Retirement Income

April 9, 2007  by

Interview with Jeremy Alexander: President of Beacon Research Cites Lack of Transparency as Root Cause of Many Annuity Industry Problems; Predicts Regulators Will Ban “Backcasting” of Annuity Product Performance.

jeremy-colorJeremy Alexander is Founder and President of Beacon Research, the industry’s leading source for comprehensive fixed annuity research. In this interview Alexander and I explore a number of issues of current interest to annuity industry participants. I ask him to explain why the annuity industry is facing its current negative marketing environment, and to comment on the changes he sees as necessary for the industry to reach its full potential in Boomer retirement security. As you’ll read, Alexander doesn’t fear new entrants that may try to take away annuity industry market share. Rather, he sees new opportunities for insurers in having their core competencies integrated into solutions which feature multiple product types.

Macchia: Jeremy, you are the founder and President of Beacon Research. Would you begin by describing your work?

Alexander: Certainly. We provide transparency into the fixed annuity market. We track fixed annuity products across all states, and all variations. We also track sales of those products in all channels. So we provide market intelligence to most of the leading fixed annuity providers which use our web–based tools for pricing, product creation and marketing. We also provide sales desk personnel with tools that allow the analysis of competitive products and give accurate answers to their sales force. And, we produce a front-end for distributors so that their producers can scan their product set to figure out which product is the most appropriate for a given client.

Macchia: You talked about the provision of transparency into the world of fixed annuities. That said, some fixed annuity products, including some that command a large share of sales, are relatively opaque. Are you able to make opaque products transparent?

Alexander: Yes, to the extent that a carrier provides their information to us. They will typically give us all of their source documents to their products; that would be contracts, brochures, state availability and rate information. And they would agree to keep us up to date on any changes that might occur to any of those variables. So once the source documents are provided to us we extract the data in a standardized format and put it into our system. At the point you have, essentially, full transparency into the product. So, yes, that’s what we do.

Macchia: It occurs to me that you have something of a unique perspective on the fixed annuity business. You live it day-to-day, you’re aware of the latest trends and developments, product development initiatives, product performance, etc. I’m curious as to your view on the long-term outlook for the health of the industry. You are certainly aware that fixed annuities have attracted no shortage of criticism by both regulators and the press over sales practices and contract designs. What do you think about when you imagine the future of the business?

Alexander: That’s a good question. Because we track sales of these products as well, we’ve been noticing something very interesting in the last year to two. And that is that typically we were able to benchmark sales by channel, by product type, and various independent indexes like rates, spreads, CD rates, even the S&P 500.

What’s been happening in the last year to two is that we’ve been seeing increased sales in the face of what would appear to be poor economic environments. So, in low rate environments, in strong stock market environments, we’ve been seeing sales that we have difficulty explaining in any other way other than the oncoming retirement income revolution. What we believe is that the fixed annuity side is truly the cornerstone of the retirement income market at this point, especially if you take a look at immediate annuities, for example. There’s no variable immediate sales, but there seems to be a continuing increase in fixed immediate sales. So, we think that there’s a very positive outlook over the next five to ten years in the fixed market. And frankly, to some extent, we believe the current regulatory scrutiny is positive to the market.

Macchia: Positive in the sense of ferreting out bad practices in order to set the stage for greater growth, tomorrow?

Alexander: Absolutely.

Macchia: When you say that, given hostile market dynamics, that you’re surprised by the level of sales you see, is that across all types of fixed annuities? Or is it indexed annuities, or something else? What type or types of product subset are you referencing?

Alexander: Well, they all compete with each other so we see expansions and contractions in book versus MVA versus Indexed versus immediates. So it’s not a straight line in each product type. I see the expansion in the overall sales. For example, we saw rates hit 5% in the 3rd quarter of last year and that created an explosion in sales of the MVA products. That was to the detriment of book value products. You could consider all of these as separate markets that compete for dollars in different economic environments. I see the overall expansion in the market in the consolidated numbers.

Macchia: I’m curious to get your views about the business of indexed annuities in the period post NTM 05-50. What have you observed up until now, and what you foresee going forward?

Alexander: My first guess about the result of 05-50 was that there was going to be a tremendous shift of sales from the independent channel over to the broker-dealer channel given that a good number of these individual insurance producers are series 6 and, or, series 7 licensed . My guess was that we were going to see movement of these products over to the broker-dealer side.

We have not seen any numbers in our sales studies that indicate that this shift is occurring. Now, part of that is simply because, you know, even if a broker-dealer does do business in the EIA space often times they’re utilizing an IMO to do that business, so some of those sales are just coming out as IMO sales even though they should be broker-dealer sales. But I think that what has actually happened based upon discussions I’ve had with clients is that a polarization has occurred in the industry in that the registered reps seem to have shifted back to the variable annuity sales, and your traditional producers are shifting over to fixed annuity sales.

We don’t think that it is necessarily 05-50 that’s created some of this downturn. There’s an indirect effect of 05-50. Now we’ve got reps selling variables instead of indexed products now, but there’s also another dynamic going on. When someone makes a calculation about where they’re going to invest they typically do sort of a risk/return calculation, My no risk or low risk option, here, is the fixed annuity earning me 5%. If I’m going to take the risk of putting my money into equities or a variable sib-account, well, I need an 8% or 9% return. Well, with rates where they are, especially with an inverted yield curve, there’s downward pressure on crediting in equity-indexed products. So when you tale a look at some of these products today you see fairly low caps; the risk/return tradeoff right now is, alright, I can earn 5% with no or low risk, but I can only earn 7% because that indexed annuity has a cap set at 7%. So, if I’m going to take the risk to put my money into something that is equity related, I’m going to go to VAs. If I like the low risk option I’m going to go to fixed. So I think that in today’s market the indexed product is being squeezed from both ends.

Macchia: We’ve seen the variable annuity product morph into what progressively looks more like a fixed annuity in terms of the various guarantees available including the guaranteed income riders. Do you think this plays into the calculus?

Alexander: Yes, absolutely. And this has always happened. You can actually see the opposite effect happening as well, which is we’re starting to see fixed products, both traditional and indexed, coming in with what has traditionally been variable annuity benefits like guaranteed living benefits and death benefits and withdrawal benefits. Certainly, the variable annuity market now has fixed sub-accounts to compete with the fixed side of the world, but interestingly, it seems as though from the numbers we’ve been seeing from VARDS, that new flow has been steadily declining as well.

So although we see a tremendous amount of sales on the variable side, we’re not seeing much new money come into that market. From what I understand, only 60% of the money flowing into variable annuities is going into equity sub-accounts. The remainder is going into the fixed bucket, so I often say if you add up the fixed components of variable sales to true fixed sales you have a larger overall fixed market than the true equity subaccount portion of the variable annuity market.

Macchia: I’ve likely made some industry executives’ heads spin- probably in disbelief- over my prediction that indexed sales could achieve a four-fold increase and reach $100 Billion within five years. I based this projection on a couple of assumptions. One is that it is inevitable that indexed products will become more transparent, the communications strategies around them will become more effective, and the product’s quite substantial inherent value proposition will become better appreciated not only by consumers, but also by advisors, most of which have shunned the product up until now.

This sales prediction is not made without context. Specifically, the needs of Boomer retirees, specially in terms of their entry into what the Retirement Income Industry Association refers to as the Transition Management Phase, and the need Boomers have to place principal guarantees under accumulated retirement assets while also maintaining the potential for upside interest growth. A consumer-oriented indexed annuity, it seems to me, matches-up nicely with this financial need. I’m wondering if you buy into my logic or, if not, if you may have any comments on it?

Alexander: Well, I think that the particular sales number you mention is open to debate. But I also think that what needs to happen in order for your prediction to come true is that the true value proposition needs to be uncovered. I say that because right now no one really knows how these products are actually performing. Are they actually providing a better return over time than a plain old fixed annuity? We don’t know.

Very often people ask me to tell them what is the best indexed annuity out there and I say to them we have no idea. Until the industry puts the light under the dark box and says here’s what’s actually happening, then we’re going to continue to have market conduct issues, and I don’t think that pent-up demand is going to be unlocked.

For example, broker-dealers are drawing somewhat arbitrary lines in the sand over what products they are going to put on their shelf. Why is that? Why is there such an argument over what indexed strategy works best- the 300 different versions of these strategies out there? Why does a broker-dealer cut-off certain types of products- just out of hand say these are no good? The reason is, they don’t know. Until they really understand what has been the renewal history of these products, what is the strategy that the carrier has for renewing rates, and how have they treated clients over time, then broker-dealers and distributors and everyone else involved will continue to sell the sizzle instead of the steak.

In think that its’ purely conjecture that these things really perform in the way everyone says they do. In a perfect world if we had complete transparency- whether its plain old fixed annuities or indexed- we would see a huge release of pent-up demand in this industry, not only would people feel more comfortable selling them, but people would feel more comfortable buying them. And advisors who traditionally wouldn’t even touch these things, the RIAs, the professional planners who say they won’t even look at fixed annuities, for example, might begin to understand how they fit into a portfolio, because the transparency is there; they can be modeled, we can show them inside an asset allocation program. I think all of that revolves around transparency. Today the industry likes to sell around a Snoopy, or a red umbrella, and not based on the actual product.

