The domino effect


Traveling in the Midwest these past few weeks has been less than easy. I almost thought John Candy and Steve Martin were following me through my planes, trains and automobiles. At the gate, I decided to leave the airport, thinking my first flight would not catch the connecting flight. However, as I stepped away from the gate, the flight began boarding and I made a last-minute decision to get on the plane. As feared, I missed my flight to Buffalo, New York; instead, the airline shipped me to my next day's appointment in Milwaukee and, after my flight from Milwaukee was cancelled, I ended up driving five hours to get home. It seemed as though the first flight set off a chain of events that resonated throughout the rest of my trip. In retirement planning, we call this sequencing of returns. 

Having several bad investment performance years over a 30-year retirement cycle is usually not a deal breaker. However, if those negative years occur at the beginning of retirement, the consequences can linger. So, many times, advisors use an analysis with an average return. If you take the average and place the best years first and/or the worst years first, the account value hits zero in a range of 13-years difference. It's important to take the risk of a poor sequence of returns out of your clients' equation, especially early in the retirement years. 

If I had this week's travel to do over, I certainly would have continued walking away from the gate. Make sure your clients walk away from the gate of potential pitfalls and unknowns. By placing part of your clients' portfolio in a guaranteed growth and guaranteed income stream, you help eliminate the initial sequence of returns. By eliminating that first potential downfall, you have positively impacted the chances of your client having a successful retirement.

What's in a rate of return?


If we don't compare apples to oranges, then why do we compare rates of return equally? There are so many components to the real rate of return that people ignore them when they choose investment vehicles. If we look at the real return to clients, many vehicles look why take on additional risk for similar returns. 

Let's take Paul and John as an example. Paul likes the idea of investing in a group of sub-accounts in a variable annuity with an income rider to protect his income. John, on the other hand, wants to protect his income but does not want to risk principal; so, he places his retirement money into a fixed indexed annuity. Paul's investments average 7% per year, but he pays 1.25% for M&E; 1.35% for the cost of the rider; and .95% for the asset management fees on the sub-accounts. His real rate of return is 3.55% (7% - 1.25% - 1.35% - 0.95%). 

John has an identical income rider with a guaranteed roll-up and income for life. His cap rate is 6.00%. During his holding period, the market hits the cap 80% of the time (statistical average) for an index gain of 4.8%. After the cost of the income rider (.95%), John's retirement money grows at 3.85% without any downside returns due to the fixed indexed annuity. 

The lure of unlimited upside potential comes at a cost in terms of fees and rider costs. It's important to have a discussion with clients about the real rate of return and not just the nominal return. Nominal returns are returns that sell, but the real return is what generates client growth. Said another way, it's not what you earn, it is what you keep.

Impact of product allocation


The financial services industry always discusses the impact of asset allocation, but it rarely mentions product allocation. How we use products can greatly enhance a client's solution and reduce risk - much like asset allocation. Using annuities in a portfolio can help reduce the pressure of withdrawals from a securities-based account. 

Let's look at a typical retiree in the U.S.: Tony and Katherine have $750,000 in a managed account. Between the two of them, the couple anticipates $20,000 in Social Security income payments. The remaining $30,000 will be taken as systematic withdrawals from the managed account. The withdrawal represents a 4 percent distribution from the account. Over the years, the 4 percent distribution is likely to put a lot of pressure on the account if there is a repeat of 2008 or longer-than-expected life expectancies. 

By adding additional products to the portfolio, the client can reduce the pressure on the managed account withdrawals. If Tony and Katherine purchase a $150,000 joint life immediate annuity with cash refund, the annuity generates nearly $9,000 in annual income. Using another $100,000 to buy annuity with an income rider, the couple receives another $5,000 per year. The remaining $16,000 continues to be withdrawn from the managed account - now only a 3.2 percent distribution factor. The reduced distribution factor helps the couple in extended down markets, allows the managed account to grow more, and the couple still retains control of their assets and protects the beneficiaries. 

Allocating a client's portfolio across different products, not just asset classes, can add significant value to the portfolio while providing guaranteed income for life - one of our clients' biggest fears. Look at alternatives before settling for the typical 4 percent distribution from managed accounts.

The value of financial advice


I read an article recently discussing how the term "wealth management" was being misused. The article focused on how clients perceived the term in relation to how much they were paying in fees. I have always objected to this type of thinking. How we describe ourselves as professionals should be defined through our core values, not by how we are compensated or our business model. 

In the past decade, much has been written about the value of fee-based planners over commission-based agents and/or advisors. I network with many advisors using different compensation models; many use fee-based planning models while many use a commission-based model. Both groups not only provide quality service to their clients but they also meet their needs. There are many instances where insurance needs cannot be met with the limited fee-only products. And, there are many client goals that can be met with just fee-only, assets under management account. 

It's time to re-think the value of advice and define it by the level of competence, expertise and integrity toward the client. Our industry must get to the point where lobbyists and regulators relinquish the power to define professionalism, and make it about how our clients perceive successful client/advisor relationships by exceeding expectations, regardless of how we are compensated. Working with a financial professional needs to be a personal choice built on relationship, trust and a confidence that the professional will exceed the clients' expectation. All of those things can be completed with various compensation models.

Follow your clients, not the herd


Too many advisors follow the herd to manage assets without focusing on the client need. This behavior leads us to overlook solutions that clients desire and that will add value to the client/advisor relationship. If we look at products in a different light, we might see new avenues to enhance our clients' portfolios and solve one of their biggest uncertainties - retirement.

Advisors continually tell me that they don't want to lock up their clients' assets with annuities, and advisors tell me their clients don't like all the fees. In a recent survey, 91 percent of annuity owners had positive or neutral impressions of them. When you dig deeper into the survey, you find that 70 percent of annuity owners say the annuity's expenses are worth the benefits they are receiving from it. 

Financial professionals need to present annuities to their clients. Nearly 40 percent of the people surveyed who did not own an annuity indicated they would consider buying one but have not been presented the opportunity to do so by their financial professional. This opens a large opportunity to have a meaningful discussion with pre-retirees and prospects about the benefits of re-positioning a portion of their assets into annuities. 

Liquidity remains a hurdle for many advisors. It's important to position the correct amount of assets into an annuity when working with clients. However, the same study found 78 percent of people who own annuities are satisfied with the access to their money. More importantly, many new immediate annuities provide liquidity features that allow as much as 90 percent of the period certain to be provided in a lump sum to the annuitant. These features provide ample opportunity for the advisor and client to be flexible in retirement planning. 

Regardless of your view on annuities, it's time to have a quality conversation with your distributor on the new generation of annuities. You don't know what you don't know until look at things differently. 

1  The Future of Retirement Income Study, Putting your clients in control of their future; page 6, Genworth, 10/9/213
2  The Future of Retirement Income Study, Putting your clients in control of their future; page 5, Genworth, 10/9/2013
3  The Future of Retirement Income Study, Putting your clients in control of their future; page 5, Genworth, 10/9/213