Annuities

Advantages in the Uncertainty of Rates


Annuities

The 10-year Treasury has jumped nearly 75bps since Donald Trump’s election.  If you talk with some economists, they’ll say the rate increase will continue; others predict a softening of rates back to the average over the past three years.  The Fed has indicated they would like to see rates above 3 percent by 2019.  In reality, we simply do not know where rates are going—short term or long term. 

 

So, what should you do with your clients in an uncertain rate environment?  I suggest you take advantage of this uncertainty and talk to your clients about how to properly mitigate interest rate risks—now and in the future. As rates were falling In the first half of 2016, we saw a significant increase in 5-year multi-year guarantee annuity sales.  Advisors were trying to lock in clients for a period of time while the 10-year Treasury fell precipitously throughout the first six months of the year.  However, we need to take advantage of the time to change the conversation with interest rates. 

 

Instead of reacting to rate changes and chasing the rate environment, try to begin repositioning the interest-driven portion of your portfolio for success, regardless of the rate environment.  I think this can best be done using the simple concept of laddering, a viable tactic to take advantage of any rate environment.  It’s a simple move that places your financial vehicles at different maturities over a certain time frame.  Once the short-term vehicle matures, you reposition it to the longest maturity available.  When the next shortest-term instrument matures, you reposition it for the same long-term maturity.  After going through your initial investments, you have laddered your portfolio.

 

The result of doing this creates liquidity and better rates.  Your client is now positioned with all of the interest-driven assets at the longest portion of the yield curve—the part with the historically highest rates and yields.  At the same time, you have a steady source of cash if the client needs liquidity.  By positioning a pocket of money annually in a ladder, the client has liquidity to a portion of his or her portfolio each year.  If the client believes more will be needed, simply position a larger percentage in each pocket of money and, perhaps, shorten the long-term maturity.  A lower yield is the likely cost of more liquidity.

 

Thinking about long-term solutions for interest-rate risk is sorely needed now—not because of a rising interest-rate risk but because we must move away from transaction-based solutions.  Your clients will appreciate the value you have added to the relationship with an actual solution versus worrying about an uncontrollable event such as a change in interest rates.

 

Winning Strategy:

Look at laddering the fixed income portion of your portfolio regardless of financial vehicle.  Putting your clients in the highest yield position with liquidity requires some repositioning but makes sense now and in the future. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities 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.”

Interest Rate Annuities

Important Demographic Shifts


Annuities

Part of my presentation at The Arizona Institute focused on the demographic changes over the last 20 years, changes that are likely to impact the retirement income space for several decades.  Some changes are the costs associated with increased longevity.  Others are the rate of savings in the United States, which has been declining since the late 1970s, resulting in smaller asset values to work with as we seek to generate future income.  But, I think the one change not discussed enough is the shift from defined benefit to defined contribution plans we have seen over the past 20 years. 

 

Defined contribution plans continue to grow in popularity due to the large selection of funds, lower costs and tax advantages.  But few plans have access to guaranteed income like a defined benefit plan.  Only recently have 401(k) plans begun to add deferred-income annuities to some target date selections.  In our research, we find that a portfolio can be optimized (a 95 percent chance of one dollar left in the portfolio at age 95), with somewhere between 18-25 percent of the portfolio in guaranteed income.  Guaranteed income may be Social Security, pension or annuities. 

 

When I talk with plan sponsors about their retirement benefits for employees, I find a ton of information in their offices about risk tolerance tests, asset allocation and fund performance.  But I rarely see or hear intelligent and meaningful conversations about converting this wealth into income.  The loss of guaranteed income streams provided by pension plans places additional pressure on our remaining assets to generate income.

 

The shift away from defined benefit plans seems to have shifted the attention of our asset managers as well.  Too many of our pension plans are currently underfunded.  Some plans are just as insolvent as the Social Security system.  Many plans have invested in significant holdings in bonds.  In a potentially rising interest rate environment, this can be devastating.  As more Boomers with these frozen pension plans inch closer to accessing their income, many plans will see increased pressure on funding levels as payouts increase and bond prices decrease. 

 

This demographic change can open an opportunity for those planners who address it.  Talking to your clients about getting in position for retirement income now can put planners in a leadership role with their clients.  Giving clients the options of guaranteed income will likely provide stability to the portfolio and peace of mind to the client.  Although this shift will end up being costly to most consumers, the financial planning industry can step in and provide proper strategies to many Americans.

