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Jefferson National strengthened by its new owner, Nationwide

Posted on March 9, 2017 by Editorial Staff -

A.M. Best has removed Jefferson National Life Insurance Company from “under review with positive implications” and upgraded its financial strength rating to A (Excellent) from B+ (Good) and its long-term issuer credit rating to “a” from “bbb-.”

The outlook assigned to the insurer’s credit ratings is stable, A.M. Best said in release.

Nationwide Life Insurance Company’s (Nationwide) completed its acquisition of Jefferson National early this month. A.M. Best determined that Jefferson National “will benefit from Nationwide’s substantial financial resources and brand name to support growth within the registered investment advisor (RIA) and fee-based advisor marketplaces. Similarly, the transaction will provide Nationwide access to Jefferson National’s RIAs and fee-based advisors, as well as access to the clients they serve.”

In its release, A.M. Best said it expects Jefferson National’s management to remain in place, and the companies expect no changes in Jefferson National’s approach to sales and service. A.M. Best also notes that Jefferson National will be transitioning to the Nationwide brand.

“Jefferson National’s stand-alone credit profile currently benefits from improved profitability, a lower-risk business profile focusing on investment-only variable annuities, increasing assets under management and adequate risk-adjusted capitalization. Offsetting these positive factors are Jefferson National’s current mono-line product portfolio and an inconsistent earnings history,” A.M. Best said.

Nobody knows you when you’re down and out (and single and old): AARP

Posted on March 9, 2017 by Editorial Staff -

Nearly half of U.S. adults age 62 and older experience loneliness, and lonely older adults are likelier to have lower income and fewer assets than non-lonely adults, according to research conducted by NORC at the University of Chicago and funded by the AARP Foundation.

“Income is a significant factor in social connectedness,” said Lisa Marsh Ryerson, president of AARP Foundation. The study is part of Connect2Affect, a collaborative effort by AARP Foundation to learn more about isolation and loneliness in older adults.

Nearly half (48%) of the respondents feel some degree of loneliness; 29% experience “occasional” loneliness while 19% are “frequently” lonely. Socioeconomic status stands out as a differentiator between non-lonely and lonely individuals.

Lonely older adults are much more likely to have an annual household income of less than $25,000 and assets under $10,000, and are more likely overall to be in the lowest income group.

The lonely group is also less likely to be married than the non-lonely group, and more likely to be divorced, separated or widowed. The data show that 14% of married older adults and 30% of unmarried older adults fall into the lonely group.

Married women are at a higher risk of loneliness than married men, but unmarried women are at a lower risk of loneliness than unmarried men. Those with more support and less strain in their marital relationship are at lower risk of loneliness.

Findings were based in part on data from the National Institute on Aging and the National Institutes of Health.

ClearFit, a turnkey retirement plan from Morgan Stanley and Ascensus

Posted on March 9, 2017 by Editorial Staff -

Morgan Stanley Wealth Management and Ascensus have launched ClearFit, a retirement program for small plans in which Morgan Stanley will serve as investment provider and fiduciary and Ascensus will serve as administrator and recordkeeper, according to a news release issued today.

Morgan Stanley will serves as the ERISA Section 3(38) investment manager, assuming the responsibility for selecting the plan’s investments which includes oversight and monitoring of the retirement plan’s fund lineup.

The investment menu will use a multi-manager approach and non-proprietary funds. ClearFit’s target date models will use Morgan Stanley’s proprietary retirement glidepaths.

Ascensus’ administrative services will include:

Integrated payroll processing with streamlined data delivery options
Retirement account withdrawal, loan and distribution approvals managed by Ascensus
Delivery of certain required notices directly to participants’ homes
Digital and mobile solutions to help boost employee participation

Details regarding investment, administrative and recordkeeping fees were not available at deadline.

The Best of Recent Economic Research

Posted on March 8, 2017 by Kerry Pechter -

Will robots save the U.S. from dreaded “secular stagnation?” Is the loss of manufacturing jobs linked to the rate of single mothers in America? When corporations save more, do households save less?

These and other questions are the subjects of five working papers from the National Bureau of Economic Research (NBER)—and one research brief from the Center for Retirement Research at Boston College—all of which you’ll find summarized below in this installment of RIJ’s Research Roundup series.

These papers cover very different topics—chatbots, disappearing manufacturing jobs, household savings rates, the dollar as reserve currency, job transitions for older workers, a book about financial regulation—but together the papers identify the points where, even when we don’t realize it, macroeconomics and personal finance intersect.

“Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation” by Daron Acemoglu, Pascual Restrepo (NBER Working Paper No. 23077, January 2017).

With the new confidence on Wall Street, it’s easy to forget that not long ago economists were predicting the start of an era of “secular stagnation.” That term refers not to stagnation outside the religious community but to non-cyclical economic stagnation, especially in developed countries with aging populations.

In their new paper, economists Daron Acemoglu of MIT and Pascual Restrepo of Boston University predict that robots will forestall stagnation by raising productivity and compensating for the departure of the Boomers from the workplace. Chatbots, industrial droids, and artificially intelligent devices will compensate for the growing shortage of human labor and prevent the economy from sagging over the next few decades, they argue.

The two economists analyzed data from the International Federation of Robotics on industrial robots across a range of industries for 49 countries. The analysis “reveals a strong correlation between…the change in the ratio of the population above 50 to those between 20 and 49, and the change in the number of robots (per million of labor hours) between the early 1990s and 2015,” they wrote.

“If anything,” they wrote, “countries experiencing more rapid aging have grown more in recent decades. We suggest that this counterintuitive finding might reflect the more rapid adoption of automation technologies in countries undergoing more pronounced demographic changes.”

“When Work Disappears: Manufacturing Decline and the Falling Marriage-Market Value of Men” by David Autor, David Dorn, Gordon Hanson (NBER Working Paper No. 23173, January 2017).

On his path to the White House, Donald Trump tapped into the frustration of Americans whose economic prospects have been hurt by the offshoring of manufacturing jobs to China and elsewhere. New economic research points to a precise source of at least part of that frustration.

In “When Work Disappears: Manufacturing Decline and the Falling Marriage-Market Value of Men,” Autor (MIT), Dorn (University of Zurich), and Hanson (University of California, San Diego) found the following:

• When manufacturers relocate production facilities outside of U.S., fewer male high-school graduates in the affected communities find high-paying work and fewer females marry the under-achievers (but do have children by them). The result is an increase in drug abuse and single parenthood in those communities.

• Though the paper doesn’t address? retirement security directly, it links offshoring to unemployment and single parenthood. Those factors can undermine the process of education, wealth-building and employer-sponsored savings that sets people up for a secure retirement later in life.

• Manufacturing employment is clearly shrinking in the U.S., the paper points out. In 1990, 21.8% of currently employed men and 12.9% of employed women ages 18-39 worked in manufacturing. By 2007, those numbers had shrunk to 14.1% and 6.8% respectively—declines of 35% among men and 45% among women.

• Manufacturing jobs tend to pay men more than women, and the authors assert that, for those adhering to “gender identity norms,” marriages are more frequent where men earn more than women, and that women would rather be single parents than be married to men who earn less.

• “A decline in male earnings spurs some women to curtail both motherhood and marriage while spurring others to exercise the option of single-headedness,” the authors wrote. “Conversely…a decline in female earnings raises the relative attractiveness of male partners, which encourages fertility and marriage while single motherhood becomes a less attractive option.”

“The Global Rise of Corporate Saving” by Peter Chen, Loukas Karabarbounis Brent Neiman (NBER Working Paper No. 23133, February 2017).

These three economists found that, in an historical role reversal, corporations now save more than households do.

In the last three decades “the sectoral composition of global saving has shifted,” wrote Chen (University of Chicago), Karabarbounis (University of Minnesota) and Neiman (University of Chicago-Booth School of Business). “The corporate sector…transitioned from being a net borrower to being a net lender of funds to the rest of the global economy.

“Whereas in the early 1980s most of investment spending at the global level was funded by saving supplied by the household sector, by the 2010s nearly two-thirds of investment spending at the global level was funded by saving supplied by the corporate sector.

“Global corporate saving has risen from below 10% of global GDP around 1980 to nearly 15% in the 2010s,” they observed. “This increase took place in most industries and in the large majority of countries, including all of the 10 largest economies.”

Causes of this shift included global declines in the real interest rate, the price of investment goods, and corporate income taxes and the increase in markups,” the authors wrote. “Further, firms have tax incentives to buy back more shares as saving increases and this leads? to an improvement in the corporate net lending position.”

Multinational firms save the most. “Firms in the group with more than one percent of their income earned abroad display a saving rate that is roughly 4 to 6 percentage points higher than firms with less than one percent of their income earned abroad. Surprisingly, this difference mainly reflects a higher share of gross operating surplus in value added—likely reflecting lower labor shares— rather than differences in taxes or dividends,” according to the paper.

Households have less to save—and presumably less to save for retirement. “The improvement in the corporate net lending position has direct implications about household saving behavior,” the authors wrote. According to their model, the change in the corporate net lending position relative to GDP [implied] a decline in household saving relative to GDP of about 6 percentage points,” which they said is similar in value to the actual decline.

