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Symetra Offers Fee-Based Fixed Indexed Annuity

Posted on July 27, 2017 by Kerry Pechter -

Symetra Life Insurance Company, the Bellevue, WA-based unit of Sumitomo Life, has introduced two no-commission fixed indexed annuities (FIAs) for distribution by fee-based advisors: Symetra Advisory Edge, for accumulation, and Symetra Advisory Income Edge, which offers a guaranteed lifetime withdrawal benefit.

Kevin Rabin, vice president of Retirement Products at Symetra, said the company has been rolling out distribution of the fee-based FIAs since April, starting with major brokerages Merrill Lynch, Commonwealth and Raymond James.

The April roll-out was timed to match the initial effective date of the Department of Labor’s fiduciary rule, whose current version—now under review by the Trump administration—adds regulatory hurdles to the sale of FIAs and variable annuities (VAs) to rollover IRA owners if the manufacturer pays a commission to the advisor and recoups the commission through fees or product pricing.

With some brokerage firms retreating from offering commission-paid FIAs and VAs, and many brokerage advisors switching to a pure fee-based revenue model, some life insurers have designed fee-based products to give them an FIA they can sell. Instead of earning a commission, advisors can charge their own advisory or “wrap” fee for managing client assets, including the annuity value.

“We had contemplated developing this type of product before the fiduciary rule, but the rule tipped us over the edge,” Kevin Rabin, Symetra’s vice president for Retirement Products, told RIJ this week. “Some distribution firms told us they are going advisory-only for qualified dollars.”

Stripping out the commission from the FIA doesn’t necessarily make the product cheaper for investors to own, because advisors add their own charge. But a fee-based design does allow the issuer to raise the limits, or caps, on the maximum amount of interest the issuer credits to the contract each year. That gives the owner more growth potential.

“Speaking at a high level, when we cut the commission to zero and put that [extra premia] into the caps, we could offer something close to 150 basis points more on [contracts linked to] the S&P 500 Index and 250 basis points more on [contracts linked to] the JP Morgan Efficiente Index, versus the commissionable product. That helps in the marketability of the products,” Rabin told RIJ.

The Advisory Income Edge version of the FIA offers a lifetime income withdrawal benefit for an added fee of 1.05% per year. Fixed payout rates start at 2.50% of the account balance per year at age 50 (2% for joint-and-survivor contracts) and increase by 50 basis points for every year post-purchase that the owner or owners defer taking income. The half-percent boost is credited each year for up to 10 years.

For example, clients who buy the product at age 65 would have an initial payout percentage of 5% (4.5% joint). If they delayed income until age 70 they could take annual withdrawals of 7.5% (7% joint). And they could take withdrawals of 10% (9.5% joint) if they waited until age 75. The minimum initial premium is $10,000.

During the deferral period, the account accrues interest. Clients who want to see their account (and their annual payouts) grow in retirement have the option of keeping their accounts linked to an equity index even after income starts. But the payout rates for that option start at lower levels—for instance, 3.75% for purchases at age 65 to 69 (2.75% joint).

Symetra made a conscious decision to incentivize contract owners to delay taking income by offering incrementally higher payout rates instead of the common practice of offering annual increases in a notional value (known as the “benefit base”). It makes the income benefit easier to understand and more transparent, Rabin said.

When annuities offer benefit base bonuses to encourage deferral, clients often fail to understand the difference between their account value (which is available as a lump sum) and their benefit base (which is not). They also often mistake the deferral bonus on the benefit base for a guaranteed growth rate.

Both Advisor Edge and Advisor Income Edge offer two indexing options. Contract owners can link their contract to the S&P 500 Index or the actively-managed JP Morgan ETF Efficiente 5 Point to Point Index.

As of June 2017, the Efficiente Index was composed of an all-ETF (exchange traded funds) portfolio of 20% SPDR S&P500, 20% iShares MSCI EAFE, 20% iShares iBoxx investment-grade corporate bonds, 10% iShares iBoxx high yield corporate bonds, 10% iShares MSCI Emerging Market equities, 15% iShares JPMorgan USD Emerging Market bonds, and 5% SPDR Gold Trust.

The composition of the Efficiente 5 Index changed over the course of 2017, as managers invested at times in the iShares Russell 2000 small-cap ETF, as well as in commodities, real estate and cash.

Interest is credited to indexed accounts using a point-to-point crediting method that compares the value of the index at the beginning of the one-year interest term to its value at the end of the interest term, subject to a cap (maximum), according to a Symetra fact sheet for Advisor Edge.

The indexed interest cap is set at the beginning of each interest term. If the index performance is positive, interest is credited for that term, not to exceed the cap. If the index performance is negative, no interest is credited for that term.

Has the Fiduciary Rule Lost Its Sting?

Posted on July 27, 2017 by Kerry Pechter -

In what may turn out to be a Christmas-in-July victory for financial services companies, the Trump administration appears willing to take the stinger out of the Obama Department of Labor’s Fiduciary (or “conflict of interest”) Rule, which went live on June 9 but isn’t enforceable until at least next January 1.

In a joint filing in the U.S. Court of Appeals in Texas on July 3, the Trump Departments of Labor and Justice endorsed the whole Rule—except for a provision ensuring that IRA owners may join class-action suits against financial services companies when those companies are believed to have systematically violated the Rule’s requirement that they act in their clients’ “best interest.”

“The government is no longer defending the BIC Exemption’s condition restricting class-litigation waivers insofar as it applies to arbitration agreements,” government attorneys wrote. “DOL may not interpret its… exemption authority as conferring upon it the specific power to discriminate against arbitration by withholding the BIC Exemption unless fiduciaries consent to class litigation.”

This is what many financial services companies have wanted to hear from the Trump administration: that they can promise to act in the best interests of their clients (and execute commission-based sales to IRA owners) without exposing themselves to the kinds of fiduciary-violation class-action lawsuits that have roiled the 401(k) industry.

If the sentiments expressed in the Texas filing find their way into the final version of the fiduciary rule, brokerages will be able to write service contracts in which rollover IRA clients (a $7 trillion market) waive their right to participate in potentially expensive and reputation-staining class action lawsuits against the brokerages, and settle their grievances or disputes with brokerages through private arbitration panels where industry has more control. That would be a huge win for financial services firms.

Two reasons were given in the Texas filing for the DOL and Justice Department’s new position on the class-action suit issue. The new position is consistent with the position on the Federal Arbitration Act that the Trump administration’s acting Solicitor General has taken in another, separate lawsuit. Also, the Texas filing said that the right to participant in class-action lawsuits was never considered essential to the Rule. It claims that the “agency would have adopted the rule without the anti-arbitration condition” and that dropping it wouldn’t invalidate the rest of the rule.

(If that suggests that the class-action right wasn’t important to the Obama administration, it is a notion rejected by Phyllis Borzi, the Obama administration Deputy Labor Secretary responsible for the Rule. “Of course it was important,” she told RIJ in an interview last week. “The signed [Best Interest] contract is the primary enforcement mechanism of the rule.”)

For marketers of annuities, the Texas filing didn’t offer much good news. It did not send the signal that manufacturers and distributors of variable annuities or fixed indexed annuities were hoping to hear from the Trump administration. They wanted, and still hope for, a change in the rule’s requirement that sellers of their products must sign the BIC pledge to act in the best interests of rollover IRA clients. They want to be regulated as lightly as are sellers of simple fixed deferred annuities (which are like CDs) and income annuities (which are like personal pensions).

