Annuities

Which Risk Do You Want?


Annuities

Since the U.S. Department of Labor (DOL) rule was announced in April 2016, there have been so many interpretations of the rule and its effects on individual financial planning firms. As I read the rule in April, one of my biggest concerns was that advisors would shift their product mix to the path of least resistance instead of really digging in to what might work for the client.

 

Unfortunately, I see and hear a lot of “I’m not going to sell annuities in the future.” Even worse, I continue to hear broker-dealers limiting product menus to make compliance easier. 

 

Over the last several years, the stock market has been on one of the longest bull runs in history. Recently, in July and August of 2016, I watched the stock market hitting all-time highs. But, at the same time, I saw inactivity at the advisor level and the client level. The annuity industry reports sales slowing during the summer months across most carriers. Our business has slowed and our sales teams report that clients don’t want to meet with their financial advisors. In turn, advisors have begun to turn their clients’ accounts into fee-based accounts after charging an upfront commission. In many cases, they feel the change is mandated by their firm. Many are not taking the opportunity to advise clients – instead, they are just focusing on the administrative change in compensation. 

 

Unfortunately, through all the DOL issues, we have failed to focus on what is most important: protecting our clients’ retirement income savings and income potential. With markets growing to all-time highs and volatility low, it seems like a perfect time to remain invested. However, when you look at extended periods of low volatility heading into the fall months, you see an increased period of volatility after Labor Day. Our clients, especially those within five to 10 years of retirement, have too much to lose in the next market downturn.

 

So, my question is simple:

 

Do you want to be protected from regulatory risk by not selling annuities under a Best Interest Contract? Or, are you exposing yourself to litigation risk by not reaching out to clients and locking in gains with a significant risk of account value loss?

 

Too often, we get caught up in media and peer conversations about the regulatory environment changes. Make no mistake, the changes coming in April 2017 are significant. But, it’s no reason to abandon our clients and stay within our comfort zone of asset management. Instead, it’s a time to reflect on the entire value proposition you bring to the table for your clients. And, more importantly, it’s time to act upon protecting their retirement savings before the next market correction. 

 

Winning Strategy

Take a look at your clients who are within five to 10 years of retirement. Call them into your office for a meeting to assess their current risk tolerance and desire to take some of the investment risks off the table.

 

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.”

Get Creative on Your Playground


Annuities

Recently, I’ve been reading “A Beautiful Constraint,” a book I would highly recommend to any financial professional thinking about how to implement changes to their practice. And, a couple of weeks ago, I witnessed an analogy the authors use to discuss creativity.

 

I was walking home to meet a repairman when I noticed students at a nearby school were out to recess. As I waited for the repairman to show up, I watched the kids play on the playground. They ran freely around the designated area, which was enclosed by a chain-linked fence. They pushed the boundaries of the recess zone – some were even climbing up the fence and had to be told to get down. But, they made up their own games with their friends, played hide-and-seek, and generally let their minds run free and enjoyed themselves. 

 

On the other hand, I also recently witnessed a class of children attending a day game for our single-A baseball team, the TinCaps. As I walked to lunch that day, the kids were in an open area, yet all of them were milling around within 10 feet of their teachers. There was no hide-and-seek, no one running to climb a nearby wall, and no one who seemed to be making up their own games. Instead, with all this wide open space, they were listening carefully to their instructor and waiting for the next order. The lack of constraint didn’t foster creativity.

 

It’s the same with business constraints – they can set up and provide a launching pad for creativity. Without constraints, we tend to follow orders or continue to do what we think is successful – probably because it’s the way it worked previously. Instead, we need to be pushing our limits and looking for new ways to attack our clients’ problems.

 

It’s constraints like the U.S. Department of Labor (DOL) Fiduciary Rule that force us to look at our clients’ needs differently … more creatively. This is a time to rethink how you provide guaranteed income to your clients and secure their financial future. Take the opportunity of the regulatory constraint and grow your financial planning practice through creative ideas and strategies, solving problems with open mindedness toward solutions that are new to you, and introduce your clients to a more holistic experience in a post-DOL world.

 

Winning Strategy

A constraint can challenge you to look at your financial planning practice differently. Use the current regulatory constraints to look at expanding your offerings and make your business more holistic. You will likely capture more business from existing 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 DOL Practice Enhancement

Seeking Income Replacement with Low Interest Rates


Annuities

Near the end of August, my daily Google search brought an article to my attention: “Advisers seek income replacement as interest rates tumble.”* The article addressed how financial planners are looking at changing the conversation with their clients to increase the return and yield in their portfolios. There were some interesting statements made in the article that I think need to be discussed.

