Indexes must evolve with inflation, rising rates, says NAFA panel

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By John Hilton

Many popular indexes supporting annuities and life insurance today might not work as well in a recessionary, high-inflation, and rising interest rate environment.

Those indexes underpin many big-selling products through a strong historical performance record. With the market on a strong 15-year growth run, most of the historical periods chosen for sales tools like illustrations show nothing but positive news.

Until recently.

To summarize the situation the industry finds itself in, Sarah Garrity recalled a quote from the 1988 movie, “Hoosiers”: “Don’t get caught watching the paint dry,” she said during a recent panel discussion at the National Association for Fixed Annuity’s Annuity Leadership Forum in Washington, D.C.

“I think that’s where we are right now in terms of product development and what we’re thinking about the future, that it’s not a time to stand still,” said Garrity, director of national sales for the annuity distribution team within BlackRock’s Retirement Group. “A lot of custom indices were perfectly positioned for outcomes of the past. And they, quite frankly, don’t address the challenge of inflation or the opportunity of rising rates.”

During a conference session last month in Washington, D.C., a similar panel posited that rising rates could open the door for annuities sold with risk-controlled indexes. These types of products will utilize, for example, a heavy bond component in order to reduce the risk elements.

Garrity agreed that volatility controlled indexes are sure to increase going forward. “There is no protection without performance with inflation where it is,” she said. “So I think that’s the first thing that we’re seeing in terms of how is this affecting product design.”

Inflation hedge

Industry veteran Sheryl Moore noted the growth of indexes during a recent Wink, Inc. webinar. When Moore started Wink, a industry intelligence firm, 17 years ago there were a dozen indexes. Today, there are at least 150 different indexes, many of them proprietary indexes developed by major carriers.

Most of these indexes are a mix of different indexes, and other assets like bonds. A standard index, such as the S&P 500, has a lengthy history of returns, upon which a reasonable projection can be made simply by looking back. Most proprietary indexes do not have this type of history.

Phillip Brzenk is global head of multi-asset indices at S&P Dow Jones Indices. He told the NAFA audience that gold is a great inflation hedge to have in an index mix.

“Gold is positive year to date 3% or 4% last time we checked,” he said. “So it’s thinking about how can you incorporate something like that into a broader benchmark to actually have that exposure, actually have a more direct inflation hedge in your index.”

Laurence Black is founder of The Index Standard, a firm that provides ratings on indexes. In a changing environment, indexes need to change as well, he said. Black used the analogy of a family who owns an SUV for when it’s raining, a sedan for country driving and a convertible for casual outings in nice weather.

“In the past, what maybe you had was one index that could cope with one environment,” he explained. “Unfortunately, we live in a much more complex world today. So I think what everyone needs to look for is more diverse packages. So if you think about an FIA, maybe what you want to see is different types of indices.

“Maybe what you want to see is a bunch of diverse indices that you can select that can give you those better outcomes.”

Themed indexes more popular

The panel agreed that “themed” indexes are resonating with conscientious investors. The most common example is environmental, social and governance (ESG) investments. Clients are asking specifically for ESG options, Brzenk said.

“I’ll tell you in the U.S., it’s definitely not going to be as prominent as in Europe,” he added. “In Europe, what we’re seeing is you basically need to have an ESG tilt in your offering, otherwise it won’t be looked at. I don’t think the U.S. will ever get to that point, but we definitely see merit to exploring some of these themes in isolation.”

An ESG investment is a stock that is rooted in values relating to environmental, social or governance issues, such as climate change, human rights, and data protection and privacy. For a stock to qualify as an ESG, it must undergo a rigorous evaluation process and adhere to certain principles set out by investment houses.

If the stock passes the initial evaluation, it is then scored based on the MSCI ESG index. ESGs can fall under three different categories in the U.S.: AAA-AA: Leaders, A-BBB: Average, and BB-B-CC: Laggard. This index rates organizations based on their exposure to ESG risks and how they manage those risks, and then assigns them one of the three categories above.

BlackRock had “a very successful launch” of its first ESG index within a fixed-index annuity last year, Garrity said. But it’s not so much the themes as the basic thought and construction put into an index, she added.

“When we think about product construction, what it should come down to at the end of the day, is how can we create the best index that’s going to create the best client outcome, regardless of a theme or a tilt?” she said. “At the end of the day, at least from our perspective, it really does come down to how can we create the most thoughtful index.”

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Ashley SaundersIndexes must evolve with inflation, rising rates, says NAFA panel
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3 Ways Alternatives Can Help Advisors Manage Investor Emotions

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By Josh Vail

In the last few years, many alternatives have lagged broad stock markets, but recent market movement suggests a favorable shift.

For the year ending mid-May 2022, the rolling, three-month, annualized daily volatility of the S&P 500 has nearly doubled — from over 13% to over 25%. Returns for the S&P 500 were down over 18% and the AGG was down over 9.5%.

Meanwhile, many private investments fared much better, and the Wilshire’s Liquid Alternative Global Macro Index, a popular index in the liquid alternative space, was up 5.35% for the quarter.

Warren Buffet said, “Be fearful when others are greedy and greedy when others are fearful.” It’s hard to avoid letting emotions get the best of us when it comes to investing, which is why the market often follows investor whims.