“Exchange Arrangements Entering the 21^st Century: Which Anchor Will Hold?” by Ethan Ilzetzki, Carmen M. Reinhart, Kenneth S. Rogoff (NBER Working Paper No. 23134, February 2017).

On the 2016 campaign trail, there was apocalyptic talk about a U.S. debt crisis, about the chance that the Chinese would stop buying our bonds, and about the possibility that the U.S. might default on its bonds or negotiate to repurchase them at less than par value.

A very different, and less alarming, macroeconomic view of the dollar and the U.S. debt emerges from a recent paper from the well-known Harvard writing team of Rogoff and Reinhart, assisted here by Ethan Ilzetzki of The London School of Economics and Political Science.

In “Exchange Arrangements Entering the 21^st Century: Which Anchor Will Hold?” they argue the dollar is, if anything, more important today than when it succeeded the British pound as the world’s reserve currency at the end of World War II.

“The dollar’s dominance as an anchor/reference currency appears to be at least as great as it was under Bretton Woods [1945-1971],” the authors wrote. “Indeed, by other metrics, its global role has expanded even further following the collapse of the ruble zone. The euro is a distant second.”

Rogoff and Reinhart co-wrote 2009’s controversial bestseller, “This Time Is Different,” which argued that a large national debt impedes future growth. In this book, they explain that our large trade deficits and our large national debt largely reflect the burden (and privilege) that the U.S. bears (and enjoys) in providing the world’s reserve currency. The dollar has only become more central, they add, since the collapse of the Soviet Union in 1989 – 1991 and the Asian debt crisis of the late 1990s.

The dollar supplied much-needed liquidity to the world during the fast-growing ’50s and ’60s. “Given that the world’s gold supplies were not increasing as fast as the demand for reserves [at that time], an expanding share of the world’s reserve assets came to be paper denominated in U.S. dollars,” the authors wrote.

“The rest of the world’s appetite for dollars could be met by the U.S. issuing more dollar debt and selling it to the rest of the world. In the balance of payments, this would require the U.S. to run sustained current account deficits, but more importantly, a fiscal deficit.”

Conversely, “to maintain the official dollar/gold parity, the U.S. would have had to restrict its supply of dollars and cease to borrow from the rest of the world, that is run a current account surplus, which in the context of the time meant running a fiscal surplus.”

In short, the benefit of having the world’s reserve currency came with the burden of satisfying the world’s growing demand for liquidity and at the cost of domestic deficits and inflation.

“How Job Changes Affect Retirement Timing by Socioeconomic Status” by Geoffrey T. Sanzenbacher, Steven A. Sass and Christopher M. Gillis (Center for Retirement Research at Boston College, February 2017).

Late-career job changes have become more common in recent years, but does job-hopping at age 53 or 55 (as opposed to staying put) increase or decrease a person’s chances of still being in the workplace at age 65?

At a time when more people need to work longer (perhaps because they under-saved), this question has become more significant. So researchers at the Center for Retirement Research looked into it.

“Since workers presumably change employers to improve their well-being, moving to a job that they consider better could extend their careers,” the CRR’s authors wrote. “On the other hand, job-changing could reduce job security because tenure protects older workers against involuntary job loss, and workers who change jobs risk a bad match. Changing jobs thus could increase the risk of a layoff and an early labor force exit.”

Using data from the Health and Retirement Study(HRS), a biennial survey that follows respondents who are ages 51-61 when they enter the study, the researchers found that, indeed, people who switch jobs voluntarily in their 50s are more likely to be in the workforce at age 65 than people who don’t change jobs.

“Workers with at least some college who voluntarily changed jobs were 10.9 percentage points more likely to be in the labor force until age 65. For less-educated workers, the effect was 7.5 percentage points,” the analysis showed. The authors conceded that some of the people who left their jobs “voluntarily” might have been “nudged” into quitting. But if that were the case, they said, it would only strengthen the findings.

“Changing employers involves risks and not all older workers can move to a better job,” they concluded. “But for those who can, a voluntary job-change is associated with a large and statistically significant increase in the likelihood of remaining in the labor force to age 65, regardless of the worker’s educational attainment.”

“The End of Alchemy: A Review Essay by Roger E.A. Farmer” (NBER Working Paper No. 23156, February 2017).

If you don’t have time to read “The End of Alchemy,” Mervyn King’s book (W.W. Norton, 2016) about the Great Financial Crisis (and how to prevent the next financial crisis), you might instead read a recent review of the book, by UCLA economist Roger E.A. Farmer.

In “The End of Alchemy,” King, who was Governor of the Bank of England from 2003 to 2013, argues that a central bank, in the future, should maintain the stability of the banking system by serving as the “Pawnbroker For All Seasons” instead of the Lender of Last Resort. Farmer summarizes King’s proposal as follows:

Under the PFAS, the central bank would require banks and other private financial intermediaries that might need liquidity from the central bank in times of crisis to:

Deposit adequate collateral with the central bank in advance. All deposits would be backed either by cash or by guaranteed contingent claims on reserves held at the central bank.
Second, the cost of liquidity provision would be mandatory and paid up front.
And third, the financial institutions that benefit from emergency liquidity provision would be required to bear the cost in advance.
The solution should be implemented gradually, over 20 years, to allow banks to gradually increase their ratios of equity to assets.

Farmer, the author of books on the financial crisis as well as economics textbooks, believes that “The End of Alchemy” overlooks a big problem: The fact that “most of the people we are trading with through the purchase and sale of financial assets have not yet been born.”

That is, transactions that fit today’s circumstances might be disastrous for people in 10 years. Central banks, representing perpetual governments, are the only institutions that can protect them from that risk.

“The fact that stock market booms and crashes are rational from the perspective of the individual does not mean that they are rational from the perspective of society. The market can remain irrational for longer than you and I can remain irrational. The market can remain irrational for longer than George Soros or Bill Gates can remain solvent,” Farmer wrote.

“But the market cannot remain irrational for longer than the U.S. Treasury can remain solvent. A national central bank, backed by the ability of the treasury to levy taxes on future generations, could make the trades that our children and our grandchildren would make if they were able.”

Fee-Based FIAs Are Customer-Friendly. But Will They Sell?

Posted on March 2, 2017 by Kerry Pechter -

Let’s consider the relatively new phenomenon of no-commission fixed indexed annuities (FIAs). These products potentially create significantly more value for investors than traditional FIAs. But it’s not clear if they will prove popular with the people who sell them.

How much more customer value can they deliver? Joe Maringer (below right), national sales vice president at Great American Life, told RIJ, “A good rule of thumb is that there’s approximately a 40% to 50% higher cap [on the no-commission product]. “So if the cap were 4% on our commission product, it would be 6% on our advisory product. Today we have caps on the S&P 500 Index of 7.25% and on REIT Index, 8.25%” on the firm’s no-commission Index Protector 7.

If investment advisor representatives (IARs) affiliated with registered investment advisor firms (RIAs) charge less than their usual one percent fee on money placed in an FIA, then fee-based FIAs should become a relative bargain for investors who are looking for both safety and upside potential at a time when stocks and bonds are precariously priced at historic highs.

“Since we’re not paying the advisor compensation, we have a larger budget to buy equity options,” Maringer said. “The advisors have the flexibility to charge whatever they believe is appropriate to charge on the contract. If you’re adding an income rider [and the contract will be held for life], one-time commission might be less expensive.”

But if commissions are eliminated, will distributors still want to sell FIAs, which have traditionally offered bigger sales incentives than almost any other widely sold retirement product?

One broker-dealer executive, Scott Stolz of Raymond James, told RIJ this week, “DOL or no DOL, this whole process is pushing more and more advisors to a fee-based-only model. We have told our insurance companies that they will need a fee-based alternative for those advisors. Even firms that are planning to use the BICE [Best Interest Contract Exemption] and continue to offer commission-based products will find that the advisors will make their own choices.”

Aside from deciding how much to charge on money in an FIA, there are other issues to be resolved before fee-based advisors can start selling no-commission FIAs. If clients buy FIAs with tax-deferred money, RIAs can arrange to take their ongoing fees out of the account without a taxable event for the client. This may require systems changes.

“Our independent RIA customers want the flexibility to take the fee directly out of the contract. With qualified contracts, there’s no taxable distribution because the client isn’t receiving the benefit,” Maringer told RIJ. “With non-qualified contracts, a Form 1099 will be issued on that distribution. You’ll need to use other assets to pay the fees. There’s more to this than people think. We think it’s comical when some [other FIA issuers] say they can just remove the commission from their product, raise the cap and put it out on the market.”

The topic of no-commission FIAs came up this week when Great American Life announced that Commonwealth Financial Network has approved the sale of Index Protector 7 by its advisors. The product, which offers an optional lifetime income benefit rider, was launched in August 2016. Lincoln Financial and Allianz Life have also introduced no-commission versions of their FIAs.

Commonwealth is the nation’s largest privately held independent broker-dealer/Registered Investment Advisor, with about 1,700 producing advisors managing a collective $114 billion or so. Last October, Commonwealth announced that its advisors would no longer accept third-party commissions on the sale of annuities to their clients.

That announcement was a response to the passage of the Department of Labor’s fiduciary rule in June 2016. The rule, now under review (for possible repeal) by the Trump administration, stopped intermediaries from selling commission-paying variable annuities or FIAs to retirement savers—such as rollover IRA owners—without signing a Best Interest Contract and incurring new legal liabilities.

