How Retirees Can Outpace Inflation

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

As October drew to a close, our national rate of inflation rose to a whopping 5.4%. The Federal Reserve also announced they would not raise interest rates, but would gradually begin decreasing the bond-buying program they had enacted in order keep credit rates low. While the market remains strong, how does this news affect the savings of retirees or those about to retire? 

One major consequence is that many retirees, who in the past have relied on bonds as secure instruments, may need to rethink this strategy. As Brett Arends wrote in MarketWatch on October 26th, “Last week the U.S. bond market’s prediction of U.S. inflation for the next five years leapt to 2.91% a year—the highest figure this millennium. That tops the inflation fears that surged in 2008, just before the financial crisis, and a previous peak in early 2005, when the housing market was out of control.” 

Many retirees remember the double-digit inflation of the 1970s, along with fuel rationing and long lines at the gas pumps. Arends points out how today’s inflation is much lower, but also much different in context. 

“Back in the 1960s and 1970s, bonds paid high rates of interest. So even though consumer prices were rising by 4% or 5% or 6% for most of the decade, the interest rate on bonds was still higher. So you had a cushion,” Arends writes. “In 1973, when inflation surged to 6.2%, 10-year U.S. Treasury bonds were paying 6.6% and BAA investment grade corporate bonds about 8%… In 1978, when inflation hit 7.6%, Treasuries were paying north of 8% and BAA corporates north of 9%. Bondholders still (eventually) got hurt: Soaring inflation caused bond prices to tumble. And at the peaks, in 1974-75 and 1979-80, the inflation rate overtook their interest rates. But overall the bonds helped compensate them for higher prices. Not today.” 

As of October 26th, the interest on a 10-year government bond was posting around 1.62%, while 30-year bonds hovered around 2%. So, bondholders stand to lose money even if interest and inflation rates don’t rise, and they stand to lose substantially if the latter continues to rise or remain at a high level. Additionally, CD and money market rates are well below 1%, and the average interest for a savings account in the U.S. now tops out around .06%. 

A story in the New York Times last week pointed out that the bond market’s expectations for inflation over the next five years had reached a new high of just over 3%. But whether 2.91%, as Arends wrote, or just over 3%, it’s not great news, and it contradicts the messaging that has been coming from the Federal Reserve about plus-2% inflation lasting only a year or two at most.   

So, how do people who are retired or about to retire combat this inflation? How can they ensure that their savings don’t lose money? Let’s look at a few of the more common options people choose for their portfolios. 

Download Your Free

FIAs Outperform Bonds Guide

1. All Equities

Equities should be a part of any portfolio, and some people go so far as fill their portfolios exclusively with equities. In a largely bull market like the one we’ve seen over the last 18 months or so, an all-equities strategy would have greatly exceeded the rate of inflation. For people 10 or more years away from their retirement, this strategy could work very well, provided they have the time and expertise to study stock options every day and/or can rely on a financial advisor to help them with their choices. In the worst-case scenario of a market crash, these individuals would still have time for the years a portfolio recovery would necessitate. But for someone retired or nearing retirement, this strategy could be fatal to their portfolio. 

Market crashes can take five years or more for people’s financial portfolios to be made whole again. If people looking to retire or already retired are relying exclusively on equities for income, a crash, or even a steep correction, could effectively either end or greatly delay their retirements. In all likelihood, they would need to continue working for many more years or reenter the work force they left. An all-equities approach is much too aggressive to safely fund a retirement, and it carries risks that could be devastating to a retiree’s portfolio.

2. Stocks and Bonds Blend

A stocks and bonds mix is one of the most common strategies people choose for their financial portfolios, and many of us have traditionally believed in it as an approach that strikes a healthy balance between risk and security. But maybe we haven’t been accurate in that belief. 

Economist Roger Ibbotson and his team at Zebra Capital Management ran hypothetical return simulations from the years 1927 to 2016, which included both rising and falling yields. Their research showed that, net of fees, fixed indexed annuities had an annualized return of 5.81%, compared to 5.32% for long-term government bonds. The return for large-cap stocks over that period was 9.92%, again proving that an all-equities portfolio is a strong choice for those not yet retired or preparing to enter retirement. 

Ibbotson’s study also showed that during below-median bond return periods from 1927 to 2016, a 60/40 stocks and bonds portfolio returned 7.6%, on average. For a 60/20/20 stocks, bonds, and fixed indexed annuities portfolio, the return for that same time was 8.12%. And, a 60/40 stocks and fixed indexed annuities portfolio produced 8.63%. Individually during the below-median periods, fixed indexed annuities (FIAs) produced a 4.42% return, while bonds returned only 1.87%.  

In above-median bond return periods, FIAs reduced returns, with long-term government bonds returning 9% and FIAs only 7.55%. Ibbotson explained that, in falling yield environments, a large portion of the bond return is capital gains, enabling them to outperform FIAs. 

“I’m not necessarily advocating you go all in,” Ibbotson said about FIAs in the paper. “I think combinations of stocks and bonds and fixed indexed annuities are good.”

