Paul Lofties heads-up Wealth Management services at Securities America Investments (SAI), the nation’s 6th largest independent broker-dealer. Lofties is also charged with setting the firm’s strategy around income distribution. In this interview I explore SAI’s efforts to transition a portion of its advisors to a Wealth Management practice model. I also ask Lofties about SAI’s strategic view of the Boomer retirement income opportunity and how the firm plans to help its advisors capitalize on it. From an independent broker-dealer perspective, Lofties also provides helpful insight on the long-range role that variable annuities and GMWB-type income riders will likely play in distribution planning. He indicates the importance of wrapping variable annuity sales in a broader context and process.
Readers should know that Securities America utilizes Wealth2k’s The Income for Life Model® as its preferred retirement income distribution solution.
Macchia: Wealth Management is a term we hear consistently in financial services. From the viewpoint of Securities America, what does the term mean?
Lofties: It means providing comprehensive wealth services, in a collaborative manner, to clients that have in excess of $1,000,000 in investible assets. I would further break that down into three, really important words in our definition of what Wealth Management means. One is comprehensive-and that we encourage our advisors, and try to train our advisors- in getting beyond just having a portfolio-related relationship with their clients, but to step into a role where they really become the general manager of all wealth-related issues. That means estate planning, insurance planning, business planning, etc… It really means becoming a comprehensive advisor on wealth related issues.
The second part in that definition is collaborative. To work successfully with high net worth customers, I believe that you really have to collaborate with them, and with other professionals. You can’t be product oriented; you really need to have a deep, deep relationship to help the client meet his or her goals.
Those two things are different than how the traditional financial advisor works, and this is a business model in which it takes a lot of time to develop a relationship, so you can’t do it for everybody. Hence, that’s why the third important part of the definition is the $1million minimum. This business model can be very lucrative but only if you focus on the higher net worth client.
Macchia: How many of your advisors are focused on building their practices in this manner?
Lofties: We have about one -hundred currently. When we started about a year ago we only had a handful. We’ve now completed a full year of training where we took 30 advisors and talked to them about the things they need to do to transform their businesses to focus on the high net worth market. We’re in the process now of taking our second group of 30 through the same educational process.
Macchia: If you were to project this initiative out two to three years into the future, what would the landscape look like then?
Lofties: At that time I’d like to say we’ll have our top 15% of advisors- perhaps 200- that have really made a concentrated decision that this is the market that they want to focus on. That they want to have fewer clients, but that they want those clients to have more money. Those advisors will have made the necessary adjustments to their business model to make that happen, both from an operational standpoint, and from a marketing standpoint.
Macchia: Would you expect that those 15% of advisors will be generating revenue to the firm in a much greater percentage than their numbers represent?
Lofties: Absolutely. The group that has completed a full year of training and the one currently in training already produce a significantly high percentage of our revenue even know they are a small group. So we are already seeing this affect and only expect it to continue.
Macchia: Let’s move to Baby Boomer retirement. When you think about this issue and all its potential implications, how does that play into everything else you’re undertaking in Wealth Management?
Lofties: That’s a tricky question because, although I’m responsible for wealth management at Securities America, I don’t necessarily view distribution strategy- which I am also in charge of- as being the same. Our senor management feels that I’m the most appropriate person here at the firm to draft what our strategy and our philosophy is going to be for all of our reps, but I don’t think its exclusive to just the wealth management group.
Macchia: Then you see it as a much wider application?
Lofties: The income distribution issue certainly is.
Macchia: Does that mean every rep?
Lofties: Absolutely.
Macchia: What then do you feel income distribution will mean to the firm over, say, the next five years?
Lofties: It’s hugely important. Obviously, that’s the demographic that is on the rise and that’s the primary challenge that will face financial advisors as a whole. It’s critical for broker-dealers for two reasons. One is, obviously, the business growth issue where you’re going to have opportunity to increase market share if you do a good job. You’re going to lose market share if you do a poor job.