Macchia: You’re agreeing with me because what you’re describing the sorts of structural changes upon which I condition my prediction. It reminds me of another issue I’d like your comments on, and that is something I have trouble with that seems to be taking root in the indexed annuity marketplace, and that’s this effort to try to make comparative decisions about various products based upon backcasting.

Alexander: Yes. This is one of my favorite subjects. Go on.

Macchia: I’d like to know what you think about backcasting. Will it be successful? What effect or effects stem from it? Do you approve if it, or not?

Alexander: No. I believe it’s misleading and mischaracterizes how the product actually works, and I’ll give a good example. If I were to take a product in today’s market and backcast it ten years, let’s assume today’s cap is 7.5%, and I say what this product would have realized if you invested ten years ago- using this 7.5% cap, well, this can contrast significantly with reality.

We’ve got a couple of players who’ve been around ten years, Sun Life Financial Keyport and Allstate’s Lincoln Benefit’s Savers Plus. Savers Plus came out in April of 1995. Had you invested $100,000 at that time, you would have begun with a 14% cap, and your $100,000 would have grown to $190,000+. Over the holding period rates declined. Well, most of the money in an indexed contract is invested in reserves. Therefore, over time Lincoln Benefit had to lower the product’s cap, because of interest rate conditions. So you saw a gradual decrease in the cap from 14% to 12% to 10%, down to the current level.

Well, if you took, say, an 8.5% cap- which is what I believed it was six months ago- and backcasted the same product over the same exact period using the same S&P numbers, it would turn into $163,000. So in this example, backcasting lowers the true return of that product over time. You’re basically saying this will be the market condition going backwards.

Secondly, and more importantly, you reward carriers that are mispricing. So if a carrier introduces a product today with a 10% cap, I know they can’t sustain that cap. But that product will show up as the best product in the backcasting model. To me, that’s lowballing. You actually reward mispricing when you have backcasting.

Here’s my best analogy: Jeremy Alexander starts a new mutual fund as of today. And because I don’t have a history, I’m going to publicly assert that my mutual fund would have realized a certain percentage gain if it had been invested over the previous ten year period. I don’t think that any regulator would allow me to show such a projection to a client, nor do I think that any OSJ at any broker-dealer would be happy to see any registered rep use that kind of methodology. In fact, I’d likely be barred from the industry and be hit with an SEC fine. And yet, this is exactly what’s happening with backcasting of indexed annuities. So yes, I’m 100% on the same page with you that backcasting is misleading, and frankly if there’s going to be anything that is disallowed over time it’s going to be that.

Macchia: Over 30 years of observing life insurance companies I’ve learned that it is certainly within the operating framework of some to introduce new products with artificially high or subsidized rates. What you’re saying is that applying the backcasting model gives such a company and its products unfair advantage, and almost by definition, a policyholder purchasing such contracts will have results which disappoint. Because the initial projections are unsustainable. Is that right?

Alexander: Exactly. And you touch on an interest subject which is expectations. When you read the complaints or the lawsuits that emerges from many of these market conduct issues you sit back and you say, Man, I can’t believe that it’s really as bad as this complaint states, or the annuity contract can’t be as bad as its being made out to be. But the point is that if you can’t set the correct expectations with the client you are going to have a problem. And that goes back to transparency.

Is the carrier, for example, offering an unsustainable cap? Well maybe… or maybe not. Maybe that carrier’s strategy is to be dynamic and move with market conditions over time, and therefore that cap seems to be higher than other caps. Or maybe I’m a carrier that is setting a policy to renew at a consistent cap, and therefore because I’m looking at my cost structure over time and I’m expecting that my benchmark average it will be “X”, and therefore I can’t come up with a higher cap. Once again, with transparency, we can start to get an idea as to what the carrier is trying to do and set the client’s expectations correctly. That’s what this is really all about, and that’s what will help lower market conduct liability. The only reason backcasting even exists is because a buyer can’t look at renewal rate histories.

Macchia: If I could somehow convey to you a magic wand, and by waving this magic wand you could effect any change or changes within the fixed annuity business which you saw fit, I mean instantly effect that change, what would the first two or three changes you’d want to accomplish?

Alexander: Good question. First, I would want the industry to disclose the renewal rate histories, whether they’re indexed or traditional products. Secondly, I’d like to see some sort of standardization of the suitability process across all lines and across all channels, not just the broker-dealer channel. This is essentially leveling the playing field so it’s not putting any distributor or carrier at a disadvantage.

Macchia: I have not been shy about criticizing the practices of some companies that have been overtly harmful to the industry as a whole. For instance, the development of annuity contracts with extraordinarily long surrender charge periods, or two-tier crediting methodologies, or excessive loading. And I’ve even named certain companies, citing them for their- let’s call it gimmickry- in contract design. Privately- for years- executives of competing annuity providers have complained to me about these very same practices, and they’ve been vocal (privately) in their criticism, and have stated we would never do anything like that, but neither these company executives, nor the industry associations, have ever publicly condemned these practices, or try to distance themselves from them, or sought to isolate and marginalize the companies which engage in them.

And I believe that the result of his inaction has been to place the fixed annuity business in its present precarious position. Would you agree with my analysis of this? And if you do, what do you think is likely to happen over the next couple of years?

Alexander: I absolutely agree. I hate to be a broken record about this but, once again, it goes back to transparency. Here’s an example. Let’s say I have a tremendously long timeframe to invest money, I’m 40 years old and I’m not going to need to access my money for 25 or 30 years. So, I’ve got a timeframe that might allow for a product with a seventeen year term. I want to know why I should buy a seventeen year product. You’ve got seventeen years to use my money. Presumably, you should be able to provide a better return to me that someone else who has my money for ten years. Prove it! If I could see a renewal rate history that makes me comfortable that this thing is going to give me 50 more basis points over time, then I have the tools I need to make a good decision.

Now it’s easy to criticize such products, and I believe that you have a very good point that they may not perform as well as some of the other, shorter term products- but I don’t know. In an opaque world you don’t know, so you end-up drawing arbitrary lines in the sand. I’m agreeing with you entirely.

I was a producer for ten years. When I was producer I was always in an uncomfortable position where it took me at least a couple of meetings to get clients to trust me. Why? Because I was an insurance guy. Well, I didn’t think that this was fair. And I couldn’t understand what I was considered inferior, say, to a stockbroker. But the bottom line was that an individual could come into Merrill Lynch, and a Merrill broker would say, Here’s what I recommend. And that person could go to their local library and check out S&P or Morningstar or Lipper, and they could say, Gee, that was a great recommendation. And the rep could say, We use this third party source and here’s how we came up with your analysis.

Well, as an insurance guy, I couldn’t do that. And I had clients who asked me would you sell this to your parents? And they’d look for me to flinch. Now that’s not the way to sell. That’s why the insurance industry has so many problems with how people perceive the industry. It’s simply that they can’t know that the recommendation is good. Until you have transparency you can’t have an efficient market. It’s bonds before Bloomberg. It’s mutual funds before Joe Mansueto. And until the industry solves this problem, it will always suffer from a poor perception.

Macchia: One of the goals I have with this Blog is to develop candid exploration of some of the inherent poor practices that the industry tends to observe so that a bright light can be shone-in and some reform may occur. This is because the industry needs to set itself up on a better footing so that it can realize the growth it will then deserve based upon its inherent competencies, benefits and advantages that perfectly align with the needs of millions and millions of soon-to-be retirees. Yet, there are many in the industry who continue to defend at all costs even the very worst practices that occur. And the failure to isolate and marginalize these worst practices publicly has brought significant harm to the entire industry. My question is, do you think this will change, or continue in the same manner that is has for a long time?

Alexander: Nothing in this industry changes quickly. I’ve been doing this (Beacon Research) for more than ten years now and it’s clear that it’s a very slow process for the industry to change. I do think that it will, however. I think that things are moving in the right direction in terms of our ability to collect data. I think that over time we will get carriers with best practices to provide the transparency we need. When that does happen it will begin to marginalize the other carriers or distributors which continue to do things that are not in the best interest of the client. I do think the industry will figure this out. I just won’t happen quickly.

If we’re looking for new flow- which everyone is talking about- and not just 1035 exchanges of fixed to fixed and fixed to variables and back again, then we’ve got to tackle this problem. I think the companies with best practices have a huge interest in doing so.

Macchia: On the institutional side, products are created that effectively match-up with the benefits of, say, an indexed annuity. And there’s a lot of talk of packaging structured products so that they can be brought into the consumer market, to deliver to the consumer via Wall Street what the insurance companies deliver to the consumer via Main Street. Have you thought about this and what it may mean? Is it a threat?

Alexander: Well first of all I don’t think it’s a threat. Every industry thinks they have THE solution to the retirement income problem. The mutual fund industry thinks it has THE solution. Every industry thinks it has THE solution. And the fact of the matter is there is no single solution; it’s a “best” solution for a client, and that is always a collection of different products working together to deliver long-term benefits.

