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Brighthouse offers fee-based indexed variable annuity

Posted on August 17, 2017 by -

Brighthouse, the company that was formed from MetLife’s individual products business and which went public earlier this month, has announced the launch of new index-linked annuities as part of its flagship Shield annuity family, including a design for fee-based advisors.

Like fixed indexed annuities, these packaged products invest in bonds and options on equity indexes. Unlike FIAs, they don’t guarantee zero losses; instead, the issuers absorb the first 10% (or more) of losses. In return, investors get a chance for higher returns than they would get on FIAs.

Indexed variable annuities enjoyed a sales burst in recent years. Brighthouse Financial reported that sales of its Shield portfolio “remained strong in the second quarter of 2017 at $570 million, up 28% year-over-year.” The products were previously sold under the MetLife brand.

The new Brighthouse products include:

Brighthouse Shield Level Select 3-Year and Shield Level Select 6-Year annuities. These product options feature no annual fee, offer a 3 or 6-year surrender charge schedule, and include a new standard return-of-premium death benefit.

Brighthouse Shield Level Select Access annuity. This product is designed for fee-based advisors who would like to offer annuity solutions as part of their practices. There is no surrender charge schedule and no annual product fees (other than the cost of advisory services).  

© 2017 RIJ Publishing LLC. All rights reserved.

Fiduciary rule delayed until July 1, 2019: DOL

Posted on August 10, 2017 by -

Apparently responding to requests from financial industry lobbies like the Investment Company Institute for further delays in the enforcement of the Obama-era “fiduciary rule,” the Department of Labor filed this statement in Minnesota federal court Wednesday:

“On August 9, 2017, the Department submitted to the Office of Management and Budget (“OMB”) proposed amendments to three exemptions, entitled: Extension of Transition Period and Delay of Applicability Dates From January 1, 2018, to July 1, 2019; Best Interest Contract Exemption (PTE 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (PTE 2016-02); Prohibited Transaction Exemption 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters (PTE 84-24).”

The delay will allow brokers to sell variable and indexed annuities under the PTE 84-24 exemption for at least about two more years, rather than under the more stringent Best Interest Contract Exemption, which gave investors the right to participate in class-action suits against financial services companies in cases of systematic abuse of the rule.   

Further DOL notices were expected today.

In a release Wednesday, Jamie Hopkins, co-director of the Retirement Income Program at the American College, said about the new 18-month delay:

“The proposed delay was entirely expected. We knew that secretary Acosta wanted to delay the full implementation date at least a year. Some industry groups have been pushing for a two-year delay, so it appears they are going to split the difference. The delay is really more about giving the DOL time to rework the rule rather than companies really needing more time to prepare.

“There is an expectation that the private right to action through class action lawsuits will be removed from the rule, some product specific changes will like be built into the rule, and we should expect to even see some more and expanded exemptions from the general rule to allow many companies to keep doing business as they do today without significant change or interruption.”

© 2017 RIJ Publishing LLC. All rights reserved.

Some DC plan sponsors would switch to state-run plans: LIMRA SRI

Posted on August 10, 2017 by -

As many as 30% of employers who offer a defined contribution (DC) plan say they are very likely to stop offering their defined contribution plan and have their employees enroll in a state-run retirement savings plan, according to a new study from the LIMRA Secure Retirement Institute.

California and Oregon are the states closest to launching their own state-sponsored Roth IRA plans for workers who don’t currently have access to a plan. But Congress’ recent reversals of an Obama administration ruling and the Department of Labor’s cancellation the federal MyRA program for such workers could hamper the roll out of state run plans.

Employers that sponsor DC plans with over $50 million in assets were more inclined than sponsors of plans with under $10 million in assets to say they would replace their existing DC plan with the state-run plan (31% versus 22%), the study showed.

The intent of the state-run retirement plans is to offer workplace retirement access to those who do not currently have it. “Employers who drop their DC plan and shift their employees to a state-run plan may weaken their employees’ ability to save adequately for their retirement,” LIMRA SRI release warned.

Many state-run plans are designed as individual retirement accounts (IRAs), which limit investors under 50 years of age to contribute $5,500 per year while DC plans allow up participants to contribute as much as $18,000 annually.

Institute research finds 86% of workers feel it is important to be able to contribute more than $5,000 a year to their retirement savings. This could also undermine long-term retirement security.

An employee under age 50 making $75,000 a year saving 10% in their DC plan ($7,500 per year) would be limited to $5,500 a year in a state-run plan. Over the course of 20 years (excluding investment growth, fees, withdrawals, increases in salary, etc.) this amounts to $40,000 in lost retirement savings.

But, while they can save that much, most current 401(k) participants save much less. The median contribution for all participants in 2012 was only $2,981, according to a study published in Social Security Bulletin, Vol. 77, No. 2, 2017.

Even among full-time workers ages 25 to 59 in the second-to-wealthiest income decile, the median contribution in 2012 was only $6,039. Those in the top 10% of earnings contributed a median of $12,368.

Employees surveyed by LIMRA SRI placed high value on certain aspects of DC plans that may not be part of a state-run plan:

  • Nine in 10 workers value the ability of their employer to contribute to their retirement, which is not allowed under state-run IRAs.
  • Eight in 10 workers say investment variety and education are important DC features — not offered in most proposed state-run plans.
  • Nine in 10 employees value investment diversity (at this point, investment options are unclear in state run proposals).

LIMRA Secure Retirement Institute conducted nationwide surveys of more than 1,000 employers that offer defined contribution plans and nearly 2,500 workers in 2016 to explore perceptions around state-run retirement programs. The results were weighted to reflect the US population.

Any large change to the retirement plan business would have a big impact on the mutual fund business, for which plans are a major distribution channel. Mutual fund assets held in retirement accounts (IRAs and DC plan accounts, including 401(k) plans) stood at $8.0 trillion as of the end of March 2017, or 47% of overall mutual fund assets, according to the Investment Company Institute.

Fund assets in 401(k) plans stood at $3.2 trillion, or 19% of total mutual fund assets as of March 31, 2017. Retirement savings accounts held about half of long-term mutual fund assets industry-wide but a much smaller share of money market fund assets industry-wide (14%).

© 2017 RIJ Publishing LLC. All rights reserved.

As Boomers retire, economy will slow: BerkeleyAGE

Posted on August 10, 2017 by -

The arrival of the Boomer generation in the late 1940s gave birth to 65 years of accelerated economic growth and innovation in the U.S. The retirement of the Boomers could have a decelerating effect. 

The global economy in 2040 will be 20% smaller under projected 2015-2040 population trends than it would have been if the population trends of 1990-2015 had continued, according to a report published in June by the Berkeley Forum on Aging and the Global Economy (BerkeleyAGE).

Demographic “tailwinds” accounted for 48% of annual economic growth from 1990-2015, the report said. But the global population ages 20-64 will grow less than half as fast from 2015-2040 as compared to the prior 25 years, while the age 65+ population will grow five times faster than the working age population.

The tailwinds in the United States and other major economies will therefore only be about 31% as strong going forward, BerkeleyAGE predicted. In the U.S., tailwinds will drop by 0.8% per year, only slightly better than the 0.9% drop in other high-income countries.

Among high-income countries overall, the working age population (ages 20-64) will decline by 4% between 2015 and 2040. In the United States, the working age population will instead increase (slightly) by 5% during this period (due in part to higher migration and fertility than in other high income countries), but this is still a sharp slowdown in the growth rate of the potential labor force as compared to the prior 1990-2015 period.

Tailwinds that added 1.3% per year to global economic growth during 1990-2015 will drop to only 0.4% per year from 2015-2040. Nigeria’s tailwind will increase by 0.4%, while China, whose working age population began to shrink in 2016, will transition from a 1.5% annual tailwind to a 0.6% headwind.