3. All Annuities

But what if someone did go “all in” on fixed indexed annuities in a portfolio, as Ibbotson mentioned. How would that play out against inflation? Not very well, actually. 

Even strategically chosen annuities—and let’s be clear, annuities should not be purchased any other way—will likely not be able to hedge against a sustained inflation rate of say, 5% or thereabouts. An annuity that pays someone $800 per month in 2025 will still only be paying $800 a month in 2035 or later. Also, the interest offered by annuities does not compound in the same way as the rate of inflation. If the participation rate of an annuity is 87%, for instance, and the interest is at 4%, it is easy to conclude that the purchasing power of this money would actually decrease in years of high inflation, much in the same way annuities cannot capture all of the gains in a high-growth market. 

There are inflation-adjusted annuities, known as Treasury Inflation-Protected Securities (TIPS), but the rate of return reported on Oct. 21, 2021, for a five-year TIPS was -1.685%, a record low. This means a policy holder is earning 1.685% below the inflation rate, or, according to TIPSwatch.com, investors are paying about $109.51 for $100.14 of value.

4. Annuities and Stocks

The stock market is not going to outpace inflation every single year. But as an average, it has definitely beat inflation throughout the history of the market. 

As Ibbotson pointed out, during a below-median bond market period like the one we find ourselves in, a 60/40 stocks and fixed indexed annuities portfolio produced an 8.63% return over the near 90-year period of his study. In this blend, the annuity portion of the portfolio is not expected to compete with inflation, because it can’t, and that’s not what it is designed to do, anyways. The equities take care of that, as an average over time, while the annuities anchor future income for retirement. 

Those retirees who still feel inclined to add stocks to their portfolio can do so, but they should read Ibbotson’s study first. His research shows that there is no historical market evidence to choose bonds over annuities for the “safe money” portion of one’s portfolio—especially in high-inflation environments like the present.  

“Because of issues like inflation, longevity, and income insecurity, to name just a few, the first step for any person preparing for retirement is to meet with a financial planner who specializes in retirement planning,” said Tucker Financial President Darren Petty. “This way, people can better identify the assets they need to take risks with in order to outpace inflation. Many folks are being forced out of low-risk investments now, and it’s been happening for a long time, actually. So, people move from fixed income, like bonds, into equities. Make your income-producing assets produce income and let your growth assets grow. That’s the foundation of any retirement plan: Identify the portion of your portfolio that needs to pay you in retirement, and therefore, isn’t exposed to catastrophic losses. And then, place the remainder of the portfolio in equities.”

“Especially given the fear of inflation, it’s easy for us to fall into the myth that all of our income always has to be increasing,” said Petty. “But that is usually not the best way to secure income for the future. Also, it ignores the fact that some annuities are paying 5.5% to 6% in interest.”

The No. 1 way for retirees to worry less about inflation is to get their asset allocation right. A balanced retirement portfolio should have growth assets and income-producing assets.

How those asset allotments figure into a sound retirement plan is different for everyone. But, with the help of a retirement planner, it’s the key to a portfolio unlocking the threat of high inflation.

Notes

For more information about retirement strategies to outpace inflation, email Jason.Demers@TuckerAdvisors.com or Kyle.Savner@TuckerAdvisors.com. 

Sources: 

1. MarketWatch 
2. The New York Times 
3. “Fixed Indexed Annuities: Consider the Alternative,” Ibbotson. 
4. TIPSwatch.com 

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

Are Insurance Companies Safe?

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

They have been called the debt managers of the world. But just how solvent and safe are insurance companies?

Shortly after The Great Recession began unraveling in 2008, many people feared insurance companies would suffer the same fate as investment banks like Lehman Brothers, Bear Sterns, Wachovia and Washington Mutual. After all, no one could have predicted those banks would fail, either. Apart from those old enough to remember The Great Depression, people had never experienced such a far-reaching financial downturn.

As Time Magazine pointed out with a story in October of that year, insurance companies operate differently than banks. For one, they are tightly regulated and they are regularly audited. The National Association of Insurance Commissioners assists state insurance regulators in, according to the agency’s website, protecting consumers and ensuring “fair, competitive, and healthy insurance markets.” The agency began in 1871, and for the last 150 years, has assisted the public interest by providing oversight of the insurance industry.

Regulations require insurance companies to contribute to state funds that protect policy holders, as well as to maintain large sums of cash and short-term investments at all times. With longer-term investments, insurance companies cannot take the same kind of risks that banks can. As Time reported in 2008, insurance companies on the whole placed only about 10 percent of their investments in real estate and mortgages, risk categories that inflicted significant losses to banks that were more heavily invested in them. The one insurance company that required a bailout, AIG, suffered its heaviest losses from its financial services division, a business segment that most insurance companies do not have. Its insurance division remained solvent and protected.

While the AIG case was an outlier, it still raised legitimate red flags among the general public. And the truth is that there have been many instances of smaller insurance companies fading into oblivion. What would happen if a large insurance institution like AIG failed?