 

Winning Strategy:

Understand how consumer behavior over the last two decades will impact retirement income planning.  More income from fewer assets, less guaranteed income available from employer plans, and increased longevity risks can provide an opportunity to expand your value proposition to the client. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities 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 Annuities Generations Employer Plans

The Fixed or Indexed Decision


Annuities

In 2016 we experienced a large rise in the sale of fixed annuities.  This makes some sense as we moved through an uncertain political landscape in a falling interest-rate environment ... clients were looking for safety and guarantees.  However, the use of fixed indexed annuities can provide the same downside safety and produce similar, if not better, returns than a traditional fixed annuity. 

 

Our office took a look at the past 30-year-returns of a fixed indexed annuity—using current cap rates—and compared the results from a multi-year fixed rate annuity.  The results surprised me.  With a 5.25 percent cap rate in years 1-4; a 5.00 percent cap rate in years 5-6; and a 4.75 percent cap rate after that, we compared the 7-year accumulation values against a 2.85 percent guaranteed return over the same period.  More than 93 percent of the periods over the past 30 years resulted in a higher fixed indexed annuity value than the 2.85 percent guarantee. 

 

When the fixed rate did exceed the FIA accumulation, the difference was only an average of $288 over the 7-year period.  When the FIA’s accumulation was higher, the average gain over the fixed rate was $7,876 over the 7-year period.  While the risk exists that the client may have zero interest credited during a period when the index had no gains, history tells us that there is a 93 percent chance the client will have more value with a FIA versus a fixed-rate instrument, given today’s rates. 

 

Even better, we are seeing the use of advisory-based FIAs emerge in the market place.  Due to the lack of commission built into the product, cap rates are substantially higher.  However, even with a 75bps fee assumed in the analysis, there was a 100 percent historical experience that the FIA outperformed the interest rate.  Too often, we look at fixed annuities or bonds to balance our equity risk or remove interest- rate risk.  The FIA can provide the same downside protection and higher potential returns if the client is willing to risk the small guaranteed rate.  In forgoing that guarantee, the client maintains principal protection and higher potential yields.

 

It’s time to relook at FIAs as a part of the portfolio and not just sell what is easy.  Instead, let’s take time to educate our clients on the value and potential benefits of owning a FIA, which can provide access to downside protection, no interest rate fluctuations, guaranteed income and tax-deferred growth (assuming non-qualified assets).  And, historically, your client is in a better position to earn a higher accumulation value over a typical 7-year surrender period.  Take the time to look at an alternative to bonds for a portion of your clients’ portfolios.

 

Call Ash Brokerage for more information on our research and learn how FIAs can be a better solution for your clients’ annuity and bond needs.

 

Winning Strategy:

Research shows that the accumulation values in FIAs have outpaced multi-year guaranteed fixed-rate annuities.  Take time to look at alternatives that can better your client portfolios. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities 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.”

FIA Fixed Annuities Annuities

The Future of Fees


Annuities

Momentum continues to move toward the advisory business.  I think there are two reasons for this.  First, we have unprecedented potential regulation coming in April 2017 favoring advisory business with fees tied to assets under management.  Secondly, we are seeing a continued industry shift to more passive investments and lower cost models—both are forcing advisers to use the lower fee structures found in advisory models.

 

Many industry experts expect those fees to continue to be driven down over the next 24-36 months due to regulation and market forces.  I agree.  So, how can we prove our value to our clients and prospects and protect our revenue while working in the best interests of our clients?  Below are a couple of ideas I think successful planners should attend to, now and in the future, to not only maintain their practice—but also grow it!

 

Fee Transparency:  I’m not talking about simply telling clients how much we charge for our services.  That has become a given because of regulation.  And, more importantly, market forces—not the DOL—will make all our fees for services look very similar.  So transparency will likely differentiate successful planners in the future.  It’s appropriate to charge 25-40bps for assets under management and disclose that amount.  It’s also appropriate to charge another 40bps for comprehensive planning with annual monitoring and/or quarterly reviews.  And it’s also appropriate to charge a certain level of basis points when planning for protection-related issues—longevity, death, disability and chronic illnesses. 