Morningstar’s 2021 “Mind the Gap” study found that on average over the 10 years ending Dec. 31, 2020, investors realized 1.7% less than the funds their investments generated over the same span. Had those investors bought and held, they would have improved their return by one-sixth.

Alternatives offer important advantages in a portfolio. They have the potential to generate alpha; returns that are independent of the market; and they exhibit lower volatility. Perhaps their greatest advantage is their ability to help investors manage emotions.

An allocation to alternatives can help investors stay the course — like the “mother” of the investment portfolio. Here’s why alternatives are a lot like our moms:

Alternatives protect us from ourselves. Illiquid alternative investments create a barrier to sale, forcing investors to hold when they might otherwise sell.

Take real estate for example, which is largely considered one of greatest wealth-creation investments out there. One could argue that stocks historically outperform the underlying asset and yes, leverage plays an important role with regard to end results.

But the nature of real estate is such that investors are forced to make ­decisions counter to their rote ­behavioral instincts and hold through difficult ­periods. If there are barriers to sale, investors are less likely to look for the exits.

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Ashley Saunders3 Ways Alternatives Can Help Advisors Manage Investor Emotions
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High inflation means the end of the “4% rule” for retirees

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By David Prosser

All retirees drawing an income from their savings face the same dilemma: how much can they safely take out each year without having to worry their money will run out?

For many years, the 4% rule devised by US financial-planning guru William Bengen has been used as a benchmark. This says that if you set your spending as 4% of your savings in your first year of retirement and increase that amount each year to keep pace with inflation, your money should last for as long as you’re likely to need it.

However, Bengen – who is now retired himself – has recently changed his mind. Having reviewed the work that he did in the 1980s and 1990s in the context of the current market environment, he now thinks 4% could be too much. So much so that he’s cutting back his own spending, he tells The Wall Street Journal.

The 4% rule is based on the historic performance of US equities and Treasury bonds. In the early 2000s, Bengen added international equities to the mix and revised the 4% rule accordingly: up to 4.7% was safe, he suggested. However, he thinks historical trends are less certain now, because high inflation is eroding the value of savings more quickly, while elevated stockmarket valuations could mean an imminent bear market. Thus retirees should be more cautious, at least until it’s clear whether these conditions are here to stay.

A more conservative approach

Bengen is not alone in feeling nervous. Research recently published by Morningstar took an even more conservative view. To feel confident about their money lasting and being able to keep pace with inflation, retirees should set an initial withdrawal rate of no more than 3.3%. And economist Wade Pfau, another influential specialist in retirement planning, estimates the 4% rule now has only a 65%-70% chance of working out for new retirees, and that 3% is a more realistic starting point.

What do all these warnings mean for savers in the UK? The threats they face are similar to those of their US peers. Inflation in the UK is at 9% compared with 8.3% in the US, although stockmarket valuations do not look quite as stretched.

Moreover, Bengen’s number-crunching has always related to savings largely or entirely invested in the US. UK equities have historically underperformed the US market, which suggests the maximum withdrawal rate might be lower for those predominantly invested in the UK.

In a sense, however, the exact numbers don’t matter. The broader lesson here is that the market environment has changed. For anyone dependent on their savings for income, a more conservative approach may now be needed to ensure wealth preservation. This is particularly important for those just starting out in retirement. The work of Bengen and Pfau focuses especially on initial withdrawal rates. This is because the early years of your retirement are decisive – if your portfolio falls sharply in value now, it will be difficult for it to recover, because you’ll have a smaller sum to benefit from a market recovery.

In recent years, income drawdown has become the default strategy for retirees converting pension fund savings into income – but maybe taking money directly from your fund in this way is not the best option. The annuity market, offering a known and guaranteed income for as long as you live, might just be worth another look, particularly with rates now on the increase.

Rising yields boost annuities

UK government debt is meant to be a safe-haven investment during periods of volatility – gilts investors know the British state is highly unlikely to default on its debts, so their capital is safe. But it appears someone forgot to remind the gilts market of this rule. Investors have seen their holdings fall by 7% this year in the worst sell-off that the gilts market has seen since the 1980s.

The explanation for this rout lies in the sudden change of priorities seen at the Bank of England and other central banks in recent months. Policymakers previously thought rapidly climbing inflation was a very temporary phenomenon, brought on by Covid-19 disruptions. They now think it will be far more persistent and so they’re raising interest rates at speed. Ten-year gilt yields have more than doubled compared with a year ago, with prices falling accordingly.

For pensions savers with gilts in their portfolios – bought for safety perhaps – this is obviously bad news, but there is a silver lining for one part of the retirement-planning market. The previously moribund annuity market is getting a boost, because annuity rates are closely linked to gilt yields. In January this year, a typical 65-year-old man with a £50,000 pension fund could have bought an annual income of £2,286, according to insurer Canada Life. Today the same fund would buy £2,676 – a rise of £400 a year in just four months.

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Ashley SaundersHigh inflation means the end of the “4% rule” for retirees
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4 retirement income strategies to match any client’s style

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By Susan Rupe

When it comes to planning for retirement income, clients face a number of risks. Each risk requires the right set of tools to manage it. And each client has their own retirement income style, which dictates the type of strategy needed to properly fund the client’s post-employment years.

How to match the right retirement income strategy to the client’s retirement income style was discussed by Wade Pfau, professor of retirement income at The American College, and Alex Murguia, CEO of RISA, during a recent webinar by the National Association for Fixed Annuities.