Going forward, any VA or FIA on Commonwealth’s shelf would have to be no-commission. While commissioned Commonwealth advisors sold a large volume of FIAs in the past, it remains to be seen whether they will sell as much in the future if they do not have the incentive of a commission, or if fee-based advisors who have never sold FIAs will choose to sell them.

“Sales have been slower because it’s a whole new educational environment,” Maringer told RIJ. “We’re back to ‘Annuities 101.’ But some firms have sold hundreds of millions of dollars worth of commissioned FIAs. As they move to a fee-based model, that money has to go somewhere. So, while the education process is taking longer than we’d like, the bucket of money is so large that it’s worthwhile.”

Instead of retirement savings, farmers bank on their land

Posted on March 2, 2017 by Editorial Staff -

Farmers tend to work longer than most Americans, and recent statistics show they are farming even later in life, driven by work that is their identity, aided by technology that lightens its physical toll, and spurred by solid profits off record yields, according to a report this week in the New York Times.

According to the Department of Agriculture’s latest census, conducted in 2012, the average age of principal farm operators in the United States is 58 years, up from 50.5 years in 1982. One third are at least 65 years old, and 12% are 75 or older.

Ask baby boomer farmers in Iowa how they are planning for retirement and the likely answer is: They are not. Fifteen percent of Iowa farmers never intend to retire, according to a 2014 farm poll by Iowa State University Extension and Outreach and the state agriculture department.

Another 20% said they plan to eventually semi-retire, continuing to provide some managerial control or labor to their farms. Many do not have a formal retirement fund. The land, they say, is their 401(k). The same independence that drew them to farming characterizes their retirement approach: free of pensions, unions and so-called experts.

“We’re on our own,” one farmer told the Times. “All you have to do is ask for advice, but we don’t.”

Only 49% of Iowa farmers have identified a successor to eventually run their farms, according to the 2014 farm poll. Even those who have selected a successor are loath to pick a retirement date and actively prepare for it.

Many avoid the topic because they equate retirement with mortality. They are quick to relay stories of farmers who died shortly after retiring—presumably, they imply, because of a loss of purpose.

Two long-term care issuers in PA to be liquidated

Posted on March 2, 2017 by Editorial Staff -

Petitions to liquidate two long-term care insurance issuers, Penn Treaty Network America Insurance Company and American Network Insurance Company, were approved this week by Pennsylvania’s Insurance Commissioner.

Policyholder claims will be paid through the state guaranty association system, subject to statutory limits and conditions, said Commissioner Teresa Miller in a release.

More than 98% of Penn Treaty and American Network’s policies are long-term care insurance. The two companies have approximately 76,000 policyholders nationwide, with 9,000 residing in Pennsylvania.

Long-term care insurance issuers ran into trouble in the past few years. According to the release:

“The pricing of these policies for many insurance companies has proved to be insufficient as a result of claims greatly exceeding expectations and low investment returns. Claims have exceeded expectations due to incorrect assumptions concerning the number of policyholders who would drop their coverage and the number of policyholders who would utilize their policy benefits, as well as the cost of providing those benefits. The pricing deficiencies and resulting financial losses have resulted in many long-term care insurers seeking large premium rate increases and some leaving the market.”

State regulators say they would not have approved a request by the companies to raise premium rates (by over 300% on average), so the state put them into liquidation as the only remaining alternative.

“Policyholders should continue to file claims… and pay their premiums in order to be eligible for guaranty association coverage,” Commissioner Miller said. In each state, insurance companies licensed in that state pay into a guaranty fund. The fund is used to cover claims when a company becomes insolvent and is liquidated.

Actuarial models predict that about 50% of policyholders of the two companies will have claims in excess of what the guaranty association will pay. Policyholders in Pennsylvania are paid up to the maximum amount provided for by the policy, subject to a cap of $300,000.

The liquidator and the court will determine whether any payments for claims above the cap can be made from the companies’ remaining assets to any policyholders who may have claims in excess of the cap.

Guaranty associations may seek to increase premiums, but any rate increase would be subject to approvals required by law which, depending on the state, may include a review process similar to rate requests filed by long term care insurers with state insurance regulators, the release said.

Consumer coalition rallies against Wells Fargo Bank

Posted on March 2, 2017 by Editorial Staff -

A coalition of consumer advocacy groups has launched a national campaign targeting Wells Fargo Bank over its illegal account-opening practices and its forced arbitration policy.

The campaign, based at wedocount.org, also released a letter addressed to Wells Fargo CEO Timothy Sloan calling on the bank to cease imposing forced arbitration on its customers and workers.

The letter said in part:

“We call on Wells Fargo to do the right thing, and to immediately cease using forced arbitration clauses in its consumer and employment contracts. A number of competing banks and credit unions already have decided to respect their customers and workers, and not to deny them their constitutional rights.

“Until Wells Fargo ends its practice of depriving its customers and workers of their constitutional rights as a condition of obtaining products, services, or employment, we will continue to call upon all Americans who value those rights to close their accounts with the bank, and all institutions to divest from Wells Fargo.”

One of the sponsoring consumer organizations, the National Consumers League, said it is withdrawing its working capital, about $1.8 million, from Wells Fargo, closing its account with Wells Fargo in Washington, D.C., and “switching to a bank that does not impose forced arbitration on its customers or employees.”

In April 2016, Wells Fargo admitted to deceiving the U.S. government into insuring thousands of risky mortgages, and paid $1.2 billion to settle a U.S. Department of Justice lawsuit.

In September 2016, the bank apologized to customers, announced steps to change its sales practices, and agreed to pay $100 million to the Consumer Financial Protection Bureau as well as $50 million to the city and county of Los Angeles and $35 million to the Office of the Comptroller of the Currency, according to press reports at the time.

At a teleconference last Monday, two former Wells Fargo customers described personal experiences with the bank’s practices. The groups provided tip on how consumers can switch from Wells Fargo to banks and credit unions that do not impose forced arbitration.

The following groups are members of the coalition:

Alliance of Californians for Community Empowerment
Consumer Action
Consumer Federation of California
Consumers for Auto Reliability and Safety (CARS) Foundation
Courage Campaign
ForgoWells
Homeowners Against Deficient Dwellings
Housing and Economic Rights Advocates

Make the Road New York
Montana Organizing Project
National Association of Consumer Advocates

National Consumer Law Center (on behalf of its low-income clients)
Public Citizen
Public Good
Public Justice
Progressive Congress Action Fund
Tennessee Citizen Action
TURN – The Utility Reform Network
Workplace Fairness

No Quick End to Fiduciary Rule Story

Posted on March 1, 2017 by Kerry Pechter -

The Department of Labor has proposed an extension of the applicability date of the fiduciary (or “conflict of interest”) rule and its controversial Best Interest Contract Exemption by 60 days, to June 9, 2017 from April 10, 2017. The proposal is announced in the Federal Register today, March 2, 2017.

The proposal specifies two new public comment periods: a 15-day period, during which the public can comment on the proposal to delay the applicability period for 60 days, and a 45-day period for comments on whether the Trump administration should keep or scrap the fiduciary rule—a signature project of the Obama administration—partially or entirely.

If, after these two comment periods, the Trump DOL (under acting secretary Ed Hugler; Trump’s nominee, Andrew Puzder, withdrew his candidacy for the cabinet position) decides that the rule flunks a cost-benefit analysis, then it may introduce a new proposal to repeal (and perhaps replace) the rule, which will in turn a new comment and review period.

“Upon completion of its examination, the Department may decide to allow the final rule and PTEs to become applicable, issue a further extension of the applicability date, propose to withdraw the rule, or propose amendments to the rule and/or the PTEs,” said the announcement in the Federal Register.

Last year, the DOL collected thousands of comments from the public about the merits of the fiduciary rule. Many of the same comments will presumably be resubmitted. The difference this year is that financial firms have already invested vast amounts of time and money adapting to the rule, on the assumption that it would be applicable on April 10.

Another difference between then and now is that, in the intervening months, several court decisions have upheld the validity of the Obama DOL’s rule. Those decisions would presumably be invoked if consumer groups file lawsuits contesting a DOL decision to rescind the rule.

“The court rulings upholding the DOL rule will make it harder to ultimately overturn the rule,” said Micah Hauptman, an attorney at the Consumer Federation of America. “When one takes an unbiased view of the rule, the conclusion is always that the DOL was on firm ground in promulgating the rule, that the DOL engaged in a proper process, that the rule is workable, and that it will benefit retirement savers in real ways.”

Rescinding the rule, which requires brokers and insurance agents to agree to act solely in their clients’ best interests (as registered investment advisors must do) could also create negative publicity for the Trump administration and financial firms that oppose the rule. And those firms’ competitors are likely to seize the opportunity to emphasize their differences. This week, for instance, Rebalance IRA, a robo-advisor advised by investment gurus Burton Malkiel and Charles D. Ellis, published a downloadable pre-written letter on its website and urged investors to send it to their advisors under their own names.

