Annuities

Cost in Absence of Value


Annuities

Throughout my sales career, several mentors told me the catch phrase, “Cost is only an issue in the absence of value.” Of course, I usually hear that and think about it from my perspective. 

 

It’s always important to add value to your business and personal relationships. But, when you talk about the added benefits of guaranteed income, you have to offset the cost with value. In many cases, the value of guaranteed income far outpaces the cost associated with the purchase of the vehicle to provide the guarantee. 

 

Now, it’s important to convey the same message to clients and not just sales teams. Specifically, we need to talk to company CEOs and human resource directors about the risk of their pension plans. 

 

Cost of Pension Plans

Today, billions of dollars sit in defined pension plans that have been frozen by employers. Those pension plans are no longer helping recruit new talent to the company or retaining existing employees. More worrisome are the expected increases to costs: 

  • The cost of administering a fully funded pension plan is guaranteed to increase by 25 percent by the end of 2019, due to the cost of Pension Benefit Guaranty Corporation (PBCG) premiums*
  • For plans that are not fully funded, the cost of maintenance might increase as much as 33 percent by the end of 2019* 

 

Those are real increases and real dollars that will be spent on an employee benefit that is not being leveraged to the full extent. So, the question is: Why would a company have a benefit that is going to increase in cost but doesn’t provide any benefit?

 

I doubt any CEO would invest in a new plant or machinery that didn’t have a suitable return. Especially with human capital, companies are reluctant to invest in additional funds without a plan to grow production through that investment. They shouldn’t do the same thing for an expensive employee benefit that is not providing value. 

 

The cost of additional contributions is expensive. Life expectancies have increased and returns are much lower than many old plan assumptions. Both of those result in funding shortages for a lot of defined benefit plans. Currently, CEOs are faced with making large contributions to bring the plan up to proper funding status. Since many are not willing to do that, they are left with the same problem year in and year out: an underfunded pension plan not benefiting the organization. Well, it’s about to create more of a drain due to the cost increases from the PBGC premiums. 

 

Value of Transfers

Myths exist around pension risk transfer business. Many believe that a company has to write a huge check to cover their shortage. Instead, in many cases, it makes sense to stagger the plan termination over a period of several years. Cash flow and capital requirements might make it easier to have a 5-10 year strategy instead of a one-time contribution. 

 

Another myth is that lump-sum distributions don’t help. In reality, lump-sum distributions can make a difference in the amount of shortage. Having educational meetings with employees can help the engagement level of lump-sum distributions. That’s where a good income specialist can benefit the employee base. Retirement remains the most complicated problem most Americans will face; our industry needs to be face-to-face with as many people as possible.

 

Winning Strategy

Take the cost of the least valuable employee benefit off the table for companies. In doing so, you can help a greater number of people retire more securely. 

Policy Review - 10 Ideas For Existing Life Insurance

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.

Register Now

 

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 Benefit Guaranty Corporation, Premium Rates, March 2018: https://www.pbgc.gov/prac/prem/premium-rates

Pension Risk Transfer Retirement Financial Planning

4 Reasons You Should Focus on Retirement Income Planning


Annuities

Over the next several decades, retirement income planning will only grow. Planners have so much opportunity to concentrate on income planning as a core competency. I spend a lot of time talking about Americans’ behavior over the last 20 years and why income planning will be paramount for the next 20. Here are four reasons:

 

  • Our savings rate continues to decline. In December 2017, our savings rate dropped to 2.4 percent.1 If you look at the past 20-year trend, you will see a steady decline in savings, with the exception of high inflation periods or around the dot-com bubble and financial crisis. This has left most people ill-equipped for their retirement. Therefore, we will be asked to create more income from fewer assets than ever before in our careers. We have to get our clients to think differently, and the planning community will have to act differently to accomplish this. 

 

  • We continue to misuse social programs. As I travel around the country, I always talk to clients who want to get their hands on their Social Security as soon as possible. They fear that the program will be bankrupt in the 2030s. There are some fixes to Social Security that will likely be addressed in future Congresses. For now, the bigger problem is the fact that we completely misuse the system. More than 50 percent of Americans take Social Security retirement early.2 That makes your benefit smaller, and you lose the valuable 8 percent growth of your income between full retirement age and age 70. For some people, that equates to a 76 percent reduction in income. Only 2 percent of men and 4 percent of women take Social Security at age 70, so there is a lot of education that needs to happen in order to secure more guaranteed income.2 With just a 20-year time frame, the difference could be as much as $122,000 in additional income. That makes a big difference for the typical retiree. 