As Time wrote in 2008 about such a possibility, “Even if a company were to fail outright, consumers are protected much in the way that routine bank deposits are guaranteed by the FDIC.”

Safeguarding against a potential failure is the Insurance Guarantee Fund, which every insurance company is legally required to pay into, and which is also managed by state-sanctioned insurance guaranty associations. These associations are charged with protecting policyholders and claimants in the event of solvency issues with insurance companies, and can even step in to take over servicing the policyholders of companies that fail. They are legal entities backed by the insurance commissioner in every U.S. state.

Unlike banks, insurance companies can’t reward executives from reserve revenue or apply it toward the nebulous category of operating expenses. That “excess” money must be legally dedicated to the claims of policyholders. As an added protection for policyholders, a failing insurance company cannot access federal bankruptcy laws to escape liability for its debts.

Of course, no company or individual is immune from financial setbacks or crashes. But then, if that is the reality of the situation, why not use the relative comparative solvency of insurance companies to one’s benefit?

That is exactly what some of the largest corporations in the world have done in recent years. Below are 10 stories that present a trend of corporations transferring the liabilities of their pension plans into the safety of indexed annuities with insurance companies.

Free Guide: High Profile Use of Annuities

Corporations Move Pensions into Annuities with Insurance Firms

1. “GM Unloads $26 Billion in White-Collar Pensions; Could Union Workers Be Next?”
Forbes; June 1, 2012
https://www.forbes.com/sites/joannmuller/2012/06/01/gm-unloads-26-billion-in-white-collar-pensions-could-union-workers-be-next/?sh=20357ddd3213

2. “Kimberley-Clark buys annuities to cover pension risks”
Business Insurance; Feb. 23, 2015
https://www.businessinsurance.com/article/20150223/NEWS03/150229961

3. “Molson Coors transfers $900 million in pension liabilities”
Pensions & Investments; Dec. 4, 2017
https://www.pionline.com/article/20171204/ONLINE/171209946/molson-coors-transfers-900-million-in-pension-liabilities

4. “DuPont to pump $30 million into pension plans in 2019”
Pensions & Investments; Feb. 12, 2019
https://www.pionline.com/article/20190212/ONLINE/190219954/dowdupont-to-pump-430-million-into-pension-plans-in-2019

5. “Eastman Chemical buys annuity to transfer $110 million in pension liabilities”
Pensions & Investments; Feb. 23, 2021
https://www.pionline.com/pension-risk-transfer/eastman-chemical-buys-annuity-transfer-110-million-pension-liabilities

6. “Centrus Energy kindles annuity deal for $30 million in pension liabilities”
Pensions & Investments; March 19, 2021
https://www.pionline.com/pension-risk-transfer/centrus-energy-kindles-annuity-deal-30-million-pension-liabilities

7. “FedEx to ship $500 million to pension plans”
Pensions & Investments; July 20, 2021
https://www.pionline.com/pension-funds/fedex-ship-500-million-pension-plans

8. “Lockheed Martin offloads $4.9 billion in pension liabilities”
Pensions & Investments; Aug. 3, 2021
https://www.pionline.com/pension-risk-transfer/lockheed-martin-offloads-49-billion-pension-liabilities

9. “CTS unloads pension liabilities with annuity purchase”
Pensions & Investments; Aug. 4, 2021
https://www.pionline.com/pension-risk-transfer/cts-unloads-pension-liabilities-annuity-purchase

10. “Macy’s purchases annuity to transfer $256 million in pension assets”
Pensions & Investments; Sept. 7, 2021
https://www.pionline.com/pension-risk-transfer/macys-purchases-annuity-transfer-256-million-pension-assets

Why would these corporations have taken these actions with billions of their pension dollars, which they’re liable for, if they didn’t believe in the solvency of insurance companies? They have made the determination that, while risk can never be ruled non-existent, it can absolutely be minimized.

This trend is causing ripple effects in the general public, especially among those who are getting closer to retirement age and want to protect their savings from market volatility. The same financial instruments that these corporations are using to shield their pensions from risk with insurance companies—indexed annuities—are sought after by retirees for the protection of their “private pensions,” or retirement savings.

As is the case with the public pensions of corporations, individuals can use indexed annuities to create their own pensions and receive a predetermined monthly income throughout their retirements. It’s the same basic income stream that pensioners receive from corporations who moved pension funds into indexed annuities. Private policyholders of indexed annuities enjoy the same protection from risk as these giant corporations.

There are even ratings agencies that help consumers navigate which insurance firms are generally thought to be the most solvent. As detailed in a story from Forbes last year, “Insurance companies are rated on their financial strength by independent agencies that each have their own rating scale and standards. The five rating agencies are:

1. A.M. Best, which rates companies on a scale of A++ to D-

2. Fitch, which rates companies on a scale of AAA to D
   3. Kroll Bond Rating Agency, which rates companies on a scale of AAA to D
   4. Moody’s, which rates companies on a scale of AAA to C
   5. Standard & Poor’s, which rates companies on a scale of AAA to D
   The highest ratings are given to companies that the ratings companies believe are in the best positions to meet their financial obligations.”