The letter says in part:

Are you, and your firm, operating under a fiduciary standard, and have a legal obligation to put my financial well-being first?
Please provide a detailed accounting of all expenses applied to our retirement accounts during the past 12 months.
Please present these costs as a total dollar figure, and as an annualized percentage of my retirement investments that your firm manages.
Please provide a detailed accounting of all one-time expenses, such as fund-level front-end loads. In addition, please provide a detailed schedule of any potential “exit or surrender” financial penalties that might be imposed if I choose to have my retirement investments managed elsewhere.
Please detail all conflicts of interest, current or potential, that you face as my financial advisor.

Lest anyone have forgotten what all the fuss is about: Billions of dollars in fees, as well as long-practiced brokerage business models and annuity distribution channels, are at stake.

The expressed purpose of the rule was to reduce the costs of financial services to retirement savers—particularly those with a collective $7 trillion in IRA savings. Those reductions, if they occur, will symmetrically reduce revenue and profits for the financial services industry by billions of dollars.

But it gets worse. Beyond the possibility of lower fee revenue, the financial industry faces the possibility of multi-million class action lawsuits over potential violations of the Best Interest Contract. Lacking its own ability to enforce the rule, the fiduciary rule empowered investors to sue service providers rather than confine their complaints to a closed-door arbitration process.

These events were triggered by a February 3 presidential memorandum in which President Trump directed the DOL “to conduct an examination of the final rule to determine whether the rule may adversely affect the ability of Americans to gain access to retirement information and financial advice. As part of this examination, the Department was directed to prepare an updated economic and legal analysis concerning the likely impact of the final rule.”

The DOL subsequently asked the Office of Management and Budget to review the matter. The OMB reclassified the proposal for a delay as “economically significant” rather than insignificant—a change that raised the gravity of the situation and demanded a longer and closer examination of the matter.

Some history is in order. The original rule was motivated in part by the fact that savers have moved (“rolled over”) trillions of dollars has moved in recent years from closely-regulated, low-cost defined contribution plans, such as 401(k) plans, to less-regulated retail IRAs, where the fees tend to be higher—high enough to reduce the value of tax deferral, which is the rationale for investing on a tax-deferred basis in the first place. Significantly, the rule extends the regulatory norms of the 401(k) world into the world of IRAs for the first time.

This was tantamount to a loss of turf for retail financial service providers. Groups representing brokers and insurance agents have argued against the rule in part because it makes it harder to earn commissions on the sale of mutual funds and annuities. The securities industry has also argued that the rule will reduce the availability of financial services to middle- or low-income retirement savers, claiming that the commissions paid by mutual fund and insurance companies (re-paid by investors in the form of annual fees) helped finance those services.

The DOL rule could also create new compliance duties for some advisors who already adhere to a fiduciary standard, potentially raising their cost of doing business. Hence the financial industry’s opposition. “While a proposed 60-day delay is a good first step, we will continue to work with the administration, and through the legal process, to repeal and replace this rule,” said the Financial Services Institute in a press release yesterday.

In a press release yesterday, the Financial Services Roundtable, an industry group, reiterated its position that the Securities and Exchange Commission, not the DOL should write a best-interest conduct standard “for all brokers accounts (including IRAs) held by retail customers, and the DOL should fully rescind its rule on this matter.”

Anecdotal Evidence: A.I. Is Coming

Posted on March 1, 2017 by Kerry Pechter -

Although conventional wisdom can turn to foolishness overnight, a fairly solid consensus has formed that the future of customer service for organizations of many types will involve a combination of robots and humans—with both of them continuously getting smarter, thanks to a magical cocktail of big data and predictive analytics.

The financial services industry, though saturated with technology, is sometimes a step slower to adopt new tools than other industries—perhaps because it can’t move faster than its regulators, and regulators are slow. (Government IT is often way out of date.) But new reports suggest that banks, brokerage and asset managers will soon employ more chatbots and fewer advisors or phone reps.

A new white paper from DST kasina, for instance, addresses the technology needs of asset management firms. The paper shows that most asset managers lack the technology needed to reach and engage advisors efficiently. “Capitalizing on Disruption: Transforming Asset Managers for 2020,” looks at the opportunities for asset managers to capture data about advisors, freshen their digital interfaces and automate repetitive tasks.

PriceWaterhouseCooper looks at the banking industry in its recent report, “Retail Banking 2020: Evolution or Revolution?” It notes that since 2004 banks have reduced their per branch headcount from 13 to six, and that banks will close 20% of their branches by 2020 as they move to new processes and technologies like biometrics, coupled with smartphones, for information security.

What firms provide this technology? Deloitte, the global consulting firm, recently added four robotics-related firms to its Deloitte Catalyst “innovation ecosystem,” which maintains a “cognitive platform and suite of services that help companies navigate the shift to the cognitive era” called Cognitive Advantage.

The four firms, Automation Anywhere, Blue Prism, UiPath and WorkFusion all specialize in Robotic Process Automation, or RPA. If you want a dose of future shock, check out their websites:

Automation Anywhere. This San Jose, CA, firm created BotFarm, an “environment that provides unparalleled control over the way thousands of digital workers (or “bots”) are created, deployed and controlled, allowing companies to immediately scale up or scale down the use of bots to meet variable business process demand.”

Blue Prism. According to its website, this firm’s software robots “can run 24 hours, seven days a week… Activities such as data validation, reconciliation or retrieval of specific information from a large data sample will typically be executed with far greater speed and granularity than a human could possibly achieve. The result is a rate of productivity that is a minimum of double, and up to ten times, that of a human equivalent.”

UiPath. Its Call Center Automation system enables phone reps to “update information in different systems simultaneously, without having to jump between screens and compromise accuracy. Dynamic search options will save time within the conversation, as well as lower call abandonment rates. The system will provide the agent with up-sell and cross-sell suggestions in real time, thus generating the opportunity to maximize revenues… This frees up time for the agent to take more calls.”

WorkFusion. This firm’s technologies reduce “manual service effort 50% by offloading repetitive inquiries to AI-powered chat bots… After training on historical conversations, the Chatbot performs just like a human agent, conversing with customers to achieve context and intent, and executing processes within the back office to fulfill requests. More complex conversations are seamlessly escalated to your people, and the Chatbot learns from each new outcome.”

The DST kasina white paper points out that the hybrid solution doesn’t always mean a combination of digital and human. Sometimes it means allowing certain humans to spend all their time on the top-tier advisor customers—segmented and identified by analytics—while other customers receive services mainly from the robotic workforce.

“More expensive salespeople are deployed selectively to land the biggest opportunities and service the most pro table relationships from the field, while other sales resources are building relationships and driving sales from the office,” the report said. The mantra, as always, is that robots will only take over the boring, repetitive tasks and that the remaining humans—presumably less numerous—will be able to focus on the consultative, person-to-person stuff.

Insured Retirement Institute announces its lobbying goals for 2017

Posted on March 1, 2017 by Editorial Staff -

The Insured Retirement Institute (IRI) released its 2017 Retirement Security Blueprint this week, offering policy proposals that “expand access to workplace retirement plans, increase lifetime income options, protect access to professional financial advice, improve access to financial education and preserve the current tax treatment for savings.”

The IRI, which became a lobbying organization in 2008 instead of a variable annuity industry group, took a position against proposed state- or municipally-sponsored auto-IRA savings plans for workers at businesses without retirement plans, such as New York City’s Nest Egg plan or California’s Secure Choice option.

House Republicans recently voted to kill a 2016 Obama Department of Labor rule exempting such plans and their plan sponsors from compliance with federal pension law (ERISA). Such plans, which provide a public retirement savings option, are seen by some as a threat to crowd out private market solutions, such as advisor-sold 401(k) plans.

Specifically, the IRI blueprint included these four goals and recommendations to policymakers:

“Do no harm” to current retirement policy for America’s retirement savers: Congress should enact legislation to:

Establish a consistent best interest standard of care that protects affordable access to professional financial guidance, preserves access to retirement advice, and offers a wide array of lifetime income products.
Maintain tax-deferred treatment for retirement savings to help workers prepare for a secure retirement.
Protect the current structure and diversity of workplace retirement plans by maintaining the different types and structures of retirement plans that were created for the needs of different types of workers.

Increase workers’ access to lifetime income in retirement plans: Congress or the Department of Labor should:

Clarify employer fiduciary responsibility in the annuity selection regulations to allow employers to select lifetime income products provided by insurers that meet certain existing regulatory requirements.
Congress should enact legislation to enable annuity portability to ensure workers are not harmed if their employer decides to make a recordkeeping change.
Remove regulatory and legal barriers to facilitate small businesses use of multiple employer plans.

Help Americans prepare for a secure retirement: Congress should enact legislation to:

Require lifetime income estimates on workers’ benefit statements.
Encourage employers to offer retirement plans for workers if workers do not have access to other retirement plans.
Increase auto-enrollment and auto-escalation default rates.
Enable financial advisors to protect their clients from financial abuse and exploitation.
Permit electronic disclosure for required disclosures to retirement plan participants.
Update required minimum distribution (RMD) rules to reflect longer life-spans.
Amend the IRS Code to reduce the age requirement for in-service rollovers to purchase lifetime income products.