As critical is the regulatory standpoint, David. The cost of getting it wrong, and your advisors getting it wrong, with the Baby Boomer demographic can just be disastrous from a regulatory standpoint. I have no doubt that over the next 5, 10, or 15 years that a lot of the action that’s going to take place will be because of poor recommendations that are made in distribution planning. So, it’s fundamentally important for broker-dealers to have some sort of philosophy that they believe in and to really train their advisors to it.
Macchia: I take from your comments that you believe that delivering a well-conceived distribution strategy to advisors is critically important. I’m also obviously aware that Securities America selected The Income for Life Model® as part of your overall firm strategy. What did you see as the benefits in taking action to embrace that program?
Lofties: There were a couple of things about The Income for Life Model. Of primary importance was that when looking at all of the philosophies that are out there, we believe the time-segmented allocation model is the best model to provide inflation-adjusted income to people. I think that it is a fundamentally superior philosophy to systematic withdrawals or stand alone variable annuity solutions where somebody gets a guarantee of income- that’s great- but as a stand alone solution I don’t think that that comes anywhere close to what the time-segmented model can achieve, which is what The Income for Life Model is.
Since I believe philosophically in The Income for Life Model, to have that put together in a wonderful package, with the proposal system, the movie and the marketing is an advantage. Plus wealth2k has been great to work with. Always ready to adapt to what we want to do. I don’t get a chance to say that often enough.
Macchia: Thanks, I appreciate you saying that. In terms of things that will be happening in the future, there’s an obvious utilization of variable annuity income riders that some advisors find most attractive. And there’s a lot of people who feel that all one really needs to solve the problem is a single product. So that’s the way they are acting. Do you believe that a single product solution is, can be or will ever be the answer? And if not, why?
Lofties: I don’t think that’s the case. When I look at the products today I don’t think it’s the case, and I don’t know if a single product will ever be the solution. The products that people most point to today as a single solution are the VAs with the withdrawal riders and the income benefit riders. Though I am an advocate of these benefits advisors must realize they have limitations. The limitations of those when people really get into looking at them is that their ability to produce inflation-adjusted income over long periods of time is uncertain. And also their ability to return principal to a spouse.
This is because although variable annuities always have some sort of death benefit guarantee, in almost all instances that’s reduced by withdrawals that are taken. You see income guarantees on the VAs in the range of 4% to 6%, but with the additional fees, and because at their heart they’re really systematic withdrawals, although a client will get that initial income for life, the research that we’ve done just doesn’t show that there’s much opportunity for that income to step-up to keep pace with inflation or that’s it’s going to return principal.
Because of that, if this is your single product solution, 5, 10, 15 years down the road you’re going to start to see some negative repercussions. Locking somebody into a solution like that may mean not being able to keep pace with inflation. A further danger is that given the way that most of those products work, if you do indeed go over and above your withdrawal benefit it will reset the guarantee. So, if my actual account balance has dropped by 25%, and I now take a distribution that’s above my guarantee, in most of these products the guarantee resets at where the account value is, which would just be disastrous for somebody. That’s the most common single product solution, today, and I think it’s got a lot of problems if it’s used as a single product solution.
Macchia: Having spoken so clearly on that issue, I also know that you feel that there’s utility in using a VA and its income rider with other strategies. You’re working with Wealth2k on incorporating GMWB rider income into The Income for Life Model proposals. How does this square?
Lofties: It will be interesting on how this appears in the blog because it does seem to be something of a diametrically opposed view. Though the VA’s riders have their shortcomings, the other reality that we just have to accept, for those of us who are very research-based and look for fundamentally what is the “best” answer, we have to come to the realization that technically superior solutions aren’t necessarily what the buying public is going to be able to grasp or understand. I saw a study this week- I think it’s from MetLife- that says that 58% of retirees desire some sort of guarantee on a portion of their retirement income. So I think we need to embrace that fact, that this is an important emotional value that the buying public wants. We should accept it, but at the same time we should not fall into the trap of making the VA a single product solution. It’s got to be used in an overall framework of a comprehensive strategy that uses multiple products.