 

  • Employers remained focus on shifting defined benefit plans to defined contribution plans. That’s good for many employees – low cost investing, multiple subaccounts to choose, tax deferral and matching employer contributions. But, the loss of guaranteed income creates a gap that needs to be filled. When I sit in a plan sponsor’s office, I see a litany of risk-tolerance tests, return sheets and asset allocation brochures. But, when I ask the sponsor to tell me how their participants are going to turn these assets into income, their faces turn blank. Turning assets into dependable income is a priority and makes a baseline for many Americans to be able to buy the things they are accustomed to buying. 

 

  • In many minds, longevity grows as the most troubling risk for retirees. The uncertainty around how long you will need income remains a fear for many Americans. Providing a plan to address this allows the client piece of mind and, if done properly, enhances the systematic withdrawal strategy. We are living longer at times at the expense of our quality of life. Clients need to plan to make sure they have not only lifetime income but also a plan if a long-term care emergency happens. The odds continue to increase that we will have a care event as we age. Shifting longevity risks for lifetime income and long-term care make sense in many cases. And, the shift of those risks is generally done for pennies on the dollar. 

 

Income planning should be thought of as a great spot to be in as a financial planner. There are large numbers of people retiring and needing planning for many decades to come. Our past behaviors create a reason to change our clients’ perspectives and create value for them. I’m looking forward to the challenge and the growth opportunities in this space. 

 

Winning Strategy

Income is the ultimate outcome for many retirees. You can’t spend assets but you can spend income. Add retirement income planning to your discussions, and you’ll add value to the client experience. 

 

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.”

 

1Bureau of Economic Analysis, “Personal Income and Outlays, December 2017”: https://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

 

2The Motley Fool, “When Does the Average American Start Collecting Social Security?” April 19, 2016: https://www.fool.com/retirement/general/2016/04/19/when-does-the-average-american-start-collecting-so.aspx

 

 

Retirement Income Financial Planning Practice Enhancement

Avoiding Derailment


Annuities

Let me ask you something …

 

What’s the one thing that can completely derail a near-retiree’s plan?

 

Many answers might come to mind. But, I’m willing to bet most of them revolve around the reliability of market returns. Think of your clients’ journey like a train on a long-distance trip – if you’re not careful, you could derail them just before their destination. 

 

Starting Up

As your clients travel through their working years, they sit in the conductor’s seat. Most don’t have a lot of disposable income in the early years – anything they make goes to pay the bills, and not much is left for long-term savings. As they work through their careers, they begin earning more money and committing more to their retirement. The locomotive starts to build steam and momentum. 

 

Slowing Down

Market corrections are inevitable. Your clients’ trains will have to slow down every now and then. But, that’s OK – most plans account for slow-downs, and there’s usually plenty of time to pick up speed. Once assured that the difficulties are behind, you can increase speed and head back on track. Sometimes, you even need to switch to a more aggressive line to make up lost time. 

 

Picking Up Speed

When we continue along a journey with little to no problems, it’s easy to forget about the fundamentals of steering a train. You can easily go too fast around a corner. If you’re not careful, the momentum that you built can work against you. After years of picking up speed, your locomotive and the cars behind it can derail and spin out of control, completely stopping you in your tracks.  

 

Avoiding Derailment

That’s what happens when we have a late-accumulation market correction. All the cars – retirement income, emergency funds, health care payments, long-term care plans – they all go off track of what we planned. The momentum your client has built for 30-plus years is ruined. But, it could all be avoided if we steer them the right way. 

 

You have a lot of clients with their eyes firmly focused on their final destination – retirement. Unfortunately, that means they sometimes take their eyes off the track they’re headed down. You can really make a difference for those clients now and during the distribution phase. You can help conduct the train and get it safely down the tracks. 

 

Winning Strategies

Ash Brokerage answers the complex questions you and your clients have in preparation for retirement. Begin by talking to your clients about the need to be more conservative and avoid the risks that can derail retirement at the end of their journey.  

 

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 Financial Planning Market Risk

The Question that Raised the Hair on My Neck … and Can Raise Your Business Standards


Annuities

Early on in my career, I participated in training for wholesalers that emphasized the need to create a business plan with each of my top advisors. 

 

The plan was not complicated. In fact, it was bare bones, simple and to the point. It established a commitment between me (the wholesaler) and the retail representative, outlining how each expected certain activities from the other to make the relationship mutually beneficial. It was never more than a single page.

 

Sounds easy, right? Well, it required me to ask the advisor a new question. Changing habits can be hard … but I knew I had to try. 

 

Taking the First Step

After the training, I went out into the field. I had doubts about the value of making a quarterly business plan with every one of my top producers. However, as a new wholesaler with the company that sponsored the training, I felt compelled, even obligated, to try it. 

 

When I arrived at my next meeting, I took nothing other than my pad of paper. The advisor and I talked about her business for about 45 minutes. I learned a lot by asking the right thought-provoking questions, and I gave her some ideas that I thought she might use, based on her business and clientele. This advisor sat in a bank and during my time at her desk, I discovered she did millions of dollars of business with a competitor. 