© 2017 RIJ Publishing LLC. All rights reserved.

Moshe Milevsky wins award for book on tontines

Posted on August 10, 2017 by -

King William’s Tontine: Why the Retirement Annuity of the Future Should Resemble Its Past, by York University finance professor Moshe Milevsky, has received the 2017 Kulp-Wright Book Award from the American Risk and Insurance Association.

The prize, awarded annually by ARIA since 1944, goes to the previous year’s most influential book on risk management and insurance.  

“This honor shows that tontine thinking, in the design of personal risk management products, is a concept with a high likelihood of catching-on in both academia and industry,” Milevsky said in a release.

“It also proves that there are valuable lessons to be learned from 17th century financial and insurance history, even in the rapidly changing 21st century.” Milevsky said he is about to publish a “prequel” titled The Day the King Defaulted: Lessons from the Stop of the Exchequer in 1672.

The award was presented at the annual ARIA conference in Toronto this week. Articles on Milevsky’s research on tontines and the history of financial retirement products appeared in the Economist in June and The New York Times in April.

© 2017 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on August 10, 2017 by -

‘One share of Brighthouse for every 11 shares of MET’

Brighthouse Financial, Inc. today announced that its separation from MetLife, Inc. was completed on Friday, Aug. 4, 2017. Brighthouse common stock began “regular-way” trading under the symbol “BHF” on the NASDAQ Stock Market on Aug. 7, 2017, when markets opened. MetLife will continue to trade on the NYSE under the ticker symbol “MET.”

Brighthouse is a U.S. provider of annuity and life insurance solutions with $219 billion of total assets and over 2.7 million annuity contracts and life insurance policies in-force. It has distribution relationships with more than 400 partners.

Under the terms of the separation, on the Aug. 4, 2017 distribution date, MetLife, Inc. common shareholders received a distribution of one share of Brighthouse Financial, Inc. common stock for every 11 shares of MetLife, Inc. common stock they held as of 5 p.m. New York City time on the July 19, 2017 record date.

MetLife, Inc. common shareholders who sold their “MET” shares in the “regular-way” market after that date, but before and through the August 4 date that Brighthouse Financial, Inc. common stock was distributed, sold their entitlement to receive Brighthouse Financial, Inc. common stock in the distribution.

Shareholders of MetLife, Inc. who owned less than 11 shares of common stock, or others who would otherwise have received fractional shares, received cash.

Brookstone Capital to distribute Great American’s fee-based FIA

Great American Life Insurance Companyannounced this week that Brookstone Capital Management (BCM) will distribute its fee-based fixed indexed annuity. Nearly 50 Registered Investment Advisors (RIAs) can now sell Great American’s Index Protector 7.

Index Protector was one of the first fee-based annuities to be offered. Like other indexed annuities, it offers earning potential, tax-deferred growth and a return of premium guarantee. Consumers can add the Income Keeper rider, which provides lifetime income payments that may increase when equity markets rise

Great American Life Insurance Company is a member of Great American Insurance Group and is rated “A+” by Standard & Poor’s and “A” (Excellent) by A.M. Best for financial strength and operating performance.

Four brokers charged in $40 million variable annuity sales fraud

Variable deferred annuities are once again on the defensive in the national media.

On July 31, the Securities and Exchange Commission charged four Atlanta-area brokers with fraudulently selling $40 million worth of VA contracts to more than 200 Georgia participants in the federal government’s Thrift Savings Program (TSP).

The suit was reported this week in the New York Times.

In a complaint filed in the Atlanta Division of U.S. District Court, Northern District of Georgia, the SEC charged four registered reps working for Keystone Capital Partners (dba Federal Employee Benefits Counselors) of inducing federal employees to roll money out of their TSP accounts to buy VAs with living benefits in 2012 through 2014.

The complaint doesn’t name the insurance company or companies that issued the variable annuity contracts. The four accused brokers—Christopher S. Laws, 49, Jonathan D. Cooke, 34, Danny S. Hood, 44 and Brandon P. Long, 28—earned an alleged $1.7 million in commissions from the sales.

The SEC charged the men with pretending to represent government benefits counselors and with misrepresenting the product that they were selling. According to the complaint, didn’t identify it as a variable annuity, they didn’t explain the difference between the benefit base of the guaranteed lifetime withdrawal benefit and the account value, didn’t clarify that the 7% annual increase in the benefit base was not a guaranteed growth rate in the account value, didn’t establish the amount of the surrender penalty, and didn’t full explain the annual fees, which included a mortality and expense risk fee of 1.3% and an income rider fee of 1.25 to 1.50%.

Upon leaving federal service, federal employees have three options for making a full withdrawal of their entire TSP account, any two or three of which can be combined: (1) a single payment, (2) a series of monthly payments spread out over time, and (3) as a TSP life annuity, which the TSP purchases on behalf of the TSP participant from the TSP’s annuity vendor.

The TSP life annuity provides a monthly benefit paid to the employee for life and, if the employee chooses, for the life of a designated survivor. To purchase the life annuity, the former employee must complete a “Form TSP-70,” as a request for a full withdrawal from the TSP, and select the “life annuity” option within the “Withdrawal Election” section of that form.

Current federal employees age 59½ or older who are not planning an immediate separation from federal service have the option to take partial or full withdrawals from their TSP accounts. To effectuate such a withdrawal, which is referred to as an age-based, in-service withdrawal, the employee must complete a “Form TSP-75.”

© 2017 RIJ Publishing LLC. All rights reserved.

On the Case: TIPS Ladder + QLAC + HELOC = Income Security

Posted on August 9, 2017 by -

Financial advisors who have acquired the Retirement Management Analyst designation tend to approach retirement income planning a certain way. They typically lock in a client’s “floor” income with safe assets, and then look for “upside” by applying the money that’s left over to equities.   

Mike Lonier, founder of Lonier Financial Advisory, a fee-only planning firm in Osprey, Fla., holds the RMA certificate. He’s the third advisor (following Mark Warshawsky on July 20 and Jim Otar on August 3) to offer a solution for the case of Andrew, 64, and Laura, 63, a real (but incognito) suburban professional couple nearing retirement.

Each earns about $150,000 today, and they’ve saved about $1.2 million, most of it tax-deferred. They own long-term care insurance. They currently work with an advisor at a major brokerage, but they worry that their fees might be too high. 

Andrew is willing to work until age 70, but he wouldn’t mind retiring sooner. Laura is ready to switch to part-time work now. They haven’t decided whether to keep their $1.24 million home indefinitely, nor have they discussed their legacy goals. Their two children are grown and financially independent.

Lonier (right) evaluated their annual drawdown goal—$77,000 from investments, to supplement $75,000 in Social Security—and deemed it too aggressive. Using the RMA framework, he divided their assets into up to four parts. Mike Lonier

He dedicated one part to provision of annual floor income, one part to equity exposure, one part to a small cash reserve, and one part to the purchase of a deferred annuity. He also introduces the possibility of a Home Equity Conversion Mortgage Line of Credit (HECM LOC). Here are some specifics from the plan he submitted to RIJ:

Quick Take Away

For Andrew and Laura, the advisor has determined that their desired $77,000 per year annual drawdown could empty their $1.24 million portfolio (60/40 stock/bond allocation) in as few as 18 years. He recommends that they reduce their essential expenses by $33,000, build a ladder of Treasury Inflation-Protected Securities for essential income, a deferred income annuity to buffer longevity risk and the opening of a home equity line-of-credit.

