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

How You Can Find Safety in Guaranteed Income


Annuities

Our headquarters is at the heart of Fort Wayne, Indiana, a city that was severely hurt by the downturn of the automobile and manufacturing sectors. But today, it’s seeing a resurgence, especially downtown. Our building, the Ash Skyline Plaza, is about 18 months old, and 15-story complex, Skyline Tower, is being built adjacent to us – just across the rooftop park. 

 

I can see all the construction activity from my office – many times, I have to turn and look away so I can concentrate. There’s nothing like a portable toilet flying up on a crane to make you lose your train of thought. 

 

But, I admire those workers. They’re on site before I arrive and still there long after I leave, even on the weekends. It’s tough work, for sure. And, it’s dangerous, plain and simple. But the crew members all wear safety harnesses, hard hats and boots to protect themselves. It’s part of their everyday habits. 

 

That makes me think … 

 

What safety habits are you instilling in your clients?

 

As they build their portfolios and retirement income, your clients are taking risks. Many of those risks are associated with longevity or outliving their income: 

  • Market returns
  • Sequence of returns
  • Inflation
  • Long-term care events
  • Legacy planning constraints 
  • Taxes

 

Regardless of what happens with all those risks, the safety harness is income. As long as a client has income, they will likely feel more comfortable, regardless of what risks arise. Now, those risks still have to be addressed. But, if your client can feel confident that their income is secure from market drops and inflation, you have a good chance at addressing the other risks. 

 

We have to instill safe habits when it comes to retirement income planning. Nearly everyone can benefit from having guaranteed income as part of their retirement plan. Whether it’s from defined benefit plans, Social Security or insurance company annuities, guaranteed income shifts the risks of longevity. However, only one of those sources has embedded inflation protection, so you must address inflation with your client. Income serves as a great safety harness for those taking investment risks. 

 

Winning Strategy

Focus on the risks that longevity creates for your clients. If you address their fears and concerns, you are likely to win a client for life, as well as many quality referrals. 

 

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 Guaranteed Income Longevity

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