    

   The Insurance Information Institute is another source of consumer-centric information about the insurance industry. The institute recommends that people reference more than one rating agency in their searches, since ratings can fluctuate from agency to agency. Some insurers will also list their ratings on their websites, though they may not be the most current rating.

   Policyholders also have the ability to change insurance companies if they wish, so it’s important to keep updated on any downgraded rating reports. Middle-of-the-pack ratings should not be a cause for concern, but policyholders may want to take proactive steps if their insurance company receives a low-end rating.

Regulators and auditors monitor the insurance industry more than almost any other industry in the world. That’s important. But how does it assist a financial advisor’s practice? For starters, it provides advisors with concrete evidence to explain to their prospects and clients that all risk is not the same. Surprisingly, many people who are invested in the market do not grasp this basic truth.

The stock market is a fantastic tool for investors to realize growth. To think that insurance tools like indexed annuities carry a comparable risk as stocks, as some people errantly believe, is insanity. They are not even remotely equal in risk. In fact, the indexed annuity is a comprehensive risk slayer.

Advisors do themselves a disservice by not letting their prospects and clients know that insurance companies have long been trusted as the most solvent firms in the financial industry; that some of the wealthiest corporations in the world trust their money with these insurance companies.

These corporations understand that, as the world’s risk managers, insurance firms are better-equipped to manage long-term pension liabilities. The tools most of these businesses use to protect billions of pension dollars is the indexed annuity. Why wouldn’t a client want their life savings to enjoy the same protection? The financial advisors who can best inform people about financial risk, and the most effective ways to minimize it, will enjoy a lasting edge over their competitors.

For more information on indexed annuities and an exclusive interview with Tucker Financial’s Darren Petty, click here.

References

Notes:
For more information about the insurance industry or to receive a downloadable white paper on addressing indexed annuity concerns, email Kyle.Savner@TuckerAdvisors.com or Jason.Demers@TuckerAdvisors.com.

Sources:
1. Time Magazine (http://content.time.com/time/business/article/0,8599,1849023,00.html)
2. NAIC.org (https://content.naic.org/)
3. Investopedia.com (https://www.investopedia.com/terms/i/insurance-guaranty-association.asp)
4. Forbes (https://www.forbes.com/advisor/life-insurance/company-out-of-business/)
5. Insurance Information Institute (https://www.iii.org/)

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

Indexed Annuities: The New Retirement Pensions?

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

Defined-benefit plans. Those of us who are older might remember them better as “pensions,” but in 2021 they seem about as common as a rotary phone. (Sorry, but we don’t have time to explain what that is.)

Investopedia.com reported in a story last year that only 17% of U.S. private-sector workers still have access to pension plans. With many of the plans still in existence, employers have placed a freeze on funding them, which is often the beginning of the process to eliminate the plans altogether. In other words, the large majority of us can no longer rely on our employers to fund our retirement plans. We are on our own.

The Pros and Cons of the 401(k)

The most common replacement of the defined-benefit plan has been the defined-contribution plan, or, the 401(k). The 401(k) often offers a traditional pre-taxed account and a post-taxed Roth account, with both sourced in a blend of stock and bond options the employee must choose and maintain with the appropriate risk tolerance until retirement.

Some of us are lucky enough to work for employers that match a percentage of 401(k) contributions. However, in recent years, that benefit has also become rarer. Ultimately, it is up to the employee to secure their future income from the 401(k) choices they make. And as James McWhinney at Investopedia writes, that’s far from a certain outcome:

“After the money hits the account, it’s up to the employee to choose how it’s invested—typically from a menu of mutual funds—and the vagaries of the stock market to determine the ultimate outcome. Maybe the markets will go up, and maybe they won’t.”

The 401(k) plan does offer advantages over pensions for employees. For one, it can be a better instrument for growing retirement savings. Also, workers no longer need to worry about whether their employer can fund the pension or will declare bankruptcy to escape liability for it. But, without pensions, employees also can’t predict an exact monthly income for their retirement. In a 401(k), the income they plan on for retirement rises and dips with the market, and they must hope that none of the “dips” turn into downturns or crashes while they’re preparing to retire.

Free Guide: High Profile Use of Annuities

What Does an Indexed Annuity Do?

Even if market risk isn’t your thing, playing it safe has its own problems. With interest rates for bank accounts, CDs, money markets and even bonds lower than the current rate of inflation, workers will actually lose money year to year by investing in those savings instruments.

So, what is the most efficient tool for creating your own retirement pension? While there are more elaborate and hands-on approaches, more and more retirees are finding the solution is to fund an annuity with a portion of their 401(k).

“One user-friendly version of self-funded pensions is the indexed annuity,” said Tucker Financial President and CFP, Darren Petty. “It functions much like a ‘cash-balance pension plan,’ a defined benefit plan created by the Employee Retirement Income Security Act (ERISA) of 1974, except the annuity version is funded by the employee at or near retirement, usually with a portion of their 401(k) balance.”

