Annuities

QLACs: The Unused Gift


Annuities

In 2014, the U.S. Treasury Department released new rules around Qualified Longevity Annuity Contracts or QLACs. After an initial increase in utilization, the focus and attention dwindled over the past two years. Today, the sale of all deferred income annuities remains stagnant and far below expectations from 2014. This gift that the government provided remains largely unused in the planning community. 

 

As I prepared for a presentation recently, I asked our team to update our research on the use of QLACs at different ages and for different risk allocation models. The results were similar to an earlier study we did in 2015. In fact, the results from 2017 are even more convincing for the use of QLACs. Keep in mind the interest rate environment hasn’t changed significantly over the past 24 months. Yet, a fixed instrument was proven to improve the probability of success across many categories. With such a wide improvement, we owe it to our clients to consider this solution in the retirement planning process.  

 

A Closer Look

Our QLAC study evaluated four asset allocation models: 

  • Aggressive – 80/20 equity-bond allocation
  • Moderate-aggressive – 60/40 allocation
  • Moderate-conservative – 40/60 allocation
  • Conservative – 20/80 allocation

 

The initial investment started at ages 55, 60, 65 and 70. We looked at placing a $500,000 portfolio in each of the allocations. Each portfolio began a reasonable distribution of income beginning at age 70. For each allocation strategy, there was a probability of success of having $1 left in the portfolio at ages 90, 95, and 100. 

 

Next, we placed a QLAC at each one of those ages and allocation strategies. The annuity began paying out at age 80. With QLACs, you can tend to change income start dates five years before and after the initial requested start date – this gives the client a 10-year window if their needs change. So, there are 48 results cells between ages 55, 60, 65 and 70 in the four different allocation strategies when we look at longevity at 90, 95, and 100. In every one of those 48 cells, the study found that a QLAC improved the probability of success. What surprised me was the fact that some of the largest improvements in success rates happened when a QLAC was purchased at younger ages.  

 

A Change in Mindset

Too often, we think of QLACs as a way to push required minimum distributions down the road. Instead, we need to initiate a conversation about this solution in order to mitigate the risk of longevity. In doing so, we reduce some of the concerns our clients have about running out of income during their life. We clearly help some of our younger, more conservative clients in the process.  

 

Winning Strategy

Take the time to evaluate the use of deferred income annuities in the planning process with clients. Their best interests might be served by providing guaranteed income later in life. Our study shows that you can engage a client and have a high probability of helping them improve their retirement outcomes. 

 

For more information about the assumptions and results of our QLAC study, call Ash Brokerage at 800-589-3000. Ask for our annuity sales desk and tell them you want to know how you can improve the probability of success for your clients.  

 

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.

Annuities QLAC Retirement

Add Value or Become Extinct


Annuities

We’ve been talking about the market forces within the financial services industry that are moving us toward a new fiduciary environment. Because even though the U.S. Department of Labor Fiduciary Rule seems to be delayed until summer, what started in late 2016 continues to gain momentum. 

 

What We’ve Already Seen

At the end of last year, several firms announced strategies to mitigate conflicts of interest, and news articles have been asking consumers to ask their advisor if they are a fiduciary. Several advisors have told me that prospects have asked them on the phone if they are fiduciaries before making an appointment. 

 

It is clear that changes in our business began even before the rule was announced. According to Morningstar, the number of ETFs charging less than 10bps rose from 125 to 348 from 2010 to 2015.* Consumers have more access to information than ever before. And, more groups are focused on the educational aspects of our industry, which is a good thing for everyone. So, even though the rule, the delay, and the pending litigation remain a focal point for our industry, consumer groups have already been forcing change. 

 

What’s to Come

It seems compressed revenue, whether it be fee- or commission-based, will likely take hold over the next three to five years. If you are only earning revenue from managing assets, you need to re-think your business model. Some experts believe asset management only will gross only 40-50 basis points, and we clearly see the trend moving that way today.