Retirement spending strategies

Pfau described four basic strategies to fund essential and discretionary spending in retirement:

  • Total return approach, in which a retiree holds an aggressive, diversified portfolio and takes systematic withdrawals from it.
  • Risk wrap strategy, which has a lifetime income floor built into it to fund essential spending but uses an annuity to fund discretionary spending.
  • Income protection strategy, in which a floor of essential income is built and then investing for discretionary spending.
  • Time segmentation or bucketing strategy, in which funds are invested in different vehicles for short-term and long-term spending.

A client’s style leads to specific strategies, Pfau said. He identified the dimensions that best capture a client’s retirement income style:

  • Probability based versus safety first.
  • Optionality versus commitment orientation.

A client who is probability based depends on market growth through the risk premium for stocks to outperform bonds. Clients who prefer a safety-first strategy rely on funding their essential needs with safer income such as that generated by annuities or bonds.

Clients also vary on how much plan optionality they prefer, Pfau said.

Some clients prefer flexibility to keep their options open and take advantage of new opportunities. Other clients prefer to lock in a solution that solves a lifetime income need.

RISA created a matrix that shows a role for retirement income investments based on a client’s retirement income style.

Choosing an approach

Clients who are commitment-oriented and prefer a safety-first approach need a protected income have a protected income style. Clients who have a commitment-oriented and probability-based approach are more likely to be served with a risk wrap income style. Those who want to combine optionality with a safety-first approach would most likely benefit from a time segmentation income style. A total return approach would be the best bet for clients who want optionality along with a probability-based approach.

What role do annuities play in these different approaches? Pfau explained that some approaches use annuities more for income and other approaches use annuities for growth.

In the commitment-oriented approaches, single premium immediate annuities, deferred income annuities, fixed indexed annuities, registered index-linked annuities and variable annuities can provide income. In the optionality-oriented approaches, FIAs and RILAs, as well as multiyear guaranteed annuities and investment-only variable annuities can provide growth.

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Ashley Saunders4 retirement income strategies to match any client’s style
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What Is the Social Security Administration?

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Almost all working Americans eventually receive Social Security benefits. These funds are collected and distributed by the Social Security Administration, a federal agency that serves to fight poverty. The SSA’s programs pay benefits to about 70 million people including retirees, children, widows, widowers and those with disabilities. It can be helpful to understand how the agency works and what it offers. Here’s a look at what the Social Security Administration provides and how its major programs work.

What Is the SSA?

The SSA stands for the Social Security Administration, and it was formed in 1935. Taxes are used to fund the agency, and payments are sent out to qualifying Americans. During its initial years, the SSA paid benefits to retired workers. In 1939, the agency added benefits for spouses, minor children and the survivors of deceased workers. Disability benefits began to be distributed in 1956. The agency also plays a role in Medicare enrollment.

Programs the SSA Provides

There are several main types of benefits the SSA pays out to individuals. These include payments to retired workers, those with a disability and survivors. Here’s a closer look at the SSA’s major programs:

Social Security retirement benefits. This program focuses on providing Americans with income after retirement. For those who have paid into the system, SSA issues monthly payments based on their 35 years of highest income. You can choose to take Social Security at your full retirement age, which for many people is age 66. You also have the option of taking it as early as age 62 or as late as age 70. “When to start taking one’s Social Security benefit is one of the biggest decisions most will make in retirement,” says Tim Wood, founder of Safe Money Retirement in Johnson City, Tennessee. The right time to begin benefits could depend on your health, working preferences, earning level and lifestyle choices in retirement.

Social Security disability benefits. Social Security Disability Insurance gives benefits to workers who become disabled and can no longer work. The program also provides for the dependents of disabled workers, and aims to replace some of the income lost because of the disability. There are rules and criteria you need to meet to be eligible for Social Security disability benefits, and you’ll need to show supporting medical evidence for your condition. “Another less known program is the childhood disability benefits, which allows individuals to receive benefits on their parent’s account so long as their disability begins before the age of 22,” says Andrew November, a disability attorney at Liner Legal in Cleveland, Ohio.

Social Security survivor’s benefits. A spouse and other family members of a worker who passed away may be eligible for Social Security survivor benefits. A widow or widower who is at least age 60 (or 50 and above if they have a disability) or a surviving divorced spouse could receive survivor benefits. This program also supports widows and widowers who are raising the deceased’s child, if that child is under age 16 or has a disability, and unmarried surviving children who are age 19 or younger and full-time elementary or secondary students or who have a disability that began before age 22. A stepchild, grandchild, step grandchild, adopted child or dependent parents could be eligible in some instances too. “Survivor benefits are one of the least understood and appreciated benefits,” says Paul Tyler, chief marketing officer at Nassau Financial Group in Hartford, Connecticut. “If your spouse passes away, you can file for survivor benefits that may be higher than your own.” If you were living with a spouse who passed away, you could also be paid a lump-sum death payment of $255.

Medicare. This government program provides health insurance for people ages 65 and older. The Centers for Medicare & Medicaid Services is in charge of the Medicare program, but the Social Security Administration handles enrollment in Medicare Parts A and B, and premiums can be withheld from your Social Security checks. If you sign up for Social Security before age 65, you may even be automatically enrolled in Medicare.