Assumptions

  • Andrew, 64, and Laura, 63, each earn about $150,000 per year, for a combined income of about $300,000.
  • Andrew will work four more years until retirement at age 68, earning $150,000 per year and collecting $27,000 in rental income from his second home until retirement. He saves $25,000 per year during those years.  
  • Laura will work only part-time for four years until full retirement at age 67, earning $50,000 per year and saving $5,000 each year.  
  • Andrew will claims Social Security benefits at age 70 and Laura will claim at her full retirement age of 66.  
  • The annual inflation rate will be 2.5%; the long-term discount rate will be 3%. Equities will return 8.5% per year on average (two percentage points less than the historical average).
  • Based on a 30% equity, 54.7% bond, 10% deferred annuity and 5.3% cash portfolio, the couple’s expected average annual return (net of investment expenses and a 0.25% ongoing management fee) will be 3.88%.   
  • As a holder of the RMA certificate from the Retirement Income Industry Association, Lonier practices goal-based planning and uses the “build an income floor, then invest for upside” approach.
  • The advisor considers the clients’ entire “household balance sheet,” including assets (home equity, human capital (earning power, pensions), and social capital (Social Security), and liabilities (present value of future income needs), to determine if their retirement is over-or under-funded.

Advice Points

  • Andrew and Laura should divide and rank their expenses into essential and discretionary.
  • They should pare their essential pre-tax expenses in retirement to a real $110,000 today (or $121,000 starting four years from now). They can budget an additional $30,000 each year for discretionary purchases, to be made cautiously and sparingly.
  • Andrew and Laura should allocate 30% or $372,000 of their retirement savings to the pursuit of  “upside” by purchasing a global equity ETF, but only if they are willing to use their home equity as a reserve.
  • To provide “floor” income for 30 years, the couple should begin building a ladder of Treasury Inflation Protected Securities (TIPS), starting with a 4-year TIPS bond to cover the first year of retirement need from savings, a 5-year TIPS bond for the second year, a 6-year TIPS bond for the third, etc., up to a 10-year TIPS bond for the seventh year, and then an additional 10-year TIPS bond each year thereafter. Money allocated to the floor ladder but not yet expended could be kept in either a rolling CD-ladder or an intermediate bond fund (if the need is over five years away).
  • To buffer their risk of outliving their savings, they should apply 10% of savings to the purchase of a joint-life qualified longevity annuity contract (QLAC; a deferred annuity purchased with up to the lesser of 25% of qualified savings or $125,000) at retirement with income starting at age 80.   

Recommendations

The priority for Andrew and Laura is to reduce their essential expenses. As a second step, they must choose whether to incorporate home equity into their income plan or exclude it.  

For instance, if they choose to exclude their $1 million in home equity from their income plan, Andrew and Laura should allocate $970,527 to provide real income of $44,000 per year in income to supplement their annual Social Security and pension income of about $75,000.

By using that money to create a TIPS ladder, they can mitigate market risk, interest rate risk, and inflation risk. They can also allocate $124,000 to the purchase of a QLAC four years from now, invest $78,722 in equities and hold $65,851 as a cash reserve. 

If they take advantage of home equity, however, they can take some additional equity risk while backstopping their essential income if they experience market losses. The advisor recommends that Andrew and Laura set up a $300,000 HECM LOC. Alternately, the couple could downsize to a smaller primary residence and put $300,000 in cash or they could sell their second home.

With that $300,000 as a reserve, they can allocate $371,700 to stocks (via an ETF representing a global stock index) and apply just $677,549 to build their floor income out of TIPS, CDs and bond funds. The recommendation to buy a QLAC with 10% of their savings and hold a $65,851 cash reserve still applies.       

Bottom Line

The couple originally hoped to spend about 6% of their portfolio each year in retirement, or well over the 3.5% or 4% benchmark, and they had no plans to downsize from their current home or sell their second home. They were therefore on track to run out of money too soon.

If the couple follows this advisor’s recommendations, their portfolio should last about 32 years instead of about 18 years, assuring them an adequate income until their mid-90s and a projected legacy of about $1.14 million in their investment portfolio.

Freemire chart 1

Freemire chart 2

Freemire chart 3

© 2017 RIJ Publishing LLC. All rights reserved.

Why Not Medicare for All?

Posted on August 9, 2017 by -

Republicans have so far failed to make good on their promise to repeal Obamacare—or even to replace it with a mean-spirited version that would kick tens of millions off insurance. Obamacare itself however left 28 million Americans completely uninsured and tens of millions more with unaffordable copayments, deductibles and uncovered services.

That’s why the Affordable Care Act has been vulnerable to Republican attacks. Obamacare is ultimately politically unsustainable because it relies too much on a private, for-profit insurance system to pay for healthcare. It is time to abandon this overly complex and expensive payments system and reconsider a single-payer system.

Basic healthcare is not insurable

The provision of healthcare is far more expensive (as a percentage of GDP) in the U.S. than in other developed capitalist countries, with no better outcomes. Other nations use a variety of methods of provisioning and paying for healthcare, ranging from full-on “socialization” with government ownership of the hospitals to market-based private ownership of medical practices.

Many use a single-payer system (whether provision of healthcare is nationalized or privatized), with government covering the costs, while some use private insurers. The U.S. is unique in relying so extensively on private for-profit insurers. In other countries that allow participation by private insurers, these are run more like heavily regulated, not-for-profit charities.

It is important to understand that insurance is supposed to be a bad deal for the insured. The idea behind it is that you pay small premiums to cover rare but expensive calamitous events. You pay for fire and auto insurance, for instance, over most of your life and hope that you will never have to collect benefits. Your premiums cover the insurance company’s payouts, plus their administrative costs and profits. Insurance is a good deal only when you’re unlucky.

Healthcare is much different from losses due to fire or automobile crashes. It is not rare. Most of our healthcare needs are routine (prenatal, birthing, and well-baby care; braces for the kids’ teeth; annual checkups and vaccinations) or due to chronic illness. Routine healthcare is not analogous to an “act of god” that destroys your house: it is predictable, welcome, and life enhancing.

Because it is both common and expensive, basic healthcare is not an insurable expense. Pre-existing conditions are not, in principle, insurable either: it is like purchasing insurance on a house that has just caught fire. The premiums that should be charged to cover a chronic, preexisting condition would be equal to the expected cost of treatments plus the insurer’s operating costs and profits. The patient would be better off simply paying for the healthcare costs out of pocket.

Everyone into the pool

Social Security and Medicare provide a model for reform along single-payer lines. Social Security’s old-age retirement plan is nearly universal, with the federal government acting as the single payer. Medicare is universal for those over age 65 and the main part of it is single payer, with the federal government making the payments.

Both of these programs impose a payroll tax and both build reserves to provide for an aging population. This is simultaneously a strength (“I paid in, so I deserve the benefits; it is not welfare”) and a weakness (intergenerational warriors continually foresee bankruptcy).

But we can look at the taxes another way, from the perspective of the economy as a whole. Taxing today’s workers reduces their net income, which reduces their spending. This frees resources that can bedirected to caring for the needs of today’s elderly; government spending on retirement and healthcare ensure that some of the resources are directed to satisfying those needs.

Since wages today account for less than half of national income, it would be better to broaden the tax base beyond payrolls. We should also tax other income sources, such as profits, capital gains, rents, and interest.

What is the right balance between spending and taxes? Let us pose two extremes. In the first case, the economy has enough spare resources to provide healthcare for all. The single-payer government simply spends enough to provide adequate healthcare with no additional taxes required.

In the second case, let us presume the economy is already at full employment of all resources. To move some of the employed resources into the healthcare sector, the government needs to impose taxes sufficient to reduce consumption and investment spending to free up resources for healthcare. It then spends to reemploy those resources in the healthcare sector.