It is too soon for financial services firms to celebrate a victory over the Obama DOL, however. By all accounts (by attorneys Barry Salkin of the Wagner Law Group in New York and Michael Kreps of the Groom Law Group in Washington), the Trump DOL’s statements in the Texas filing don’t necessarily mean that, after reading and weighing the latest round of comments on the Rule that the DOL solicited from the public and the industry) submitted this summer) the Trump DOL won’t allow IRA owners to waive their right to bypass arbitration when they have grievances.

The Trump DOL’s handling of the Fiduciary Rule may depend on the outcome of a case currently before the Supreme Court. In National Labor Relations Board vs. Murphy Oil, which tests whether an employment contract violates the federal law if it requires employees to waive their right to bring a class-action suit against an employer.

When this case was filed, the Obama Justice Department favored employees’ right to sue. The Trump Justice Department recently reversed its position, and now favors employers right to require arbitration. “It is rare for the DOJ to switch positions in a Supreme Court,” said a June 16 article at Politico.com.

A lot is at stake here. The fiduciary rule was always about the right of the brokerage industry to sell products to rollover IRA owners (the $7 trillion market mentioned above) as if their savings were ordinary retail money, as opposed tax-deferred savings intended for retirement income. We’re not talking about a small change, and we’re not talking about small change.

If the Rule has sting in it (via the right to sue), prices on products and services for IRA owners will arguably be lower than if the Rule lacks a powerful incentive for compliance with the pro-consumer spirit of the original Rule. Billions and billions of dollars in corporate revenue (or enhanced retire savings) hang on the outcome of this legal dispute.

Income Solutions wins award from RIJ, adds Nationwide SPIA to its annuity sales platform

Posted on July 27, 2017 by Editorial Staff -

Nationwide announced this week that it will offer its INCOME Promise Select single premium immediate annuity (SPIA) on the Hueler Income Solutions platform. Income Solutions’ founder, Kelli Hueler, received the 2017 Innovation Award from Retirement Income Journal and the Retirement Income Industry Association at RIIA’s Summer Conference in Salem, Mass., on July 17.

The Income Solutions platform is a website where individual investors can submit requests for competitive bids for single premium immediate and deferred income annuities from a half dozen or so life insurance companies.

The number of bids and their prices depends on the customer’s state of residence, the product type, and the issuers’ appetite for sales at any given time. According to Hueler, competitive bidding gives added control to individuals who are shopping for annuities and reduces the cost of buying retail annuities by as much as 10% or more.

Access to the Income Solutions platform is broad but controlled. It can be used by Vanguard shareholders, participants in plans serviced by Vanguard, and to participants in certain large 401(k) plans—IBM, GM and Boeing, for instance—can use it. These plan sponsors use the platform, in lieu of a defined benefit plan, to give their retirees a way to convert qualified savings to a retail personal pension at the least possible cost.

Hueler (right) describes Income Solutions as the “only institutionally priced, fully automated, multi-issuer platform currently available.” It differs from other annuity sales platforms in that it is not just a point-of-sale or a provider of price quotes, but also the destination point of a virtual pipeline from 401(k) plans whose sponsors support it by educating participants about the importance of lifetime income and providing a link to Income Solutions on their internal websites.

INCOME Promise Select is a fixed immediate annuity from Nationwide. It can be customized to pay income for one or two people, for a specific period or for life, at a fixed amount or with cost-of-living adjustments. Clients who choose a term-certain or cash-refund contract can take lump-sum withdrawals in case of a financial emergency, according to Nationwide.

The beginning of the end of “leakage”?

Posted on July 27, 2017 by Editorial Staff -

Auto-portability—the “routine, standardized and automated movement of a retirement plan participant’s 401(k) savings from their former employer’s plan to an active account in their current employer’s plan”—took another step toward reality last week.

The “roll-in” portion of the system, which is intended to stop so-called leakage from qualified plans when workers change jobs, has now been demonstrated to work, according to Charlotte, NC-based Retirement Clearinghouse (RCH; formerly Rollover Systems, a custodian of unclaimed rollover IRAs), the company that pioneered the process.

In the first live exercise of the concept, RCH worked with Conduent, a business process services company spun off from Xerox this year, and a large health care company that uses Conduent as its 401(k) recordkeeper. Conduent built the interface that allowed RCH to find matches between people in its database of owners of abandoned 401(k) accounts and current participants in the health care company’s plan.

“More than 150,000 safe harbor IRA accountholder records were sent to the plan using RCH’s file transfer protocols, which have been implemented at the plan’s recordkeeper. Among the more than 200,000 active participant accounts in the plan, over 2,800 accountholders’ records were located and matched,” said an RCH release.

“The located and matched records belong to plan participants who have been subject to a mandatory distribution from a prior employer’s plan over a period that spanned one week to 10 years ago. In the coming weeks, RCH will seek the affirmative consent of the matched account holders, and for those that respond, will complete an automated roll-in of their savings to the plan.”

In an interview with RIJ this week, Spencer Williams, the president and CEO of RCH, described the auto-portability process as comparable to turning today’s custodial IRA firms from “landfills” into one big “recycling center” at RCH. The Employee Benefit Research Institute has found that such a system could reduce so-called leakage from qualified plans. Leakage prevents many participants from accumulating adequate retirement savings.

Today, 401(k) plan sponsors and recordkeepers routinely, and legally, purge the small-balance accounts that former employees—many of them low-income or minority workers—leave behind when they leave their jobs.

The accounts are sent to “safe harbor” IRA custodians like RCH or Millennium Trust, in Oak Brook, Illinois. These custodians invest the money in cash equivalents and earn fees on assets-under-management until they track down the rightful owners and release the money.

Williams envisions replacing this system with a nationwide automated network running through a data exchange run by RCH. When the name of the owner of an old, abandoned account matches the name of the owner of a new 401(k) account at a different company, RCH validates the match, obtains electronic consent from the owner and forwards the assets to the owner’s current plan account.

As Williams said in a recent press release:

“Defined contribution plan sponsors and their record-keepers are swamped with the administrative burdens of small accounts from separated participants, such as excess recordkeeping fees, missing participants, and uncashed distribution checks—all of which have exploded since the advent of auto enrollment.

“RCH Auto Portability addresses the small account problem through systematic consolidation of retirement savings as participants change jobs—attacking each of these problems at their root cause, which will significantly reduce the incidence of stranded accounts, lost/missing participants, and uncashed checks.”

For this system to work smoothly, workers will have to agree to auto-portability when they join a firm’s 401(k) plan, perhaps during the auto-enrollment process. RCH has been seeking an advisory opinion from the Department of Labor that will assure plan sponsors that it is permissible under the Employee Retirement Income Security Act of 1974 (ERISA) to auto-enroll participants into an auto-portability program.

Eleven Republican members of the U.S. Senate have co-signed a letter to the DOL from RCH on the matter. Tim Scott (R-SC), a friend of RCH owner Robert Johnson, the billionaire who founded and later sold Black Entertainment Television, led the contingent of legislators who signed the letter.