I actually think it’s healthy. In fact, insurance companies have begun to provide risk components to non-insurance products. Could, for example, an insurance company provide a living benefit to a plain old mutual fund? Certainly it could. It could take the portion that is the risk and package it inside the mutual fund. Over time we will see combinations of products.

I’d be interested in seeing a pooling of these products to serve the client’s best interest instead of a mindset which says, My silo is best. This is something that could unlock pent-up demand. Everybody talks about the fact that we need this new product or that new product. Wrong! We already have all the products we need to create a strong retirement income portfolio. We have longevity insurance, we have immediate annuities, we have living benefits, we have mutual funds, and we’ve got bonds and stocks. All of those things in combination could and will provide a secure retirement for individuals. This isn’t to say I’m against innovation. But the industry needs to think more about how they fit into the picture instead of his they are the picture.

Macchia: I agree with you and that‘s a terrific insight. Is there anything else you’d like to address that we’ve missed?

Alexander: No, I can’t think of anything.

Macchia: Thank you, Jeremy, I really enjoyed it.

Alexander: Me too.

©Copyright 2007 David A. Macchia. All rights reserved.

in Annuity Marketplace Challenges / Retirement Income / Technology & Improving the Sales Process / The Interviews: Industry Leaders & Innovators / Uncategorized 0 comments
April 6, 2007  by

Update: The Application of “The Macchia Vision” to the Challenge of Increasing Participant Deferral Levels

Following yesterday’s post I received several emails form individuals who work for 401(k) providers asking about how what I termed, “The Macchia Vision” could be applied to the challenge of increasing the current levels of deferrals among 401(k) plan participants. Conceptually, a strategy to motivate increased deferrals (or even initial participation in the plan itself, for that matter) would almost exactly mirror the process I set forth yesterday. What would differ is the text of the email sent to the individual participant; it becomes a message aimed at younger workers who, arguably, are not saving enough for their retirement years. In addition, the streaming video would need to be multi-dimensional.

Keeping the example from yesterday’s post of Fred Jones, an employee of XYZ Office Products, who is participating in a plan provided by ABC Retirement Company, let’s assume that Fred is currently participating at only a minimal level. The email message text to Fred might read like this:

Dear Fred,

Sometimes the most attractive of benefits can be found right under our noses! One of the most attractive financial benefits available to employees of XYZ Office Products is your company’s 401(k) plan. You may say, “What’s so attractive?” Well, consider these facts:

ZYX Office Products will match your contributions to the plan up to a level of 5%. Think of this matching contribution as the equivalent of a 100% return on your money! There may be no other single opportunity available to you that offers such an attractive financial incentive.

The reasons for taking full advantage of your opportunity to defer more of your current income are not without context. Americans are, in general, saving very little for their futures. In recent years, the national savings rate has sometimes actually been less that zero. To this add concerns over the long-term health of Social Security and increased longevity and you begin to realize that employees have a special responsibility to create their own retirement security. No one can argue that, going into retirement, it’s not better to have more money than less.

By the way, you may already know that salary you defer to contribute to your 401(k) plan is “before tax”, meaning that you receive a big income tax benefit. That’s the icing on the 401(k) plan cake!

To help you learn about the importance of saving adequately for retirement, ABC Retirement Company has created a 30-minute, on-demand video program called, “Retirement: A Time for Security.” The video is engaging, informative and full of valuable information and insights.

Now, the best part: To help you view the program with the maximum of convenience, ABC Retirement Company has created for you your own website. This website is unique to you, and has its own web address.

Just click on

    www.FJones.ABCRetirement.com

to watch the movie.

After learning why increasing you salary deferral may make good sense, you may simply click the Increase My Contribution Action Button to indicate your desire to save more. We will call or email you with any additional information we may need to fulfill your request.

Please feel free to share your website with family members or friends who may benefit by learning more about the importance of saving for retirement. And please know how much we look forward to helping you increase your retirement security.

Sincerely,

ABC Retirement Company

Again, please see yesterday’s post for a detailed exploration of the other components of “The Macchia Vision” and its projected benefits.

©Copyright 2007 David A. Macchia. All rights reserved.

in 401(k) & IRA Rollover / Retirement Income / Technology & Improving the Sales Process 0 comments
April 5, 2007  by

401(k) Providers: A New Vision is Needed to Stanch the Bleeding of 401(k) Assets

Time to inject 21st century technology into the asset retention process!

Improving low retention rates of 401(k) assets is one of the most vexing problems facing 401(k) plan providers. According to PLANSPONSOR Chief Operating Officer, Nick Platt, “Due to demographic trends, financial services providers will experience significant retirement asset outflows in the next 10 years. A comprehensive rollover capture strategy is critical to the net retention of assets during this period.”

For a number of providers the asset bleeding is already in full swing. Year after year, the assets held by a majority of retiring or transferring participants leave numerous providers for other pastures. Notice I didn’t says greener pastures; the simple truth is that, in many cases, the existing pasture was already sufficiently green. It just wasn’t appreciated as such.

This sad fact implies a high-stakes breakdown in communications; the value of keeping assets with existing providers isn’t being communicated effectively to participants, if at all. Yet with so much at stake, one would think that the providers would be more focused on optimizing the communication of their long-term value to plan participants. Why does this suboptimal condition endure? Where’s the, “comprehensive rollover strategy?”

Now, the answer! The best analogy I can think of is as follows: In terms of participant-facing communications, the 401(k) industry is operating on a DOS operating system in a Windows world. Unless and until it moves to the financial services equivalent of the Windows operating system, providers will lose billions of dollars more to aggressive competitors targeting their rollover assets.

I’ve lately been assessing the “state-of-the-art” in rollover communications. From my point of view it’s not a pretty picture. A new, high-tech “operating system” is called for. So, humbly, here is “The Macchia Vision” for how asset retention can be improved significantly:

Personalization + Web Delivery + Streaming Video + Convenience = Asset Retention Success

Personalization

The technology exists to create personalized websites (microsites) down to the individual plan participant level. Whether the number of plan participants in a given plan is 100 or 100,000, each individual can be provided his or her very own microsite with a unique URL. The microsites can be customized (branded or co-branded) to the plan sponsor level, and they can carry all required disclosure language. The content on the microsites can be managed by the provider via a web interface. Key or unique messages that may be important to the plan sponsor may be included on the microsites.

Web Delivery

Imagine Fred Jones, an office worker and plan participant at ZYZ Office Products, receiving this email from his 401(k) provider, ABC Retirement Company:

Dear Fred,

With retirement right around the corner it’s time for you to consider how you will convert your retirement assets into durable, inflation-adjusted retirement income. This is no small challenge, and meeting it requires a solid plan. Fortunately, ABC Retirement Company has developed such a plan; an attractive, low-cost and flexible solution designed to help you create the highest level of retirement income based upon your accumulated assets.

To help you learn about all of your options for generating retirement income, ABC Retirement Company has created a 30-minute, on-demand video program called, “Retirement: A Time for Security.” The video is engaging, informative and full of valuable information and insights.

Now, the best part: To help you view the program with the maximum of convenience, ABC Retirement Company has created for you your own website. This website is unique to you, and has its own web address. Simply click on www.FJones.ABCRetirement.com to watch the movie.

After learning why keeping your 401(k) assets with ABC is a wise decision, you may simply click the Rollover Action Button to indicate your desire to keep your assets invested with us. We will call or email you with any additional information we may need to fulfill your request.

Please feel free to share your website with family members or friends who may also face the challenge of creating long-term retirement security. And please know how much we look forward to being your retirement income provider.

Sincerely,

ABC Retirement Company

Streaming Video

401(k) providers must realize that their participants are living in a society which is undergoing a transition in the manner in which people acquire knowledge. Less and less information is acquired by reading, and more and more is acquired by watching. Read my opening remarks to RIIA’s 2007 Managing Retirement Income conference for more on this topic.

Streaming videos, which are presentations that engage, motivate and connect emotionally with the viewer, are an indispensable component of “The Macchia Vision.” Placing video content in the center of the rollover communications effort implies nothing but advantages:

• Video presentations are NASD and/or provider-reviewed; they are compliant by definition

• Video presentations are consistent across all plan participant interactions

• Video presentations present a much fuller value-based story than PDF documents and brochures are able to convey

• Video presentations meet the information conveyance format that today’s participants have come to expect; it’s what they receive from retailers, manufacturers, real estate, health care- all other large industries

• Video presentations can be interactive; viewers may input data and see real-time results within the needs-based presentation

• Video presentations provide the critically important context for the purchase of investment products

Convenience

Convenience is so very important. Busy lives mean that people will learn and evaluate during times outside of normal workday hours. It may be that 10:45 PM is the only convenient time for Fred Jones to learn about ABC’s rollover strategy. Why shouldn’t ABC accommodate Fred on his terms? Convenience for the plan participant is another indispensable component of “The Macchia Vision”.

Asset Retention Success

Think about it from Fred’s perspective. “The Macchia Vision” placed his relationship with ABC Retirement Company on an entirely different level; one that’s far more personal, value-based, engaging, informative, contemporary and convenient. Did I forget to mention, compliant? The “power” shifted to Fred; he became empowered to hit the “Action Button” on his terms.