An indexed annuity is an insurance vehicle that can guarantee a reliable monthly income over the lifetime of the policy holder, with the remaining balance payable to owner’s beneficiary(ies). The cash balance can grow at a stated interest rate, much like a bank CD, or it can have greater growth opportunity if the owner chooses an indexed option. This “links” the annuity cash value to a stock index like the S&P 500. When the market grows, the annuity cash value grows. When the market declines, the annuity doesn’t lose value because it isn’t directly invested into equities. To be fair, these annuities aren’t to be compared to a stock portfolio in terms of overall growth opportunity, but they can earn a respectable rate, all without market risk.

Why Are Corporations Moving Pensions into Annuities?

When you consider that indexed annuities de-risk principal and can guarantee a reliable monthly paycheck, it’s easy to understand why retirees are finding them to be attractive pension replacements. Even major corporations, such as GM, FedEx, DowDuPont, Lockheed, Molson Coors, Kimberley-Clark and others, have transferred their pension funds into annuities. These corporations understand that insurance firms act as the world’s risk managers and are better-equipped to manage long-term pension liabilities.

Critics of annuities claim they carry high fees, and this is particularly true of variable annuities, which have fees ranging from 2% to 5%. The lower-cost indexed annuity typically comes with a 1% or less annual fee, depending on the retiree’s deferral period (years until retirement). Others say you can make more money by investing in stocks. It is true that you might grow money faster in stocks or mutual funds, but creating your pension income at retirement is still the goal of this growth. Another common critique is that indexed annuities “tie up your money,” but in fact, most offer between 10% and 20% liquidity each year. “This (liquidity) is far more than you should ever access,” said Petty, “when you consider that all distributions are fully taxable if the annuity has been funded by 401(k) dollars.”

Indexed annuities are not for everyone, and they may not be for you. If you’re still well within your accumulation years, you can take greater amounts of risk in the market. For those who are, say, less than 40 years old and have the time to recover any potential loss from riskier market investments, it may be wise to wait before investing in an indexed annuity. And, if you are a very high-net-worth investor who does not require secure monthly income for retirement, an indexed annuity is likely superfluous.

But the recent trend toward indexed annuities as an alternative to other retirement income solutions is not an accident. People want the security of the old pension plan. They’re finding they can come very close to recreating that financial period of history with a carefully selected indexed annuity.

We spoke with Darren Petty a bit more in depth about what he sees as the similarities and differences between the old pension plan and today’s indexed annuity, as well as other possible methods of creating this kind of income.

Q: How can retirees most efficiently receive pension-like income throughout their retirement?

A: There are several options within just the categories that are appropriate for retirement income. You have dividend-paying stock portfolios, laddered-bond portfolios, rental income or annuities. Within these categories, we look at four main things: income, growth, liquidity and tax efficiency. So, within those four categories, the most efficient for those who don’t want to be tied to managing their investment constantly during their retirement is the self-funded annuity. It provides reliable income, respectable growth, sufficient liquidity and tax efficiency. The fifth, bonus aspect is that it requires no monitoring or maintenance. Q: What are the advantages and disadvantages of dividend-paying stocks for retirement income? A: The advantage is that you can get stock growth and receive a monthly income when the sun is shining, so to speak, and the tide is high and all boats are floating. So, in an expansionary economy, they’re great. In a recessionary economy, the stock value goes down and its dividend often disappears. As Warren Buffet said, “Only when the tide goes out do you discover who’s been swimming naked.”

Q: What are the pros and cons of annuities for retirement income?

A: Some of the cons are that they can’t compare to your stock portfolio. The growth potential can be disappointing if compared to a high-flying stock. They are also not 100% liquid. The advantages contrast the disadvantages. While your annuity will not experience outsized growth, the vehicle has no downside risk, which makes it appropriate for an income-producing asset where moderate gains that never experience a market loss are sufficient. Also, 100% liquidity is an insane request on a 100% tax-deferred vehicle.

Q: Can you talk about the key differences between employer pensions and self-funded annuities?

A: If you have an employer pension, the advantages are that you don’t have to allocate or manage the investment. Your retirement income is easy to calculate, and it’s a clear trajectory. In a 401(k), as we’ve discussed, it will be a bumpier ride but you’ll be able create your own pension that you own and control. And an indexed annuity will likely be a large part of that creation.

Q: How much of a retiree’s income should be “guaranteed,” i.e., how much of the 401(k) should be used to fund an annuity?

A: I think that is a very practical question for people. So, this should be a reverse-engineered calculation where you subtract Social Security benefits from your required annual retirement income, and fund an annuity to cover the difference. For example, if your goal is $100,000 in annual income, and $50,000 of that is in Social Security benefits, you would fund an annuity for the other $50,000. That may require anywhere from 40% to 70% of your 401(k), but that’s the purpose of 401(k)s, to fund retirements. Our approach is that we’re trying to leave as much outside the annuity as possible but still make sure that the client has zero lifestyle risk. That’s our goal, to keep as much of your investible assets out of the annuity while still securing your monthly retirement needs.