The more likely case is somewhere between those two extremes, so that a combination of increased taxes and spending by the single payer can free up and move resources to provide healthcare for all. This insight can help us understand what’s wrong with a system that relies on a large number of private, for-profit insurers, and how such a system might be fixed.   

Competition among for-profit insurers works to exclude those who need healthcare the most—simultaneously boosting paperwork and billing costs even as it leaves people under-covered. If we do not allow insurers to exclude preexisting conditions, and if we could somehow block insurers’ ability to deny payments for expensive and chronic illnesses, then each insurer needs young and healthy people in the pool to subsidize the unhealthy.

The best way to ensure such diversification is to put the entire nation’s population into a single pool. If the “insured” pool includes all Americans, there is no possibility of shunting high-cost patients off to some other insurer. And total costs are much lower because billing is simplified, administrative costs are reduced, and no profits are required for operating the payments system.

This is essentially what we do with Medicare, albeit only for those over age 65. Medicare for all would provide the truly diversified pool needed to share the risks and distribute the costs across the entire population.

Medicare is a proven, cost-efficient payments system, and it is compatible with the more market-oriented system that Americans seem to prefer. A single-payer Medicare-style universal program is also compatible with the existence of private health insurance that can be voluntarily purchased to supplement the coverage offered by the single payer.

Just a few months ago, few politicians aside from Senator Bernie Sanders were willing to stand up for single-payer healthcare. However, the debate over “repeal and replace” has made it clear that if we are serious about providing universal healthcare to Americans, the only sensible option is single payer.

Randall Wray, Ph.D., is a post-Keynesian economist and Senior Scholar at the Levy Economics Institute of Bard College. This article is adapted from a longer Policy Note published this month by the Institute and republished here with the author’s permission.  

On the Case: Jim Otar Answers Our Income Challenge

Posted on August 3, 2017 by -

Jim Otar, a Toronto-area CFP, has made lasting contributions to the field of retirement income planning. Every retirement income specialist should be familiar with his “aft-casting” technique, his book, his Retirement Optimizer software, and his useful classification of new retirees into green, yellow or red “zones.”   

When RIJ invited Otar to suggest a solution to the case of Andrew and Laura, he replied that the couple is “on the border of the green zone.” In Otar-speak, this means that they can relax. With about $1.24 million in savings and $1.8 million worth of real estate, they’re unlikely ever to run out of money.

“I would not worry too much about complicated strategies,” he wrote after a preliminary review of the information we provided about Andrew and Laura’s finances. (They’re a real couple, ages 63 and 64, whose names we’ve changed.) “They probably don’t need guaranteed income (annuities), a bucket strategy or anything fancy to cover their shortfall,” he said, referring to the difference between the couple’s desired annual income and their income from Social Security and pensions.  

Keep in mind that, two weeks ago in RIJ, Mark Warshawsky, also a much-published explorer of the retirement income space, recommended that Andrew and Laura put about half of their savings into safe income annuities and invest the rest in equities. Otar’s solution takes Andrew and Laura in a very different direction.

Quick take-away

In hoping for a pretax income of about $140,000 per year in retirement starting at ages 65 to 70, Andrew and Laura want more income than their $1.24 million portfolio alone can safely furnish for 25 or 30 years, according to Otar’s simulations. So he ran simulations based on a plan where they withdraw $50,000 per year. He determined that if the couple reduces expenses by at least $15,000 a year (requiring $35,000 from savings) or agree to sell their home at age 85 (if their portfolio looks like it might fail), they can both retire by age 70 or earlier.

RetirementOptimizer’s assumptions

  • Andrew and Laura are in Otar’s “Green Zone,” which means that their retirement is well-funded. They have enough savings and other assets to retire on, assuming they don’t over-spend or retire too early. Green-zoners don’t have to transfer their longevity risk to an insurance company via the purchase of a life annuity—though they have the option to do so if it makes them feel more comfortable or opens up other options (like taking on more market risk).  

People in the yellow zone (“constrained”) must change their plans if they hope to retire safely. They need to work longer, save more, cut expenses, abandon non-essential goals, or consider longevity-risk-pooling products like annuities or reverse-mortgages. People in the red zone (“underfunded”) have little choice but to consider risk-pooling products or simply bear longevity risk. Anyone, regardless of wealth level, can be in any of the zones; it depends on the ratio between their expenses and their income-generating resources.

  • Andrew and Laura want $50,000 a year from their $1.24 million in SEP-IRA and other savings to top up their combined Social Security ($72,000) and pension income ($7,000).   
  • Otar will project the distribution of possible future market performance scenarios through “aft-casting,” a proprietary technique that he uses instead of Monte Carlo simulations. Rather than based on purely randomized sequences of market returns, his projections are randomized among actual historical sequences of returns starting in 1900. In his experience, this method better accounts for the possibility of “black swan” events; it recognizes that “markets are random in the short term, cyclical in the medium term, and trending in the long term.”

Advice point: Invest in a balanced portfolio

Since Andrew and Laura don’t need annuities as a solution to longevity risk (i.e., living long enough to run out of money), Otar recommends a balanced asset allocation for their retirement savings. His analyses are based on a portfolio of 58% equities, 39% bonds and 3% cash, with annual rebalancing to that allocation. In this preliminary analysis, he doesn’t specific individual investments or make assumptions about investment expenses.

Advice point: Provide more detailed list of expenses

Andrew and Laura need to provide more details about their annual expenses than they have so far, especially if they hope to reduce them in retirement. “I normally ask for three pages of line-items of expenses,” Otar said. 

Advice point: Put expenses in a value hierarchy

With a nod toward goal-based income planning principles, Otar recommends that Andrew and Laura categorize their expenses as essential (i.e., food shelter, etc.), basic (i.e., customary or lifestyle-related) or discretionary (“bucket list” items). “If I had more a detailed list of expenses to work with, the outcomes would likely be more favorable,” he said, implying that expense-adjustments can often make or break a retirement income plan.

Advice Point: Clients need to decide how they view their real estate

Adam and Laura need to come to a decision about their homes. That is, are they committed to living in their primary house and second home indefinitely (perhaps as part of the bequest to their two daughters)? Or would they consider including the value of their homes in their retirement income plan, perhaps by planning to downsize or sell one of the homes later in life?

Recommendations

Otar offered three options for Laura and Andrew. They could:

Consider selling their home as a “stop-loss” strategy. They can both stop working by the time Andrew reaches ages 69, Otar said, if they agree that at age 85 they will sell their current home, put the proceeds of the sale into a cash-equivalent account and move into their second home.

They should execute this strategy in 20 years if their investments are in danger of running out before they reach age 95. Historically, there is a 40% chance of that happening. The proceeds of the sale of the primary home should be put in cash because of the couple’s short time horizon.

The first slide below demonstrates the outcomes if the couple intends to sell their house at age 85. The second slide demonstrates the outcomes if the couple holds that option (a 40% likelihood) open.

Otar Slide 3

Otar Slide 4

Reduce expenses and/or find other sources of income. If Laura and Andrew reduce expenses by $15,000 per year, or find an equal source of income (e.g., rent part their home, work part-time or as consultants), or any combination the two, then they can retire at age 70 and stay in their primary home for life without tapping into the value of the home.

Otar Slide 5

Keep working until age 74 or 75. If the couple is determined to achieve an income of $140,000 a year (from Social Security, pensions and withdrawals from investments) and to live in their home for life (and leave it as a bequest), one of them will need to work until age 75 (See first slide below). If they save $25,000 a year over the next ten years, they can both be retired by age 74 (See second slide below).