Regulatory initiatives to promote consumer choice, education and reduce regulatory burdens for lifetime income options:

Congress or the Department of Labor should preserve employer choice, competition and protections on retirement plan coverage options by revoking the state and local savings arrangements rules, and instead authorize states and local governments to rely on existing requirements for private sector plans.
The Securities Exchange Commission should adopt a variable annuity summary prospectus and annual update to improve consumers’ understanding of their investment choices and reduce regulatory burdens to facilitate better decision-making regarding lifetime income options.
The president should implement the national insurance licensing clearinghouse by appointing National Association of Registered Agents and Brokers board and establish a one-stop federal licensing clearinghouse for financial professionals holding state insurance licenses in multiple states.

‘Money isn’t everything’

Posted on March 1, 2017 by Editorial Staff -

Earth to retirement advisors: A survey of consumers worldwide shows that money offers a floor-level of satisfaction but that people have higher emotional or spiritual needs that money alone can’t fulfill.

Just 40% of people worldwide say that money gives meaning to their lives, while about half say they’d be happier if they consumed less, according to a new study by Havas Worldwide, a network of 11,000 consultants in 75 countries who provide “integrated solutions to leading brands.”

The study, “Money, Money, Money: Attitudes Toward Credit, Consumption, and Cryptocurrency,” suggests that “capitalism is quickly becoming bankrupt” thanks to “a stalling global economy, shrinking personal wealth, and changing attitudes about money, consumption and debt.”

Major findings of the study include:

Respondents believe that money is important, but not everything: While 71% of respondents say that life would in fact be better with more money, 81% say that people obsessed with money miss the true meaning of life; 73% admire rich people but still live simply.

People are cautious about debt: Nearly 70% of respondents say their lives would be better with less debt. People will incur debt to buy a home (50%), pay for children’s education (40%), invest in one’s own business (31%), or buying a car (27%).

Questions persist about the rewards of capitalism: Just 40% of mainstream respondents agree that hard work is always rewarded with higher earnings. Half say “it frustrates them to have to work so many hours just to support themselves.”

Banks need to change: Consumers worldwide expect banks to adapt to new technologies and “take on a more personal role in customers’ lives.” Forty-nine percent of respondents want their financial life bundled within a single organization, and of the early adopters (‘Prosumers’) in the sample set, 55% want to pay for everything with smartphones and just as many would like to use biometric technologies for payments. Fifty-nine percent say they wish they were “smarter about saving money.”

“Consumers are caught in a perfect storm of financial uncertainty: their hard work isn’t paying off, their hard-earned money is at the mercy of a stalling global economy, their desire for better money management tools remains unfulfilled and the financial future of their children looks bleak,” said Dan Goldstein, chief strategy officer, Havas New York. “There is no doubt that globalization and rapid advances in technology have contributed to the unfair distribution of wealth, which is at the heart of many of these issues. [Companies] must rewrite the contract between themselves and society, shifting their focus from creating value for shareholders, to creating value for the world at large.”

The findings are based on a survey of 11,976 people aged 18+ in 37 markets. The survey was created by Havas Worldwide and fielded by Market Probe International.

Lincoln and BlackRock Launch No-Commission Variable Annuity

Posted on February 24, 2017 by Kerry Pechter -

Lincoln Financial Group and BlackRock have collaborated to offer a no-commission, no surrender charge variable annuity for fee-based advisors who want to give clients a source of guaranteed lifetime income and who like using low-cost exchange traded funds. The product is called Lincoln Core Income.

“We’re targeting advisors who haven’t traditionally sold or who have never sold variable annuities, because of their perceptions of the cost, and their questions about whether the guarantees offer value at that cost,” said Dan Herr, vice president of Product Development for Annuity Solutions at Lincoln Financial, in an interview.

“With Core Income, the goal was to bring the cost way down and to align the benefit with how fee-based advisors traditionally tell clients to take income,” he told RIJ. “By guaranteeing a safe, COLA-adjusted 4% income, our solution matches the income method that these advisors typically use today. This also fits into the trend toward passive investments.”

Core Income differs from earlier variable annuities with income riders. Since there’s no commission, there’s no surrender charge period or annual mortality and expense risk fee (whose purpose was to reimburse the insurer for paying B-share commissions). The income rider offers an annual cost of living adjustment of 2% to help income keep up with inflation.

The rider, which must be purchased at issue, costs only 85 basis points per year (capped at 1.50%). There’s a return of principal death benefit option for 75 basis points, for a total expense ratio of about 1.9%. Any advisory fees or platform fees charged by the distributors would be extra.

To control its own risk exposure, Lincoln reserves the right to set the payout rates. For all policyholders age 65 or older, it’s currently 4% (3% if the owner or joint-owner is age 60 to 64 at the time income starts):

“The initial percentages applicable to Core Income Benefit elections are determined in our [Lincoln Financial’s] sole discretion based on current economic factors including interest rates and equity market volatility. Generally, the percentages may increase or decrease based on changes in equity market volatility, prevailing interest rates, or as a result of other economic conditions. This percentage structure is intended to help us provide the guarantees under the rider. The initial percentages for new Core Income Benefit elections may be higher or lower than the percentages for existing Contract owners that have elected the rider, but the percentages for existing Contract owners will not change.”

The client can defer the income start date and have the initially-quoted payout rate be increased by the COLA. For example, if a 65-year-old purchaser was quoted a 4% payout rate at issue but chose not defer income for five years, his or her initial payout rate be over 4.4% (because the 2% COLA compounds) of the principal (minus fees) or of the current account value, if higher.

There are three investment options with annual expenses (including initial waivers) as low as 28 basis points. All are ETFs, which reflects the growing flight toward passive investment options among fee-conscious fee-based advisors:

Lincoln iShares U.S. Moderate Allocation Fund (Standard Class)
Lincoln iShares Global Growth Allocation Fund (Standard Class)
Lincoln iShares Fixed Income Allocation Fund (Standard Class)

It remains to be seen whether fee-based advisors will like no-commission variable annuities, or see the advantage in insuring a 4% payout when the 4% payout itself is supposedly protect against running out of money in retirement. But the approach of the applicability date of the 2016 Department of Labor fiduciary rule—the rule took effect last June—has accelerated the shift among advisors away from commission-based to a fee-based revenue model, and insurers must adapt.

In January, Transamerica announced a no-commission variable annuity with a lifetime income benefit rider. The same month, Jackson National Life announced a fee-based version of its popular Elite Access variable annuity, which offers access to so-called liquid alternative investments but doesn’t offer an income rider.

Core Income, however, “has nothing to do with the Department of Labor’s fiduciary rule, although it will only help this product if that rule goes through,” Herr told RIJ.

‘A Dangerous Time in History’

Posted on February 23, 2017 by Michael Gayed -

We have entered a dangerous time in history. A time when the truth changes every day.

The amount of misinformation being spread daily is nothing short of remarkable. It seems like everything is “fake news” now, independent of who reports it. Rather than seek out the truth, confirmation bias results in the spreading of lies with little thought as to whether one’s existing beliefs are rooted in reality, or are complete fantasy.

What is worse is that the speed with which this misinformation is spread trains our brains not to use Kahneman’s “System 2” part of the mind (which is analytical). Rather, everyone now simply reacts and moves on to the next distraction.

What does any of this have to do with investing? Absolutely everything.

At some point, the market prices in the actual truth, but only after overreacting in both directions. In between those two points, buy and sell decisions are made based on reactions not only to the recent past, but also to the narrative constructed around it. It is far easier to react to something that sounds like it makes sense rather than to think about nuance—or even ask if the information presented is fiction or non.

The narrative now in the investment community is remarkably void of any questioning of logic, or of any actual information. Interest rates will only go up, stocks will only go up, inflation is going to skyrocket, and volatility is going to remain historically low.

Why does everyone believe this is the future? Because interest rates have already gone up, stocks have already gone up, inflation has already gone up, and volatility is historically low.

The narrative reacts to what has already happened, and spreads like wildfire across the media. Investment decisions are then based on the story, rather than the fact that mean-reversion dictates the exact opposite.

Yes, rates may go up, stocks may go up, inflation may skyrocket, and inflation may go up. But realistically, it is hard for any of these to continue the way investors believe.

Why? Because the narrative is predicated on Trump being a reflationary president through tax cuts, infrastructure spending, and regulatory reform.

My biggest problem with this is that 1) Seemingly everyone believes that this is a certainty, and 2) Seemingly no one is addressing the not-so-alternate-fact that the current fiscal year-end 2017 US federal government debt is estimated to be $20.1 trillion. And that’s before any new legislation is passed. If Trump has his way, the size of that debt will explode.

Somehow, disturbingly, no one is discussing the potential that tacking on even more government debt is long-term deflationary (see Japan), represses long-term growth (since you’re pulling it forward), and tends to increase overall asset volatility.

But who cares, right? Someone says something we agree with that confirms our own biases and beliefs, and it only reinforces our belief that what we think is true. Independent thought is impossible when we’re inundated with information that confirms what we think, rather than what is actual reality. And when those beliefs are proven false, a new narrative is constructed to fit a new set of beliefs—which are again based on recent events.

We must, as investors (but more importantly as members of society), stop changing the truth to fit the moment. We must stop reacting to every bit of information and instead make sure the information is valid. We must stop believing in false narrative. Perhaps most importantly, we must stop doing this to ourselves.

Will Trump Derail the Fed’s Game Plan?

