Annuities

How You Can Find More Clients with Pension Risk Transfer


Annuities

Our sales team talks with a lot of advisors over the course of our travels. Most conversations center around the need to grow the advisor’s business. 

 

As I’ve discussed before, part of The Go-Giver philosophy is the Law of Compensation: Your income is determined by how many people you serve and how well you serve them. Deploying this law through pension risk transfer sales can help you drive your firm’s revenue and increase the number of people you serve. 

 

Pension risk transfers will be a significant market over the next decade. For advisors, it’s a great way to meet new prospective clients through a business contact. It opens the door to a group of employees with the approval of the employee’s human resource department or company’s leadership. What a great introduction to new people! 

 

Companies of all sizes have pension liabilities that are at risk of hurting the enterprise. Pension plans carry longevity risk for the plan sponsors, interest rate risk for the pension fund managers and investment committee, and cost increases that concern C-suite leaders. When working on pension risk transfers, you can reduce or eliminate several problems for the employer:

 

  • Reduce a liability that shows up on the balance sheet (if not fully funded)
  • Avoid the increasing cost of administering the pension plan in the future
  • Shift the risk of employees living longer than funds can support payments
  • Eliminate the risk of interest rate fluctuations and equity market volatility 

 

There are several reasons that an employer would want a retirement income specialist in their office to talk with their employees about options on pension risk transfer decisions:

 

 

Pension risk transfers create a win-win-win scenario for the advisor, the employer and the employees. The employees gain the advantage of talking to a retirement expert on-site, which is viewed as an added benefit at no cost to the employer. The employer gains the ability to transfer their risk to an insurance carrier, and eliminate or reduce the risks to their balance sheet and cost structure of maintaining a pension plan. The advisor wins by helping more people and serving them better, which is the basis of the Law of Compensation.

 

Winning Strategy

Help more people and help them with their most complex problem – retirement. You can do both by working in the pension risk transfer market. 

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Craving More?

Register for our April 19 webinar where we talk how pension risk transfers can be an effective tool for defined benefit plan sponsors seeking solutions for rising costs and longevity risk.

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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.”

Pension Risk Transfer IRA Annuities Retirement

Asset Location Over Allocation


Annuities

As I travel back from a business trip in Portland, I’m reminded how important location is on an airplane. Flying four and a half hours in the middle seat is not fun, especially when you don’t sleep on an airliner like me. 

 

Over the past few years, the location of assets has become more important in the financial planning arena. The biggest reason is the continued shift to income versus accumulation. During distribution, income is more important than the rate of return, which is largely driven by the allocation of assets. Let’s look at an example where location can improve your chances of success. 

 

Average Couple, Average Approach

A typical American couple approaches your firm. They have done a nice job of creating a nest egg for their retirement and would like to receive $50,000 a year in retirement income. They anticipate receiving $20,000 of annual Social Security income. So, they need to take $30,000 a year from their accumulated assets of $750,000. In other words, they will need to sustain a 4 percent withdrawal strategy from their assets under management. 

 

While the 4 percent rule worked during higher interest rate periods, most economists believe the safe withdrawal rate is around 2.8 percent to 3.5 percent. Without a doubt, this couple is in jeopardy of a significant failure in retirement, especially if they were to have a significant drop in asset value early in their retirement years. This is where asset location can make a huge difference over asset allocation. Because allocation doesn’t fully protect the clients from a loss in their account – it might make the ride smoother or reduce their losses and gains, but it will not provide protection from losses. 

 

What worked for clients during the accumulation phase will not work for them during the distribution phase. In fact, in many cases, the strategies that clients used to accumulate assets will hurt them in retirement.

 

New Approach, Better Outcomes

Let’s look at using different products to sure up their retirement income.

  • First, the couple buys a single premium immediate annuity (SPIA) to secure $9,000 of annual income. In today’s interest rate environment, that will cost just under $170,000 of the account value. The SPIA’s income is protected for both the couples’ lives, and if they both die before using up the $170,000, their beneficiaries get the balance of the unused funds. 
  • Next, the couple purchases a fixed indexed annuity (FIA). The $100,000 FIA generates $5,000 of guaranteed annual income. The clients remain in control of the assets and can change the annuity if something happens. 
  • Their remaining $480,000 is invested in their asset allocation strategy according to their risk tolerance. The assets only need to create $16,000 of annual income off the $480,000 in assets. That means that the use of two additional products reduces the withdrawal percentage to 3.3 percent. Most would agree the 3.3 percent is a significant improvement to the withdrawal percentage and increases the probability of success. 

 

The result is that the clients begin their retirement with the same $50,000 of targeted income: 

  • $20,000 from Social Security 
  • $16,000 from the systematic withdrawal strategy
  • $9,000 from the SPIA
  • $5,000 front the FIA

 

Notice that between Social Security and the annuities that $34,000 of their $50,000 annual income is guaranteed for the rest of their lives. That’s makes a powerful impact on their retirement income strategy.

 

Check out our one-page sales idea on this concept, and I think you will see that the location of assets is far more important than the allocation of the assets. The location strategy provides more consistent income with less volatility in income. Your clients will appreciate the guarantees and the unique location of their assets. 

 

Winning Strategy

Asset location is more important than allocation during the income phase. Look at using alternative income-producing assets to reduce pressure on assets and provide a more secure retirement 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.”

Asset Allocation Retirement Income Annuities Social Security

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