Otar Slide 1

Otar Slide 2

Bottom Line

Given their good health and the significant possibility of a 30-year retirement, Andrew and Laura need to be a bit more realistic about how much they can spend from savings in retirement, even with savings of $1.24 million.

They will have enough money, however, if they draw on their real estate wealth in retirement and are willing to sell their primary home (or selling both homes and moving into a rental) at age 85. The good news: If future returns are as high or higher than the historical median (as calculated by Otar), their portfolio will be worth at least $2 million in 30 years.

Otar didn’t include nursing home expenses in his plan. The couple has long-term care insurance to protect their wealth, and Otar said he would have included the insurance in his models if he had seen the specific terms of the contract. His plan leaves the value of the second home untouched, so there’s room to absorb uncovered health care costs.

Otar considers this type of work-up to resemble one of the rough drafts of a retirement income plan. “I would use these scenarios as discussion points with the client,” he told RIJ. “In many situations in my practice, once I discuss multiple options with the client, then a clearer solution develops over time.”

Freemire financials 1

freemire financials 2

freemire financials 3

© 2017 RIJ Publishing LLC. All rights reserved. 

Advisors could lose autonomy as a result of regulation: Cerulli

Posted on August 3, 2017 by -

Many brokerage executives believe that home-office discretion will increase as underperforming advisors are identified and persuaded to use portfolios created by the headquarters consulting group, according to the latest research from Cerulli Associates.

“The DOL Conflict of Interest Rule poses risk to a firm if sponsors knowingly allow advisors to manage underperforming portfolios for clients when a better-performing portfolio with a similar risk level is available from the home office,” said Tom O’Shea, associate director at Cerulli, in a release this week.

“As firms add compliance and monitoring capabilities to their rep-as-portfolio manager (RPM) platforms, they are finding that several advisors do a poor job of steering client assets.”

More than two-thirds (68%) of advisors rely on themselves or their practice to help them with portfolio models. Only a minority of advisors look outside their practice for input. Advisors typically look for ideas from their own advisor team rather than a home-office or a third-party strategist.

“Many advisors are emotionally invested in managing their clients’ portfolios and will resist their firms’ coaxing to use third-party models,” said O’Shea. “They have worked hard to acquire certifications such as the CIMA, CFA, or CFP designations. Asking them to outsource portfolio construction and management to a third party is tantamount to questioning their purpose in life.”

Cerulli believes that if managed account firms want to increase outsourcing, they need to introduce it as a compelling alternative for growing an advisory practice. These findings are from the August 2017 issue of The Cerulli Edge – U.S. Edition, which explores how practice management programs, outsourcing portfolio construction, and a value proposition help advisors become more productive.

© 2017 RIJ Publishing LLC. All rights reserved.

Dealing with the Contradictions of Financial Advice

Posted on August 3, 2017 by -

About two decades ago, when Francois Gadenne left the professional ranks of financial services and became a high-net-worth consumer of retirement planning advice, the founder of the Retirement Income Industry Association noticed that the advice he received was inconsistent and sometimes even contradictory.

Under such circumstances, how could a client become well-informed about income planning, and how could he or she decide what the best strategy might be? And, if there are no bedrock principles or unified theories of retirement income planning, what can an advisor recommend with any degree of confidence?     

This problem bothered him 20 years ago, and it still bothers him. A big part of RIIA’s mission, especially after it developed the RMA (Retirement Management Analyst) designation for advisors, has been to establish a “body of knowledge” and “best practices” in the field of retirement income planning.

Easier said than done. RIIA’s eclectic group of members, including some from the world of public policy and broad solutions for aging populations, and some from the profession of advising high-net-worth, tax-averse clients, could not agree on best practices. Some hated annuities, for instance. Others liked annuities but differed strongly on the timing of annuity purchases. 

Gadenne raised this issue during his presentation at RIIA’s 2017 Summer Conference in Salem, Mass., three weeks ago. And he included several of the contradictions in the book that he and advisor Patrick Collins published as a study guide for the conference.

Equities and Hamlet

We’re all familiar with some of the common contradictions in financial planning. For instance, we’re told that the market’s past performance is no indication of its future returns. Yet most projections of likely future returns depend on analyses that rely, in one way or another, on price history.

There are even more controversial contradictions. Jeremy Siegel and many others have told us that stocks pay off in the long run. And we often follow that principle. Anyone who accepts the “bucket” method of retirement income planning knows that clients should put small-cap equity funds in the bucket they won’t tap for two decades or more—as if small-cap equities were a type of wine that matures to perfection after 20 years.

But Zvi Bodie and others say that this is nonsense, just as it is nonsense that an infinite number of monkeys, etc., could ever produce the text of Hamlet. Stocks are more volatile than bonds, and their volatility only compounds over time. “Time, on average, decreases risk over the population average; but, for any given individual, time increases risk. [This] may temper the inclination to advise a client to hold equities if they have a long planning horizon or to hold bonds if they have a short-term planning horizon,” wrote Gadenne and Collins in the conference handbook.

The concept of “utility”—always a puzzle to this writer—is another source of disagreement among retirement income specialists. By definition, it is the amount of satisfaction that a person gets from something—such as a larger portfolio, a better physique or a child on the Dean’s list.

Investment-focused advisors might think of utility purely in terms of wealth and what a client is willing to give up for it (like safety). An advisor who uses behavioral economics might think of utility in terms of achieving emotional or spiritual goals in addition to financial goals. The question becomes: Should the advisor try to make the client richer, or happier? The implications for the retirement planning process are profound.

Other contradictions are easy to find. There is the index-versus-active management conflict, the disagreement over liquidating tax-deferred assets first or last during retirement, the insurance versus investment products dispute, the leverage-home-equity/ignore-home-equity conflict. There’s the question: Does “bucketing” work as a risk management technique, or is it just “mental accounting”?

The match game

RIIA has a big-tent kind of membership philosophy, and Gadenne doesn’t take sides in these controversies. But he assumes that advisors do, and he’s come to the conclusion that they follow three basic schools of thought. As he and Patrick Collins wrote in the latest issue of Investments & Wealth Monitor, the magazine of the Investment Management Consultants Association (IMCA), most advisors will either be “Curves,” “Triangles,” or “Rectangles.”

By these geometric symbols, respectively, he and Collins refer to advisors who focus primarily on investment management and who rely on Modern Portfolio Theory as a guiding principle; advisors who incorporate behavioral finance into their advice and align investments with their client’s personal goals and aspirations; and advisors who incorporate all of a household’s assets and liabilities into each retirement income plan.

Smart advisors will match the right techniques to the right client, or specialize in certain techniques and certain types of clients, Gadenne believes. “This is not a problem of Truth and Proof,” he wrote in an email. “It is a problem of measurement (of outcomes) and fit (to a specific client type).

“The remedy described in our paper seeks to associate prescriptions with descriptions (of specific clients type to whom it applies), We ask the advisor, “Can you describe the ideal client for this (prescriptive) recommendation?”

© 2017 RIJ Publishing LLC. All rights reserved.

An Obama-era retirement savings initiative gets the ax

Posted on August 3, 2017 by -

The Treasury Department has ended the Obama administration’s MyRA plan program, citing its expense. The decision came not long after Congress voted to undo an Obama-era rule that would have made it easier for states to sponsor automatic workplace retirement savings plans for workers whose employers who didn’t offer the plans.

Both initiatives—MyRA and the state plans—were aimed at solving a big problem: At any given time, only about half of U.S. workers have access to a payroll-deferral, tax-deferred savings plan at work. If more workers could save for retirement at work, the Obama administration believed, they would be less likely to need support from Medicaid in their old age.

The program aimed to work in support of private industry, not against it. Under the MyRA program, workers could save up to $15,000 in Roth IRAs. To relieve small savers of market risk, contributions would be placed in U.S. Treasury bonds.