How the SSA Is Funded

Employers and workers pay into the Social Security program through a federal payroll tax called FICA, or the Federal Insurance Contributions Act. The current payroll tax rate requires both companies and employees to contribute 6.2% of wages up to a certain limit, which is $147,000 for 2022. Self-employed individuals pay 12.4% of their earnings into the Social Security program.

How to Contact the SSA

There are several ways to get in touch with the SSA if you have a question or concern about your benefits. Many routine tasks can be accomplished online at You can call 1-800-772-1213 between 8 a.m. and 7 p.m. Monday through Friday to speak to a representative. There are also automated telephone services that you can reach 24 hours a day. In addition, it’s possible to visit a local Social Security office in your area and make an appointment to speak to a representative about your situation.

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Ashley SaundersWhat Is the Social Security Administration?
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Nearly a quarter of Americans are putting off retirement because of inflation, survey finds

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Americans say they’re putting aside their retirement dreams for the moment – at least until the price of consumer goods and inflation settle down.

The BMO Real Financial Progress Index, a quarterly survey conducted by BMO and Ipsos that measures Americans’ opinions about financial confidence, found that nearly 60% of those surveyed think that inflation has adversely impacted their personal finances. Another 25% feel that rising prices have had a “major” effect on their finances.

The survey also showed that 36% of Americans have reduced their rainy day savings, and 21% have cut back on putting money away for retirement. Younger Americans – aged 18 to 34 – are taking the biggest hit, with over 60% of respondents in that demographic saying they have had to reduce contributions to their savings in order to make ends meet.

What people are doing to offset the growing costs of living

Consumers are taking a wide range of steps to keep their financial lives from crashing down around them. Some of them include:

Changing how they shop for groceries. Forty-two percent of survey respondents are opting for cheaper items and avoiding brand names. Instead, they’re buying more store brands and limiting purchases to necessary items.

Dining out less. Forty-six percent of the respondents said they either dine out less frequently or are consciously spending less when they do go out.

Driving less. Thirty-one percent of respondents are driving only when it’s necessary to offset the soaring cost of gas.

Spending less on vacations. Twenty-three percent of consumers said they’ll be cutting back on some of the frills when they go on vacation or canceling their vacation plans altogether.

Cutting back on subscriptions. Twenty-two percent of respondents said they are ending subscriptions to their gym, streaming platforms, and other services to save money.

What financial plan experts suggest as best practices

ConsumerAffairs reached out to retirement planning experts to see what they suggest Americans do to gain some financial balance between their spending habits and rising inflation. Paul Tyler, the Chief Marketing Officer at Nassau Financial Group, said the first thing near-retirees should do is continue to work if they can.

“By continuing to work, near-retirees can continue to bring in a paycheck to cover surprise expenses and let their 401(k) balances grow a little longer,” he told ConsumerAffairs.

He added that cutting back on unnecessary expenses is also a good strategy right now.

“Analyze your credit card bills and see where you can conserve cash. Call your cable provider and request a discount. Tell your cell phone company your thinking of switching carriers and they may offer a discount. Plan errands to maximize your gas dollars.”

Another insight comes from Mark Williams, CEO at Brokers International. He says consumers should try to reduce expenses by cutting out certain “luxury” purchases, but he also notes that credit card spending is also something to keep an eye on.

“If you are noticing money is getting tighter, try not to start using your credit card more often and go into debt,” Williams told ConsumerAffairs.

His suggestions for small changes you can make to your retirement strategy that might help?

  • Reduce the amount you contribute to your retirement accounts by reducing the withdrawal percentage you are contributing to your 401K, IRA, 403B, etc…
  • Reduce the amount of auto-withdrawal (if you have one) that is going to a savings account.
  • Reduce the amount you may be saving for secondary education.
  • Consider using the equity in your home for certain expenses by using a HELOC or other type of equity loan.
  • Consider increasing your deductible(s) on certain insurance policies (homeowners, car, boat, etc…) to reduce the monthly premiums. However, consumers should note that increasing deductibles means paying more out of pocket if there is a claim. If you take this approach, Williams says you should increase your safety net emergency savings account to offset the increase.
  • Consider a review of your life insurance policies and determine if you are overinsured. If you are, you could lower the face amount of the policies to reduce cost. This should be done after speaking to a financial advisor.

“Always seek professional advice when making changes to any retirement strategy and that becomes increasingly more important the closer you are to retirement,” Williams emphasized.

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Ashley SaundersNearly a quarter of Americans are putting off retirement because of inflation, survey finds
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Are You Selling a Verb or a Noun?

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By David Macchia

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Meet a woman driven to change investment regulation and understand why it’s important that she succeeds.

Michelle Richter is a principal at Fiduciary Insurance Services, LLC, and executive director of the Institutional Retirement Income Council, Inc. She is also one of the smartest people I’ve ever met. Richter’s intellect incorporates both dimensions of “smart,” which is why she was placed in charge of a Fortune 100 company’s broker-dealer and RIA.

Richter is driven. Her “cause” is reform of regulation that levels the playing field for insurance through the introduction of a 40 Act-equivalent governing insurance advisement. I fully support this because it will result in better outcomes for investors. It will facilitate commercialization of intellectual property that, today, represents unfulfilled potential. To help the advisory profession understand the regulatory inequality that exists, Richter developed her own lexicon, using the “verbs” and “nouns” construct.

I spoke with Michelle on May 22.

I was surprised and enlightened to learn about the construct of the verbs and nouns. I didn’t know it was an issue. What brought you to the realization that we needed this?