RetireOne to offer Great-West’s fee-based Smart Track VA with income rider

Posted on July 27, 2017 by Editorial Staff -

Great-West Financial’s no-commission Smart Track Advisor variable annuity (VA) is now available to registered investment advisors (RIAs) on Aria’s RetireOne platform, where fee-based advisors can get help evaluating their clients’ existing VA contracts and exchange them for better or cheaper contracts.

In a side note, RetireOne CEO David Stone told RIJ that selling stand-alone living benefits—lifetime income guarantees unbundled from mutual funds—to RIAs to wrap around their own sets of investments “remains a core part of what we do. We are in development of some new SALB-type products to be launched in early 2018.”

Great-West describes Smart Track Advisor as “a low-cost dual-strategy variable annuity” with these benefits:

More than 90 investment subaccounts
Ability to delay adding the living benefit rider after issue to keep costs down until guaranteed income is needed
Withdrawal rates as high as 6% at age 65 for life
Single and joint riders for the same cost
Ability to choose single or joint income
Multiple ways to increase income after withdrawals start – including age band income resets

Smart Track Advisor allows advisors to bill for their advisory fee separately or have the fee (up to 1.50%) deducted from the annuity contract without disrupting any guarantees.

The guaranteed living and death benefits offered are similar to those on Great-West Financial’s comparable commission-paying B-share product, Smart Track II – 5 Year Suite. Advisors can choose the share class and fee structure that meets each client’s needs.

Recently, Barron’s ranked Smart Track Advisor as the top traditional variable annuity for tax-deferred investing, Great-West said in its release.

Honorable Mention

Posted on July 27, 2017 by Editorial Staff -

Jackson appoints Richard White as senior vice president, Government Relations

Richard White has been appointed senior vice president of Government Relations for Jackson National Life Insurance Company, responsible for the strategy and direction of the company’s government relations efforts at the local, state and federal levels.

Based in Washington, D.C., White will report to Barry Stowe, chairman and chief executive officer of the North American Business Unit of Prudential plc, Jackson’s parent company, as well as Chad Myers, executive vice president and chief financial officer of Jackson, who has general responsibility for the company’s overall government relations efforts.

White will lead Jackson’s engagement with local, state and federal legislative and regulatory organizations and agencies, including collaborating with industry leaders and key members of the National Association of Insurance Commissioners (NAIC) and the American Council of Life Insurers (ACLI).

Most recently, White served as a partner at Thorn Run Partners, a leading federal lobbying and policy consulting firm based in Washington, D.C. Before joining Thorn Run Partners in 2014, White helped to found and manage several boutique federal government relations firms and has represented a broad array of clients from Fortune 50 to small innovative medical technology companies.

Prior to his time in the private sector, White worked in the White House under former President George H.W. Bush and in the United States Senate for the late Senator John H. Chafee of Rhode Island. He earned a BA in government from Franklin & Marshall College in Lancaster, Pa. and a JD from the Columbus School of Law at The Catholic University of America in Washington, D.C.

eMoney adds web marketing tool to its advisor platform

Many advisors are only just now realizing what early-adopters learned a decade ago: The need to master online marketing. What’s different today is that, with API technology, prospecting functions have gotten easier to add to existing advisor platforms.

Case in point: eMoney has added “Lead Capture,” a plug-in designed to help advisors “attract, engage and qualify leads online” and deliver “an automated, digital financial planning experience” to its wealth management platform at no added cost to current users, the Fidelity unit announced this week.

Lead Capture gives advisors a custom link that, when clicked on emails, social media posts or websites, will send prospects to a landing page where they can enter basic financial information and request a personal consultation. The system alerts the advisor to new hits and automatically adds the leads to the advisor’s eMoney dashboard.

For more information about Lead Capture, visit the eMoney blog.

A new report from Spectrem Group, Using Social Media and Mobile Technology in Financial Decisions, asserts that “the vast majority of investors now use smartphones to read articles and blogs, watch videos and learn about new investment products and services, underscoring the need for advisors to cater to these mobile preferences.”

Key findings in the report include:

Two-thirds of Mass Affluent investors (those with a net worth under $1 million) who use Facebook check it at least once a day, with 44% checking it at least twice a day. More than half of Twitter and Instagram users check those sites at least once a day. Users try to connect with their advisors, especially on Facebook, Twitter and LinkedIn.
Among Millionaire investors (with a net worth between $1 million and $5 million), 32% watch videos on financial topics, and that climbs to 58% of Millennial Millionaires. Younger investors look for videos on stock tips or investment products. Older Millionaires look for videos on stock market updates or economic news.
Those Ultra High Net Worth investors (with a net worth between $5 million and $25 million) who want to communicate with their advisor do so in a variety of ways. Thirty-six percent of UHNW investors under the age of 53 have texted their advisor and 20 percent have communicated with their advisor via Twitter. The interest in being able to text an advisor is growing, even among the oldest investors.

For an extra 15 bps, Betterment offers unlimited smartphone calls to live CFP advisors

Betterment, the $9.7 billion digital advisory firm, now offers an app that enables anyone with a Betterment account and mobile app to send any financial question to the team of licensed financial experts, and expect to receive a response in about one business day.

Experts can recommend which funds to move to Betterment, and help individuals set goals, choose the right risk level, and decide how much to invest in what type of account.

Anyone with a Betterment account can download the free app at no additional cost, regardless of plan or account balance. To get unlimited calls with Betterment’s Certified Financial Planner advisors, they have to pay 0.40% per year. A basic Betterment Digital robo-advice account costs 0.25% per year.

Betterment currently serves more than 280,000 customers. They can learn more about the new messaging feature and download the Betterment iOS or Android app at https://www.betterment.com/financial-experts/.

Two new House bills would alter Obama fiduciary rule

Posted on July 24, 2017 by Editorial Staff -

Proposals to kill the Department of Labor’s fiduciary rule were approved by two separate House committees this week in the latest Republican-led assault on the Obama administration’s attempt to protect rollover IRA owners from conflicted brokers, according to Bank Investment Consultant magazine.

The fiduciary rule was issued in April 2016 and became effective (but not enforceable yet) on June 9, 2017.

The House Committee on Education and the Workforce’s “Affordable Retirement Advice for Savers Act” would replace the existing fiduciary rule with a statutory obligation for advisers to make recommendations in their clients’ best interests, but relying more heavily on disclosure to mitigate conflicts of interest. It now goes to the full House for consideration.

At the same time, the House Appropriations Committee approved a funding bill blocking the department from enforcing the fiduciary rule. The second phase, which includes the controversial “Best Interest Contract” provisions, has a scheduled implementation date of Jan. 1, 2018.

“We completely agree that Americans deserve retirement advice that’s in their best interests,” said Rep. Phil Roe (R-TN), the author of the bill. “But a rule requiring so-called ‘sound retirement advice’ achieves nothing if it means many people will no longer have access to retirement advice at all.”

Roe, a medical doctor, was echoing the argument made by the financial services industry that brokerages will have to stop providing advisory services to middle-income rollover IRA clients if the fiduciary rule hinders them from earning commissions on the sale of products to those clients. In the 2016 election cycle, according to opensecrets.com, Roe received $11,000 in campaign contributions from the Investment Company Institute (which spend almost $5 million as a lobbyist in that cycle), $10,000 from New York Life, and $10,00o from UBS. Most of his largest donors were medical societies, however.