When account balances reached $15,000, a level at which they would be large enough for financial services firms to service economically, the assets would be rolled into private-sector brokerage IRAs and invested in diversified mutual funds. 

Demand for the accounts over their first 18 months was not high enough to justify their expense to the government, said Jovita Carranza, the U.S. Treasurer, in press release. The MyRA program has cost a reported $70 million since 2014 and would cost $10 million annually going forward.

Participants in the program will receive an email on Friday morning alerting them of the closure. Participants can roll the money into a Roth individual retirement account, the Treasury Department said.

Using an idea developed by policy experts Mark Iwry of the Brookings Institution (an Obama Deputy Treasury Secretary from 2008 to 2016) and David John (then of the Heritage Foundation, now at AARP) President Barack Obama ordered the creation of these “starter accounts” three years ago.

They became available at the end of 2015. Since then, about 20,000 accounts have been opened with participants contributing a total of $34 million, according to the Treasury, with a median account balance of $500. An additional 10,000 accounts have been opened but their owners have not made contributions.

The goal of MyRA was to encourage saving, especially among lower-income and minority workers who work at small companies that are less likely to offer retirement plans. Workers could transfer up to $5,500 (or $6,500 if they were age 50 or older automatically from their paychecks, or they could transfer funds to a MyRA from their checking or savings accounts.

The funds were invested in United States Treasury savings bonds, which paid the same variable rate as the Government Securities Fund, available to federal employees through the government retirement plan. There was no minimum deposit and no fees.

A group of Democrats in Congress recently asked Treasury Secretary Steven Mnuchin to support the MyRA program. The program became even more important, they said, after Congress voted to reverse two Obama-era rules that would have made it easier for states to sponsor low-cost workplace savings plans for workers whose employers didn’t offer them. Oregon, California and Illinois are still moving ahead with those plans.

© 2017 RIJ Publishing LLC. All rights reserved.

Three 401(k) providers take aim at Vanguard and Fidelity

Posted on August 3, 2017 by -

American Funds, Empower Retirement and Voya are trying to take market share away from Fidelity Investments and Vanguard in the 401(k) market, according to Retirement Planscape, an annual Cogent Reports study by Market Strategies International.

“While Fidelity and Vanguard have historically dominated the recordkeeping market… the three challenger brands are gaining ground by increasing their consideration potential for new business,” a Cogent release said this week.

Only 15% of plan sponsors say they are thinking about a change in providers in the next year. But American Funds, Empower Retirement and Voya are now joining Fidelity and Vanguard on plan sponsors’ short-lists of potential recordkeepers.

Voya and American Funds are gaining ground in the micro-plan market (under $5 million in assets), while Empower Retirement—under former Fidelity COO Robert Reynolds and other former high-ranking Fidelity managers—is trying to take business from Fidelity and Vanguard in mid-sized ($20 million to $100 million) and large plans ($100 million to $500 million).

Fidelity and Vanguard both have internal sales teams and can tailor their sales and service methods to each segment. Voya has an internal institutional sales team but also sells plans through advisors. [Voya, Empower and American Funds] “have successfully leveraged their advisor networks to reach smaller plans, while empower has made significant investments in technology infrastructure to appeal to the larger end of the market,” said Linda York, senior vice president at Market Strategies and coauthor of the report.

The needs of plan sponsors often vary according to the size of the plan, York said. Micro plan sponsors look for value and trustworthiness while small to medium plans seek greater choice and flexibility with investment options. Large and mega plans hone in on best-in-class participant service and support.

Cogent Reports conducted an online survey of a representative cross section of 1,422 401(k) plan sponsors from March 22 to April 17, 2017. Plan sponsor survey participants were required to have shared or sole responsibility for plan design, administration or selection and evaluation of plan providers or for evaluating and/or selecting investment managers/investment options for 401(k) plans.

© 2017 RIJ Publishing LLC. All rights reserved.

U.S. ‘fintech’ investments quadruple in first quarter

Posted on August 3, 2017 by -

An uptick in venture capital (VC) funding pushed investment in fintech in the U.S. to $2 billion across 129 deals during the first quarter of 2017, up from $500 million in the year-ago quarter, according to KPMG’s Q2 2017 Pulse of Fintech report.

Total global fintech investment more than doubled quarter-over-quarter to $8.4 billion across 293 deals, up from $3.6 billion in Q1’17. Of that VC firms accounted for 227 deals worth about $2.5 billion.

Investor interest in the U.S. shifted to business-to-business (B2B) solutions and companies that offer to improve the cost efficiencies of mid-and-back office functions, according to KPMG’s analysis. Of the first quarter’s top 10 deals, four involved the B2B market, rather than customer-facing initiatives.

“The U.S. continues to lead the way in fintech investment,” said Anthony Rjeily, leader for Financial Services’ Digital and Fintech practice in the U.S., in a release. “In the short term there could be caution as a result of macroeconomic issues and the expectation of rising interest rates.”

© 2017 RIJ Publishing LLC. All rights reserved.

Advisors pivot from high-cost to low-cost active funds

Posted on August 3, 2017 by -

In a sign that the fiduciary rule is discouraging commission-based mutual fund sales, advisors at independent broker-dealers and wirehouses have shifted assets out of high-priced actively-managed “load” funds and into low-fee or institutionally-priced versions of active funds.

Active funds enjoyed a net inflow in the first half of 2017, but most of the net flow stemmed from the conversion of load funds into low-fee and institutional-priced share classes, according to the Fund Distribution Intelligence service of Broadridge Financial Solutions.

As of June 30, advisors at independent broker dealers invested a net $150 billion into the low-fee classes of active funds, while advisors at wirehouses added a net $40 billion. Most of that money came from liquidations of A, B and C-shares of load funds, which shrank by $122 billion at independent broker-dealers and by $37 billion at wirehouses.

The shift hurts purveyors of active funds. (In a sign of the times, Fidelity, whose wheelhouse was traditionally active funds, said Monday that it would reduce total fees on 14 of its 20 stock and bond index funds to 0.099%, effective August 1, the better to compete with Vanguard.)

“Fund manufacturers without a low-cost solution are, at best, being ignored and at worst, getting trampled,” said Jeff Tjornehoj, Broadridge’s director of fiduciary and compliance research, in a release. “While equity mutual funds have collective outflows of $69 billion, those with an expense ratio of just 20 basis points or less have inflows of $93 billion.

“The battle ahead is about how fund sponsors will accept a fraction of what they historically collected. Even channels that traditionally supported premium-priced products, such as wirehouses and broker dealers, have shifted strategies based on fees.”

“We expect to see the move to lower fee share classes continue throughout 2017 as the majority of advisors move to a fee-based practice and the broker-dealer home office realigns the mix of share classes offered to meet both client demand and regulatory requirements related to the DOL fiduciary rule,” said Frank Polefrone, senior vice president of Broadridge’s data and analytics business, in a release.

Advisors continue to invest client assets into passively managed ETFs and index funds at an increased rate, the release said. The net new asset flows into institutional shares of actively managed funds, Polefrone added, demonstrated that “price and performance are the driving factors in advisor fund selection.”

A shift to lower-fee products
Virtually all net new assets in the first half of 2017 flowed to lower fee products – ETFs, index funds, and institutionally priced actively managed funds. AUM increased by $566 billion, or 5.5%. Of that, about $433 billion went into lower fee passive products and ETFs and the remaining $133 billion flowed to lower fee institutional share classes of actively managed products. 

Across all channels—independent broker-dealers, wirehouses and RIAs—actively managed funds experienced net inflows of $87 billion while passive funds gained $48 billion. Net new assets into actively managed funds from all retail channels – independent broker dealer, wirehouse, RIA and online retail – were up $87 billion versus $48 billion for passively managed funds.

