Annuities

Happy Birthday, Mediocrity!


Annuities

At the end of August, Vanguard Group’s First Index Investment Trust turned 40. While many people laughed at John Bogle as he rolled out low cost investing designed to match the index instead of beating it, the fact is that the S&P 500 Index Fund now stands at $252 billion in assets. Client sentiment has changed since the launch of indexing. Between the concept and the perception, our world evolved to embrace mediocre investment performance subsidized by low cost management.

 

Over the past four decades, the philosophy of matching the index instead of outpacing it grabbed the attention of many clients. While most managers do not beat the index, it’s problematic that too many indices are measured against the S&P 500. Many funds are not meant to beat the benchmark because the manager might reduce an exposure to undue risk, for example.

 

Of course, the advantage of indexing is to do so in a low cost manner. According to the Wall Street Journal, Vanguard has reduced investment fees by as much as 90 percent.1 In the end, whether it is cost or performance, indexing seems to have won out against the active manager. Even the U.S. Department of Labor mentions indexing as a viable alternative for retirement investors. 

 

So, if fees are near minimum and matching the index is a desired investment return, how can a financial professional add value to his/her financial planning practice?

 

The answer lies in getting clients to consider other things besides just return. We need to change our approach …

  • As our population ages, we must provide inflation-adjusted, after-tax income (not returns) to our clients
  • Conversations about longevity will become more important than conversations asset allocation
  • For more Americans, affording the same essentials 20 years into retirement will be more of a concern than how much equities they have in their portfolio
  • It will be more valuable to know our clients’ portfolios won’t be devastated if a health care event happens compared to knowing how much they earned in one year
  • Talking about how we can protect our clients’ legacy for the next generation will be more powerful than talking about how we reduce investment risk

 

Being able to execute on those value propositions will be more important in the future. Just as Vanguard changed the conversation to cost and return, we have to change the conversation to protection, income and longevity in order to add value in the long run.

 

Winning Strategy:

Look at how Vanguard has changed the dynamic of investing since 1976. Indexing drove the investing population to cost and little value. Drive your clients to valuable services like reducing longevity risks, creating legacy values for the next generation, and protecting their wealth. 

 

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.”

 

1“Wealth Adviser Daily Briefing: Index Funds turn 40, a ‘How-to’ for Foreign Home Buyers,” The Wall Street Journal, Sept. 1, 2016: http://blogs.wsj.com/moneybeat/2016/09/01/wealth-adviser-daily-briefing-index-funds-turn-40-a-how-to-for-foreign-home-buyers/

 

Fundamental Truths of Chasing Yield and Liquidity


Annuities

I have long discussed the need to position your products and services on value propositions besides rate.  However, I want to talk about the advantages of selling in today’s low rate environment and placing the client in a better position using rate as an example. In the long run, the value you bring to your clients by talking about current fundamentals will bring more people back to your office.

 

As I looked at today’s rates (Sept. 6, 2016), the current 30-year Treasury Yield is 2.24 percent. Currently, several insurance carriers are offering five-year, multi-year guaranteed rate annuities with similar rates. I constantly read in the Wall Street Journal about advisors placing their clients in dividend-paying stocks in order to create better yields in the portfolio. So, in order to obtain higher yields, the client either must take equity risk in the portfolio or expose the bond portion of the portfolio to extreme price depreciation in the event of a rising interest rate market. Neither sounds fundamentally strong for the long haul.

 

Too many advisors fail to show an alternative because of their own biases against annuities or a bad past experience. But, I believe we are in the best-ever market conditions to sell our products. Even with fixed annuity yields between 2.25 percent and 3.34 percent (assuming an FIA hits a 4.5 percent cap 75 percent of the time), our taxable equivalent yield is, at a minimum, 3.84 percent – well above the current investment grade corporate bond yields. And, the nominal return is just as high as the current 30-year Treasury rate, with no risk to principal in an increasing interest rate environment. 

 

So, while your competition searches the next best thing that their clients want to hear or chase, talk to your prospects and clients about two fundamentals: safety and liquidity. Ask yourself:

  • Why wouldn’t your client want to take a 30-year yield with one-sixth of the maturity?
  • And, why wouldn’t the client want to have a more liquid portfolio for the same yield with additional flexibility for emergencies and medical issues? 
  • And, what prevents you from showing this option? Likely, it’s your mindset against a lower interest rate than six months ago.

 

Winning Strategy:

Don’t focus on where the economy or interest rates were six months ago and compare them to today. Look at the relative economic conditions and talk to your clients about fundamentals. They will appreciate the simple, straight-forward approach to their retirement success.

 

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.”

 

Yield Annuities Rates Economy Market

If You Knew Then What You Know Now


Annuities

You’ve probably heard the phrase, “Hindsight is 20/20” or, “Looking in the past is the clearest way to see the future.” While these phrases are often true, people don’t always learn from their mistakes – especially when it comes to investment decisions. 

In summer 2016, the market experienced record low Treasury yields. During that time, many clients and advisors failed to review historical trends and move assets into alternative investments.  