For decades now, the financial industry has presented indexed annuities as products. Some financial advisors used them in ways that did not maximize their advantages for the client. So, advisors themselves are somewhat to blame for indexed annuities only now receiving their due as powerful financial instruments when used the right way to fund retirements.

Determining the correct amount for your “annuity pension” is something a good financial advisor will help you with by providing a context for a comprehensive financial plan. The indexed annuity can play a crucial part in any financial portfolio that seeks a balance of growth and security. Even more exciting, when used the right way, indexed annuities can serve as a worthy substitute to the pension era that retirees once enjoyed.

Notes

For more information about indexed annuities or to receive a downloadable white paper on addressing annuity concerns, email Kyle.Savner@TuckerAdvisors.com or Jason.Demers@TuckerAdvisors.com.

Sources:
1. Investopedia.com
2. MedicareWallet.com

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

WILL I HAVE TO BECOME A FIDUCIARY? 

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

If you’re a financial advisor, you have likely heard about the Department of Labor’s recent fiduciary rules. The larger question for the industry as a whole remains, where will these rules take us next?

The word “fiduciary” refers to any advisors who must legally prioritize their clients’ interests above of their own. When advisors are not fiduciaries, they follow what is called the “suitability” requirement, which is basically an ethical call to follow the same prioritization of interests.

According to the Department of Labor’s (DOL) website, the identification of a fiduciary follows ERISA standards and the five-part DOL test, based on the assumption that anyone who offers investment advice for a fee, commission or other compensation, will be regarded as a fiduciary.

Download Your Free
Referral Marketing Guide

Five-Part Test for Status as an Investment Advice Fiduciary

For advice to constitute:

“investment advice of a fiduciary, a financial institution or investment professional who is not a fiduciary under another provision of the statute must:

1. 1. Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
   2. On a regular basis,
   3. Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that
   4. The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
   5. The advice will be individualized based on the particular needs of the plan or IRA.”

The DOL text goes on to say that a “financial institution or investment professional that meets this five-part test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under ERISA (Title I) and under the Code.” Additionally, “Title I of ERISA and the Code each contain provisions forbidding fiduciaries from engaging in certain specified ‘prohibited transactions’ involving plans and IRAs, including conflict of interest transactions, unless an exemption applies.”

While this update has not enforced any further regulation on the financial industry, many believe that day is coming. We recently interviewed Lloyd Domingos, Senior Director of Operations for Tucker Asset Management, about the current regulatory landscape and what he sees unfolding as we move forward.

1. Could you give a brief summary of what the current regulations mean for advisors?

Lloyd Domingos – Basically, the current rule, in a nutshell, would force insurance-only agents to act as fiduciaries—not get paid as a fiduciary, but to have the obligation to act as one. So basically, they’re going to turn you into a fiduciary whether you like it or not. But, if you don’t get your Series 65, you’re not going to get paid as a fiduciary. And you could potentially write less business, because clients will perceive that you’re not a holistic advisor, that you don’t perform the complete duties of an advisor in an all-encompassing way for your clients. Now, they haven’t begun enforcing the new definition of “fiduciary” as part of the rule. But that is supposed to begin on Dec. 20, 2021.

2. What does the IRA rollover exemption mean for advisors?

Domingos – This doesn’t mean that you can no longer roll over an IRA. But, if doing so would earn you money, you will likely need additional disclosures, documentation, policies and procedures, and annual review requirements. Again, this action cannot just help your pocketbook, it has to be in the best interest of the client.

3. How do you interpret the DOL’s “best interest” standard?

Domingos – It has to be the very best interest of the client. It can’t just be the “suitability requirement” anymore. It can’t be an action that is very good for the client, but not “the” best. Who is going to determine what this best interest is? The SEC? The client? The DOL? We don’t know that yet.

4. What are the key points advisors need to beware of in order to be in compliance with the present definition/regulation regarding IRA rollovers?

Domingos – I thought RIA in a Box provided a good summary of these points:
The new prohibited transaction exemption, which was affirmed by the Biden Administration on Feb. 16, 2021, “provides RIA firms with two options as relates to IRA rollovers:

1. Provide only general investment education regarding rollovers. Here, the RIA firm would not need to avail itself of the new prohibited transaction exemption; or
2. Provide investment advice regarding rollovers that affects compensation. Here, the RIA firm would need to utilize the new prohibited transaction exemption, with requirements including advice subject to the ‘Impartial Conduct Standards’ and a series of other disclosure, documentation, policies and procedures, and annual review requirements.”

5. There has been a lot of talk in recent years of potential new regulations for advisors, which some say could happen by December 2021. Could you comment on some of those possible changes?

Domingos –  I don’t want to speculate too much here. But the path the industry has been on over the last five to 10 years has definitely been one of more regulations, more processes and more standards to follow, not less. So, if anything, my opinion is that it will get harder to do business and not easier.

6. What do you see as the key areas of concern for advisors moving forward?

Domingos – Familiarize yourself better with the definition of “fiduciary” so you know it backwards and forwards, because it’s your livelihood. And take steps, whatever you deem necessary for your practice, to ready yourself for what might be further regulation, or at least more explicit regulation.