ABC delivered to Fred, not a sterile opportunity to remain a customer, but rather, ABC delivered a genuine “experience”, one that played-up to Fred’s ego… and his needs.

It will be interesting to see if 401(k) providers begin to adopt the process illustrated above. I’m convinced it’s a strategy worthy of investment and implementation. Common sense, in my judgment, says that it’s the right thing at the right time.

©Copyright 2007 David A. Macchia. All rights reserved.

in 401(k) & IRA Rollover / Retirement Income / Technology & Improving the Sales Process 1 comments
April 4, 2007  by

Interview with Paul Lofties: Head of Wealth Management Services at Securities America Investments Talks About Income Distribution Strategy, Regulatory Risks and the Role of Variable Annuities in Income Planning.

pl1Paul 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.

in Retirement Income / The Interviews: Industry Leaders & Innovators / Variable Annuities 1 comments
April 3, 2007  by

Interview with Francois Gadenne: The Executive Director of the Retirement Income Industry Association Talks About How RIIA Emerged, the Future of Retirement Income, and RIIA’s Role in Helping to Define It.

fg1In this interview with Retirement Income Industry Association (RIIA) Founding Chairman, Francois Gadenne, I explore a variety of issues including the status of present and future income-generation solutions, key questions for the industry that are being asked by RIIA, and changes occurring which may cause transformation and disruption within financial services. Readers should know that I am hardly a disinterested party when it comes to this not-for-profit association; I serve it as both a Board member and Chair of the organization’s Communications Committee.

Macchia: You were born and raised in France, and you’ve enjoyed great success since settling in the U.S. and becoming a U.S. Citizen. Talk about what brought you to this country, and share your experiences up until the time you began to work on the formation of RIIA.

Gadenne: I left France because I was a born entrepreneur and I was living in a culture that favors central planning and government control. My primary source of comparative advantage and specialization was not highly valued. Once I understood it clearly, in graduate business school in Paris, there was only one thing to do, I had to leave. From this point forward, the path was straightforward. I earned an MBA at the Kellogg School, and then became engaged in business strategy consulting at Braxton where I focused on the financial industry. I pursued my interested in Artificial Intelligence by joining a start-up involved in the development of expert systems for the financial industry. After that start-up failed, I joined the Artificial Intelligence Section of Arthur D. Little to lead a team building a weather forecasting system for NASA in the aftermath of the Challenger disaster.

Then I was hired by the Bank of Boston (BKB) to build expert systems. I grew-up on the IT side of the Bank to become a resident entrepreneur, managing increasingly complex and mission-critical projects including the launch the 1784 mutual funds family. I transitioned to the business side of the Bank when I joined The Private Bank. My mission was to develop and to run a technology-focused investment advisory business model for the core customers of the Private Bank.

At this point, in the early-90s, it became clear to me that such business models could be leveraged over became the Internet. This is when Ben Williams and I founded Rational Investors. Our mission was to provide mass-customized investment advice over the Internet in DC Plans. In 1999, we sold the company to Standard & Poors’. I became the general manager of S&P’s Retirement Services Division, we made the earn-out in two years and then I retired for 59 days. That’s when my wife, Lucie, told me across the kitchen table, “I married you for life, not for lunch. Go do another one.” That was the birth of Retirement Engineering.

At this point, both March 2000 and 9-11 where part of our history and consciousness. To start Retirement Engineering, Ben Williams and I interviewed about 100 former advisors, clients and prospects to ask the following question: “What is an important problem to solve in the retirement business?”

We heard many things and chose to retain two key ideas:

“Don’t do Process (like Rational Investors) do Products”.

“if you do Products, don’t do Inputs, do Outcomes”.

Retirement Engineering (REI) is a Research & Development Holding Company developing new forms of product packaging (Future-Income Denomination™, DBinDC®, etc.), new retirement income structures and products (GRInS®, LIncS™, MSI™, etc.) and new financial planning methodologies and benchmarks (IncomeAtRisk™, etc.). Our work is very low-key and under mutual non-disclosure agreements. We do not discuss our work nor do we talk about our clients. (Click here to see a high-level view of services offered by REI).

Along the way, an old friend and advisor, Professor Zvi Bodie of Boston University, offered me the opportunity to teach his class, so now I’m a lecturer at B.U. The nice thing about teaching is that it challenges you to see the limit of your thinking so that it can become more direct and more clear.

Macchia: Let me ask you about the formation of RIIA. I recall that it was only in February of 2006 when RIIA formally came into being.

Gadenne: The Retirement Income Industry Association (RIIA) emerged from persistent requests and comments made by REI’s clients, prospects and lawyers, including Al Turco who is RIIA’s co-founder. “Retirement income cuts across the business silos, but we can’t achieve the right level of conversations within our existing associations and business structures because they are product, process or silo focused. We need a new association to address retirement income issues and questions across the traditional product, process and business silos.”

The notion of RIIA goes back to discussions held in 2003 starting with Al Turco. In 2005, something clicked in place. I had been working on a retirement income conference built around the idea that existing conferences were too silo-specific. It was becoming clear that the retirement income discussion was not taking place to our clients and to our prospects’ satisfaction. There was an emerging need to have a new type of retirement income conference. This led to a conference that I chaired in June 2005 organized by IIR and held in Boston.

The conference was more successful than we had expected and, as a result, led to the IIR’s and RIIA’s very successful Managing Retirement Income (MRI) conferences in Feb. 2006 and Feb. 2007. Along the way RIIA was formally constituted and the 2006 & 2007 MRI conferences doubled up as RIIA’s Annual Meeting.

Macchia: RIIA had a fulfilling first year. Talk about the progress you’ve seen.

Gadenne: The first challenge was to make RIIA real. We accomplished this in less than a year. The second challenge is to make it permanent. This is accomplished by reaching critical mass in several areas: Membership, demonstrable value-added and relevance, and Budgets. Once it’s permanent, then you have to make sure that it thrives.
It was very rewarding to see that RIIA became real in less than one year. It just blossomed on us. Companies started to join rapidly. Since RIIA is a volunteer organization, where the work is performed by the members and for the members, we reached a critical mass in all areas and we reached it faster than planned.
Macchia: Why did so many prestigious organizations so quickly gravitate to RIIA?

Gadenne: This is a typical case of being lucky at the right time. RIIA is doing the right thing at the right time and at the right place. There was a need, and RIIA’s goals and structure fill that need well.

The membership realizes that it’s a volunteer organization, not an organization where a bureaucratic administration seeks to impose its preconceived, or politically correct, notions upon the membership. As a result, different types of deliverables emerge, different types of activities happen. Initial ideas quickly turn into committees, turn into specific projects with goals, turn into valuable deliverables. Members are involved and the rapid results motivate them to stay involved.

In the first few months, the Education Committee delivered the first training course for RIIA’s Retirement Income Expert certification, The Research Committee delivered the first quarterly research deliverable, the Communications Committee delivered the website ( www.riia-usa.org ), etc. It all moves very quickly.

Macchia: Talk about the types of members RIIA attracts.

Gadenne: In typical RIIA fashion, membership categories are developed by the members as new challenges and opportunities appear. RIIA has several membership categories.

RIIA began with about 30 Founding Members sorted into two categories; Regular Members, organizations that are building retirement income businesses, and Associate Members, organizations that provide third-party services to Regular Members. These are RIIA’s full memberships with all benefits and obligations.

As the Regular and Associate memberships grew, discussions started and deliverables followed rapidly other types of industry players asked if they could get involved: Plan sponsors, financial advisors, academics, silo-focused associations, etc.
In response to this demand, RIIA created new membership categories to accommodate their needs as well as their funding abilities. This created a second set of membership categories with lower cost and matching benefit levels. You can see the details on RIIA’s website.

Some leading Plan sponsors asked join RIIA’s discussions and activities. RIIA created a Plan Sponsor membership category. Leading financial advisors, who often times have expressed frustration that their companies are not moving fast enough, asked if they could join RIIA to be where the action is. RIIA created a Financial Advisor membership category.

We have a number of leading academics who have become very interested in RIIA’s activities, people like Moshe Milevsky, Meir Statman, Zvi Bodie and Shlomo Benartzi, so RIIA created a membership category called Special Advisors to the Board.
Then we heard from leading product and processfocused associations who wanted to leverage their specific mission with RIIA’s extensive membership and activities. RIIA created an Affiliated Association membership category.

This process is on-going. RII is currently considering an Honorary Membership category as some members have changed jobs to move to more distant industries and seek to retain a relationship with RIIA. The membership level increases daily, you can see the latest membership information on the RIIA website.

Macchia: In terms of RIIA being a different sort of organizations, focusing exclusively on retirement income, cutting across industries and silos, positioning itself as the preeminent thought leadership vehicle, attracting all manner if large companies and innovators, attracting the leading lights of academia, it’s a very interesting combination that has resulted. I’d like you to explain who gets helped by this, and who, if anyone, gets hurt?

Gadenne: It is too early to have winners and losers. RIIA exists because something new is being created. RIIA is about building and growing the pie, not sharing the spoils of a zero-sum game. This may change when growth slows but there is a long way to go before we get there.