The commissions, paid by mutual fund companies and annuity issuers, serve as upfront “vendor financing” for financial services when mutual funds and annuities are sold. The manufacturers gradually earn back those commissions from investors by deducting annual fees from the value of their mutual funds or annuity contracts.

The Obama DOL objected to these long-standing arrangements because few investors understand how those arrangements work. The fees are, in effect, hidden from them. Those fee arrangements are disclosed, but only in the fine print of contracts that few investors read.

When investors have large enough account balances, advisors can deduct a percentage—say, 0.50% to 1.5%—of their account balances (“assets under management” in financial industry parlance) each year as compensation for general financial advice and management services.

But the account balances of many middle-class rollover IRA owners, especially those who are retired and about to spend their savings down, aren’t large enough, and may never be large enough, to generate attractive levels of advisor compensation at those percentages.

10 Key Questions That Pre-Retirees Should Ask (and that advisors should help them answer)

Posted on July 20, 2017 by Editorial Staff -

On the Case: An Income Plan from ReLIAS

Posted on July 20, 2017 by Mark Warshawsky -

A few weeks ago RIJ challenged its readers to suggest solutions to the real case of a near-retirement professional working couple (“Andrew” and “Laura”) whose qualified and non-qualified savings amount to about $1.2 million and whose two homes have a combined market value of about $1.8 million.

Mark J. Warshawsky, Ph.D., was among the first responders, and his solution is described below. A prolific author (e.g., “Retirement Income: Risks and Strategies,” MIT Press, 2012), he has worked in government (Assistant Treasury Secretary for Economic Policy, 2003-2006), consulting (Director of Retirement Research, Towers Watson) and academics (he’s a Senior Research Fellow with the Mercatus Center at George Mason University).

He has also been an entrepreneur. Four years ago, Warshawsky (right) founded ReLIAS LLC, a “design firm for personalized retirement income solutions.” He submitted Andrew and Laura’s case specifics (see tables at bottom of this story, or click here to see prior story) to the ReLIAS software (making some assumptions where needed) and produced the following preliminary solution.

Quick take-away

Warshawsky’s solution matches the school of thought that says: Use life annuities to fill any gaps (beyond Social Security and pensions) in required essential income and then exploit the increase in risk capacity by putting all other investable assets in equities. Since this couple can afford to keep paying down the mortgages on two homes (a primary residence worth $1.23 million and an income-producing property worth $435,000), he recommends that they hold onto their real estate equity for potential application to health care expenses, if necessary.

ReLIAS’ assumptions

The Social Security income at age 70 will be $36,000 annually for each member of the couple.
No new contributions were being made to IRAs.
Both members of the couple are in good health, are moderately risk averse and are conservative in their future spending profile.
Each strategy starts at age 70.
Annual investment expenses on the portfolio will be 75 bps.
The taxable assets are tax-favored (unrealized capital gains) or tax-exempt.
The couple’s non-health spending needs will decline after age 80.

Advice point: Create an analysis for each spouse

Because both members of the couple have their own IRAs, and seem to have complete work histories, he ran the software separately for each, giving each an independent strategy, with no joint-and-survivor annuities purchased, or spousal benefits in Social Security and the pension.

Advice point: Continue to build real estate equity for future use

Reserve the real estate assets for the provision of housing services and as a contingent reserve for future uninsured health and long-term care needs.

Advice point: Use the couple’s SEP-IRAs for their retirement income

Set aside the taxable assets for the desired bequests and any emergency family or personal needs.
The retirement assets will be used mainly for producing retirement income. Minimum distribution requirements would force some of that anyway.

Recommendation for ‘Andrew’: Single-premium immediate annuities

Andrew should purchase a fixed $288,000 SPIA at age 70 from the IRAs.
To maintain inflation-protected income, he should make smaller annual purchases of SPIAs for 15 years ($2,200 at age 71 increasing slightly every year to $3,100 at age 85 and none thereafter).
Why not buy inflation-indexed SPIA instead of buying more income each year? “They have larger loads and therefore I avoid them. Annual purchases of SPIAs allow us to do some inflation adjustment, interest rate hedging (pricing of SPIAs) as well as control the slope of income,” Warshawsky said. That is, some retirees may want to change their real income.
The remaining retirement portfolio should be allocated 100% to equities.
Andrew should distribute 7.5% of the portfolio balance (whatever dollar amount that is) annually to be consumed.
Why is the payout rate so high? “The plan is determined by the goals, preferences and resources available,” Warshawsky said. Why not annuitize more wealth to meet the income goal? “Income is the combination of payouts from immediate annuities and withdrawals,” he said. “SPIAs are great for steady income but lack liquidity and growth potential, so a combination approach is best.”

Recommendation for ‘Laura’: Similar to Andrew’s

Laura should purchase a $330,000 SPIA at age 70 and make smaller annual purchases of SPIAs ($3,300 to $4,300 from age 71 to 82).
She should allocate 100% to equities and distribute 7.5% of her portfolio balance each year.

Bottom line

Andrew’s annual income starting at age 70, with Social Security, will average about $90,000 in pre-tax income (at historical rates of interest, inflation, and investment returns), or about $67,000 post-tax, declining, in real terms, to $60,000 at age 75, and $54,000 at age 80, as the couple’s non-health spending needs likely decline.
Laura’s annual income starting at age 70, with Social Security and her DB pension of $7,000 per year, will be $110,000 pre-tax ($80,000 post-tax) at age 70, declining gradually, in real terms, to $71,000 at age 75 and $63,000 at age 80, on average.
The amounts could be higher or lower, depending on economic and financial realizations, with Social Security, the annuities, and pension providing (real or nominal) floors.

Why We Need Randomized Modeling for Retiree Income Strategies

Posted on July 20, 2017 by Mark Shemtob -

In an effort to enhance their income in retirement, retirees are required to make some important decisions when creating their personal financial plans. Some retirees may have many decisions, yet others just a few. Here are some decisions that retirees may need to consider:

When should I start collecting Social Security?
Should I purchase an insured lifetime income product; if so, which type(s) and with how much of my retirement savings?
If I am entitled to an employer pension should I elect an annuity payment (and if so, in what form), or should I select the lump sum option if permitted?
If I have retirement funds in different sources (pretax, Roth, and after-tax), in what order should I withdraw them to minimize taxes?
How should I invest my retirement savings among different investment classes such as stocks and bonds?
If I have home equity value, should I use it to create income through a reverse mortgage?
If I have debt, should I pay it off with some savings?
Should I purchase long-term care insurance or plan to finance from retirement savings, should the need arise?
Should I relocate to another state for tax purposes?
Should I maintain or buy life insurance for estate tax or legacy goals?

An illustration

Even a few decisions can lead to thousands of unique strategies. To see how stochastic modeling can help a retiree decide on a strategy by comparing alternatives, let us look at a simple example.