Posted on February 23, 2017 by Stephen Slifer -

For the past eight years the Fed has been the driving force behind the economic expansion. But now President Trump has an unprecedented opportunity to re-shape the Fed’s Board of Governors. There are currently two vacancies on the Board. Fed Governor Dan Tarullo, who has been the Fed’s point man on financial regulation, intends to resign in the spring. Fed Vice Chairman Stanley Fischer’s term ends in June. And Fed Chair Yellen’s term ends in January of next year. That means that President Trump will have the ability to appoint the next Fed Chair, Vice Chair, and three Fed governors within a year. How might that alter the Fed’s conduct of monetary policy? Probably very little.

The markets currently fear that President Trump’s push for wildly stimulative cuts in individual and corporate income tax rates will produce much more rapid GDP growth and trigger a re-emergence of inflation. If so, the Fed would need to raise rates far more quickly than it currently envisions which could be the catalyst for the next recession. That fear is overblown. Despite changes in Fed leadership the Fed will continue on a slow but gradual path towards higher interest rates, the economy will continue to expand for several more years, and the expansion will ultimately go into the history books as the longest expansion on record.

As the economy swooned in 2008 the Fed lowered interest rates to a record-setting low level of 0%. But now the Fed has decided the time has come to embark on a slow but steady path towards higher short-term interest rates. Why? Because it needs some leeway to lower rates at that point in time when the recession ultimately arrives. The Fed envisions the federal funds rate reaching a “neutral” level of 3.0% sometime during 2020. The direction of rates is clear regardless of who sits in the Fed Chair’s seat.

The second step in the Fed’s easing process in the wake of the recession was “quantitative easing” whereby it purchased U.S. Treasury bonds and mortgage-backed securities. In the process it flooded the banking system with more than $2 trillion of surplus reserves. Those “excess reserves” represent the lending ability of the U.S. banking system. If banks suddenly become willing to lend at the same time that consumers and businesses become more willing to borrow, those excess reserves could fuel an unprecedented, and highly inflationary, spending spree. Ultimately, those surplus reserves must be extinguished. One way to do that is to allow some of the Fed’s holdings of Treasury and mortgage-backed securities to mature and not be replaced. But such action is as contractionary as its bond buying spree was stimulative. To let securities run off at the same time that the Fed is raising short-term interest rates is not a good idea. While the Fed needs to shrink its balance sheet, this process will probably not begin for another year. But it is going to happen regardless who the Fed Chair might be.

The most important pick for President Trump is obviously the Fed Chairman. He could re-appoint Janet Yellen, but given his comments during the campaign about how she and the Fed were keeping interest rates artificially low in an attempt to support Hillary Clinton and the Democrats, the odds of that happening seem quite low.

The biggest challenges for the new Fed chair will be the speed with which interest rates will rise, and how soon the Fed will begin to shrink its balance sheet. It is not going to sit idly by and let the inflation rate climb. Why? Because in the past the Fed has let inflation get out of control and it paid a price for doing so. In the 1970s, the economy overheated and the Fed (under Arthur Burns) refused to raise rates high enough or fast enough to prevent an upsurge in inflation. Ultimately, Paul Volcker had to push the funds rate above the 20% mark to break the back of inflation. The Fed will not let that happen again—regardless of who is in charge.

Keep in mind also that while Fed governors and the Fed chairman may change, the Board’s staff does not. These are people who have chosen a career at the central bank and are, in our opinion, extremely smart, capable and dedicated individuals. We have the greatest respect for the Board staff and are quite comfortable having it oversee the process of implementing monetary policy.

Some would like the Fed to implement a “rules-based” policy whereby rate changes are determined by formula rather than what some see as a rather arbitrary decision-making process. We strongly disagree with that concept. Models are based on history. As long as the structure of the economy does not change they may work well enough. But the economy is dynamic and constantly evolves.

During the Great Recession consumers and businesses reassessed their attitude towards debt and are far less willing to hold debt today than at any time in recent history. Technological changes have made the economy far more reliant on the service sector today than in the past. Financial developments can result in never-before-seen instruments whose impact on the economy are unpredictable in advance. Reliance on a simple model to determine the course of monetary policy would be a disaster.

In our view, tax cuts of some magnitude will be adopted this year. However, with the prospect of $1 trillion budget deficits looming by the end of this decade President Trump will be unable to get Congress, or even Republicans, on board for untethered tax cuts. Some offsets in the form of reduced government spending will be required to temper the impact of the tax cuts. Hence, the economy will receive only mild stimulus this year, and the resultant increase in inflation should be relatively small.

Thus, regardless of changes in future Fed leadership, monetary policy for the next several years will not change much from what was described earlier—a moderate increase in interest rates followed by an eventual runoff of Fed holdings of U.S. Treasury and mortgage-based securities. If those things happen gradually the expansion is poised to become the longest expansion on record. It will hit the 10-year mark by June 2019. If the Fed can engineer a record-breaking length period of expansion, why in the world would anyone want to tinker with the process?

Indexed annuity sales hurt by fiduciary rule: LIMRA SRI

Posted on February 23, 2017 by Editorial Staff -

Despite tailing off in the fourth quarter, total fixed annuity sales hit a record-breaking $117.4 billion in 2016, 14% higher than in 2015 and nearly $7 billion higher than 2009 (when sales were last at their highest), according to LIMRA Secure Retirement Institute’s Fourth Quarter U.S. Annuity Sales survey.

Fixed annuities finished the year poorly. Total fixed annuity sales fell 13% to $25.7 billion in the fourth quarter compared with the same quarter in 2015. Sales of fixed-rate deferred annuities, (book value and MVA) fell 9%, to $7.7 billion. Fixed indexed annuity (FIA) sales fell 13%.

“We have noticed FIA sales have declined quarter over quarter since the Department of Labor (DOL) reclassified FIAs under the best interest contract exemption. Until there is some clarity on the DOL fiduciary rule, the Institute expects sales to continue to drop in 2017,” said Todd Giesing, assistant research director, LIMRA Secure Retirement Institute

But fixed-rate deferred annuities nonetheless finished 2016 up 25%, at $38.7 billion, and FIAs hit record levels in 2016, up 12% to $60.9 billion. The Institute expects sales to rebound in the first quarter 2017, responding to the post-election interest rate spike late in 2016.

“This marks the ninth consecutive year of growth for FIAs,” Giesing said, but noted that fixed-rate deferred annuities saw the biggest gains of the year, rising 51% in 2016 from 2015.

“Unlike the last several years where indexed annuities propelled overall fixed annuity growth, in 2016, fixed-rate deferred was the primary driver of fixed sales in 2016. A large block of fixed-rate deferred annuities purchased in 2009 came due in the first half of the year, creating a significant amount of money in motion,” he said.

Despite the 85 basis point jump in the 10-year Treasury interest rate, fixed immediate annuity sales fell 23% in the fourth quarter to $2.0 billion. In 2016, fixed immediate income annuities grew 1% to $9.2 billion. Deferred income annuity (DIA) sales fell 30% in the fourth quarter to $575 million. Year-over-year, DIA sales increased 4% to $2.8 billion.

Total annuity sales were $51.0 billion in the fourth quarter, falling 17% from the prior year. This is the third consecutive quarter of decline in overall annuity sales and the lowest quarterly sales since the first quarter 2002. For the year, total annuity sales fell 6% to $222.1 billion.

“Until yields come up, consumers are going to resist giving up liquidity for the guaranteed income offered through income annuities,” said Giesing. “That said, demographics are in our favor, we expect slow steady growth in the income annuity market.”

VA sales were below $30 billion every quarter of 2016. Sales totaled $25.3 billion, down 20% in the fourth quarter from the same quarter in 2015. In the fifth consecutive year of VA sales declines, total sales were $104.7 billion in 2016, down 21%, or $28 billion, from 2015. VA sales are nearly $80 billion lower than their peak in 2007 and are at lowest level since 1998.

“Aside from the DOL fiduciary rule, one of the factors driving VA sales declines has been a drop in sales of products with guaranteed living benefit riders,” noted Giesing. “LIMRA Secure Retirement Institute is expecting sales of variable annuities with a GLB rider to be around $50 billion in 2016. This is a decrease of nearly $20 billion from last year, and a drop of over 50% from just 5 years ago.”

To view LIMRA’s fourth quarter results, visit 2016 Annuity Industry Estimates. To view variable, fixed and total annuity sales over the past 10 years, visit Annuity Sales 2007–2016. The Institute said it will release the top 20 annuity manufacturer rankings in mid-March, following the last scheduled earnings release from survey participants.

LIMRA Secure Retirement Institute’s fourth quarter U.S. Individual Annuities Sales Survey represents data from 96 percent of the market.

Trump rally takes unexpected direction: Morningstar

Posted on February 23, 2017 by Editorial Staff -

Although the Trump administration’s promises of tax cuts and infrastructure spending spurred confidence in U.S. equities in late 2016, investors directed most of their money to fixed-income and international equity funds in early 2017, according to Morningstar’s mutual fund and exchange-traded fund (ETF) asset flow report for January.

In January, investors put $30.6 billion into U.S. equity passive funds, down from $50.8 billion in December 2016, the report showed. On the active side, investors pulled $20.8 billion out of U.S. equity funds during the month.

