usage on behalf of Nuveen using a sample drawn from the Discovery Database.

The study, also conducted in 2013 and 2016 by Dubick & Associates, included a weighted statistically valid sample of 326 financial advisors from wirehouses, regional broker/dealers, independent broker/dealers, registered investment advisors, bank and insurance companies. The 2017 study was fielded from April 27–May 11.

Ubiquity Retirement + Savings recognized for growth rate

For the 11th consecutive year, Ubiquity Retirement + Savings, a flat-fee 401(k) provider for small businesses and individuals founded in 1999, has been named in the Inc. 5000 list of the nation’s fastest-growing private companies.  

The 2017 Inc. 5000, unveiled online at Inc.com and with the top 500 companies featured in the September issue of Inc. (available on newsstands), is the most competitively successful group in the list’s history. The average company achieved a three-year average growth of 481%.

“Our placement on the Inc. 5000 for so many years represents our commitment to supporting small businesses and educating the market on the importance of personal savings,” said Chad Parks, CEO and founder of Ubiquity Retirement + Savings, in a release. “Since 1999, Ubiquity has strived to reach unserved markets, which makes up more than 40% of our nation’s workforce.” 

Conning publishes study of life-annuity leaders

A new Conning study, “Individual Life-Annuity Growth and Profit Leaders: Preparing to Change Tack” analyzes individual life-annuity insurer performance, identifies the most successful firms based on Conning’s multi-year leadership criteria, and identifies shared characteristics among the successful firms.

“Companies that met our criteria to be considered growth and profit leaders did so by successfully managing through operating and market complexity,” said Steve Webersen, Head of Insurance Research at Conning.

“Leading companies of all sizes consistently exhibited faster capital growth than their peers and had bond portfolios of longer maturity than the remaining companies. Overall, annuity products performed better in the period than life insurance, which explains the predominance of annuity specialists among the leading companies,” he added.

© 2017 RIJ Publishing LLC. All rights reserved.