There were a few things, but mainly, it’s because my experience is as a person who believes in creating value as an intellectual property developer, and that’s where I’ve spent my career. I’ve worked on a lot of consumer-liability-minimizing concepts, which were good concepts from good people who had good ideas. It became increasingly evident that those ideas couldn’t be commercialized.

Why is it that all these good ideas from good people cannot reach the market? I kept applying things that I had learned previously to arrive at this point, which relates to guidance that I received when I was working at a Fortune 100 insurance company, serving as both an intellectual property (IP) developer and overseer of that entity’s corporate broker-dealer and RIA. At the time, when we were developing that intellectual property, my IP counsel advised me on something that over the past few years has hit me like a ton of bricks.

It related to my IP counsel’s interpretation of the distinction between how an entity defends a trademark versus how it defends a service mark.

That’s what caused me to realize something important. At that time, 15 years ago, we had developed unique IP, and my counsel advised me that because the IP would not be embedded directly into an issuable container, that it should be service marked rather than trademarked. If you Google “trademark definition,” what you’ll see is the ability to profit from one of two things: issuance or sale. Sale means direct remuneration. If I’m selling you X, I’m getting paid for X. Inherent to the definition of trademark-ability is that you can either issue or distribute intellectual property. If you can’t profit from the product, then that product is a “noun.” If you can’t profit from the product, either by issuing it or by receiving compensation directly for it by selling it, then you have to service-mark the IP, because it is a service.

Was it a planning concept, as opposed to a product?

It was a framework for the embedding of insurance values into an asset allocation architecture, where you can value either a life insurance policy cash value, or you can translate the income value of an annuity into asset-based values. Then the value of assets, or the value of income that can be translated to assets or vice versa, is advised upon within the product. The income or accumulation value within the product can have the attributes of either fixed or variable investments, perhaps multiple asset classes within that framework. But the framework was designed to include insurance values within an asset-allocation architecture.

Would that be more like a business process?

It’s a great question. It can be monetized that way. It can also be monetized within a managed account or managed model services.

You could use the insurance values as part of the managed model values. Plenty of people, 10 years later, were doing exactly that.

When I was working at that organization, we did not permit registered representatives to sell managed accounts services because we viewed them as services, not as accounts. I was advised by my general counsel that RIAs sell “verbs,” whereas agents and brokers sell “nouns.”

With respect to managed account services, I was advised that the value for which the consumer is paying does not derive from the form of custodial account. It derives from the advising that occurs on the account.

Registered reps who are not dually authorized lack an investment adviser license that enables them to sell verbs.

Registered reps lack an investment adviser license. But RIAs, including IARs of an RIA, do.

At that time, the essence of the view communicated to me was that things like managed accounts services were verbs. Following from this logic, I believe that the 40 Act governs verb sales, appearing on the left side of the balance sheet, for two reasons. The first is very easy to explain, which is that the 40 Act is short for “investment adviser’s act.”

Investments are assets. Assets occur on the left side of the balance sheet.

But does anyone disagree with you on that?

There are people who viscerally disagree with me because they have not heard that parlance before. There are also people who feel that the point I am making is very complex, so it is understandable to only a very small audience. They would prefer that I discontinue communicating these points out of fear that I might unintentionally confuse people.

There are also people who feel like I am a nut. That’s a valid viewpoint. But I’ve not yet heard an argument that – from anyone – that says, “No. You’re misunderstanding the world.”

I don’t agree that you’re a “nut.” True passion can come across that way, however.

I concluded that the 40 Act governs verb sales by reviewing how organizations supervise it. They require things like routine, ongoing meetings with the client, because advice can only occur at the end of an advising process. Back in my day, meetings that enabled an advisor to advise had to occur at least annually. Things like that are how we can detect what’s occurring under the 40 Act. Those who have the authority to be an investment adviser are verbs. If we were to look at section 202(a)(11) within the Advisers Act, we’d observe that the words that communicate what an investment adviser does end in “ing.” Because that is the case, we can detect a verb in its present form.

The argument that what financial advisors provide is “advice” (a noun) is logically equivalent to saying that what lawyers provide is “law,” as opposed to “ legal interpreting”.

When we add an “r” to the end of a verb to refer to a person, we are describing the identity of the person who routinely performs an action (a verb). We wouldn’t call a person who once ran across the street a “runner.” We call a person a runner when they routinely run, such that part of their identity can be described by adding an “r” to the end of the verb they routinely perform.

This is another way of saying that an advisor is a person who routinely advises. Professional advising means to give advice in exchange for compensation.


The other side of the balance sheet, which is involved with liability management, is where the noun sellers live.

That’s one place where noun sellers live. Registered representatives are also noun sellers. The 40 Act made it so that there could be both noun and verb sales in financial services. I am not a historian, but as a layperson, I have heard it said that prior to the advent of the 40 Act, consumers were experiencing behavioral challenges with respect to financial professional conduct when there was only a noun-sale framework. It’s unfair to my community, those who identify with liability mitigation, that we are all seen as inexpert product shillers, like how used car salespeople are viewed.

There isn’t a verb-sale framework for liability management. The only way that we’ve seen people who have that expertise in insurance to be able to monetize their experience and their viewpoint is through noun sales. We don’t have a 40 Act for the right side of the balance sheet. We do not yet have a regulatory construct for advising on benefits or income under management. That this is messed up.