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.

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

Following investors’ preferences for equities after the U.S. presidential election in November, investors are back to fixed income at the start of 2017, contributing $36.5 billion to taxable-bond and municipal-bond funds. January flows into U.S. equity were diminished, but remained positive with total flows of $9.9 billion. International-equity flows increased to $16.5 billion on the heels of encouraging economic data from Europe.

Typically, traditional bonds do not perform well in an environment of rising interest rates, yet investors still chose taxable-bond funds in the month following the federal interest rate increase in December with total inflows of $32.2 billion.

Morningstar Category trends for January show both large-blend and mid-cap blend in the top five, although their inflows all came on the passive side, mitigated by outflows on the active side. Among fixed-income categories, bank loans joined intermediate-term bond in the top five, with inflows of $4.1 billion on the active side.

Vanguard has dominated the asset management industry in terms of inflows for the past two years, as it attracted positive and increasing flows while the rest of the industry sank into outflow territory. In 2016, Vanguard alone attracted $1.1 billion of investor money daily.

Among active funds, PIMCO Income, which has a Morningstar Analyst Rating of Silver, attracted the largest inflows, $1.6 million. Bronze-rated PIMCO Total Return suffered the largest outflows, $1.6 million in January.

Despite sizable outflows from the allocation category group, Silver-rated American Funds American Balanced is second in the top-flowing five funds in January because of its consistent performance, garnering $915 million in the month. This fund was on the top-flowing list consistently in 2016.

Among passive funds, SPDR S&P 500 ETF was the fund with the largest outflows in January of $3.3 billion, which is typical of the fund’s flows pattern each year.

For more information about Morningstar Asset Flows, visit.

Perhaps with less to spend, retired Southerners spend less

Posted on February 23, 2017 by Editorial Staff -

New research by the Employee Benefit Research Institute (EBRI) shows large variations in spending by older households across the country, including differences between large U.S. Census regions (e.g., the Northeast vs. the South) and smaller divisions (such as New England vs. South Atlantic states).

Specifically, looking at variation by total household spending:

Among 65-to-74-year-olds, Northeastern households had the highest median annual spending ($41,860) and Southern households the lowest ($32,836). Among the different census divisions, New Englanders ages 65 to 74 spent the most (median of $46,019), while peers in the West South Central division (TX, OK, AR, and LA) spent the least ($28,540).

Geographic differences in housing and housing-related expenses were consistent with total spending differences. New England households ages 50 to 64 spent almost 2.5 times more (annual median of $30,240 ) on housing and housing-related expenses than those in the southern states of TX, OK, AR, and LA (annual median of $11,948).

Midwestern states have much higher health care expenses than other regions for those ages 75 and above and non-institutionalized. Among those 85 and above, the median annual spending among Midwesterners was $3,480, which was 41.5% more than the median ($2,460) in the next-highest spending region (the West).

Nationally, average household spending declined with age. In 2015, average total annual spending for households between ages 50 and 64 was $53,087, but only $34,982 for those ages 85 and older. Median spending levels for the same age groups were $42,235 and $26,497, respectively. Housing and housing-related expenses remained the largest spending category for all age groups above 50, varying between 44% and 48% of total household spending for different age groups.

The full report, “Geographic Variation in Spending Among Older American Households,” is published in the Feb. 21, 2017 EBRI Issue Brief, online at www.ebri.org.

Steep drop in fintech investment: KPMG

Posted on February 23, 2017 by Editorial Staff -

Political and regulatory uncertainty, a decline in megadeals and caution among investors contributed to a steep drop—to $12.8 billion in 2016 from $27 billion in 2015—in total funding for U.S. fintech companies and deal activity, according to KPMG’s Q4 2016 “The Pulse of Fintech” report.

Globally, fintech funding fell to $25 billion in 2016 from $47 billion in 2015. Nonetheless, 2016 was the third strongest year for fintech investment and second highest year for venture capital (VC) fintech investment.

M&A and VC investments totaled 489 deals in 2016, down from 615 deals in 2015. Total VC investment in the U.S. dropped to $4.6 billion in 2016 from $6 billion in 2015, while M&A activity fell to just $8 billion in 2016, down from $21 billion in 2015.

The median deal size increased year-over-year for both seed rounds and early-stage VC deals. In addition, massive late-stage fintech financings contributed to keep total deal value healthy.

Total investment retreated to its lowest level in five years and there was a year-over-year decline in M&A. But private equity deal count rose to an all-time high, and deal value remained stable when compared to pre-2015 annual results.

Fintech Corporate VC activity represented 18% of all fintech venture financings in the U.S. in 2016, the biggest share in the past seven years.

“Because valuations have corrected, the market has set up a perfect storm for IPOs and M&A to happen in 2017,” said Brian Hughes, co-leader, KPMG Enterprise Innovative Startups Network and national co-lead partner, KPMG Venture Capital Practice, in a release. “An increasing number of exits will likely stimulate demand for new investments.”

KPMG identified these trends:

Insurtech. Interest in “Insurtech” rose significantly in 2016, with the introduction of smart contracts, currency exchange, and other applications in financial services.
Blockchain. Investors are watching blockchain closely. During 2016, a number of blockchain projects and proof-of-concept initiatives were conducted, but investors want more evidence that the technology can be applied in “effective, scalable and profitable solutions.”
Robo-advice. Robo-advisory has been a strong area of fintech investment over the past few quarters. While robo-advisory has primarily been envisioned as a way to reach Millennials, the technology is now evolving to become more accessible to other clients.

‘We’re the Kasparov Inside’

Posted on February 16, 2017 by Kerry Pechter -

Still essentially a TAMP—a turnkey asset management platform—Envestnet has in the past few years grown through acquisition to become perhaps the largest single provider of cloud-based wealth management software to tens of thousands of advisors at independent, bank-owned and insurer-owned broker-dealers and registered investment advisors (RIAs).

By scooping up firms like Tamarac, Yodlee and others, the Chicago-based, publicly held (since 2010) firm has steadily increased the breadth and depth of its menu of technology solutions that enable broker-dealers and RIAs to outsource almost any of their middle- and back-office portfolio management, research, administrative or client relationship management chores.

Envestnet was, in a way, the first white-label robo-advisor for advisors. Its chairman, CEO and co-founder, Judson Bergman, saw earlier than most that a robo-human hybrid model is the most efficient way to offer fee-based, fiduciary, mass-customized financial advice in the advisor-mediated space. In that equation, his company delivers the automated, software-driven, algorithmic half and wealth managers provide the consultative, client-facing, rainmaking human side.

“What people don’t do well, computers excel at,” Bergman told RIJ recently. “What we’re good at, they’re lousy at. Experts plus machines are better than machines alone or experts alone. This principle inspires me.”

If you’re not familiar with Envestnet, that may be because it’s a behind-the-scenes technology provider like Intel, not a consumer brand. “Envestnet is the ‘Kasparov Inside.’ Or rather, we’re the technology inside the future Kasparovs of wealth advisory. We enable the experts,” Bergman said in the interview.

Alois Pirker, an analyst at Aite, has followed Envestnet for several years. “They’ve consolidated the TAMP market. There still are other TAMPs. But if you go back 10 years, there would have been a ton more TAMPs than today,” he told RIJ.

“There will always be firms that build in-house, like Merrill Lynch and the other wire houses, but that space has narrowed. Very few firms have that luxury to build within. Others have chosen to differentiate in the way they communicate rather than by maintaining their own platform.

“Envestnet had always been in the broker-dealer space,” Pirker continued. “That’s the core area for TAMPs. The acquisition of Tamarac put them in the RIA space. Their other category of acquisition is less about gaining market share in our core market and more about evolving into new areas. Their biggest acquisition so far has been Yodlee, which is heavily focused on the bank space and the data aggregation space.

“That’s expanded their turf quite a bit. Aggregation is a key capability because businesses want to provide holistic services. The digitization of the industry means that the client portal is front and center, and Yodlee already has a strong position on the client portal,” Pirker said.

Bergman, a former managing director at Nuveen Mutual Funds (who with Nuveen colleague Jim Lumberg founded Envestnet in 1999), grew up in the same Minneapolis suburb as Sen. Al Franken and New York Times columnist Tom Friedman, attended Wheaton College and earned his MBA at Columbia. In an interview at his office on E. Wacker Drive in Chicago (across the Chicago River from a tall silver skyscraper bearing the surname of the new president of the United States in giant letters), he spoke with RIJ about fintech, advisor fiduciary obligations and how the two fit together.

RIJ: Envestnet is now a serial acquirer of other companies, most notably of Yodlee for $590 million in 2015. What’s the motivation for these purchases?

Bergman: The motivation is a conviction that wealth management is rapidly changing from an investment-centric process to a financial-planning-and-wellness-centric process. That means advisors who intend to act as fiduciaries must deliver plans that demonstrate knowledge of the customer. That means more data. It means stronger capabilities in related areas, like tax planning.

We want to equip and enable the advisor of the future to become a symbiotic advisor, on the assumption that persons-plus-machines is better than either alone. The goal is to enable advisors to take advantage of the best technology, to depend on Envestnet to do the routine tasks that aren’t necessarily value-added—CRM; research, to a degree—and to give them automated know-your-customer capability around their clients’ liabilities, spending needs, goals and objectives for retirement and health care.