The fastest-growing channel on a percentage basis for the first half of 2017 was the direct online channel, led by Vanguard and Schwab. Net new flows of mutual funds increased by $67 billion, or 22%, with more than half of net new assets ($36 billion) going into actively managed funds. 

In the first half of 2017, overall assets for ETFs increased by 11.6% to $3.1 trillion. The largest increase of ETF assets in the first half of 2017 occurred in the RIA channel, with net new assets of $78 billion, up 11.4%. The RIA channel remains the largest channel for ETFs, with over $800 billion invested in ETFs.   

© 2017 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on August 3, 2017 by -

Plan sponsors look past their recordkeepers for TDFs, new study shows

Plan sponsors are increasingly decoupling from their own recordkeepers’ proprietary target-date funds and choosing funds from other providers, according to a new study of the TDF landscape by AllianceBernstein L.P. and BrightScope.

Sponsors are drawn by the “enhanced diversification, lower fees, multiple managers” and other benefits that TDF providers from outside the recordkeeping bundle are able to offer them. Those benefits include access to low-cost collective investment trusts (CITs) or passive offerings.

Between 2009 and 2014 (the most recent year for which data is available), recordkeepers’ proprietary TDFs share of the plan sponsor market has declined to 43% from 59% while the share of non-proprietary target-date funds on platforms has leapt to 41% from 25%.

This reverses the trend that began in 2006, when the passage of the Pension Protection Act gave birth to TDFs as “qualified default investment alternatives.” Recordkeepers who offered prepackaged, proprietary TDFs with prices already bundled with the plans’ administrative costs” had first-to-market advantage.

Today, about 78 firms offer more than 139 different TDF series, but the market is highly concentrated. At the end of 2016, according to Morningstar’s 2017 Target Date Fund Landscape report, Vanguard had TDF assets of about $280 billion, Fidelity followed with $193 billion and T. Rowe Price was third with $148 billion. American Funds was a distant fourth, with $53.6 billion.

Between 2009 and 2014, the number of plans using TDFs grew by 16% and assets grew by 229%, with most of the growth in plans of more than $500 billion in assets.

The use of collective investment trusts (CITs) has gained in defined contribution plans, with some recordkeepers introducing CITs or other passively-managed target-date funds to reduce fees. Since 2009, the use of CITs in TDFs has risen to 55% from 29%.  

Other key findings include:

  • In plans with over $1 billion in assets, the penetration of proprietary target-date funds was 31.7% in 2014, down from 38.4% in 2009 and from 34.4% in 2013. More than 60% of smaller plans (under $100 million in assets) still used proprietary target-date funds from their recordkeeper in 2014.
  • Three plan providers—Nationwide, Empower and Hancock—have increased the use of their proprietary TDFs.  
  • From 2009 to 2014, the use of low-cost target-date collective investment trusts (CITs) nearly doubled as a percentage of TDF assets, to 55% from 29%. Usage of TDF mutual funds fell to 42% from 68% over the same period. 
  • Some recordkeepers, such as Vanguard, T. Rowe Price and Wells Fargo, for example, have broadened distribution by placing their TDFs on other recordkeepers’ platforms. Those firms’ TDF series lost market share on their own recordkeeping platforms between 2009 and 2014, but grew their share of the overall TDF market.

The survey taps BrightScope data that spans more than 6,000 401(k) plans, representing more than $2 trillion in assets and 25 million participants as of 2014. A copy of the report is available at http://bit.ly/2tQQ3wu.

Tom Streiff joins Aria Retirement Solutions

Aria Retirement Solutions, provider of the RetireOne platform, today announced the appointment of Thomas F. Streiff as an independent director of the firm. Most recently he was a Senior Managing Director and head of Retirement Income Products and Distribution for TIAA-CREF & Nuveen. 

Prior to joining TIAA, Streiff spent 6 years as an Executive Vice President and head of Retirement Solutions for PIMCO. Prior to PIMCO he was a Managing Director at UBS where he spent time as Head of Insurance Sector Relationships in the Investment Bank and Head of Investment Solutions at UBS Wealth Management. 

Streiff is a member of the Advisory Board of Vestigo Ventures (Fintech) and an immediate past member of the Board of Directors of the Insured Retirement Institute (IRI). The author of over 100 articles for the financial trade press and co-author of three books, he is a Certified Financial Planner, Chartered Life Underwriter, and Chartered Financial Consultant. He holds a bachelor’s of science in Nuclear & Mechanical Engineering from University of Utah and a master’s in business administration from Pepperdine University.

Place Millennials in decisive marketing roles: Cerulli 

If you weren’t an early-adopter of strategies for selling to Millennials, there’s still time to be a fast-follower. But you’ll have to hurry. And if you think strategies that worked with Boomers will work with Millennials, you’re kidding yourself, according to the latest The Cerulli Edge–Global Edition. 

 “The values, priorities, and expectations of Millennials, currently aged 20 to 35, differ from those of their Baby Boomer parents, currently aged 51 to 69,” according to a release this week from the Boston-based global consulting firm. “Managers that have not started factoring in these differences risk disappearing from the radar of the Millennial cohort, which will be worth an estimated US$19-24 trillion (€22-27 trillion) by 2020.”

Three-quarters of Millennials conduct at least 20% of their engagement with their wealth managers through digital mediums, compared to 54% for Baby Boomers, according to Cerulli’s research. In five years, the proportions are projected to have risen to 95% and 73% respectively.

Asset managers firms should start appointing Millennials to decision-making posts and should start making greater use of data mining and artificial intelligence to learn how Millennials think, the Cerulli release said. 

Betterment triples AUM in about 18 months, to $10 billion

Betterment announced this week that its assets under management have passed $10 billion, up from only about $3 billion at the start of 2016. It claims to be the first independent online financial advisor to reach that mark. The company said it manages investments for more than 270,000 customers, up from about 150,000 customers only 18 months ago.

Betterment charges 25 basis points to 40 basis points on its AUM, depending on the level of service, so its gross revenue on $10 billion would be $25 million to $40 million. Visitors to the site are currently offered a waiver of first-year fees.

The firm, headquartered near Madison Square in lower Manhattan, was launched in May 2010. “It took us a little over a year after our launch to reach $10 million in AUM,” said Betterment founder and CEO Jon Stein in a release. We now typically attract more than that in a single day.”

To attract larger deposits, the web-based “robo-advisor” recently added access to licensed advisors on the phone and through in-app messaging, as well as tools to make investing more tax-efficient.

Betterment offers globally-diversified portfolios of exchange-traded funds (ETFs) with algorithm-generated advice tailored to each investor’s stated risk-tolerance and financial goals. Customers can open and customize regular investment accounts, traditional, SEP or Roth IRAs, trust accounts, and accounts for retirement income. Betterment’s platform also serves advisors and provides 401(k) services. 

MetLife funds research on expanding financial services in emerging markets

Two organizations funded by the MetLife Foundation have released a new report examining how partnerships between mainstream financial institutions and fintechs are expanding access to the formal financial economy to unserved and underserved people in emerging markets.

The report, “How Financial Institutions and Fintechs Are Partnering for Inclusion: Lessons from the Frontlines” was produced by The Center for Financial Inclusion at Accion (CFI) and the Institute of International Finance (IIF). It identifies four key financial inclusion challenges in emerging markets that mainstream financial institutions address through fintech partnerships:

  • Gaining access to new market segments
  • Creating new offerings for existing customers
  • Data collection, use, and management
  • Deepening customer engagement and product usage

The report features successful tech-based collaborations. One partnership sends SMS nudges to bank customers in Colombia and another uses a cryptocurrency-enabled digital ledger to record mobile wallet transactions in India.