If there were a regulatory framework that allowed advisement on the insurance types of products, in a practical sense, what would they be advising on?

One good example would be the income base within a variable annuity, or for an FIA with living benefits, or for a SPIA. Any of those constructs that has a value to annuitization, or a value to an income stream that could be indicated from within the product, could support a billing base for an adviser if it were the case that we valued liability management as a verb. Something that could and would occur in the event of such a framework is the creation of inspired-by-tontining services. We do not yet broadly have tontining in the United States. We are behind the rest of the developed world in this development of non-guaranteed longevity risk mitigating products or services because we do not have the required regulatory framework. If we had the correct regulatory framework, we would already have a collective defined contribution tontining product (other than what is available from TIAA). Tontining is non-guaranteed risk-pooling for longevity benefits from which you can’t charge a large fee, because the whole premise is about efficiency. For those organizations that have invested in the noun part, which means issuing and/or distributing authority, successful products occur at the intersection of three things: novel intellectual property, issuing authority, and previous investment in distribution – a whole-saleing architecture.

When either a financial professional or an issuing organization can only profit from the noun in the sphere of liability mitigation in the way I just described, then there’s no value to intellectual property, because the issuing authority has to meet the needs of the previous investment in wholesaling. It would make no sense for an issuing organization that has made this substantial investment in distribution to create, and to promulgate, a noun that’s less profitable than is its incumbent portfolio of nouns. The efficient, low-cost asset managers, like Vanguard and Dimensional, came to exist only after there was a 40 Act, and only in the context of the RIA community. RIAs were not being paid from inside the noun. The service of advising is paid based upon the AUM or based upon notional assets that are advised upon, which is to say, upon which advisory services are delivered by a professional.

RIAs are paid for providing a service to their clients from outside the noun structure. All services are verbs.

Because my words are true, there can be no such thing in my field as valuable intellectual property. I experience offense at that.

Imagine that you had a magic wand, and a new regulatory framework appeared tomorrow for agents selling fixed-index annuities.

There would be no protection whatsoever. No financial institution to stand with them as a co-fiduciary under PTE2020-02 for qualified sales.

Let’s say that it existed. Say an agent working with a family consummated a $250,000 transaction to purchase an FIA. What would the latitude be? What would the compensation scheme look like? What would the responsibilities of advisement be in that scenario?

I believe in sentences. The insurance field has parity with the investment field, meaning that we have access to both noun and verb sales. I want to be clear about the fact that no judgment is occurring upon those of us who earn our compensation from selling nouns.

Let’s imagine it comes to be the case that insurance – liability mitigation orientation – is orchestrated around the advising premise as it differs from the product-sales premise. In this world, the placement of the FIA transaction is not the basis for the remuneration that the insurance liability adviser receives. Another way of thinking about that is what the financial planner receives. The value proposition in this case would be the fact that the adviser, the liability adviser, has worked with the client to understand what their needs are. They may recommend that indexed annuity. They may use today’s regulatory framework and get a commission from that. It could be perfectly appropriate. Alternatively, but never concurrently, as is true in the investment space, in my alternative reality, they could and should be able to charge the client on the value creation of the management of that person’s liabilities, instead of the commission that they could receive from the noun within that advising context. Either, but not both concurrently, should be valid compensation constructs available to financial and insurance professionals.

The broader scope of using that is as a strategic tool to manage a certain set of liabilities that the person or individuals have.

Right. That fits well with the premise of codifying financial planning as a discipline.

In part two of this interview, Richter addresses financial planning, the usage of annuities by RIAs, regulatory implications, and more.

Wealth2k® founder David Macchia is an entrepreneur, author, IP inventor and public speaker whose work involves improving the processes used in retirement income planning. David is the developer of the widely used The Income for Life Model®, and the recently introduced Women And Income®. David has authored many articles on the subjects of retirement income planning and financial communications. He is the author of two books, Constrained Investor®, and Lucky Retiree: How to Create and Keep Your Retirement Income with The Income for Life Model®.

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Ashley SaundersAre You Selling a Verb or a Noun?
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Annuities Provide Nourishment In An Income-Starved Environment

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by Susan Rupe

Just as food sustains the body throughout its lifetime, an annuity sustains a client’s savings throughout their retirement.

Just how important an income annuity is to the success of a retirement portfolio was the subject of a recent webinar by Tamiko Toland, director of retirement markets for CANNEX, and sponsored by the National Association for Fixed Annuities.

CANNEX looked at the use of annuity income incorporated into the fixed income allocation, and how that would affect the retirement portfolio sustainability. Among the findings:

» The annuity improves the sustainability of savings throughout retirement.

» Characterizing the annuity as part of the fixed income portfolio can further benefit retirement outcomes, particularly when the portfolio allocation leans more toward the fixed income side.

» The annuity can increase retirement sustainability as well as legacy.

» Equity exposure contributes to both retirement sustainability and legacy.

These findings apply to any form of guaranteed lifetime income, Toland said, whether it comes from an income annuity or guaranteed lifetime withdrawal benefit.

The research looked at whether the retiree would run out of money over the course of retirement. In addition, the research looked at legacy, or how much money would be left over when the retiree dies.

Three different asset allocations were explored in the study.