Another reason is that RIIA is not about making statements that might cut the pie into winners and losers. Rather, RIIA is about asking questions. It is about asking the right questions so that members do not end-up making decisions that result in dead-ends.
The reason why it works is that we don’t show-up saying, “Please kneel, I’m going to tell you how it is or isn’t.” It’s quite the contrary. Things are different, things change, it’s pretty messy out there and we’re having a hard time figuring out what’s what. Why don’t we get together and figure out what are the right questions to ask. This is RIIA’s function, and why its thought-leadership is so evident.

RIIA is a place where we can all ask questions and not run the risk of being ridiculed, railroaded out of town, or ostracized. RIIA is a place where people from very different backgrounds can come together to talk as opposed to a place where there is a stated dogma, and if you don’t fit into the dogma you’re out. So everybody wins, there are no losers because the purpose is growing the pie, not promoting a specific way of slicing a fixed pie. Exactly how that pie will grow, and in what directions, well, that’s exactly what the effort to define the right questions is all about.

Macchia: I’d like to ask you about something that I’ve heard and that I feel needs to be addressed directly. This has to do with a view of some who feel that because RIIA was moved to reality by an entrepreneur, and because you are still an entrepreneur, at least part time, that somehow RIIA lacks the level of legitimacy that another organization might have. Now as a Board member I know that this is not valid criticism, because I know how lily pure RIIA’s operations are conducted. But I’m interested in your view of this issue?

Gadenne: The first thing I’d say to those who have concerns about RIIA’s direction, please give us specifics that can help us become better. Become a member, participate in our meetings, join a committee and see for yourself how we operate, experience our transparency. Read our bylaws, talk to our members and judge from RIIA’s facts not just from your own fears.

For instance, the wording of the question that you asked does not seem to originate entirely from RIIA’s specific facts. RIIA has two co-founders: An entrepreneur and a lawyer. From the very first day, Al and I have worked to give RIIA the right organizational DNA with proper By-Laws, a Code of Conduct, having the Board and the Directors become members of the National Association of Corporate Directors (NACD) to ensure a level of Board professionalism not often seen outside of large corporations, etc.

In most circumstances, change engenders fear and insecurity among individuals and organizations. After all, RIIA is focused on a high-stakes marketplace, we’ve had tremendous growth, we’ve attracted many major corporate members and we’ve innovated. That’s may be viewed as disruptive to some. I believe that such concerns will be best addressed and transcended into value if these individuals or organizations join RIIA. RIIA’s membership structure, including the Affiliated Association membership, is designed to create leverage and value-added opportunities for all.

Macchia: What changes and enhancements do you see coming from RIIA over the next 2-3 years?
Gadenne: Just last week RIIA signed a contract with IIR that will split the original conference into its two components. In the past our conferences functioned as an industry conference- Managing Retirement Income- and also functioned as RIIA’s annual meeting. Going forward, we will continue to hold the Managing Retirement Income conference in February, albeit in a warm weather locale, and we will also offer a Fall Annual Meeting including an Awards Dinner. We will give awards in a number of categories, including advertising, with well-regarded, independent experts lined-up to judge in the various categories.
This fall we will also hold our first Annual Retirement Income Communication Conference to help focus our members on this very important issue.

Macchia: Regarding associations which inherently advocate for a particular product, in what way may such organizations be handicapped in terms of helping the larger industry craft the solutions and processes that will be necessary to fully meet the demand of the Boomers’ retirement security needs?

Gadenne: The have constraints and rigidities in the form of a very specific mission and view in support of a very specific product. When you have a hammer you tend to see all of the screws around you as things that need to be hammered. As the landscape changes and the shift from accumulation to transition to distribution unfolds, it becomes clearer that many of these products provide part of the solution but not all of the solution. The need for cooperation across silos increases. As the shift progresses, the part of the market best answered by specific products may grow, or it may shrink. The developments that may address the market change in a larger and more fulfilling way, in a way that creates dominant market share and stronger companies- may best come from reaching across silos. Join RIIA.

Macchia: I want to ask you about the issue of training for financial advisors. It’s become conventional wisdom that financial advisors long ago acquired the level of knowledge necessary to properly accumulate retirement assets. The second part of that conventional wisdom is that the vast majority of those same advisors have yet to acquire the skills, insights and techniques needed to properly place retirement assets into a distribution mode. Do you agree with this? And if you do, what role will RIIA play in changing the advisor education landscape?

Gadenne: Let me field that in terms of one of the key questions RIIA is exploring: Is the body of knowledge for accumulating assets in a suitable and compliant way different from the body of knowledge necessary to engage in distribution in a suitable and compliant way? The answer is, gee, this is worth looking at! It may be that the body of knowledge that FAs currently have to provide suitable and compliant accumulation is adequate to also have them provide suitable and compliant distribution advice. Then again, maybe it’s not, and that’s the subject of a lot of ongoing discussion and development. I would not place the blame on FAs for having insufficiently trained, it may be that something fundamental has changed here. So, it’s a deeper issue than thinking, well, I’ll take some additional training. That training may not even exist, yet. RIIA is working on it.

Actually, the academic theory (for retirement income) may be in its infancy. This is why we have so many academics associated with RIIA, because those are the issues we’re trying to sort out. This is also why RIIA is creating the Retirement Income Expert training programs and certification, because that’s exactly what it seeks to address- starting from what’s fundamental at the academic level, and how do we reflect that into something that properly trains the FAs.

The other issue is that almost everything we have done in accumulation has come from the institutional world. Modern Portfolio Theory, and pretty much this whole assemblage of financial theory, which is only 50 or 60 years old, is very institutionally-focused and based on clients that have a near infinite investment horizon. We can say to clients with a near infinite investment horizon, that on average, in the long term, blah, blah, blah… it works!

But now when we deal with a retail world, where clients have a finite lifecycle and some hard dates, like a retirement date, well the “on-average” and “over the long term” may not apply nearly as well for some or even for many of the customers. That’s the source of a fundamental shift in the theory as we move from an institutional world with infinite horizon to a retail world with very specific and finite dates. What this may suggest is that the financial world may move from a world where products were sold, and the customer was an investor, to a world where products are bought, and the customer will be more like a consumer.

Macchia: When I look at the current landscape of income distribution solutions I see it breaking down into philosophical-based choices analogous to the various religions we are familiar with. For instance, there’s the distribution religion of systematic withdrawals, or the religion of life time annuitization, or the religion of time-segmented, laddered strategies. And then some of these morphing into combinations, such as lifetime annuitization mated to target date funds. What do you think of this? Do you see the issue this way? And do you think that one of these religions is likely to catapult into a leadership role? Or, will it be solutions that we today can’t imagine which will assume a market leadership position?

Gadenne: All of the above. I mean, all of these things that you mention are adaptations to the changes we discussed earlier, given what we know and what we have on hand right now. For instance, this makes me think of the first Dreadnaught, which was the first ship with steel armor and with turret guns that was put together by the Brits. For the first time, a ship had guns that could blow-up other ships at distances that could be measured in many miles. Yet, for a long time, these ships still had a ram on their bow.. So, when the transition occurred in naval warfare from having a reasonable expectation to be able to ram opposing ships to being able to blow-up opposing ships from great distances, for a long time the ship builders still kept building ships with hulls that were built for ramming.

When you have evolutionary changes you end-up with something like the human appendix. There are design features that don’t really make sense any more yet they’re kept; out of inertia, or irrelevance, or tradition. I look at all these distribution solutions and I say, fine, these are all very interesting adaptations given what we know and the specific needs and market they serve. But my sense is that there are so many open questions that I would not rule out the appearance and the development of additional products, processes, and methodologies that may fill other needs and other markets. The key question becomes: What are the larger, growing and profitable needs and markets?

Going forward we may have all kinds of solutions that meet a specific market, and satisfy a specific need. When we transitioned from horse and buggy to cars, I’m sure there were buggy whip manufacturers for a good long time. If you live in Pennsylvania there’s still a good market for them. Still, most of us prefer to drive a car.

Macchia: You still have the wonderful French gift for analogy.

Gadenne: Ha!

in Retirement Income / The Interviews: Industry Leaders & Innovators 5 comments
March 30, 2007  by

I answer an FA’s Question about The Income for Life Model® vs. The Grangaard Strategy

Recently a financial advisor asked me to compare Wealth2k’s The Income for Life Model® program with another popular income distribution program called The Grangaard Strategy, developed by Paul Grangaard, CPA. This inquiry surfaced because of advertising which characterizes The Grangaard Strategy as, “The 6.6% Retirement Income Solution™”, and states, “Expert Explains How to Increase Retirement Income over 50%.”

Firstly, I commend Mr. Grangaard for his work and continuing efforts to focus advisors and investors on the importance of adopting a well-conceived strategy to generate long-term, inflation adjusted retirement income. That said, I can and will address some of the contrasts I see between The Income for Life Model and The Grangaard Strategy, and where I see The Income for Life Model having both structural and competitive advantages. Visit Phil Lubinski’s website to watch a movie on The Income for Life Model.