A hypothetical 62-year-old would-be retiree’s primary goal is to secure an inflation-adjusted pretax income for life starting at $X per month. The income will come from Social Security, a fixed-income life annuity, and periodic withdrawals from an investment portfolio. She wishes to consider:

When to start collecting Social Security (ages 62 to 70);
Whether to purchase a fixed-income life annuity with 0%, 25%, 50% or 75% of her retirement funds
The investment allocation to be used with the remaining retirement savings modeling a passive equity fund and a passive fixed-income fund with 11 potential allocations (0% to 100% of each investment class in 10% intervals)

This basic example has 396 alternative strategies (9 × 4 × 11). Stochastic modeling can test these strategies to determine which provides the greatest probability of success in securing sufficient income to last an uncertain lifetime. The success probabilities are determined based on thousands of scenarios for each strategy using alternative rates of return (based on mean and variance for each investment class), inflation expectations, as well as life expectancies (based on a life expectancy table considering current age, health, gender and income level.)

If not satisfied with the strategy recommended by this analysis, she should consider the following:

Test for a different income level, especially if the success probability is very high or very low
Test the impact on the success probability if one or more of the optimum strategy components are modified
Once an income amount and strategy are finalized, she can investigate the amounts that would likely be available as liquid investments or an inheritance each year in the future.

Alternatively, our retiree might wish to have modeling performed based on a success percentage (e.g., 90%). The result would indicate the maximum inflation-adjusted income that can be generated with the desired success level. If not satisfied with the strategy produced, she should consider the following:

Test for a different success percentage, especially if the income level is very high or low
Test the impact on the monthly income if one or more of the optimum strategy components are modified
Once an income amount and strategy are finalized, she can investigate the amounts that would likely be available as liquid investment or an inheritance each year in the future.

One might think that our hypothetical retiree would need to provide an overwhelming amount of information for this analysis. But, addition to either a monthly income or success percentage, all she would need to supply is:

Date of birth
Gender
Smoking history and general health information
Social Security information
Retirement savings

In the case of more complicated applications where more decisions need to be considered, more input information will be required.

Technical considerations

Modeling will depend on a variety of parameters built into the program that will require periodic updating, such as:

Standard mortality tables by gender
Mortality table adjustments to account for personal health and income levels
Capital market expectations for expected returns and variances of alternative investment classes
Expected inflation rates
Others (annuity purchase rates, tax rates, LTC premium rates, etc.).

The use of unreasonable rates of returns for investment classes would favor certain strategies over others. For example, the value of delaying Social Security would be understated if unreasonably high rates of return were assumed. Higher-than-reasonable rates of return would also discourage consideration of insured lifetime income products. Alternatively, longer-than-reasonable expected lifetimes would tend to emphasize the value of annuities and delaying Social Security. Shorter-than-reasonable expected lifetimes would do the opposite. Impact of the overall household income should be considered, including that of a spouse or partner.

Conclusion

Stochastic modeling tools have been used for over a decade to test retirement financing scenarios. Many of these tools are proprietary and available for use by advisers when recommending the products or investments offered by the various financial institutions. These can be biased and may not consider strategy components that the financial institution would not offer or benefit from.

Other modeling tools have been created for independent financial advisers and generally provide for more flexibility in strategy options. However, biases of the adviser may impact the strategies tested. For example, some fee-based advisers may not consider the use of fixed-income annuity or deferred-income fixed annuity products for their clients.

Consumer-created web applications may be especially valuable for individuals with modest retirement account balances who cannot attract the expertise of an unbiased adviser with decumulation expertise. However, as an individual’s personal situation becomes more complex, the value of retaining a qualified advisor increases.

Mark Shemtob, MAAA, FSA, is an actuary and the owner of Abar Retirement Plan Services LLC.

Vanguard’s New CEO: No Surprises

Posted on July 20, 2017 by Kerry Pechter -

Vanguard has a new CEO, Mortimer (Tim) Buckley, 48. Don’t expect a break in continuity at Vanguard as he succeeds Bill McNabb. Buckley’s ascension has been foreordained since he arrived from Harvard College and Harvard B-school as an assistant to Vanguard founder Jack Bogle in 1991.

Long ago, as a new hire at the firm, I saw Buckley (right) give a presentation to Vanguard “crewmembers.” Afterwards, I had to ask who this preternaturally polished, square-jawed young man could be. Buckley often ran five miles at lunchtime with then-CEO Jack Brennan. It was rumored that the two had known each other in Boston since Buckley was a child. Over the years he has served as Vanguard’s Chief Information Officer, head of its Retail Investor Group, managing director and Chief Investment Officer.

Buckley can be expected to maintain Vanguard’s focus on austere pricing and perfect execution. He inherits a firm whose $4 trillion+ AUM has grown 16-fold in 20 years; time has vindicated not only its passive investing style but also its ownerless, co-op business model that pays off richly for its leaders, outside fund managers, clients and employees (although the pressure for perfection can make it stressful to work there and a lack of room for internal creativity can leave ambitious young talent frustrated and impatient).

What intense Ivy League distance-runner is Buckley grooming as his own successor? Given the new CEO’s youth, that question may be moot until about 2030.

LPL will flatten advisor compensation on mutual fund sales

Posted on July 20, 2017 by Editorial Staff -

In a nod toward compliance with the Department of Labor’s still-uncertain fiduciary rule, LPL Financial’s 2018 mutual fund platform will feature load-waived shares in more than 1,500 funds from 20 asset managers, Bank Investment Consultant magazine reported this week.

LPL, the largest independent broker-dealer in the U.S., also plans to cap upfront commissions to 3.5% and limit trail commissions to 0.25% on the platform, which is scheduled to launch in early 2018, according to press reports.

The fiduciary rule’s best interest contract exemption (BICE) requires advisors who accept manufacturer-paid commissions on product sales to IRA clients to pledge to act in their clients’ best interests instead of recommending products that pay the advisor more. To comply with the BICE, brokerages are leveling or reducing advisor compensation on mutual fund sales to IRA clients.

The mutual fund industry resents the rule, whose express purpose is to help IRA investors spend less on fees and keep more money in their accounts so that fewer of them run out of money in old age and need help from Medicaid. Its representatives are lobbying the Trump administration may try to rescind or revise the rule before its full implementation Jan. 1.

While some brokerages may choose not to offer brokerage services to IRA owners at all (thereby avoiding exposure to the legal liabilities of using the BICE) LPL and other firms think that complying with the BICE and modifying their brokerage services for IRA clients, rather than shutting them down, will be better for everybody.

“At launch, [the new platform] will be a price-competitive solution that not only preserves investor choice — but amplifies it,” according to a company memo to advisers. “Other financial firms have limited or even fully removed brokerage options for retirement investors. But when brokerage is in the best interest of your client, we’re providing a solution.”

More than 80% of LPL’s current mutual fund products for brokerage clients are expected to be on the new platform. Offerings from Fidelity Investments are still awaiting final approval for possible inclusion on the platform, LPL said in a memo obtained by Financial Planning magazine.

LPL executives have yet to decide if they’ll require IRA owners to use the new platform, an LPL spokesperson told Financial Planning in an email. The choice depends on the “regulatory environment and industry developments,” he said.

Shift to passive funds slows down in June: Morningstar

Posted on July 20, 2017 by Editorial Staff -

Investors put $9.3 billion into U.S. equity passive funds last month, down from $13.1 billion in May 2017. Meanwhile, investors pulled $14.6 billion out of U.S. equity funds, compared with $16.2 billion in the previous month, according to Morningstar’s U.S. mutual fund and exchange-traded fund (ETF) asset flow report for June 2017.

