Annuities

2 Investment Theories that are Critical in Today’s Market


Annuities

When you’re done reading this, you should Google “investment theory.” You will find more than 577 million articles, videos, news releases, opinions, and thousands of different types of investment theories. It’s mind-boggling to think of the different ways you can manage assets in this industry. 

 

The problem is we forget that the most important part of managing assets is making sure our client understands and feels comfortable with the direction of their portfolio. Maybe even more important is how our clients make decisions. 

 

Out of the millions of Google results, there are two theories that I find relevant in today’s investment management market: Prospect Theory and Recency Bias. Understanding how your clients react to these two behavioral theories is important in how you manage their expectations and set the course for their retirement strategies.  

 

  • Recency Bias assumes you are going to get the same result as you have previously when there is a chain of consistent events. For example, if you watch a football game and the kicker is setting up for a game-winning field goal, you assume he will make it because of his high percentage of successful kicks and the fact that he has already kicked several field goals earlier in the game. In reality, he has no better chance of hitting that field goal than any other kick. But, our recency bias tells us that he will make it. In investing, the recent gains in just about every asset class make us think that the equity and bond markets will continue to increase. In reality, there is no fundamental reason to believe that the chances of continued equity market increases are greater than they have ever been. We just perceive that the markets will go up. And, our clients feel that way when they make decisions. 

 

  • Prospect Theory addresses the willingness to avoid loss. In most cases, clients feel a loss 2.25 times more than the same amount of gain. They tend to choose products on how they are positioned. For example, let’s assume that the total return for a client in two different scenarios is $25 for the same, two-year fixed period. One results in a steady gain of $25 over the two years, or $12.50 for each year. Another scenario allows the client to achieve a $50 gain in year one but a $25 loss in year two, resulting in the same net $25. Most clients tend to choose the first scenario because they have a tendency to look for gains and avoid losses, even if the result is the same. 

 

As we start to look into 2018, think about how your clients might be affected by different market scenarios. How likely are they to get scared or concerned if they don’t see the steady growth of their retirement dollars? Is your practice in a better position by making sure your clients feel better about steady growth versus random fluctuations in the market? Make sure you understand what your clients are feeling in order to build the portfolio that best matches their goals. 

 

Winning Strategy

Understanding how clients react to recent events and potential gains and losses is just as important as managing money to benchmarks. Take time to ask the right questions and look at alternatives to address behavior and money management theories. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Investment Theory Retirement Annuities

3 Ideas to Quickly Generate Profit


Annuities

If you’re like me, you run a business. And, you do so for profit – for you or for your stakeholders. 

 

Profit can be summarized by an income statement showing gross revenue, expenses, and net profit. But, I think it’s broken down to two factors: effectiveness and efficiency. The better you can execute on these factors, the greater your profit will be. In order to do that, you have to work smarter, finding ways to generate top-line revenue while minimizing client acquisition costs. 

 

One of the fastest ways to generate new revenue is to capture a greater share of your clients’ wallets – or more market share of household investments. Creating a new stream of income from existing clients drastically reduces the cost of acquiring a new relationship. 

 

But how do you create additional revenue without exposing your assets? 

 

  • First, repurposing old assets make sense as you position your clients for retirement. Many have changed jobs throughout their careers and let assets simply accumulate in former employers’ qualified plans or individually owned IRAs. Those assets should be considered for lifetime income assets. By positioning guaranteed income in the portfolio, you can reallocate the assets under management to meet longer term goals, as well as gain tax efficiency and the potential for growth. If positioned properly, many of these assets can be placed on trail-based compensation to create recurring income for your financial practice.

 

  • Second, many old assets have beneficiary designations that have not been reviewed. Our firm commissioned a white paper by a respected ERISA attorney that identifies the risks of qualified plan beneficiaries. Taking the time to review and rename beneficiaries can save a family thousands of dollars in income taxes at the time the asset transfers to the next generation. By leveraging this savings, you have the potential to gain the confidence of the next generation. So, reviewing asset beneficiaries has the effect of repurposing the asset as well as creating a bridge to future clients.  

