Annuities

4 Strategies for Rising Interest Rates (That You Might Have Forgotten)


Annuities

Fortunately or unfortunately, depending on your point of view, we haven’t had to worry about rising interest rates for nearly a decade. Monetary policy, including quantitative easing, forced interest rates to near zero for a period of time. Clients benefited from the falling rates through capital gains growth that historically has not been a large part of bond returns.

With today’s rising interest rates, financial professionals need to offer strategies that many clients haven’t thought of for several years. Some will seem foreign to clients, as well as financial professionals, due to the time lag since they have been last deployed.

  1. We can’t chase yield. In my opinion, this has always been a staple of good, quality advice. However, we tend to chase the highest rates in any vehicle. Pressure on adhering to best interest standards makes us think that the highest interest rate is only the right thing to do. I think we should make sure there is balance with long-term stability of returns, rather than simply chasing high returns. Look to build a more consistent portfolio instead of just finding yield for a portion of the portfolio.
  1. Laddering continues to make sense. Like all good professionals, we tend to tweak what worked for us until it no longer looks like the thing that was successful. Over the past decade, we have forgotten how to take advantage of rising interest rates. We’ve changed how we position interest-driven products as rates fell quickly after the financial crisis. By laddering your interest-driven vehicles, your clients eventually have all their funds at longer term duration, which should bear a better interest rate in normal yield curve scenarios, but with liquidity staggered throughout the portfolio. We find this is a good strategy for all rate environments, but we tend to get away from it at interest rate peaks. 
  1. The purpose of the asset must be defined. Many clients tell their financial advisor they want growth with the appropriate level of risk. And, we tend to oblige them with “custom designed” portfolios from a third-party money manager. Instead, let’s change the conversation to “What do you want this money to do for you?” This question has the potential to lead to a more open discussion around long-term planning. If the assets are for retirement, let’s position them accordingly, using strategies that make sense for protecting the longevity of the portfolio. Income is the new outcome which requires more complex analysis as opposed to the highest current interest rate.
  1. Adopt to new product development made for this environment. New designs tie returns to a variable interest rate benchmark. As that benchmark interest rate increases, the client’s rate increases the following year. Many will find a three or five-year duration long; however, using laddering strategies can be beneficial in mitigating this risk.

We face a lot of challenges as the baby boomer generation continues to leave the workforce toward retirement. If not handled correctly, a rapidly rising interest rate environment makes for a potential portfolio burden that many clients are not seeing clearly. Take time to review the client’s intentions and plan for a rising rate environment over the next several years. 

Winning Strategy

Evaluate your bond holdings and plan for a rising rate environment. Your clients are unlikely to see the risks ahead due to recent monetary policy. Put your clients in a position to win.

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About the Author

Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.

Retirement Interest Rates Winning Strategies Capital Gains

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