I’m a great believer in the notion that a diverse group of income distribution strategies are emerging, that more will emerge in the future, and that each will have its adherents largely decided along long philosophical beliefs analogous to the diversity we know with religions. Financial advisors will eventually migrate to one of these “distribution religions.” For instance some may select the religion of systematic withdrawal programs, or the religion of lifetime annuitization, or the religion of laddered strategies. Some of these strategies will cross-pollinate i.e. lifetime annuitization mated to target date funds. Both The Income for Life Model and Grangaard are examples of time-weighted, laddered strategies.

In terms of comparing The Income for Life Model with The Grangaard Strategy, here are some of the differences I pointed out to the financial advisor:

The first difference is in the underlying rate-of-return assumptions. Rate-of-return assumptions for The Income for Life Model (IFLM) were developed to be realistic across virtually all economic scenarios. For instance, The Grangaard Strategy (Grangaard) assumes 5% for the first, near-term investment bucket or “segment”, as we refer to it, versus a 2% assumed rate for The Income for Life model. About Grangaard, the first question I would ask is, “Where could you find 5%, say, three years ago?” It wasn’t possible. We simply view the issue of short-duration rate-of-return projections more conservatively.

Grangaard’s assumptions continue to assume more aggressive returns over succeeding segments. For instance, 9% on a ten-year hold versus 6% for IFLM. Grangaard also presumes a return of 10% on a fifteen year hold versus 8% for IFLM.

These are relatively large differences in assumed returns which we would not be comfortable using.

My understanding of the Grangaard strategy is that it uses historical “average” rates of returns. In a perfect bell-shaped curve, you would fall short of the average 50% of the time. Although there may be several rolling periods that didn’t fall significantly short, The Income for Life Model’s assumptions allow advisors to be delivering “good” news a higher percentage of the time. If the higher rates of the Grangaard assumptions are met with that model, it would be reasonable to assume they would also be met in the IFLM, thus allowing IFLM to deliver higher income without over-promising up front.

Grangaard uses, I believe, Ibbotson chart numbers combined with historical testing back to 1936. We have determined that the years most prone to deliver poor results were 1927-1930 and 1932. Had we eliminated those years in testing for The Income for Life Model we could have significantly boosted its initial income rate of 5.66%. The combination of not using the worst time periods, plus allowing nothing for investment expenses, allows Grangaard to project higher income levels.

Which leads to a very significant difference in the Models: as far as I can tell, Grangaard doesn’t calculate any compensation for the advisor. This is a very real issue. A large, independent broker-dealer which offers IFLM to its advisors tested IFLM assuming average investment product costs of 2%, and still concluded that it delivered 87% reliability. If you add to this a procedure called, “Risk Free Sweeping™”, the probability of IFLM increases to 90%. Again, this is derived from objective testing done by large broker-dealer customers that offer IFLM to their advisors.

Another advantage: The Income for Life Model is backed by an array of high-tech communications tools- including advanced, web-based tools- that are critical to providing solid education to consumers. These same communications tools also serve to educate advisors.

Although both Models, IFLM and Grangaard, potentially have the same investment opportunities, our research indicates that IFLM’s less aggressive assumptions, obviously, would have the higher probability of success. Most importantly, IFLM includes the most critical ingredient…the advisor!

©Copyright 2007 David A. Macchia. Al rights reserved.

in Retirement Income 0 comments
March 22, 2007  by

Phil Lubinski’s Retirement Security Advice for Boomers: A Host of Insights Which Are Seldom Communicated Effectively to Retail Customers

Occasionally we have the good fortune to meet someone through business who becomes very special to us. Over my 30-year career I’ve been blessed with my share of such relationships. None, however, have I come to admire more than Phil Lubinski.

Phil is a Certified Financial Planner who is based in Denver. I met him several years ago at a seminar where he presented to 250 retail customers on the topic of income distribution planning. This is a subject Phil knows a lot about- maybe more than anyone else in terms of his hands-on experience with retirees. Since 1984, Phil’s practice has been exclusively devoted to retirement income. That year he developed a time-weighted asset allocation model which he consistently and successfully implemented with retail clients for decades; that model became the foundation for The Income for Life Model™ program developed by Phil and Wealth2k in 2003.

Phil’s success in distribution planning led him to many consulting engagements for teaching other advisors how to implement his strategies. While consulting with Allmerica Phil was instrumental in the development the Post Retirement Navigator software marketed by Financial Profiles.

Today Phil devotes a portion of his time to speaking at industry conferences as well as ongoing training of hundreds of financial advisors in the investment and tax strategies necessary to properly engage in income distribution planning.

Phil, who in my judgment really is “The World’s Greatest Living Expert” on distribution planning. was kind enough to let me reprint the following article he wrote for Boomer clients:

BOOMERS:
Do We Have Enough Gold…
for Our Golden Years?

By Philip G. Lubinski, CFP
Co-author, The Income for Life Mode™

The largest population in history is about to transition into retirement (the wealth distribution years) and we better be ready because we have challenges unlike any prior generation. And, guess what, every financial services company and advisor is suddenly our best friend. Why, because we are 76 million strong and control an estimated 12-15 trillion dollars, that needs to be managed to provide a lifetime of income. Every industry from diapers… to baby food… to blue jeans…to automobiles has made fortunes catering to our needs and desires. Now it is the financial services industry’s turn and they’re frothing at the mouth. Retirement income models are sprouting up all over the country and we need to pick one that will work for us. Which one will be the best….unfortunately, none of us will know until the last boomer dies. What are we facing that no generation before has?….

1. broken promises….corporate pensions are failing at unprecedented levels and a day doesn’t go by that we wonder about Social Security’s ability to continue
2. longevity…. We are projected to live longer than any generation before us
3. medical costs that are bankrupting the average health care facility and passing through premiums to us that seem to have no limit
4. inflation…remember when a new mustang was $3,500 and a gallon of gas was 32 cents

Yet, we want to be more active in retirement. And now everyone and their brother has an investment model that promises to make our money last as long as we do. So how do we choose the strategy that is best?…….first and foremost, forget all the hypothetical theories and spreadsheets with future economic projections. Look for a model that has a successful history and deals with what we know to be true, not what someone is forecasting based on a lot of academic psycho babble. Also, look for an advisor who walks the talk and puts their own personal wealth in those products and strategies that they think are so good for you. Make sense? If so, read on.

No matter how much we analyze, forecast and hypothesize there are only certain things that can be declared irrefutable. The following 10 points are “truths” we can be certain of as we develop our retirement income strategy.

“The Ten Truths of Retirement Income Planning”

1. Historically, over long holding periods small cap stocks have outperformed large cap stocks… which have outperformed bonds… which have outperformed cash.

2. Over the long term there is an expected mathematical “spread” between inflation, stocks, bonds and cash.

3. There is no empirical evidence that would suggest that bonds with long term maturities adequately reward investors over bonds with short term maturities.

4. No retiree can know exactly what their income needs will be beyond 5 years.

5. No retiree knows when they will die.

6. No one knows what the future tax rates will be.

7. Systematically adding to a growth oriented portfolio during market downturns typically rewards the investor, while systematically withdrawing from a growth oriented portfolio during market downturns typically hurts the investor and could potentially destroy the portfolio.

8. Greed and Fear are emotions that have historically hurt individual investor returns.

9. Strategies for successfully distributing retirement income are different that those for successfully accumulating retirement wealth.

10. Individuals who employ personal coaches typically make
more progress than those who try to do it on their own.

For example, you can Monte Carlo test, stochastically analyze, historically research and run probabilities until you’re blue in the face. The fact is, over long periods of time small stocks have outperformed large stocks. Large stocks have outperformed bonds and bonds have outperformed cash. So, if you predicted that large stock portfolios would earn 10% at the end of 20yrs and they only did 8%…so what. Nobody else got 10% either, but they still would have done better than if they had invested in bonds or cash. Would we have as much wealth as we thought we would…of course not, but we wouldn’t be broke either. UNLESS, you made the fatal mistake of drawing income from the stock portfolio based on the 10% assumption.

Understand that the only way to achieve a 10% rate of return is that some years you make 20% and others you lose 10%. If you make the unfortunate mistake of drawing income at the same time the market is losing money then the combination of the two could drive your portfolio so low that no matter how good the next few years might be, you may never recover. When your growth oriented investment is reinvesting rather than distributing income the losses don’t hurt, they get averaged out in the end.

Most spreadsheets assume growth is linear, when in fact it never has been, nor ever will be. Consequently, the only reliable method of achieving higher rates of return is to leave the account alone and reinvest all of your earnings. So, where does your income come from??? An account that has no market risk….like cash. Are you beginning to understand the importance of identifying how much of your wealth is needed for income in the short term vs. how much you won’t need to tap for income until further down the road. Just how far down the road will determine the asset allocation for that portion of your money, i.e. if I don’t need the income on some of my money for 5 yrs. I could put that into something with a Bond orientation… 10-15 yrs. a large company stock orientation… 15-25 yrs could now be invested in something more aggressive like smaller company stocks. What should start becoming self evident is the importance of compartmentalizing or segmenting your money based on short, medium and long term needs. Any model that would suggest differently makes absolutely no sense.