7. Why do you think the regulatory environment has changed and may continue to evolve?

Domingos – While many investment advisors and insurance agents truly have the best interests of their clients at heart, unfortunately, there have been the Bernie Madoffs of the world that have heightened the regulatory environment. That story, because of its sensationalism in the media, became somehow representative, when in fact, it really isn’t at all. But that’s just kind of the nature of how many of us react to big media stories like this, so people also likely expressed concerns to government agencies that they might not have expressed before, as well.

8. Are there steps that advisors can take now that will safeguard them from the potential new regulations?

Domingos – I don’t want advisors to think that if they get a Series 65 that it will cure all ills, but having a Series 65 means that you are already held to be a fiduciary in the eyes of the SEC. And most of these regulatory standards are part and parcel of what you already do, because you’re already held to that standard. Most Series 65 advisors’ compensation is fee based. That appeals to consumers, and rightfully so. If the consumers’ balances grow, so does the compensation for the advisor, because their fees are proportionally based on the client balances. But if the balances decrease, so does the balance for the advisor. So, everyone is in step. Neither party benefits while the other doesn’t. There’s a direct correlation.

9. What are the consequences of an advisor simply doing nothing now and waiting to see what happens?

Domingos – Worst-case scenario, you could find yourself going out of business. This could be the precursor to even more extensive regulation. Again, that’s why the Series 65 is important.

10. What assistance is out there for advisors who want to be prepared moving forward?

Domingos – There are educational materials and courses out there that advisors can find by searching online pretty easily. As an example, for advisors who qualify, Tucker Asset Management regularly hosts Series 65 Training Courses that advisors can take. We provide the classes and we pay for many of the costs associated with obtaining the Series 65 license. There is help out there for advisors.

We acknowledge that this is far from a comprehensive summary of the current regulations in our industry, and encourage you to research these issues on your own. It will be time well spent for your business.

We plan to closely follow this fiduciary definition and the regulations that may affect it later this year. Ignoring these issues as a financial advisor is no longer an option. The consequences can dramatically affect both the ways we do business and the potential success of those efforts.

Notes

For more information or assistance about fiduciary regulations, email Kori.Brooks@TuckerAM.com.

Sources:
1. The U.S. Department of Labor
2. RIAinaBox.com
3. ThinkAdvisor.com
4. MSN.com

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.

Keys to Preparing for ‘The Great Wealth Transfer’

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

Nearly $70 trillion. According to research firm Cerulli Associates, that’s how much wealth aging generations like baby boomers will transfer to their children and grandchildren in the next two decades or so. This figure represents the largest generational inheritance of wealth ever, which some are now tagging “The Great Wealth Transfer.”

The effects of this massive transfer will introduce new challenges for financial advisors. Gen Xers, millennials and members of Generation Z think differently about money than their parents and grandparents. The methods advisors use in serving this new client base will need to adapt, also.

In addressing this subject, we won’t be so bold as to offer specific recommendations in this space because the challenges are still so new to both this potential client base and advisors alike. We simply want to introduce some methods that advisors may want to consider now and moving forward.

There are many generalizations we can make about younger generations that are as unfair to them as the stereotypes leveled at previous generations. Instead, let’s talk about prevailing tendencies that may or may not exist in the younger folks you might meet as prospects:

They might not be rebellious, but they likely won’t be traditional or “establishment,” either; They might not be impressed by your marketing efforts simply because they’ve already seen everything repeatedly, having been saturated with advertising, marketing and digital culture their whole lives; They might also be less impressed by your credentials and expertise, unless you can show them how your industry experience can directly impact their lives.

Additionally, more young adults live at home than at any point since 1969, according to Generational Insights, a leading research firm on generational demographics. This is not always by their design or preference, as they have weathered unique financial circumstances such as The Great Recession, housing slumps and aggressive valuations, as well as skyrocketing college debt.

Generational Insights summarizes younger generations’ view on experts like financial advisors as follows: Experts are teachers; Experts acknowledge the uniqueness of an individual’s situation; Experts guide, rather than seek to control; Expert’s resources should be available repeatedly, even long after a transaction has closed.

Financial advisors seeking to connect with younger generations would do well to emphasize both their personal characteristics as well as their professional traits. Younger people engage with personal details of people every day in social media settings. While it might be more appropriate to reveal such details in Instagram or Facebook than on LinkedIn, advisors should feel free to express their preferences when it comes to movies, music, sports and other media. What are your hobbies, collections, travel interests and outdoor pursuits? What interests inspire passion in you? You may not feel as comfortable about it yet, but younger people have seen information like this about others as long as they can likely remember.

We spoke with the founder of Generational Insights, Cam Marston, for his expert’s take on what it means to be an expert to younger people today.

“It appears to us,” said Marston, “that many experts in the financial industry who are age 50 and older have some expectation the methods and manners that worked with the parents and grandparents are going to work with the children and grandchildren. Unfortunately, that’s usually not the case.”