Highlights from Morningstar’s report about U.S. asset flows in June include:

Investors continued to pour money into taxable-bond and international-equity funds. Unlike previous months, the taxable-bond category group saw higher inflows on the passive front than on the active one with inflows of $18.5 billion and $14.4 billion, respectively. Taxable-bond funds continued as the overall leader among category groups, with inflows of $32.9 billion; international equity followed with inflows of $28.9 billion.
The three Morningstar Categories with the highest inflows in June remained the same as the previous month: foreign large blend, intermediate-term bond, and large blend. A fourth category attracting strong flows in June was diversified emerging markets, anticipating stronger growth potential after the MSCI Emerging Markets Index returned 18.4 percent year to date.
Among top U.S. fund families, American Funds was the leader in active flows with $3.9 billion, followed by Vanguard with $2.9 billion. On the passive front, Vanguard was the top fund family, with inflows of $22.7 billion, closely followed by BlackRock/iShares with $22.4 billion in inflows.
Fidelity Series Intrinsic Opportunities Fund and Fidelity Series Growth & Income Fund attracted the largest active flows in June, both approximately $3.1 billion. PIMCO Income, which has a Morningstar Analyst Rating™ of Silver, was pushed to third place with flows of $2.6 billion. The passive fund with the highest inflows was Vanguard S&P 500 ETF Index Fund, which saw $3.1 billion in inflows.
Fidelity Series Equity-Income Fund had the highest outflows for active funds at $6.5 billion and Gold-rated Harbor International saw outflows of $1.0 billion, its third consecutive month on the bottom-flowing list. On the passive front, Power Shares NASDAQ-100 Index Tracking Stock ETF saw the highest outflows of $2.8 billion.
Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.

Low unemployment is the bright spot in the economy: Chao

Posted on July 20, 2017 by Editorial Staff -

Even though the U.S. economy, inflation and sentiment all softened in the second quarter of 2017, the Federal Reserve remains committed to “normalizing” interest rates, marveled Philip Chao, principal and Chief Investment Officer of Chao & Co., a retirement plan and fiduciary consulting firm in Vienna, VA, in his 2Q2017 market commentary. “Consensus suggests that the Fed will likely raise rate once more this year (possibly in December) and soon (possibly in September) will normalize its balance sheet,” he wrote.

“After four 25bps rate hikes [by the Federal Reserve] since 2015, we have witnessed a gradually more accommodative financial condition which is opposite to what was expected. Is the market saying we don’t believe the Fed will keep raising rates and in fact it would lower rates if the economy continue to slow? Or is the market saying that with a lower neutral or terminal rate, the rate normalization is almost over and we are not worried?” Chao added.

“Since the Trump win last year, the market has reacted very positively in anticipation of constructive fiscal policies, tax reform and deregulation,” he concluded. “After the failure to repeal and replace Obamacare, it is increasingly unlikely that any major legislation will pass during this fiscal or calendar year. We expect a difficult September as lawmakers debate the debt ceiling and the 2018 budget.”

Highlights from Chao’s commentary included:

U.S. first quarter real GDP was revised upward to 1.1%. The second quarter is projected to be at or around 2.5%. This means the economy was growing at an annualized rate of 1.8% for the first half-year. Depending on how the second half performs, the economy is on track for around 2% growth this year. This assumes no significant policy changes in Washington, such as infrastructure spending and tax reform.
Good news remains with the labor economy, with U3 unemployment down to 4.4% and U6 down to 8.6%. Even at the 62.8% participation rate, it is hard to argue that much labor slack remains. Although wage growth has not been obvious, the Employment Cost Index (wage and benefit cost) is now growing at 2.9% while the average weekly earnings is at 2.5%. Both are now above the inflation rate.
The Federal Reserve has moved from a dovish bias to a normalization bias. The Federal Open Market Committee (FOMC) is expected to raise rates three times this year. The market expects the next hike to be in December. The FOMC is positive about the U.S. and global economy, positive about the labor economy, confident that the core inflation will return to 2%, confident in a strong banking system, and more able to act under a supportive financial condition environment in the market. But the pace is expected to remain accommodative in supporting its dual mandates.
The FOMC is expected to embark soon on its efforts to normalize the Fed’s balance sheet by not reinvesting all the principal payments from agency debt and MBS and not rolling over maturing Treasury securities at auction. The June FOMC meeting provided an updated guidance and framework of how the FOMC will use an escalating cap system to shrink its balance sheet over time. This process will be gradual. Markets expect the normalization to begin this September.
Although CPI and Core CPI have taken a surprising turn downward and away from the 2% inflation target, the FOMC expects the effect to be temporary. The FOMC’s long-term outlook for inflation remains higher than the market expectation, as evidenced by the 5-year forward inflation expectation value, as well as by the 10-year forward inflation estimate (comparing the 10-year Treasury yield with 10-year TIPS). Historically, the market has proven correct about a lower interest rate with a lower inflation rate; the FOMC had to repeatedly align its projection with the market expectation.
After almost a decade of unconventional and extraordinary monetary accommodation globally, investors and markets have grown complacent with and reliant on the central bank’s safety net. The normalization phase is likely to be tricky, and sooner or later financial conditions will tighten and add stress to the system. This effect will be exaggerated if the European Central Bank and other central banks also begin to normalize. Regardless of the gradual pace of balance sheet and rate normalization, the markets are focused more on the destination than on the path.
The world dodged a bullet in Europe after the Brexit Referendum. The outcomes of a string of Europe elections did not favor the breakup of the eurozone and the euro under a wave of populism. This has helped to reduce political risk and uncertainty in the eurozone and added support to a cyclical economic rebound.

Prudential reorganizes five businesses into three main groups

Posted on July 20, 2017 by Editorial Staff -

Prudential Financial, Inc., today announced a new organizational structure for its U.S. businesses that “better reflects the company’s strategic focus on leveraging its mix of businesses and its digital and customer engagement capabilities to expand its value proposition for the benefit of customers and stakeholders.”

Under the new structure, which will become effective in the fourth quarter of 2017, the company’s five U.S. businesses will be aligned under three groups oriented to the needs of specific customers.

Each group will have a leader focused on understanding customer needs, experiences and expectations, and applying that understanding to capture growth opportunities within and across businesses.

Individual Solutions will comprise Annuities and Individual Life Insurance, and be led by Lori Fouché, who currently leads Annuities. Kent Sluyter, who currently oversees Individual Life Insurance, will become president of Annuities. Caroline Feeney, who currently leads Prudential Advisors, will become president of Individual Life Insurance, which includes Prudential Advisors. Salene Hitchcock-Gear, currently chief operating officer of Prudential Advisors, will become president of Prudential Advisors and report to Feeney.
Workplace Solutions will comprise Retirement and Group Insurance, and be led by Andy Sullivan, who currently leads Group Insurance. Phil Waldeck will continue to lead Retirement, and Jamie Kalamarides, currently head of Full Service Solutions within Retirement, will become president of Group Insurance.
Investment Management will continue to comprise all PGIM businesses, including PGIM Investments, and will continue to be led by David Hunt, president and CEO of PGIM.