Our solution to this issue was to do something new and take a fresh look at risk profiling. Our industry has used risk profiling for years to determine the best allocation for a client portfolio among various asset classes. As our client’s move to distribution, I believe we now must begin profiling client a client’s risk tolerance as it relates to their income stream. The emotional benefits of having a portion of retirement income guaranteed cannot be overlooked by number driven planners. At SAI we have done a lot of work to develop a questionnaire and methodology to determine not only what someone’s asset allocation risk tolerance is, but also their tolerance and need for a guaranteed income. Based upon the methodology we’ve developed around this we think that that you can have a split between a VA income rider and a time-segmented allocation strategy that provides guarantees that client’s want and opportunity for inflation adjusted income.
Macchia: Let me ask you about advisor education. It’s conventional wisdom that advisors have been focused on accumulation for decades, and that they have learned a great deal about how to properly accumulate assets. The other part of the conventional wisdom is that these same advisors lack the knowledge and insights that they really need to properly put a client’s assets into a distribution mode. If you feel that this is true, how does Securities America manage around this issue?
Lofties: I do feel it’s true. Our answer to that is to strive to educate and train our advisors on the distribution philosophies. As a firm we’ve accepted a philosophy and we want our advisors to do the same. So we’ve done some white papers and research and we’ve done regional training which will expand in the future. Another point I’d like to make which is really important about education is that one of the dangers with a single product solution that we’re beginning to see is that even when you accept a distribution philosophy, there still is a lot of flexibility and customization that has to take place in an individual’s distribution plan.
When I drill down and work with an individual client there are still a lot of nuances that are going to be different every time. Tax situations are going to be different. Or, where their money is currently invested may only provide me with the ability to manage certain parts of it, so I may have some limitations. That really gets to the point of why education is so important. You’ve got to educate people on the underlying philosophy so that they have the knowledge of that, and then give them the skills they need to do some customization. That’s going to be crucial. For people who don’t really understand the philosophy, and have basically just bought into a single idea, or a single product, they’re going to try to be fitting people into those products when they really need some customization. That’s just going to lead to problems.
Macchia: The advisor education training programs I’ve seen seem to favor an academic focus rather than a practical focus. Do you feel that the available educational programs are adequate? And if not, how is that being managed at Securities America?
Lofties: I don’t feel that they are adequate. When I look at the state of distribution education- right now- the educational programs that are being developed by fund companies, VA companies and even other member firms, there seems to be a lot of focus on how much it’s going to take to retire. I’ve seen very little education in the practical application of how to structure a portfolio to get an actual paycheck. That really concerns me. I think we have it backwards. These tools have some value but I don’t think that retirees that have worked for 35 or 40 years all of a sudden magically lose the ability to know how much it cost to live day to day. And how to manage a budget. I think they are concerned with where am I going to get a paycheck from? How long is it going to last? How much it’s going to be? I don’t see a whole lot of training for advisors on how to make that happen. That’s why our focus was on The Income for Life Model. Income for life is much more that. It’s about how do we practically provide income to the retiree, and not so much of the other stuff.
Macchia: In terms of the training for The Income for Life Model which has been led by Phil Lubinski, have Securities America advisors felt that they’ve received the level of practical guidance that they really want and need?
Lofties: They have, and people have raved about the training. But we have room to do better. The challenge is that it’s a fundamental shift in how you do business. I recall that Wealth2k put a video together on accumulation versus distribution that made the comparison of living in the United States versus living in Tibet. That was a good comparison. It’s a fundamentally different way that you have to think about working with your client and planning for your client. Firms like ours are going to have to, over the period of the next two to three years, continually be in front of our advisors talking about what we think are the best philosophically sound strategies, and to really do our best to understand how those work and how that can customize them for their clients.
©Copyright 2007 David A. Macchia. All rights reserved.