 

  • The firm being highlighted manages to the asset return minus inflation. They are targeting a long-term return of 3.5 percent to 4.0 percent, which is very reasonable. However, their model portfolio to achieve those returns consists of 25-30 percent fixed income and 70-75 percent equities. Even for a 60-year-old with a long life expectancy, that concentration in equities presents some risk that many may not be willing to take. And, even with conservative returns, longevity risk has not been addressed – the client can still run out of money. With a 70 percent allocation into equities, sequence of return risk remains high, even though the equity portion is well diversified. 

  • The firm states that if the client can’t settle for an annual 3 percent return, it recommends a 90 percent equity allocation. Obviously, the client’s risk tolerance must support this. However, chasing return tends to make portfolios more aggressive, increase turnover costs, and increase tax exposure to non-qualified portfolios. Planners need to be careful about allocation strategies that tend to drift to more aggressive. I like to remind clients they never know how much risk to take until they have taken too much. Additionally, the firm looks to add illiquid vehicles to boost yield. Again, as we look toward retirement, the need for liquidity and uncertainties mount. The need for liquidity might increase as we move from our working years to our non-income-producing years. 

  • The article failed to address the other risks besides market risk to the portfolio. Planners tend to address market risk and return risk through allocation strategies. However, there are so many other risks for a near retiree or retiree. Successful plans mitigate longevity risk and make the portfolio more efficient, provide access to affordable health care options, provide a strategy to maximize Social Security, address the potential effects of a chronic or unexpected illness, mitigate long-term care expenses associated with a nursing home or in-home health care expenses, and much more. 

 

We have slipped into a world of asset managers and asset gathers. Being fiduciaries means looking out for our clients’ best interests – that will include not only asset growth, but also asset protection. By protecting assets, we can eliminate pressure on the remaining assets that would have required a higher return. By reducing longevity risk, we may be able to lower the required return and adjust equity allocations to normalized allocation percentages for retirees. 

 

Winning Strategy

Address the entire financial plan, not just the assets under management. Too many firms are concentrating on asset growth and using asset growth to replace income. That type of portfolio is tax and cost inefficient. We need to look at alternatives that can protect the portfolio while mitigating the other risks associated with retirement income planning. It’s not as simple as changing an allocation. 

 

*“Advisers seek income replacement as interest rates tumble,” FinancialPlanning, Aug. 29, 2016: http://www.financial-planning.com/news/advisers-seek-income-replacement-as-interest-rates-tumble

 

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 Assets Under Management

Jump-Starting Slumping Sales


Annuities

I have always been told sales is similar to a teenager’s first car – if you turn the car off to get gas, you aren’t 100 percent sure it will start again. It inevitably does, but you really have to work at it.

 

The summer lull is over and many advisors tell me they don’t have a reason to contact their clients. The stock market continues to be bullish and clients aren’t complaining. Low interest rates don’t seem attractive enough to reach out to clients. There is a lot of complacency in our industry. 

 

Let me give you a few reasons to contact your clients right now:

 

Take the option to lock in some gains

The stock market has reached several all-time highs in recent months. There are many signs that the market growth has slowed, or it may be ready to turn to a bear market. Signs such as high P/E ratios and dividend yields resemble those pre-financial crisis. Talk to your clients about sweeping gains off their IRAs using a tax-free direct transfer and lock in the gains from the account. You can protect your clients from a potential bear market and still keep them linked (subject to caps) to equity indices or asset allocation strategies.

Reduce the risks of longevity in the portfolio

The number one fear of Americans remains living past their assets and not having enough income. You can reposition your client’s portfolio, maybe making the portfolio more efficient, by implementing a deferred income annuity strategy. This will help take some longevity risk off the portfolio by making sure your client has income for the rest of their life, irrespective of their asset values. 

Consider positioning bond portfolios against rising interest rates

Earlier this year, the 10-year Treasury reached an all-time low. While no one can predict when rates will rise, the Fed has signaled a potential increase in interest rate policy. This will eventually have a ripple effect on bond prices. Take the time to sit down with clients and talk about that risk. Annuities as short as a five-year duration provide higher yields than 30-year Treasuries as of today (Sept. 9, 2016). Now is a perfect time to diversify the interest rate risk and protect bond portfolio values. 

 

Those are just a couple of reasons you should call clients today. If they don’t start your sales engine, you might have to keep trying to start that old car. Too often, we get lazy as an industry and think that because our clients aren’t calling us they don’t want to hear from us. I challenge you to think differently. I suspect our clients want to hear from us. In fact, they probably think that’s why they are paying us – to reach out and lead them through the complexities of retirement income planning.

 

Winning Strategy

Don’t wait for clients to reach out with a difficult situation. Take the initiative to reach out to your clients now and give them options to protect their retirement income savings.  

 

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 Sales prospecting

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/