» Conservative: 30% equity/70% fixed

» Balanced: 60% equity/40% fixed

» Aggressive: 70% equity/30% fixed

The researchers added annuity income in 5% increments starting at 0% and ending at 30%. Researchers looked at a scenario in which the annuity was separate from the remainder of the portfolio and a scenario in which the annuity was included as part of the fixed income allocation.

The percentage of annuity “based on the amount of money put into the annuity on the first day of retirement,” Toland said. “And for the purpose of the study, we used single premium immediate annuities with a 2% inflation adjustment.”

The scenario considers a 65-year-old with $1 million in retirement savings who seeks a starting retirement income of $50,000. The income increases by 2% annually to account for inflation.

The SPIA income amount is based on an average of the top three rates available at the time from a SPIA with a 2% cost-of-living adjustment a company rated at least A++ from AM Best. The rate using a $100,000 premium payment was $410 a month or $4,920 a year.


In this scenario, the conservative portfolio has the highest allocation to fixed income, but it also benefits the most from adding the SPIA. Meanwhile, the SPIA reduces the financial legacy because it dedicates some starting assets to the lifetime income stream with no death benefit.

“One of the things that I think is really important is the basic principle that by shifting the annuity into the fixed income allocation, you’re able to fully allocate the rest of that portfolio into equities, as opposed to if it’s outside,” Toland said. “Then it’s almost like doubling up on the fixed income component.”


The balanced portfolio has twice the equity allocation of the conservative portfolio. As with the conservative portfolio, adding the SPIA as part of the fixed income allocation gives a noticeable improvement to the portfolio.


Although treating the annuity as part of the fixed income allocation has a noticeable improvement on both the conservative and the balanced portfolios, it has little effect on the aggressive portfolio.

Overall, the findings support the idea that it makes sense to include guaranteed annuity income as part of the fixed income allocation of a retirement portfolio, Toland said. One interesting note, she added, is that much of the effect of this approach shows up in the legacy component and not in the income sustainability component.

She said the findings consider the effect of the annuity purchase on both the strategy’s ability to provide the target income over a lifetime (retirement sustainability quotient, or RSQ) and the size of the legacy.

This is true when simply adding the annuity or counting the annuity as part of the fixed income allocation.

“What I really wanted to focus on is the idea that characterizing the annuity as part of the fixed income portfolio can further benefit outcomes, particularly when the portfolio allocation means towards more towards the fixed income side,” Toland said.

“A lot of good customers for annuities are people who are very conservative-leaning in their investments, and they don’t want to take a lot of chances. But this strategy of including the annuity as part of the fixed income allocation enables the client to be able to have a higher equity allocation. So I think that there’s a general understanding within the industry among people who really understand these products and understand the fundamental dynamics — that not having enough of an equity allocation in a retirement portfolio has its own risks and simply protecting assets alone is not the only thing to consider.

“But protecting assets does allow you to take that risk. And this study is very helpful, I think, in demonstrating how much of an effect that can have in terms of improving outcomes, particularly when clients are conservative in their investments.”

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Ashley SaundersAnnuities Provide Nourishment In An Income-Starved Environment
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Conference Speaker Offers New Way To View Retirement Assets

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By InsuranceNewsNet

BOSTON – Moshe Milevsky thinks underwriters, risk analysts, and actuaries are seriously overlooking major elements of their business that could produce savings as well as make more money.

In a fast-paced entertaining 45-minute talk in the main ballroom at the Park Plaza here, which is hosting the 2022 Retirement Industry Conference hosted by Secure Retirement Institute and the Society of Actuaries, the fintech entrepreneur and finance professor, focused on “decumulation.” Decumulation is a relatively new word to describe how to calculate strategic ways to use retirement assets while ensuring everything one has accumulated during their life lasts for as long as it’s needed, with some left over for heirs.

Milevsky’s talk, billed as “Longevity Risk Management Post Pandemic: Purpose, Products, and Strategies,” was an examination of three basic factors that insurers might want to redefine or view from new perspectives to better calculate underwriting risks and actuarial tables in a changing world:

  • Inflation
  • Aging
  • Annuities

 The True Definition of Age

“I’m going to challenge you to think carefully about what the definition of inflation and age is and how we really measure them,” he began. “And I’m going to ask you what really is an annuity.”

Milevsky relied on information from two books he’s authored, “Longevity Insurance for a Biological Age,” and the upcoming “How to Build a Modern Tontine,” to show how there is really no single inflation rate – it can vary dramatically by region, age, race, and economic standing. That information should be specifically factored when trying to determine how long a retirement nest egg will last. And he showed how both chronological age as well as biological age should be considered when designing retirement portfolios.

“Your chronological age is simply how many times you’ve circled the sun,” he said.

Biological age, on the other hand, considers factors such as telomeres, the DNA sequences at the end of one’s chromosomes, and other biomarkers that reveal a person’s true health, mortality rate, and life expectancy that may not correlate with chronological age.

“Consider the implications for this as clients – people, humans – start to become aware of this and they’re on their iPhone or Fitbit, or iWatch, and it wakes them up in the morning and tells them their biological age just went up because of something they did last night,” he said.

Everyone wants their biological age to be lower than their chronological age.

“What happens to your retirement planning and asset allocation and investment models when you have two different numbers,” he asked. “What does that mean to an investment advisor, a Social Security Adviser, and so on.”

A Centenarian Trend

Milevsky surprised the audience when he polled them on what country had the most centenarians. The majority of respondents by far chose Japan, over China, US, Indonesia, and India. The answer, however, was the US, with 92,000 chronological centenarians.