Betterment adds socially-responsible portfolio option

Posted on July 20, 2017 by Editorial Staff -

Betterment, the $9.6 billion digital advisory platform, now offers its 270,000 online clients a socially responsible investing (SRI) portfolio strategy that invests in companies that foster “inclusive workplaces or work toward environmental sustainability” while avoiding those with poor labor practices or that damage the environment.

The SRI portfolio reflects a 42% improvement in social responsibility scores (relative to the Betterment portfolio) on US large cap assets. The improvement came from substituting iShares DSI—a broad US ESG stock market ETF—for the portfolio’s U.S. large cap exposures. An additional ETF, iShares KLD, will serve as the secondary ticker for DSI.

All other SRI portfolio asset classes match Betterment’s existing portfolio because an acceptable alternative doesn’t yet exist or because the existing alternatives have high fees or liquidity limitations. Betterment plans to add new SRI funds as they become available. The SRI portfolios are also eligible for Betterment’s tax-loss harvesting and tax-coordinated portfolios services.

Total Assets Indexed or Benchmarked to S&P Dow Jones Indices

Posted on July 13, 2017 by Editorial Staff -

1Q2017 bank annuity fee income up 4.2% from 1Q2016

Posted on July 7, 2017 by Editorial Staff -

Income earned from the sale of annuities by large bank holding companies in first quarter 2017 rose 4.2%, to $788.5 million, from $756.6 million in first quarter 2016, according to Michael White Associates (MWA), which compiled the findings.

The findings are based on data from all 5,856 commercial banks, savings banks and savings associations (thrifts), and 624 large top-tier bank holding and thrift holding companies (collectively, BHCs) with consolidated assets greater than $1 billion operating on March 31, 2017. Several BHCs that are historically insurance companies are excluded from the report.

Of 624 BHCs, 280 or 44.9% participated in annuity sales activities during first quarter 2017. Their $788.5 million in annuity commissions and fees constituted 35.1% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage fee income) of $2.24 billion.

1Q2107 bank annuity fee income

Of 5,856 banks and thrifts, 762 or 13.0% participated in first-quarter annuity sales activities. Those participating banks and thrifts earned $189.8 million in annuity commissions, or 24.1% of the banking industry’s total annuity fee income. The annuity production of banks and thrifts fell 9.2% from $209.1 million in first quarter 2016.

Over two-thirds (67.6%) of BHCs with over $10 billion in assets earned $762.1 million in first-quarter 2017 annuity commissions, an amount equal to 96.6% of total annuity commissions reported by the banking industry, up 6.2% from the $717.9 million in annuity fee income earned in first quarter 2016.

Among this over $10 billion asset class, annuity commissions made up 37.6% of their total insurance-product sales revenue of $2.03 billion in first quarter 2017. Wells Fargo & Company (CA), Morgan Stanley (NY), UBS Americas Holding (NY), JPMorgan Chase & Co. (NY), and Citigroup Inc. (NY) led all bank holding companies in annuity commission income.

BHCs with assets between $1 billion and $10 billion recorded a 32.0% fall in first quarter to $26.4 million in annuity fee income, down from $38.8 million in first quarter 2016. These annuity earnings accounted for 12.2% of their total insurance sales income of $216.6 million. Among BHCs with between $1 billion and $10 billion in assets, leaders included First Command Financial Services, Inc. (TX), Wesbanco, Inc. (WV), United Financial Bancorp, Inc. (CT), First Commonwealth Financial Corporation (PA), and NBT Bancorp Inc. (NY).

The smallest banks and thrifts, those with assets under $1 billion, act as “proxies” for the smallest BHCs, which are not required to report annuity fee income. These banks generated $12.2 million in first quarter annuity commissions, a 20.4% drop from $15.4 million in first quarter 2016.

Less than 10% (9.4%) of banks this size engaged in annuity sales activities, the lowest participation rate among all asset classes. Among these banks, annuity commissions constituted the smallest proportion (16.1%) of total insurance sales volume of $75.9 million.

Leaders among these bank proxies for small BHCs were The Citizens National Bank of Bluffton (OH), First Federal Bank of Louisiana (LA), Bank Midwest (IA), Thumb National Bank and Trust Company (MI), First State Bank (NE), FNB Bank, N.A. (PA), Bank of Clarke County (VA), Heritage Bank USA, Inc. (KY), First Columbia Bank & Trust (PA), and First Neighbor Bank, N.A. (IL).

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 quarter 2017. Among the top 50 small banks and thrifts in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 12.8% of noninterest income.

Honorable Mention

Posted on July 7, 2017 by Editorial Staff -

Former pro footballers receive advice from Northwestern Mutual

Two Northwestern Mutual advisors will be the exclusive Wealth Management Advisors of the National Football League (NFL) Alumni Association, according to an announcement last week by Pro Football Legends, the commercial marketing arm of the association.

The advisors, Stephen Schwartz, CFP, AEP, and Michael Schwartz, CFP, AEP, are brothers. Michael advised current and former players, coaches and employees and their families since March 2016. He is now joined by Stephen.

Members of the NFL Alumni Association can receive a free comprehensive consultation from one of the Northwestern Mutual advisors. Services life insurance, long term care planning, retirement planning, investment strategies and estate planning.

“As players transition to new careers and plan for their futures after their playing days have concluded, maintaining financial stability can be difficult,” said Elvis Gooden, President and CEO of NFL Alumni, in a release.

“Enhancing financial security for NFL Alumni members and their families is an important goal which can be accomplished through developing and tailoring both offensive and defensive individualized financial game plans.”

Robo plus human beats either alone: Milliman

An “iterative process of advanced computing and human input” can be better at risk management than either machine algorithms or humans alone, according to a new study examining multi-criteria decision-making by Milliman Inc.

“While not obvious at the outset, combining human input with advanced computer modeling allows domain experts to analyze results and elicit insights into features that subsequent iterations of a model should contain, thereby refining the process,” said Neil Cantle, principal in Milliman’s London office.

The results of the Milliman study suggested a number of practical applications for insurance enterprise risk management (ERM), including finding patterns in the key risks that drive capital losses and understanding diversification in order to enable “quick judgments about the similarities and differences in the risk profiles of different portfolio elements,” according to Milliman.

When faced with “multiple objectives and multiple constraints,” “visualization and complex systems-mining techniques” plus “expert input” can solve problems that “machine algorithms” have difficulty solving, Milliman’s release said.

Milliman’s Corey Grigg said, “Looking toward the future, this sort of optimization technique can extend to big data, simulations, and enhanced visualization, ensuring that even as the complexity of our data and problems increases, experts can continue to add value.”

Milliman’s study employed the DACORD platform from DRTS, Ltd. to support its system-mining efforts. It was conducted in conjunction with Dr. Lucy Allan of University of Sheffield.

“Future states are unknown, involve human affairs and are therefore complex,” said Jeff Allan, CEO of DRTS, Ltd. “Augmenting experts with the appropriate tools and processes can aid the reasoning and evaluation of a range of solutions.”

Bill Harmon to lead Voya’s 401k business

Bill Harmon has joined Voya Financial as its new president of Retirement Corporate 401(k), effective June 30. He will join CEO of Retirement Charlie Nelson’s leadership team, as well as Voya’s Operating Committee, a Voya release said.