For starters, the parents and grandparents either missed the brunt of the Great Depression or had already secured careers and wealth by the time of the Great Recession. They experienced their share of market pressures, but they were different in scope than what young people face today.

“Keep in mind that for some members of this younger audience, like millennials, for instance,” said Marston, “there is still a stain on the financial industry because of the Great Recession. This event occurred right when many of them were trying to enter the work force and begin their careers. And, this new audience views a financial advisor as even more of a burden when they consider what ‘robo’ offers, where you don’t have to interact with a human to set up accounts or undergo the small talk that comes with human interactions. So, the question they ask themselves is, ‘Why should I work with a human?’ That’s why it’s so important financial advisors communicate with them on their level in the ways they prefer.”

What works for older clients, such as telling your story or presenting credentials and awards, may not elicit the same responses from younger prospects.

“Your ‘story’ remains effective with older clients,” said Marston, “but get out of your story and into the future with younger clients. They don’t want to know about you as much as they want to know how you can help them. So, it’s not just the future of the client, it’s, ‘Here is what I see happening if we work together.’ It’s a future focused with the advisor involved. Draw the picture of what the future will look like and then attach an emotion to this future: ‘This is going to be fun’; ‘I think you’re going to like what you’ll learn.’; ‘I think this will be an exciting experience for you,’ and so on.”

One of the biggest challenges facing financial advisors, Marston believes, involves the sales process. It should be a careful and deliberative process with clients of any age, but the way that process functions moving forward may change dramatically with younger prospects.

“Selling has always involved both emotion and logic. Now it’s generational, too,” said Marston. “When it comes to offering a sales pitch, my advice is to first create a picture of the future, with you the advisor as a part of that future. Second, sell in herds, that is to say, ‘Hey, I’d love the opportunity to tell you about what I do. Why don’t you grab a few friends, I’ll buy you all a round of beers and I’ll tell you about how my business works?’ It’s hard to isolate people alone in these younger generations, they’re often more comfortable in groups and with friends. Third, when given the opportunity, say something to the effect of, ‘Before I tell you what we do, why don’t you tell me everything I need to know about you?’ And in that moment of conversation, hopefully, that person feels heard, feels like you are invested in who he or she is. This then allows you to move on to telling them what you can do for them.”

Download Your Free
Referral Marketing Guide

Using data that Generational Insights has compiled, we gathered a list of methods that may still be too new to call “best practices.” That said, here are:

5 Keys to Working with Younger Clients

1. Online Reputation

• The first step younger clients will take to learn about you is to search your name, business name and website online. Make sure you have put in the work for them to find positive results across multiple search engines and/or review sites.
• Maintain a presence on LinkedIn that is updated, followed by Twitter, Instagram and Facebook, in that order.
• If there are communications at this stage, present yourself as an information source, not a salesperson.
• If a “meeting” develops in this initial stage, keep it as informal as possible and don’t insist that it can only be in person.

For more information on building your online reputation, click here.

2. Key Considerations

• Gen Xers have weathered The Great Recession, a housing slump and massive college debt, so they remain highly suspicious of the financial market.
• They trust recommendations from their peers more than “experts.”
• Don’t take their casual attitude as a personal affront.
• Millennials use online and convenience financial services more than any other group.
• They are more likely to invest in their causes and beliefs than any other generation.
• They are comfortable in groups, value their peers and may post online about their interactions with you.

3. Introductions

• In general, be transparent and authentic. Don’t pretend to share their lifestyle and interests if you really don’t. You can be yourself and still be curious about them at the same time.
• For men, a collared shirt with the sleeves rolled up and a sport coat by your side is fine; Women can also dress business casual—comfortable slacks and a blouse.
• Ask them what you need to know about them and really listen.
• Get to your points without wasting time.
• Ask more questions.

4. Selling

• Avoid aggressive pitches and don’t pressure people for decisions.
• Instead, offer information, ask questions and wait for feedback.
• When explaining your suggestions, offer options.
• Show them where they can research your suggestions on the internet, but provide advice you feel they cannot find online, also.
• Consider offering free services for a limited time, or show how you are customizing your services to fit their needs.

5. Follow-up

• Be responsive to emails, texts and voicemails within 24 hours.
• Your ongoing service should match their initial experience with you.
• Be succinct in your messaging and ask them which they prefer: Email, texts, social media, etc.
• Don’t sign them up for newsletters or email opt-ins without their permission.
• Only reach out when necessary.

Thus far, we have largely discussed working with younger generations of clients as a future event. It’s not. The Great Wealth Transfer has begun and is in full progress.

You may have helped the parents and grandparents of today’s children. You might believe that, because of that service, new business is owed to you. But it’s not. The sooner you realize that, the better it will be for your bottom line.

Instead, embrace this new challenge of getting to know younger generations. What could possibly be more exciting than meeting the future in the form of bright, engaging young adults? It will be as much a new experience for you as it is for them. There is much to teach, and even more to learn.

Notes

For more information about generational demographics, please email Cam@CamMarston.com.

Sources:
1. Cerulli Associates
2. Generational Insights
3. F&G

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.