One could argue the merits of trying to strategically move money along the way between stocks, bonds and cash. Typically, those moves are based on greed and fear resulting in miserable results. According to Dalbar and Associates 2006 study of investor behavior, mutual fund investors from 1986-2005 only achieved a 3.7% annualized rate of return and day traders actually had compounded losses of over 3%. Why….because we are humans and our emotions drive our decisions (the largest deposits into the U.S. stock market were in the spring of 2000 and the largest withdrawals were in October of 2002). Keep in mind that the U.S. stock market during this same 20 yrs. delivered more than an 11% rate of return. Once again it’s critical that we stay on a course that we know, rather than one filled with speculation and disappointments.

Another assumption that always tickles me is looking at long term spreadsheets that delve into multiple layers of depth trying to accurately forecast our future needs and tax brackets. In nearly 30 yrs. of working with retirees I have never seen anyone spend what they thought they would and I’ve certainly seen a pattern of constant tax law changes. The significance of this point is that you should be in a model that allows you to re-evaluate and make changes along the way in order to adapt to what you will really need vs. some hypothetical projection of what you think you will need (which, at best, might be close for the first 5 yrs).

Therefore, a single product model is absolutely ludicrous. Some single product models would have you put all your retirement assets in a single annuity and make withdrawals that stay under the typical 10% free withdrawal amount. So now you’ve locked yourself into this narrow strategy and suddenly an unplanned emergency or opportunity comes up that requires a significant withdrawal. In addition to a potential large tax hit (non-IRA annuities require all earnings to be withdrawn first and taxes paid) you also could incur a large surrender penalty that could be as much as 10-15% of your excess withdrawal. Single product solutions are rarely in your best interest.

Additionally, who knows how long we will live in retirement. Probability analysis is interesting information and should be taken into consideration, but once again, some models are based solely on probabilities. At some point we all become a statistic that most likely will not match the probability. I had a 30% probability of developing Diabetes, until I got the disease. Suddenly, my probability became 100%. Has my game plan changed…..ABSOLUTELY! So, a structured model based on probabilities alone is inferior to a structured plan based on flexibility.

And finally, a do-it-yourself model is nothing short of retirement roulette. When you were 25 and working with relatively small amounts of money you could make a few mistakes and learn. You had plenty of time and more money to invest. When you’re 60 and making decisions with your life savings, there’s not a lot of time you can afford to spend learning, and certainly no more money if you make a mistake. You only get “one” retirement and you need to get it right. Everyone thought it was so funny in the 90’s when chimpanzees throwing darts at the Wall Street Journal were getting better returns than the analysts. What we didn’t realize at the time was that these reports were making a mockery of advice. “Who needs an advisor, when a monkey is just as good?” What a costly lesson we learned as the market went south.

Whether you’re trying to lose weight…make “athletic” progress or “financial” progress, those who employ coaches do better than those who don’t. Find a financial advisor that can demonstrate expertise in retirement income planning. Your needs are changing as you transition to the land of “distribution”. It may require that you change advisors, just like you would doctors, if your current physician was not able to treat your condition. There will be a plethora of retirement income models to select from, but only a few that will meet your needs.

As a beginning point take a few moments to answer the following questions:

1. In retirement I am more concerned about the reliability of my income than I am the return on my investment.

2. I would rather make periodic adjustments to my investment income in retirement (up and down) based on the returns I actually achieve, than make no adjustments at all and potentially go broke.

3. Having a retirement income strategy that is flexible and liquid enough to adapt to unexpected changes during my retirement years is very important to me.
4. I would prefer not to put all of my retirement savings with one company.

5. I would like to have some guarantees built into my retirement income plan.

6. I understand that having an income that grows with inflation requires that some portion of my portfolio will need to be exposed to market risk.

Believing the 10 “truths” and answering yes to these six questions could result in a segmented approach to retirement income planning. Single product solutions…long term forecasting without sufficient parameters to make adjustments along the way… models that validate themselves primarily on statistical analysis alone… and self serving models that do not lend themselves to an open and diversified product solution shelf may not be in your best interest. Find an advisor who has access to a comprehensive product offering without any incentives to recommend one product over another and who has been trained in retirement income planning. Most of the financial services training programs are focused on helping individuals “accumulate wealth”. Your life savings is at risk.

The “Income for Life Model” is a trademark of Wealth2K, Inc. Copyright Philip G. Lubinski, LLC and Wealth2K, Inc.
All rights reserved 2004

Securities and advisory services are offered through INVEST Financial Corporation, member NASD, SIPC, a Registered Broker Dealer and Registered Investment Advisor.

in Retirement Income 0 comments
March 21, 2007  by

Interview with MetLife’s Garth Bernard: Advocate of Income Annuities Pulls No Punches About Industry’s Need to Step-Up and Wear the Mantle

garthblogGarth Bernard, FSA, MAAA, is Vice President in the Retirement Strategies Group at MetLife. He is a staunch and articulate advocate of immediate annuities and he holds strong views on why these products have not been used more extensively.

Macchia: Garth, although immediate annuities provide income-generation which the consumer cannot outlive, they still represent only a small percentage of overall annuity sales. Why is this so?

Bernard: I think we first have to beak it down into what are the things that advisors have pre-conceived notions about, and what are the things that consumers may have misconceptions about. I think the issue really comes down to the advisor having preconceived notions about income annuities. Because, when you look at the consumer’s actions you see that the consumer follows the advice of someone that they trust. So, if that trusted advisor does not recommend an income annuity, or, in fact, suggests that an income annuity not be used, then obviously the consumer is going to walk away with a similar perception.

So I suggest that change really starts with educating the advisor on dealing with some of these preconceptions. Some of those would include- in fact, the first one is always lack of liquidity. But, to me, that is a notion that is based in the accumulation paradigm because the real question is, what is more critical when you get to the distribution phase? Is it control of assets? Or, is it reliability of income? The answer is to not jump to an obvious conclusion. Let me put it in perspective. Here stands Garth who is now 85 years old. He’s run out of assets so he only has Social Security to rely upon now. But, guess what? He started off with a million dollars and he was in control of his assets the whole time! Wouldn’t that be ironic?

This is exactly the issue advisors face when they project the accumulation paradigm into the distribution phase and maintain their focus on this need to control assets. The other thing that’s at play, to be frank about it, is compensation. In fact, you and I know that advisors refer to annuitization as “annuicide.” But when you move into the distribution it’s different. Let’s forget about annuitization, let’s look at the reality. If advisors were getting paid under the basis of assets under management- asset trails- they would already be facing a declining compensation pattern because the client is using those assets under management. The question is how long it would take to decline. Advisors are not looking at a level or increasing amounts of trail income in the distribution phase. So they have to rethink all of the notions that were familiar to them in the accumulation phase and start re-looking at them with a new pair of eyes. And the insurance industry needs to generate new compensation patterns including income trails. When this happens advisors will be much more open to rethinking the value of income annuities. When advisors start converting their asset book over to an income book, as their clients age and transition into retirement, they could get paid on income. And that way, even if the assets disappear, the income doesn’t. In fact, the income is very clear and present.

Macchia: What about advisors who say that, strategically, annuitizing assets when interest rates are relatively low is akin to locking in below market levels of income? Do you give any credence to that objection?

Bernard: Well, they may have a point if you think of this as allocating most of your assets to this one product. In other words, if you were annuitizing 100% of your portfolio, that would be a valid concern. But no one would ever want to put all of their eggs in one basket. Secondly, even when interest rates are low – like today – if advisors actually look at the numbers, they would find that a 65 year old will receive an 8% income stream relative to the deposit. That’s still substantially higher than they could otherwise sustain in a pure investment vehicle – and that’s reliable income.

What do investment advisors typically advise when they use pure investment vehicles? The withdrawal range tends to run from about 3% to as high as 6%. Again, we’re talking about an income annuity even in a low interest rate environment starting at around 8% for age 65. The rate goes up for older ages. So I don’t agree that locking in the income at low rates doesn’t make sense. For a portion of your assets, it could make a lot of sense. If you look at some of the research that has been done, for example by Peng Chen of Ibbotson and Moshe Milevsky, they wrote a landmark research paper which led to what I call Ibbottson’s income allocation model, where they demonstrated that the only way to reach the efficient frontier in the distribution phase, the only way to maximize income for a given investment risk tolerance and legacy requirement is to allocate a portion of your assets to an income annuity.

Macchia: So your point is that the efficacy of income annuities in income distribution planning is already academically proven and beyond reproach.

Bernard: It’s academically proven, and it’s unmatched.

Macchia: So the real issue is that the industry is facing more of a marketing challenge?

Bernard: It’s definitely a marketing challenge and it starts with educating advisors, getting them over their preconceived notions. Income annuities, because they provide unmatched leverage, allow you to do more with less. Therefore, you’re more likely to have assets left over to meet other retirement needs after you’ve taken acre of the income goals. So, including income annuities in the portfolio is likely to provide a better solution for the client in terms of meeting the broad retirement needs.