Harmon will oversee all aspects of the Corporate 401(k) business, including sales, relationship management and strategy for all segments of the market, from small- and mid-sized companies to jumbo plans.

Harmon spent 29 years in the U.S. retirement business of Great-West Lifeco, which is now called Empower. Before joining Voya, he was senior vice president, Core Markets for Empower Retirement.

Harmon holds a bachelor’s degree in Marketing from Loyola Marymount University in Los Angeles. Voya serves approximately 47,000 plan sponsor clients and more than 4.5 million individual retirement plan investors. Voya also operates a leading broker-dealer.

A High-Tech Challenge for High-Touch Advisors

Posted on July 6, 2017 by Kerry Pechter -

Technology vendors with new digital tools—“inorganic intelligence,” as one consultant calls them—are pitching their wares to wealth management firms these days with unprecedented zeal. Almost daily, a firm like Envestnet, Broadridge, FIS or Wealth2k unveils a digital or web-based solution for wirehouses, brokerages or boutique advisory firms.

Wealth managers are listening more closely (and more humbly) than they used to—and for good reason. Their cushy empire is under siege. The 401(k) revolution has gradually produced an unprecedented army of mid-sized investors, many now retiring. This army is now overwhelming a shrinking pool of advisors, and bringing the compliance standards, low costs and automated investment practices of the 401(k) world with them.

But many wealth managers, by all accounts, aren’t sure which technologies to acquire in response. For the moment, they’re shopping for solutions that will help them document their processes for complying with the fiduciary rule. Beyond that, they are said to be more or less unsure about which aspects of their businesses to automate or which slices of the wealth market they should pursue, defend, or relinquish.

“We’re talking about wealth managers changing the way they do business, not just which technology products they buy,” Alois Pirker, Research Director of Aite Group’s Wealth Management practice, told RIJ this week. “The era when the business guys and the tech guys had separate problems is over. Most business model decisions today have technology implications and vice-versa.”

“There’s a gun pointed at the head of the advisory business, held there by government-mandated compliance directives and rapidly advancing fintech,” said David Macchia, founder and CEO of Wealth2k, which began marketing web-based solutions to advisors more than a decade ago.

“This combination creates commoditization of advice, products and advisors themselves,” he added. “This is the supreme challenge to the entire wealth management industry. My sense is that wealth management firms have been hyper-focused on compliance-driven technology spending that’s directly related to their perceived obligations under the Department of Labor fiduciary rule. But they don’t know, in general, what the next best move is.”

The Broadridge view

These are busy times for technology vendors. A few weeks ago, Broadridge, the 10-year-old spinoff from Automated Data Processing (ADP), issued a white paper urging wealth managers to automate. Broadridge has jumped on the digital opportunity. The once-quiet white-label communications firm now offers client-engagement, compliance and trading automation tools.

Broadridge uses a novel term—“inorganic intelligence”—to describe what wealth managers need to leverage. The term encompasses “artificial intelligence, natural language processing, machine learning, complex event processing, cognitive computing” as well as behavior analysis tools, virtual assistants, chat-bots and predictive analytics.

These tools, Broadridge and other technology firms believe, will help wealth managers deal with the DOL fiduciary rule, financial advisor retention, competition from robos, the need to pivot toward Millennials, the tyranny of the smartphone and cyber-security.

“At Broadridge, we’re asking, ‘How can we help advisors use technology for relationship initiation and acceleration? How can we turn a two-dimensional investor into a real person?’” said Traci Mabrey, head of Wealth Solutions at Broadridge.

“This is about personalization of the investor base, about maintaining ‘high-touch’ world. With tech at their fingertips, advisors can focus on the business of financial advice and the intangible element of trust. We’re hearing that the primary goal-set is around the ‘digital engagement strategies,’ a hybrid between the personal and the digital. As a fintech provider, that’s where we think the excitement is.”

The FIS view

FIS, the Fortune 500 financial software firm, recently announced a partnership with Trizic to deliver a pre-fab robo solution to banks and credit unions. The partnership is intended “to increase advisors’ ability to provide investment advice to Millennials and tech-savvy high net worth clients more profitably,” according to an FIS release.

The Trizic technology, which is part of the existing FIS wealth management platform for financial institutions, “automates the full advisor workflow from onboarding and risk tolerance to portfolio construction, reporting and billing. It also gives a complete digital advice solution to banks and other financial institutions without a wealth division.”

“Wealth managers at every type of institution are struggling to attract the lower balance, emerging wealth from Millennials,” said Will Trout, a senior analyst at Celent. “Some form of automation is required to cost-effectively service smaller-balance accounts.

“Bank wealth managers are using robo as part of the broader refinement of their segmentation/client optimization strategies. They want to hook younger people onto their investment platforms and activate dormant customers from within their wealth management units and other parts of the bank.

“The gains in fee income are expected to offset any cannibalization from their high-touch wealth advisory services. It’s an efficiency play aimed at reducing costs. But it has the parallel objective of growing the business over time,” Trout added.

“Within the institutions, robo will be a bottom-up phenomenon,” he added, meaning that advisors want internal digital support, especially to serve lower-value clients, as much as retail investors want digital interfaces with the banks.”

The 80/20 rule

All wealth managers face the Pareto principle, which states that 80% of a company’s revenue from 20% of its customers. In that sense, all of them face the problem of serving the smaller clients efficiently.

“A private banker at one of the most profitable banks told me that 40% of his investment portfolios aren’t profitable. That is, 40% of accounts are too small to pay for themselves,” Aite’s Pirker said, adding that the bank still isn’t sure what to do about it.

At the same time, each wealth management firm has unique traditions and perceived obligations. “Take Merrill Lynch and Morgan Stanley, for instance. Merrill Lynch is part of the bigger Bank of America empire, and it has to come up with something for the middle market. It can’t say, ‘We don’t care about people with less than $1 million,’” Pirker said.

“Morgan Stanley, however, might be able to say—though I haven’t heard them say this—we’re just going to serve the high net worth.” Some companies have already decided what they will do. “Look at Goldman Sachs, which has made moves toward the wider market,” he added.

It can be risky, but there’s potentially a lot of money to be made by extending a luxury brand into the middle-market, Pirker noted. “Those firms that bring a high-end wealth management brand to the mass-affluent marketplace are the ones that will ultimately harness the competitive advantages of these innovative platforms,” he said.

Whither or wither

Lots of questions remain. Before they can shop for digital tools, wealth managers have to decide what they want. To upgrade their front, middle or back offices? To make more sophisticated strategic decisions? To give clients a faster, cheaper, and simpler experience? To pursue or abandon the mass-affluent market? To analyze big data and refine their marketing? To control advisor conduct? To master the world of mobile?

It’s an awesome challenge. “Big firms have deep pockets and can sort themselves out eventually. But you also need a willingness to change,” Pirker said. “Some are better at that than others. It’s a Netflix-versus-Blockbuster moment. And while financial assets are stickier than video rentals, technology is going to take its course.”

Jackson appoints Richard White as senior vice president, Government Relations

eMoney adds web marketing tool to its advisor platform

For an extra 15 bps, Betterment offers unlimited smartphone calls to live CFP advisors

Former pro footballers receive advice from Northwestern Mutual

Robo plus human beats either alone: Milliman

Bill Harmon to lead Voya’s 401k business

Data Connection

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