Looking back over the past 10 years, numerous financial and non-financial events rocked the market. Did you and your clients invest funds strategically in response to these events, or did you miss a good opportunity?

impactful_events.jpg (1)

  • The mortgage crisis of 2007 caused many investors to run from securities. But those who kept their ground are now reaping the rewards after the market reached record highs in summer 2016.  

  • In 2009, the swine flu appeared to be a catastrophic pandemic, sending many people into a financial frenzy. Yet, for those who remained invested during that time, the yield was nearly 5 percent.

  • When the United States’ credit rating was downgraded in 2011, many predicted a yield increase to reflect the rising risk associated with the downgrade. Surprisingly, the yield fell substantially. 

While you should be optimistic about yields increasing over the next three to five years, in the meantime, you must get your clients focused on how to generate income in retirement. You can’t allow the past to dictate your clients’ future. Clients are often focused on reasons not to save or invest, so it’s crucial to educate them on the proper products and asset allocation to maximize their portfolio. 

 

Winning Strategy

While clients often allow past economic conditions to dictate their current financial decisions, take the opportunity to educate them about promising investment opportunities and optimize their funds to achieve their retirement goals. 

 

About the Author

Mike McGlothlin is the Executive Vice President of Annuities at Ash Brokerage. His strength is helping advisors become more efficient and effective in their businesses. He and his team provide income-planning solutions focused on longevity and tax efficiency, and they also assist advisors with entering defined-benefit termination planning and structured settlement markets.

How You Can Overcome Constraints Like Super Mario


Annuities

A constraint is often seen as a limitation. However, true innovators see a constraint as an opportunity for improvement and creativity. It’s an opportunity to not only overcome obstacles, but also to improve upon the processes and solutions we use when problems arise.

Constraints come in many forms. In the financial services industry, our constraints include: 

  • Time
  • Resources
  • Technology
  • Regulations
  • Market conditions, especially when experiencing volatility or low yields

Regardless of your perceived limitations, you have the opportunity to produce creative solutions for your clients and the industry.

 

Constraints Lead to Creation

Mario is an iconic video game character, but the story of his creation isn’t as well known. Have you ever wondered why Mario wears his hat, gloves, overalls and huge mustache? All of those features helped his developers overcome constraints. 

They didn’t have enough pixels to make Mario’s hair flop or bounce as he moved through the game, so they gave him a hat. They also didn’t have enough time or resources to design a mouth, so they gave him a bushy mustache. Finally, limited ability prevented them from creating a shirt, buttons or belt buckle, so – you guessed it – they gave Mario overalls.  

As you can see, great successes can emerge from great constraints. As increasing regulations, changing interest rates or volatile markets seem to place undue constraints on your business, use them as an opportunity to separate yourself from the competition, be creative and provide a unique solution for your clients. 

 

Winning Strategy

Use constraints as an opportunity to differentiate yourself in the marketplace, make unique solutions and improve processes.  

 

About the Author

Mike McGlothlin is the Executive Vice President of Annuities at Ash Brokerage. His strength is helping advisors become more efficient and effective in their businesses. He and his team provide income-planning solutions focused on longevity and tax efficiency, and they also assist advisors with entering defined-benefit termination planning and structured settlement markets.

 

The Real Problem with Retirement Planning


Annuities

Some people claim the U.S. Department of Labor (DOL) conflict of interest rule is ruining the retirement industry. But, have you ever thought that maybe the industry is ruining retirement?

According to a 2015 article from U.S. News and World Report, Americans aren’t saving enough. Here are the average retirement account balances at the end of each age bracket: 

20s – $12,537
30s – $33,784
40s – $68,683
50s – $122,957
60s – $212,812

While the DOL implementation and other market shifts certainly affect retirement trends, at the end of the day, Americans simply aren’t prepared for retirement. Imagine having $212,000 set aside for retirement with no further chance to earn income. And, it must last you the rest of your life. 

In reality, the retirement industry may have created this problem. For the past two decades, I’ve been told to focus on building a renewable income stream for myself. But, in order to do that in a productive business model, most planners must move up market and set minimum asset levels to engage new clients. The problem is millions of Americans have failed to work with a financial professional early in their career to develop a well-allocated, systematic savings plan. Now, they are suffering the consequences.  

The DOL is attempting to level the playing field, but collateral effects include commoditization of our business. How can you make your business stand out from the rest and make a difference in your clients’ lives before the industry continues to make the same mistakes?

 

Strategies for Improvement

  • Evaluate your business model and target markets in light of the DOL rulings to ensure excellence in products and services
  • Focus on serving the middle class through education and strategy, as this population is ill-prepared for retirement, both financially and emotionally
  • Initiate income planning conversations with Americans of all ages whenever the opportunity arises
  • Utilize effective tools that provide relief for past years of ignoring the problem  

 

Winning Strategy

Seize the opportunity to support the underserved middle class in America. Moreover, discover market niches that boost productivity for you and your business as you navigate the post-DOL world.

 

About the Author

Mike McGlothlin is the Executive Vice President of Annuities at Ash Brokerage. His strength is helping advisors become more efficient and effective in their businesses. He and his team provide income-planning solutions focused on longevity and tax efficiency, and they also assist advisors with entering defined-benefit termination planning and structured settlement markets.