 

Vibrant Protection Platform:  With an emphasis on passive investments coming from the DOL, it will be harder to justify a high-fee structure for clients when our services are limited to asset management.  Absent of active managers, you might be setting yourself up for unhappy clients when you disclose the value of the fee.  Having a protection platform will be critical for future success.  Our clients are living 2.5 years longer for every 10 years in the United States.  Our clients’ Number One Fear remains outliving their money.  And, half of Americans underestimate their life expectancy.  Talking about contingencies and mitigating those risks will be paramount in the new financial planning world.  You have to have a team capable of executing on complex insurance and longevity issues in order to protect your assets under management and have any chance of retaining those assets with the next generation.

 

Collaborate:  From the first night that I read the DOL rule, I have said that most planners need to come to grips with two questions:

 

1. Am I going to move up market?

2. If I stay in my current market, how do I become more efficient and capture market share?

 

Our industry is one of the most collaborative I have ever seen.  We are willing to share clients for the good of the client.  Our clients have complicated issues that require expertise in many specialties.  Therefore, we have to be able to bring experts to the table for our clients.  We not only need to have a quarterback mentality to direct and execute a financial plan but also bring in experts to have the most success.  That coordination of talent, expertise and access is valuable to our clients.  Having a “network” can bring value on top of your specialty, which may soon be subject to fee compression. 

 

I can go on and on about changes in fee structure and the impact of regulation, but I think you get the idea—we have to look for different ways to earn our revenue from clients.  That means we need to expand our services to platforms we haven’t been offering to date, including life, guaranteed income and chronic illness protection.  Our clients will rightly expect a full accounting of our fee structure. Being able to clearly outline the value they are receiving will make it easier to have the fee conversation. 

 

Winning Strategy: 

Don’t look at disclosure as a reason to reduce fees because the market is reducing their fee.  Value will be important in the future.  We simply need to redefine our value, change our practices to offer services that are important to our prospects and be transparent in the fee structure. 

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities 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.”

DOL Strategy Annuities

Think Like a Factory


Annuities

I recently listened to a 30-minute podcast featuring Jeb Banner, CEO of Smallbox.  Smallbox develops web sites and consults on transformative ideas like putting employees first.  The owner works with clients on Factory Days and/or Weeks.  At their core, Factory Days are about reinvesting in yourself and your support staff.

 

Smallbox shut down its business for the first time in 2011 for a Factory Week, allowing everyone to get away from the business and work on themselves.  And, of course, we can all use time to improve ourselves—recuperate, recharge, relearn and discover new possibilities.  Although the experiment was not perfect, it did focus on the employees and their development.

 

How often do you shut down your business to improve your staff and your practice?

 

As planners, we control our schedules.  Unfortunately, we allow our clients to set our weekly or daily schedules.  And we tend to chase the “next case” or “next revenue source.”  But we rarely take time to get offsite and work on our own practices.  The old saying is “work on your business not in it.”  I would say that most financial professionals are busy chasing the next urgent need, regardless of its importance.  We simply love to be busy as a way of justifying our revenue to our clients.  Worse yet, we have hired talented individuals to leverage our time, sales and service, but we don’t always know how to use our staff in the most effective ways possible. 

 

How much more balanced would your life be if you didn’t have to chase after every client need?

 

If you reinvest in your staff, I bet you can learn much from them about your business.  And, they are likely to provide great ideas on becoming more efficient, providing better customer service and helping you grow your business.  But they need to know what to do and how to do it.  A simple word for that process is “training.”  We rarely budget time, energy, dollars and other resources to make our staffs better.  I am almost certain that we all underutilize our sales support staff members.  If we better train them, chances are we can have better balance in our lives—versus running around 10 to 12 hours a day. 

 

Who do you think is most important? 

 

While it may seem selfish, Smallbox would argue that you and your staff are the most important assets you have.  Ultimately, you are using your talents for the betterment of your clients’ financial futures.  However, you have to keep yourself and your staff engaged in ways that help them grow and get better.  Learning and growing will allow you to provide more value to your clients and prospects.  So, from time to time, take time to step away from your business and get re-engaged in your most important asset:  you and your staff.

 

Winning Strategy:

Schedule regular time throughout the year to think about your business, discover new ways to help clients, and improve the skill sets of you and your staff.  It’s worth the investment.

 

About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities 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.”