Our purpose is to enable advisors to go from being investment advisors to being wealth advisors, to being the expert in the middle of a complex technological and economic eco-system. That’s a tall order.

RIJ: Envestnet used to be one of many TAMPs. Why did it emerge from the pack? What made it different?

Bergman: We were the first web-based managed platform. We were in the cloud before it was called “the cloud.” At the beginning we did demonstrations of our technology. Prospects said, “Let me see how you do research, proposal, account rebalancing,” and we did demos. Then they said, “When can you install it?” We said, “What do you mean? We host it.”

RIJ: At the time, that must have required some explanation.

Bergman: I’ve been on the bleeding edge as much as I’ve been on the leading edge, and it’s not always a comfortable place to be.

At the time, firms still had firewalls around installed enterprise software. That was starting to break down by 2003, 2004 and 2005. So we were the first TAMP to unbundle asset management from technology and we were the first to have a tablet-enabled platform. That drove a lot of adoption.

As early as 2003, you could use us like a TAMP and get an outsourced chief technology officer, chief information officer and chief operations officer, or you can just get the technology, like billing or reconciliation. We blew up the TAMP business.

We recognized that there are different buyers. There are the high-end RIAs, who consider themselves to be the ‘chief executive officers’ and ‘chief investment officers’ of their firms. Bundling asset management makes no sense to them. They want enabling technology for CRM or billing or administration. Providing a full range of services is still a significant part of our revenue, but more of the revenue comes from à la carte offerings or bundled à la carte offerings. You can get the vegetables and the appetizer, and skip the aperitif or dessert.

RIJ: What does that mean for the individual advisor and his or her clients?

Bergman: Traditionally, a financial plan was built after weeks or months of gathering data—literally boxes of paper records, check stubs, check registers. The client gives that to the planner, and once the plan is done it has a shelf life of a few months or a year. The process is highly labor-intensive and very inefficient. You’ve got data aggregation and analytics plus net worth applications and budget applications that all feed into the financial planning activity, which drives the investment programs that serve the clients’ goals and fit their risk tolerance. Today, much of the work could be done through automation. And to do all that in real time…this is our vision of how advisors can add value in a fiduciary standard world.

RIJ: Did you predict that there would be a push for a fiduciary standard?

Bergman: I can’t claim that we saw the fiduciary rule coming. What we saw, from the founding of the company, was the trend to fee-based advice. It’s been 17 years since then, and there’s still more commission-based business than fee-based. But we got the trend right. If, when we started, someone with a crystal ball had told me that 17 years later there would still be more commission-based business than fee-based business, I would have said, ‘Maybe we shouldn’t do this.’ We saw it, but we were early. As for the outsourcing of advisor technology, anybody could see that. But we acted.

RIJ: When did you start positioning yourself as a provider of fiduciary compliance services?

Bergman: Originally, most of our enterprise clients had broker-dealer businesses, and followed a suitability standard. So they weren’t buying fiduciary support. Then, in 2014, advisors to 401(k) plans had to disclose if they were agents or fiduciaries; that was the first DOL ruling. That was a meaningful change, so we put together our retirement solutions business and launched that.

At the same time, we saw that the fiduciary standard, if it were adopted, would have broad implications for how the typical advisor ran his or her business. If you’re following a suitability standard, you don’t need to know as much about the client. The fiduciary standard means that people who are investment experts, who do just asset allocation and vehicle selection, in order to succeed in a fiduciary world, will have to be able to plan, coach and be aware of tax and estate issues.

We saw that the path forward was to empower advisors with sophisticated enabling technology that spanned the fiduciary services continuum—data aggregation, financial planning, analytics, portfolio management tools, on-boarding tools, product access, billing, performance reporting—and tied it all back to the objectives of the financial plan. In a DOL world, it’s the only way to turbo-charge advisor productivity. It’s a warp speed accelerator of client on-boarding, and a quantum enhancement of the advisor’s ability to understand the client.

RIJ: Where did the Yodlee acquisition fit into the picture?

Bergman: When we bought Yodlee, people said, ‘What’s so wrong about your business that you had to buy them?’ We said, ‘You’ll see how it makes sense when the fiduciary standard is adopted.’ Now people say it wasn’t so stupid. Data aggregation turbo-charges on-boarding and productivity. Data portability is part of client freedom. If you can do it in a secure and trusted way, it can create many benefits.

RIJ: What are some of those benefits?

Bergman: For instance, we can forecast when clients will have an overdraft or when they will have the ability to save more. In the hands of a trusted advisor, this creates opportunity for better outcomes—better returns, better outcomes for retirement. One result of it is higher share of wallet, but advisors get that on the backswing. Capturing a bigger wallet share is a result of, but not the purpose of, data aggregation. The purpose is that it gives the trusted advisor and the investor a real time picture of the client’s finances. How else do you demonstrate that you understand the client, except by looking at not just assets but also liabilities and spending?

RIJ: The passage of the fiduciary rule last year wasn’t exactly welcome news for your broker-dealer clients, though.

Bergman: When the DOL rule was first announced, our clients were evidencing the stages of the Kubler-Ross syndrome: Denial, grief, anger, etc. The attitude is coalescing toward acceptance. Some companies are focusing on basic risk-mitigation. Others are making fundamental changes to their business models. Those who have been fiduciaries all along, are asking, ‘What does this mean to me in terms of on-boarding, documentation, oversight, or fulfillment? If I’m a fiduciary, how do I document that?’ And the responses vary, depending on whether you’re an RIA or a trust officer or an insurance agent or a broker-dealer rep.

RIJ: Now, with the results of the presidential election, the fiduciary rule is in jeopardy. How are you and your clients reacting?

Bergman: A typical response has been, ‘We have to be ready but if something changes we won’t proceed as quickly.’ The election doesn’t change our strategy, which is fiduciary support. Whether the DOL rule is enacted or delayed, most of our client base has concluded that using a fiduciary standard is a better business model. There’s been a range of responses from our clients. Banks and insurance companies have had a longer lead-time and they’re a little more risk mitigation-oriented. They’ve concluded that it’s too risky to wait and see. At this point [mid-January], they’re assuming that it goes into effect in April.

Without a crystal ball on political stuff, it makes more sense to ask: Which firms and advisors will make it a priority to work by a fiduciary standard? Our major enterprise clients are building some flexibility into their rolling out processes. They want to be prepared to go, but they’re also prepared to slow it down if that’s what happens.

RIJ: Shifting gears a bit: As automation and outsourcing to a firm like Envestnet allows advisors to serve more clients, do you think advisory firms will employ fewer advisors?

Bergman: Over 100% of the growth in the RIA business is accruing to advisors with over $500 million under management. Those with less are losing share. That’s a fact. Yes, there will be fewer advisors and the most successful will have characteristics that are benchmarkable. Certain practice patterns are emerging. Those that grow will make effective use of integrated wealth management technology. The facts bear those trends out over the last five or six years.

RIJ: Broker-dealers and RIAs are known for specializing in wealth accumulation rather than decumulation. Do you see that situation changing?

Bergman: Of the firms that have chosen to leverage our product and technology, some have focused on retirement income, but it’s not a majority. We serve over 50,000 advisors at over a thousand organizations. Some organizations are huge. Some are sole practitioners. Most of them haven’t had retirement income as their primary focus. That may not change dramatically, but more and more of them will see retirement income as an important dimension of their practice.

RIJ: Envestnet’s share price has seen some volatility over the past couple of years. What underlying story does that tell?

Bergman: In late 2014, despite what anyone tried to do to stop it, there were momentum investors that came into our stock because our top-line and cash flow numbers were growing at an accelerating rate. When that happens to a small-cap company, you get investors without a solid understanding of the fundamentals. We tried to make it clear that our acceleration was in part because of the strong market—that it couldn’t continue. And it didn’t. The market was flat for much of the next year. As revenue and growth slowed, there was a change in the market’s perception of the company. I don’t know many entrepreneur-founders who think their stock is overvalued, but we’ve been overvalued and we’ve been undervalued. Since we’ve gone public, our revenue has increased eight- or nine-fold. Cash flow has risen by a similar amount. That’s a strong indication that clients want our services and technology.

RIJ: In manufacturing, they’ve talked about ‘mass customization.’ Do you think that information technology is going to be able to deliver mass customization in the world of investment advice?

Bergman: Individuals increasingly want solutions—portfolio or retirement solutions—that are personalized. The successful organizations in this space will be able to offer personalized financial plans that go beyond considerations of age, beyond risk-tolerance questionnaires, and beyond projections of net worth at retirement. Plans will include behavioral aspects and considerations that go far beyond traditional risk analysis. Advisors will be able use smart, learning-adaptive algorithms to provide more personalized investment solutions for clients.

RIJ: Even for mass-market clients?

Bergman: As they perfect the technology, they’ll be able to do that for individuals of lower net worth than they can now. It’s difficult today for investors with less than $500,000 to $1 million to get that level of personalization. I expect that technology, with an expert in the middle, will be able to lower those wealth thresholds to maybe $100,000 or lower. You’ll see personalized plans for not just the mass affluent, but also for the mass market. That’s how we think about the future. It’s all pointing toward greater personalization at lower levels of net worth.

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