 

What You Need to Do

In order to sustain a healthy business model as a planner, you’ll need to expand your horizon and modify how you manage wealth. That includes leveraging protection solutions, such as insurance, annuities and alternative products, to maximize your client relationships. Many of us many will need to partner or merge with experts in collaborating fields in order to grow revenues. Without a doubt, you’ll need to add valuable services that will retain customers and help you acquire new relationships.  

 

If you stagnate in your offerings, you will likely find yourself earning less than the 40-50 basis points mentioned. Or, you might find yourself out of business. 

 

Your clients will only continue to become more fee-conscious and look for the most efficient asset management. There’s too much information out there about asset allocation services, so that can’t be your only offering. Instead, your expertise should be driving from managing different and expanded segments of your clients’ financial lives. But, that will require a willingness, a mindset, a toughness, and a curiosity to make your clients’ lives better in the long run. I’m confident all of us in the financial professional community are up to the challenge. 

 

Winning Strategy

Look to add to your existing services in order to offset the likely fee- or commission-based compression over the next three to vie years. Adding valuable solutions to your menu of client services will provide leverage and lift to future revenue in your firm. 

 

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.”

 

*Wall Street Journal, “WSJ Wealth Adviser Briefing: Broker Fee War, Morgan’s Make-Right, FAs on Snap’s IPO,” March 1, 2017: http://blogs.wsj.com/moneybeat/2017/03/01/wsj-wealth-adviser-briefing-broker-fee-war-morgans-make-right-fas-on-snaps-ipo/

 

Be Ready for the Questions Your Clients Will Be Asking


Annuities

As I was traveling around the country attending conferences, The New York Times published an article that caught the attention of many people in our industry. “The 21 Questions You’re Going To Need To Ask About Investment Fees,” points out questions we all need to get comfortable answering.* Better yet, we should prepare to discuss them upfront with our clients  

 

The article is a perfect example of the market effects taking place in the financial services industry. While the U.S. Department of Labor Fiduciary Rule has been delayed, our industry has already started a transition that is unlikely to be reversed. Our clients have been exposed to many of the perceived conflicts that exist in our business, and they have the right to ask appropriate questions. 

 

At the same time, I believe it is entirely appropriate to continue selling commission-based products, especially in long-term income planning and tax-deferral situations. Simple math indicates that commission-based products, when used properly, enhance the client position in many cases (as with any product solution).

 

The article asks questions about compensation, incentives, trips and fees. All of these are important to disclose to our clients in the future. If incentives are involved, I would argue we need to be upfront about those in the new fiduciary world. In fact, we need to figure a way to not be incentivized by these and focus on vendors making our business more efficient and effective. In the end, we must be prepared to answer all our clients’ questions about our compensation, the fees of the product, and why the particular product is the proper solution.  

 

As an industry, we need to take this type of article to heart. The news media should not be educating our clients about fiduciary status. Instead, we need to show them how valuable financial service professionals can be in building a long-term retirement and wealth management plan. If we commit to that, everyone wins.  

 

Winning Strategy:

Whom do you want educating your clients – you and your staff or the news media? Stay ahead of any hype. Be ready to answer questions about fees and compensation. 

 

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.”

*New York Times, “The 21 Questions You’re Going to Need to Ask About Investment Fees,” Feb. 10, 2017: https://www.nytimes.com/2017/02/10/your-money/the-21-questions-youre-going-to-need-to-ask-about-investment-fees.html?_r=0

Annuities DOL Fiduciary

Rule Delay Announced


Annuities

On April 7, the U.S. Department of Labor (DOL) will likely publish an official delay of its fiduciary and conflicts of interest rule. Many in our industry have been waiting for this rule to be delayed, but several points around the fiduciary rule remain uncertain. Industry experts predict a further delay, allowing the DOL to fully complete President Trump’s requested review of the rule.  