 

  • Third, as our clients near retirement, many will want to take Social Security. Using an unused asset to create a bridge has proven to be a positive move for many clients. The bridge – in the form of a single-premium immediate annuity – allows the client to receive the same income as an early election from Social Security. However, the strategy generates more than $122,000 more in income from age 70 to 90. The increased leverage from social programs protects assets under management and allows for a positive conversation with the next generation as well. 

 

Looking within your own client base makes your business more efficient. Your existing clients provide the fastest path to new revenues – many of which can be recurring. 

 

With so many Americans afraid of running out of money in retirement, you have a chance to provide assurances that your clients will maintain the standard of living they are planning for. When your activities focus on ways to be effective and efficient, the chance of increasing your profits grows exponentially. 

 

Winning Strategy

To draw profit for your business, look inward. You will earn more business from your existing clients with quality ideas. This creates additional revenue, plus opportunities to be introduced to the next generation. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Practice Management Retirement Annuities

The First Five Minutes: How to Set a Positive Tone for Your Entire Year


Annuities

No matter the sport, there are a few critical points in every game when coaches focus on motivating their team. Obviously, finishing the game strong is a must – you have to execute down the stretch and perform in pressure situations. 

 

However, coaches also talk about the first five minutes of each half as being critical to success. The first five minutes set the tone, allow the team to put pressure on the opponent, and energize (or take out) the crowd.

 

As we begin 2018, I think the first five minutes of your year are important for the same reasons. You have to set the tone for your clients, relieve them of the pressures of retirement income planning, and take out some of the risks of retirement, namely longevity issues. Each has a specific purpose in helping your clients feel more confident in their long-term retirement strategy. And, by focusing on your clients’ needs, you add tremendous value to their lives. 

 

  • What are some events that might derail your clients’ retirement today?
  • If you could reduce that risk, how much value would your client feel you delivered?

 

Set the Tone

Could a correction happen in 2018 or 2019? Are your clients going to be able to time the market to avoid an eventual correction? With today’s rising equity markets, it’s hard to take investments out of the market. 

 

We have a tendency to maximize the returns for our clients each and every year. However, as they age, return is less important to many as their focus turns to income versus accumulation. Our clients fear they will not have enough income in retirement, and our response is mistakenly to accumulate more assets. In reality, we have to protect their asset base and help them generate more income. 

 

Lock in Gains

Our clients have accumulated trillions of dollars of assets in qualified plans, including their personal IRAs. The current tax law allows for qualified transfers from one IRA to another rollover IRA with no current tax as long as it meets the transfer criteria, i.e., direct trustee-to-trustee transfer. 

 

By using conservative vehicles to sweep gains from their account, the client can take investment risk off the table while earning a competitive, conservative return. In many cases, the client can still earn indexing credits tied to their favorite equity or blended allocation index up to 5 or 6 percent (current pricing as of this blog). If the client sweeps the gain from their mutual fund or accumulation-based variable annuity, they have “locked in” the gains from the previous bull run.

 

If the markets continue to increase, they can participate in some of the equity returns up to the stated maximum cap or participation rate. But, they will not lose the gains they have been building. 

 

Your clients will enjoy knowing that if a market correction comes in 2018, you have protected their gains and positioned them for success. A 20 percent correction may take years to recover, and many of our trailing baby boomer clients (age 50-59) cannot afford a dip in their assets just prior to retirement.  

 

Winning Strategy

Locking in gains from the recent long bull run allows you to set a positive tone for your clients in 2018. It takes pressure off their decision of when to exit the stock market by still being able to participate in equity indexing, and you can maintain positive momentum for income in the event of a market correction. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Retirement Longevity Annuities

Making the Comeback Count


Annuities

Everyone loves a comeback. How many time have you watched a sporting event where the losing team suddenly comes from behind? It doesn’t matter the sport – at that point, nearly everyone cheers for the underdogs. 