Macchia: What about what the industry needs to do?

Bernard: I think that the industry simply needs to have the courage to step up to the plate and start telling the income annuity story. Because consumers get it. Think about it. We know that they do due to their reactions to Social Security and employer sponsored DB plans when they feel those programs are threatened: “Don’t cut my Social Security benefits!” When DB plans are frozen or taken away, people feel that their rights have been violated, they feel violated. So that’s how we know that consumers get it. Perhaps it goes beyond having courage – if we don’t, someone else could try to step up to the plate and take the franchise from us. They could try to take the mantle from us.

In fact, we’re not really wearing the mantle and we should be, and if we don’t wear it someone could walk up to us and say, “Give me that! I’ll proudly wear that mantle because it fits!” It’s already started. In my remarks at the recent NAVA Marketing Conference I pointed out that one of the executives at Mellon Bank had written a paper for the CFA Journal that says the investment world should create a mortality pool. Wouldn’t it be a crying shame if the industry, which legally owns the mortality pooling franchise, refused to have the courage to speak about something that only they can deliver and something that consumers need, fails to adequately educate the insurance advisors about them – only to have somebody come along and rip the rug our from under them. This is a strategic issue for the industry: we have the franchise now – what if it is decided that we shouldn’t have it exclusively?

Macchia: One of the places where I have seen SPIAs become very useful is in combination with other retirement strategies; perhaps in a laddered asset strategy, or combined with a variable annuity, or in a systematic withdrawal portfolio. And that one of the intellectual arguments for combining in this way is that you’re taking a portion of the client’s assets and turning it into absolutely guaranteed retirement income which may allow the client to put an even higher percentage of the remaining assets into more aggressive investments, which over the long term may provide more overall income. Do you subscribe to that?

Bernard: I fully subscribe to the effectiveness of packaging for positioning income annuities in the retirement income solution. In fact, we were talking about some of the more common objections to income annuities. One of the biggest areas of misperception is the area of context. If you go down the path of a product solution, that’s where you end up in knots. The most effective context in which income annuities should be used is in the context of maximizing income and protecting income with a finite set of resources. You cannot solve this retirement problem with a single product. That’s where the packaging notion comes from – that income annuities are most powerful when used in combination with other vehicles including pure investments and deferred annuities. It’s not about a single product, or about having all your money in pure investments, or all of your money in a variable annuity, or all of your money in an income annuity. It’s a combination of those things. That the income annuity should be a part of the overall strategy is not in question. The only question is how much.

Macchia: If the percentage of the total assets allocated to the immediate annuity is so critical to determine, how will advisors be provided the tools they need to assess that?

Bernard: That’s one of the things as insurance companies think about how they address this and step up to the plate, we have to build those tools. It is possible to build those tools, and it is relatively easy to build those tools. The reason that it hasn’t been done to this point is that people haven’t focused on it. I’ll giver you an example. In the accumulation phase, one of the critical questions is how much of your assets should you allocate to stocks and bonds? Just about every provider offers asset allocation models to address this question. They’re ubiquitous.

To do it, you first have to define the problem, understand it, focus on it and build the tool to solve it. The same thing applies here. We can’t just ask the question. We have to help the advisors by providing them the tools, the firepower that provides the answers to those kinds of questions.

Macchia: So is it fair to say that unless and until the industry steps up to the plate, as you describe it, and provides not only those analytical tools but also the communications and marketing tools that advisors truly need, that SPIAs probably are not going be very successful?

Bernard: That’s absolutely correct. That would be true of any product that could potentially assist in financial solutions. Until someone steps up, puts a spotlight on it and delivers what’s necessary- not just the products but the analytical support tools and the communications support tools including education- those products will not be used and recommended in solutions. Advisors won’t know how to do it, or would not be able to do it easily.

Macchia: Is it fair to say that this is an opportune time for one of more life insurance companies to step up and show leadership in this area?

Bernard: It’s high time that they showed not only leadership but courage.

Macchia: Isn’t it true that when the industry introduces products and, from the very first day, doesn’t provide advisors and consumers the correct context in which to view them, namely a real accurate explanation of what the products’ true value is, that we find ourselves in a situation like we have today; some products are under utilized, some products are over utilized, and some products are mis-utilized?

Bernard: Yes, I agree with that. The process of selling….. there may be an expedient method. You always speak to today’s issue at hand. You talk to the consumer about that specific issue, you position the product around the issue and then you deliver that product. But you may not fully articulate to them all of the power of the product and how it can be helpful or appropriately utilized beyond the current stated need. So it really comes down to being able to tell more than just the transactionally-focused story rather than the most expedient way to make the sale. It takes time and it takes effort to tell a bigger story. But that’s just what’s needed for retirement solutions. So it behooves us to find ways to help the advisor tell the entire story, without jeopardizing the ability to close the sale on the immediate need. We have to find ways to tell more powerful, more articulate, more complete stories around the solutions that we can provide.

For example we almost never tell the complete story about deferred annuities. Deferred means later. Annuity means income. But we continue to primarily talk about the accumulation aspect of deferred annuities.

Macchia: Is it fair to say that the insurance industry in comparison, say, to the investment industry has done a poorer job of communicating its inherent value to both advisors and consumers?

Bernard: That’s a tough one. Here’s my take. The investment industry sells “first order” financial instruments and the insurance industry sells risk management financial instruments, or “second order” financial instruments which, almost by definition are more complicated. So, it’s almost as if the investment industry has an advantage in that they have a simpler concept to explain.

Here’s the simple example. The investment industry has to explain “a stock.” The insurance industry has to explain what is analogous to “an option on a stock.” “Stock options” are inherently more complex than “stocks.” This makes it even more critical that the insurance industry find ways to communicate more effectively. We face a bigger challenge and thus need more communication firepower to meet it. In other words, it is more important that the insurance industry be better communicators.

Macchia: How would you like to end this interview?

Bernard: When advisors rethink income annuities and annuitization in the new light, they may come to this realization: “why did we not see this? … it was in front of us the whole time!”


The views and opinions expressed by Mr. Bernard are his own and not those of MetLife Financial or any other entity of individual.

in Retirement Income / The Interviews: Industry Leaders & Innovators 4 comments
March 12, 2007  by

For Most Boomers: No (or Negative) Inheritances

Today’s online Baltimore Sun has an excellent and insightful article by reporter Linell Smith. The articles busts some commonly held myths and fantasies about Boomers including about the immense wealth Boomers are in line to receive- what Smith describes as the “Great Boomer Inheritance.” The article points out that it’s just not true.

Smith cites a 2006 AARP study which found that most Boomers won’t receive any inheritance at all, and if they do it’s unlikely to make a “significant contribution” to their retirement savings. Alicia Munnell, who heads the Center for Retirement Research at Boston College, is quoted as saying that, “Wealth in the economy is extremely skewed: a fraction of the top one percent of the population has all the wealth. Bequests are even more skewed.”

Munnell also goes on to say, “What people expect the typical boomer to inherit is $20,000,” she says. “That’s not a life-changing number. And because it’s the middle number, half will inherit less than that. Most wealth is held by the very, very rich. Even if you have wealth at 65, you will probably use up a lot of it over the course of your retirement and your final estate will not be that big.”

The article delves deeper into other aspects of Boomer inheritances including the phenomenon of “negative inheritances” which arise when Boomer children become financially responsible for their parents’ health care costs, for instance. Visit http://www.baltimoresun.com/features/custom/modernlife/bal-ml.boomer11mar11,0,7387524.story to read the article in its entirety.

I mention this article in the context of my own efforts to get financial services companies to focus on meaningful, candid communications with customers when it comes to retirement. See the March 9 blog entry for more.

©Copyright 2007 David A. Macchia. All rights reserved.

in Retirement Income 0 comments
March 9, 2007  by

Where’s the stratight talk and passion in our communications on retirement?

I get a kick out of the television and print advertising for retirement income solutions aimed at Boomers. It seems large financial companies are reluctant to explore some of the more troubling issues facing the Boomer generation, i.e. most will not have enough money in retirement and will be forced back into work.

I wonder if this institutional reluctance to portray retirement as anything other than a time to learn to snowboard or parachute serves the national interest? Or even the corporate Interest?

I recall a meeting I had a couple of years ago with a senior executive in charge of retirement services at a very large investment company. I quizzed this individual about her organizations highly-charged, over-the-top-in-optimism advertising campaign which struck me as a collection of messages that missed the point. She told me that the organization had carefully considered a communications strategy based upon direct and candid communications but that, institutionally, there was no appetite for saying anything that could be perceived “as a negative” no matter how factual. Wow. That’s leadership!

Let me make a prediction. The first big financial company that comes clean with the American public will see a very pleasant return on its advertising dollars. More than any time I can recall over my 30 years in financial services I observe that consumers want a shepherd. Shepherds lead, not with filtered spin but rather with straight talk and passion.

I have stated many times that the financial services organizations that triumph in the Boomer retirement security opportunity won’t be those with the “best products.” Rather, they will be those that are the best at passionately and candidly communicating their value. Will someone get on with it? America is waiting.

©Copyright 2007 David A. Macchia. All rights reserved.

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