 

I want to stress to all who work in our industry that many aspects of the rule will go into effect June 9, 2017. Most notably, impartial conduct standards must be adhered to on any qualified sale after the delayed implementation date. Although the Best Interest Contract (BIC) requirement appears to be have been pushed off until Jan. 1, 2018, the sale of an annuity inside a qualified account must be in the best interest of the client, make no misleading statements, and have reasonable compensation tied to the transaction.  

 

More importantly, our industry has already begun to shift to the fiduciary status and will continue to do so before the June 9 delayed implementation date. For those of us serving our clients, it continues to be table stakes to work in the best interest of our clients. We must work toward the standard of care that every client deserves while protecting our profession that serves those clients.  

 

Even with the relief of the BIC through 2017, we need to look at the next nine months as an opportunity to evolve in the fiduciary world. We must continue to evaluate our sales process, our product shelves, and our holistic nature of our clients’ needs. The successful retirement advisor of the future will get to the fiduciary standard quicker, more efficiently, and have greater effectiveness with each client. 

 

Ash Brokerage stands committed to helping all our advisors make this transition. As implementation grows clearer in the coming weeks and months, we will announce several tools and resources to help you.  

 

Many aspects of the rule remain unanswered. Namely, the independent marketing organization exemption continues through the review process without finalized thresholds for marketing organizations to sign the BIC in 2018. We look forward to continuing to be part of the conversation in shaping these important changes to our industry. Look for continued information through Ash’s sales teams and social media. I look forward to growth in our industry with the increased care that the rule will provide to our clients.  

 

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 Annuities

Resting on the Red Sweater


Annuities

March Madness is the most exciting time of the year for me – even more exciting than Christmas. You see, this time of year always brings back memories of Indiana’s run to the national championship in 1987.

 

As a student manager, I can remember preparing the bench for the national championship game at the Superdome in New Orleans, Louisiana. I was extremely anxious – everyone was. And, as I walked back into our locker room for the last time before warm-ups, what I saw made me even more anxious. 

 

Coach Bob Knight was laying on the training table. He’d folded his famous red sweater into a nice, neat pillow … I couldn’t believe he seemed to be resting peacefully just minutes before our biggest game of the year.  

 

Looking back now, however, I think he was at peace because he knew our team was prepared. During the season, we had several days to prepare for games, but for the national championship, we had just 48 hours. However, we followed the exact same process: 

  • The team reviewed the players from Syracuse right after the national semi-final 
  • The coaches watched film Saturday night and presented the game plan to the players the following morning
  • On game day, we went through the exact same preparations as we did for every other game in the  season
  • We continued to use our model of basketball – man-to-man defense and motion offense 

 

Preparing for Your Own Big Game

When it comes to preparing for the fiduciary rule, you can use the same formula for success. As planners, most of us already act and make recommendations in the best interest of our clients. However, we need to document our sales process and make it repeatable.

 

Though the outcome was different for each game, the Hoosiers’ process remained consistent through the 1987 season. We evaluated each team’s strengths and weaknesses from top to bottom – we just didn’t look at the team’s starting five or star players.

 

Similarly, as planners, we have to focus on all the risks associated with financial planning. Too often, we look at asset management as the solution to wealth management. But, we also have to consider longevity needs (so our clients don’t run out of money), long-term care, taxes, the death of a spouse, and transferring their legacy to the next generation. These concerns need to be evaluated as a regular part of our client process.

 

I encourage everyone to evaluate their sales and business practices during the time remaining before the fiduciary rule takes effect. You could say it’s already in effect due to many broker-dealers implementing new strategies and FINRA assessing fines based on conflicts of interest. To reduce your risk of litigation, you should prepare to win, and prepare consistently.

 

Winning Strategy: Establish a sales process that is repeatable and can easily be documented. Consistency will allow you to focus on your clients’ needs, and force you to consider all the risks.

 

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.”

Preparation DOL Fiduciary Annuities