 

As thrilling as it is, many comebacks end in disappointment. The losing team expends so much energy and effort, they don’t have enough in their tanks to win.

 

 Seems familiar, doesn’t it? 

 

Are you preparing your clients for a retirement comeback but a shortfall in the end?

 

Sometimes, we have to help clients make a comeback – they didn’t save enough during their working years to get the income they were hoping for. You have to come to their rescue so they can “catch up.” Even if they did save enough, we too often focus on just getting them to the goal line. Great – now, it’s time to finish the game.

 

Unfortunately, many people get seven to 10 years into retirement and realize that they have fallen short in their plan. Inflation begins to take a toll on their spending. Most notably, the cost of health care increases at a rate much faster than other goods and services, and puts pressure on them to make adjustments. By planning ahead – looking beyond just “catching up” or making it to retirement – you can help position both guaranteed income and inflation protection. 

 

Winning the Game

One of the easiest ways mitigate inflation is to push Social Security to age 70. Social Security typically has an inflation component that increases the income annually, even if at a slower rate than other inflation indices. Other income sources provide guaranteed options to increase the monthly income by 1-5 percent annually. And, other riders allow the income to increase by changes in the underlying crediting method. Either way, by increasing the client’s income, you have have helped push them closer to the top of winning their income game – longevity and inflation. 

 

Winning Strategy

Don’t be like the teams that get behind early and spend too much energy coming back, only to lose in the end. Make sure your clients complete the comeback with inflation protection in addition to guaranteed income. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Annuities Retirement Longevity Inflation

Safety in Numbers: 3 Reasons to Stop Running with the Crowd


Annuities

When we have a market correction – and we will have one sooner or later – many investors will run to banks and place their assets in money market accounts or certificates of deposit. While those are traditional safe havens for many people, they tend to only be temporary. Once the markets start rising again, investors leave their safe havens to take on more risk. 

 

We need to rethink why we do those transactions and if it’s worth the effort to complete the run to safety. Instead, why not think about proper allocation for a risk tolerance that probably can’t stomach the full amount risk that’s being taken. 

 

As the old saying goes …

 

You never know how much risk to take until you take too much.

 

Rethinking Risk Strategies

A temporary shift in risk management does very little for clients in the long run. There are several reasons, but here are three. 

 

  • Money markets and CDs earn historically low interest rates compared to instruments like annuities. Today, the average annuity is earning 200 to 250 bps more for A-rated carriers on a five-year product. Now, liquidity is not equal as bank accounts are generally liquid while CDs have some type of penalty if not held to maturity. Annuities provide liquidity in emergencies and limited free withdrawals. Remember, we are talking about rethinking allocations to avoid the temporary run toward safety. In a new allocation strategy, liquidity would likely come from other assets first. 

 

  • Taxation favors annuities. Even during the high tax rates and high inflation/return periods of the late ’70s and early ’80s, tax-deferred assets outperformed their taxable counterparts. Not only in return, but mainly in real return – after tax, inflation and fees. 

 

  • There is a common misconception that money market accounts can’t lose money. In fact, they do fluctuate in value and can go below their targeted one dollar valuation. With many annuities, the client receives a guarantee of principal plus a minimum interest rate return. 

 

So, safety can come in many forms. The most popular are bank instruments, which serve a great purpose. However, the numbers point toward a better solution: better nominal and real rates of return, lower tax rates, and more stable values. Add in the fact that charges are not paid upfront and only when you do not hold the asset to maturity. This makes the purchase efficient from a cost perspective, an effective way to increase yields on conservative vehicles, and provide confidence to the client by showing them a more stable valuation of their conservative asset selection.  

 

Winning Strategies

Don’t follow the leader or the crowd when the market corrects. Rethink your current allocation strategies and look at the real returns to help clients protect their wealth the most efficient way possible. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

Annuities Market Risk Market Correction