“This is a trend that’s increasing,” he said, again raising the implications on mortality rates and life expectancy. “We’re going to have more of them.”

Finally, Milevsky took the audience through the history of tontines, which date back to the 1600s. Tontines are life insurance policies shared by subscribers to a loan or common fund, the shares increasing as subscribers die – the mortality credit – until the last survivor enjoys the entire income. Milevsky said there is a budding realization that tontines could find a resurgence in the retirement asset allocation business.

“More and more asset managers are saying: ‘We get the retirement income story. We get it, we understand that we have to provide them with something,’ ” he said. “But why does it have to be guaranteed? Why can’t we just give them the mortality credits without the capital? And I think you have to keep an eye on what the investment industry is doing. Because this concept appeals to them and they want to compete in that particular space. I think they can do it.”

Essentially, he said, he believes the investment community will begin to buy up assets that appreciate from longevity improvements. “And what they’re going to tell you is we’re going to take that money, and we’re going to put it in things that do well, if indeed, longevity breakthroughs take place,” he said.

Overall, Milevsky said, it’s a good time to be in the retirement business.

“A lot of players are going to come in and say ‘yeah, maybe we can do this differently,’” he said.  “And there is going to be a big focus on managing longevity, expenditures, and uncertainty.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at

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Ashley SaundersConference Speaker Offers New Way To View Retirement Assets
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Don’t Move to Another State Just to Reduce Your Taxes

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By Jerry Golden

We know lots of friends who are considering moving from a high-tax state, such as New York, to a state with low or no state income taxes. They think they will end up with more money, although they are torn because they may also be moving away from family and friends just to escape state taxes.

What I advise them to do is think about spendable income — the amount they’ll have to spend after taxes — and not just low or zero tax rates. If you have more money to spend after paying the tax bill wherever you currently live, you might as well stay where you are, if it’s closer to the grandkids. You may be able to pay for at least one warm-weather winter trip, too.

Design a Smarter Retirement Income Plan

Before making life decisions about moving (or downsizing, purchasing insurance, etc.) retirees ought to know their number for their total starting income, and have a plan for retirement income that includes a projection of income and savings, and all planning assumptions.

The income plan ought to cover:

  • Starting income
  • Inflation protection
  • Beneficiary income protection
  • Spousal income (if applicable)
  • Plan management (when plan assumptions are not realized)
  • Market risk to plan (when markets fluctuate)
  • Legacy passed on to beneficiaries or heirs

All these subjects are covered in articles on In one article, How to Generate an Extra $20,000 a Year in Retirement, we examined the income from our favorite investor (a 70-year-old woman with $2 million of savings, of which 50% is in a rollover IRA). We saw a large before-tax income advantage from Income Allocation planning. Even if she invests a portion of that to meet her legacy objective, she still has a $20,000 advantage in spendable annual income.

The question is whether she gives back that advantage in federal and state income taxes in her home state of New York.

Reducing your Combined Federal/State Retirement Tax %

You may have heard that New York is a high-tax state, and that’s true. It ranks No. 5 on Kiplinger’s list of the 10 least tax-friendly states for middle-class families.

Importantly, most states exclude Social Security income from taxation, as well as a portion of IRA distributions and employer pension plans. Together with interest on state and local bonds that is not taxed, a retiree has a head start in reducing state income taxes.

But the question remains how much of that advantage is eaten up in New York state income taxes. The key for our Go2Income planning is that annuity payments are treated the same in both the New York and federal tax returns, meaning the tax benefits carry over. And with some of the adjustments at the state level mentioned above, the favorable tax treatment of annuity payments may be even more valuable.

Let me share with you the high-level elements of our 70-year-old investor’s federal and New York state tax filing.

A table shows a total gross income of $168,183 results in federal taxes of $20,191 and New York state taxes of $3,564.

Benefits and Cost from this Planning

For our investor the income taxed by New York would be around $67,500 — or about 40% of her total gross income. As a percentage of total income, the state income tax is a little more than 2%. Even after adding federal taxes, her Retirement Tax Rate is less than 15%. That leaves her a big advantage in spendable income. A traditional plan without annuity payments and with lower income actually pays more in total taxes — with a combined tax rate of over 18%.

So, our plan produces more cash flow from savings, much of it tax-favored, and gives our retiree the freedom to live where she prefers.

And the cost? The primary one is that annuity payments don’t continue at your passing even before the premium has been recovered.

You can elect a beneficiary protection feature that makes sure total annuity payments will equal the premium at a minimum. However, that choice will reduce the level of guaranteed annuity payments and some of the tax benefits. Or you can use the higher annuity payments to purchase some life insurance. And those planning choices aren’t the only options you will have in terms of beneficiary protection.

What if the lure of zero state income taxes is too great? Our retiree could move to Florida, save the $3,500 in New York taxes, adopt a Go2Income plan for her circumstances — and pay for the kids’ trips to visit her.

So be with the kids, live where you want and possibly leave less at your passing if it’s early in retirement. Bottom line: Don’t follow the crowd. Do your own research. And rely on resources at Kiplinger.

At Go2Income, we can provide you with a complimentary personalized plan that delivers both a high starting income and growing lifetime income, as well as long-term savings.

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersDon’t Move to Another State Just to Reduce Your Taxes
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