The new report is part of a two-year initiative from CFI and the IIF, with support from MetLife Foundation, to help advance the financial services industry’s ability to reach unserved and underserved populations.

The project, titled “Mainstreaming Financial Inclusion: Best Practices,” is intened to help financial institutions reach lower income market segments. The project will identify and transmit practical guidance that financial institutions can use to serve the poor. 

The Center for Financial Inclusion at Accion (CFI) is a think tank dedicated to improving the financial lives of the world’s three billion who are unserved or underserved by the financial sector. Its report was based on 24 interviews with firms and experts from around the world, and highlights 14 partnerships in 14 countries.  

U.S. ETF assets approach $3 trillion in first half of 2017 

Passive funds (and, recently, institutional share classes of active funds) dominate the sales charts today, but some asset managers hope to revive active management by offering environment, social and governance (ESG) funds, according to the July 2017 issue of The Cerulli Edge – U.S. Monthly Product Trends.

The total value of mutual fund assets grew by 9.2% or $152.8 billion in the first half of 2017, to $13.6 trillion. Flows were positive in all six months. ETF assets grew 16.7% or $243.7 billion to just under $3 trillion.   

In response to rising demand from both retail and institutional clients, many asset managers launched ESG investment products or strategies in recent years. Such products could help create opportunities for active managers, despite the continued growth of indexing.

Non-profit organizations and their constituents are asking for ESG investment options, and other institutional investors and even individuals are likely to follow. According to a recent Cerulli survey, half of consultants expect stronger demand for ESG from nonprofits than from any other type of institution.

© 2017 RIJ Publishing LLC. All rights reserved.

Curve, Triangle or Rectangle: What Kind of Advisor Are You?

Posted on July 27, 2017 by -

Retirement advisors can be either “curves,” “triangles,” and/or “rectangles,” but it’s best to corral all three symbols inside a holistic circle and use them as a framework for serving the best interests of the retirement client, said Francois Gadenne at the July 17-18 meeting of the Retirement Income Industry Association (RIIA).

Quick definitions: A “curve” advisor focuses on investment management. A “triangle” advisor helps facilitate a client’s goals and aspirations. A “rectangular” advisor considers a client’s entire household balance sheet, including all assets and liabilities, along with investments.

Advisors who master this entire model—by obtaining RIIA’s Retirement Management Analyst designation, as a start—will survive and prosper in the Ice Age of commoditization, automation, regulation and fee compression now chilling the wealth management industry, said Gadenne: “You can demonstrate compliance just by checking off the boxes of RIIA.”

“The advice industry faces its most disruption ever,” Gadenne (right) told a group of 40 or 50 at RIIA’s 2017 Summer Conference on the campus of Salem State University in Salem, Mass, where he released a workbook, written by Gadenne and investment analyst, educator and author Patrick Collins, Ph.D. He founded RIIA in the Boston area over a decade ago and remains its chief executive.Francois Gadenne

RIIA’s 148-page workbook describes the Curve-Triangle-Rectangle-Circle concept, which Gadenne says advisors can use as a framework for professional education and client communication. It builds on RIIA’s “View Across the Silos” (a cross-sectional map of the retirement industry and market), its “Floor and Upside” strategy (of dedicating assets to a combination of safe income and risky investments in retirement) and its “RMA Procedural Prudence Map,” a process for serving retirement clients.

The shape of things to come

Here’s an attempt to defined the most important elements of the Gadenne-Collins paper that was introduced in Salem:

The Curve. Advisors who are curves limit themselves to portfolio management. The curve is a reference to Modern Portfolio Theory and the efficient frontier. Those two models, along with each client’s answers to questions about risk tolerance and time horizons and the risk-free interest rate, provide the bases for many advisors’ asset allocation recommendations. This type of advisor focuses on risk/return optimization.

The Triangle. Advisors who are triangles practice so-called goal-based planning. Clients describe their essential, desirable and aspirational goals and the advisor helps them finance the achievement of those goals. The image of a triangle refers to Abraham Maslow’s 1943 hierarchy of human needs, a five-level pyramid including, in order of pure necessity: physiological requirements, safety, love/belonging, esteem and self-actualization. This type of advisor focuses on portfolio sustainability.

The Rectangle. Advisors who are rectangles create plans that consider all of the assets and liabilities of the client’s household. The rectangle refers to the Household Balance Sheet (HHBS), use of which is a central to the RMA training. The HHBS includes a family’s real property, social wealth (e.g., the present value of Social Security benefits), human capital (earning power), debts and future liabilities—such as retirement expenses. This type of advisor focuses on portfolio feasibility.  

The Circle. The circle signifies a holistic, comprehensive retirement advisory model that encompasses the rectangle, the triangle and the curve. To put it another way, the advisor who uses this model operates not just in one dimension (asset allocation) or two dimensions (asset allocation plus goal-based planning) but all three dimensions (asset allocation, goal-based planning and the HHBS). The entire model is described in RIIA’s aforementioned Procedural Prudence Map.

Advisors who follow the map can’t help but serve the best interests of the client and thereby comply with the spirit and the letter of the DOL fiduciary rule, RIIA believes. The RIIA process is fundamentally client-centric.

“Procedural Prudence starts with the client and circles back to the client,” write Collins and Gadenne in their paper. “The advisor helps the client organize facts and priorities in order to translate them into actions and outcomes. The fact-patterns originate with client-specific data. 

“The decisions are the client’s to make, not the quant’s or the psychologist’s. Who makes the decision (governance) is as important as what is decided (policy) because a decision becomes successful, in large measure, only when it is willed into existence on a daily basis, by the client.”

Gadenne’s perspective

Will this model help advisors and broker-dealers survive the current crisis and make more money? Presumably yes, because multi-dimensional advisors are less likely to be replaceable with robots and more likely to capture a bigger share of the client’s so-called wallet. But RIIA and Gadenne—the two are nearly synonymous—are at heart more concerned with the client’s well-being than with the advice industry’s.

That’s because Gadenne had first encountered the retail financial services industry from the outside, as a client. After co-creating and selling a kind of robo-advisor during the dot-com boom of the late 1990s, he became, by definition, a high net worth prospect for Boston-area advisors.

An intellectually rigorous, French-born MBA-holder from Northwestern’s Kellogg School of Management, Gadenne was surprised by the conflicting messages he received from advice providers. “Becoming a client myself, with agents and advisors coming at me, I realized that I was getting contradictory prescriptions, sometimes even in the same meetings,” he said in Salem.

On the one hand, he heard that stocks were safe if your time-horizon was long enough. On the other hand, he heard from Zvi Bodie that stocks were not safe in the long run. He was told to trust in bell curves and Monte Carlo simulations, but he knew that averages and normal distributions have little value for individuals. He heard that investors are rational and that they are irrational.

Gadenne decided to start RIIA to make sense out of what he was hearing. The messages were contradictory, he found, because they came from different parts of a fragmented financial services industry, and because they were often merely ad hoc formulations designed for marketing purposes. Many of these contradictions vanished, in fact, when the financial plans began with the needs of the client rather than the needs of the sellers of investments or insurance products.

As evidenced at the conference, RIIA now believes that what’s good for clients will be good for advisors, at least in the long run. It’s trying to take advantage of the current disruption by positioning its educational materials and its RMA designation as a solution for advisors and broker dealers who are trying to stay compliant in a post-fiduciary rule world, trying to make themselves automation-proof in a world of increasingly sophisticated artificial intelligence tools, and how to differentiate themselves and justify their profit margins in a world where financial advice and products have become commodities.

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