 

As we wrapped things up, it was time for me to ask her for the next appointment and for us to sit down and do a business plan together. A “yes” meant that she liked the interaction with me, and my company, and had interest in our products for her clients. A “no” meant that I destroyed the relationship before it got off the ground. 

 

In the past, I would have asked for the next appointment but with no specific purpose. Or, I would have relied on my internal partner to follow up with the advisor and set another follow-up appointment. But, I had made a commitment to myself to change the way I sold – times were changing and advisors were looking for better partners.

 

So I gathered my confidence up and asked for the next meeting in three weeks, when I would be back in the area. And, I asked that we set aside 90 minutes so we could jointly create a business plan that would help keep both of us accountable to reaching some of the goals she had outlined.

 

There was dead silence for what seemed like an extended period of time … like eternity. I could feel the hairs on the back of my neck standing up, and it felt like I was about to break out in a cold sweat. 

 

Her response? She was happy to do it. In fact, she said she didn’t move forward with a wholesaler before making a formal business plan with the company’s representatives. I was floored. It was as if it was set up by the training school. 

 

Planning for Success

This advisor went on to become a multi-million dollar producer for me. In our business plan, we agreed to set out the very next quarter to host a client event, where she would have 50 clients and prospects in attendance. In the following quarters, I would provide training to her staff and mailers to use with existing clients, and I would host a networking event for centers of influence around town. For those commitments, she said she anticipated placing a portion of her business with me and my company. 

 

I encourage all financial professionals to have this same requirement of their partners and distributors. As we move deeper into the fiduciary world, it’s more important to surround yourself with firms, wholesalers, and other advisors whom you can trust with your clients. 

 

Business planning comes in many forms. But, planning with your partners might be the most crucial aspect for the ongoing support you need in this complicated financial services world. 

 

Winning Strategy

Create a business plan with each of your vendors. Those who complete the exercise with you should be considered partners. That’s what you are looking for in today’s complex distribution. You need partners who understand you business and can help it grow. 

 

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.”

Financial Planning Business Planning Practice Enhancement

How to Deliver Value and Better Your Business


Annuities

As you read this, the financial services world is changing. Regulatory pressure accelerated a shift over the past 12 months; however, the current state of fiduciary status was inevitable. Our clients were beginning to demand it, and today, we have to deliver it to even stay in the game.

 

The challenge, and the main reason to really think about your business in 2018, is to remain relevant with your clients and prospects through the fiduciary standard. The firms that grow will be the ones that not only adapt to the fiduciary rule, but also find ways to differentiate themselves from the rest of the fiduciaries in the marketplace. 

 

Discovering Your True Value

Your value in the market place will never be defined by your broker-dealer or regulation. Value is determined by how much you deliver above the cost of your services. That’s not to say that the U.S. Department of Labor’s rule won’t likely affect how broker-dealers form your commission schedules. But, your level of commission doesn’t determine your value. It’s how much you deliver to your clients. 

 

Value is about the client experience. How you deliver your expertise may be more meaningful than the information itself. Clients want to have information now. It must be accurate. It has to be timely. And, it must be easy to understand and digest. 

 

Value is also delivered by those items that clients truly value. Asset allocation is becoming – or has been for some time – a commodity. It has been outsourced by third-party money managers, computerized, and easy to access via the Internet. In order to drive value above your current pricing, you need to find other topics that are important to your clients. 

 

Retirement income is a nearly irrevocable decision. You only get one chance to get it correctly. If your client begins running out of money, it’s usually too late to correct the path. Income planning requires expertise, tools, and understanding of the emotional impacts of a variety of external factors. Robo advisers are not equipped to handle this in-depth conversation and complex problem. 

 

Bettering Your Business

This is where you need to plan for 2018 and beyond – by reshaping your business for maximum success in the future. It’s no longer OK to simply bring on new clients, apply an asset allocation model, and monitor the assets. You have to think about the demographic shift happening in the United States and the impact on your planning in order to stay ahead. 

 

If you are going to drive value – the ability to give more than you receive from your clients – you have to offer more. That doesn’t mean several more services. Instead, it means identifying what’s important to your clients and delivering with the highest client experience possible. 

 

You need to evaluate the technology, products, services, and processes that will guide you and your clients through the discovery and planning process. Look at the talent level in your office to deliver on the changing needs of your clients, and find partners who can assist in delivering new solutions. Taking a step back and looking at your office in the fourth quarter can make a huge difference for many years to come. 

 

Winning Strategy

When setting goals and planning for next year, take a deeper look. Evaluate the process, the talent level, technology, and the client experience. Make sure you are making a difference that adds value to your clients’ overall client experience with you. 

 

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.”

Financial Planning Retirement Practice Enhancement Business Planning