It should come as no surprise that the next 10 years will bring significant and rapid change for financial advisors and their clients, many of whom are Baby Boomers. Longer life expectancies, savings for health expenses estimated to be as high as $250,000 per person during retirement, historically low interest rates and ongoing volatility, have converged to bring unprecedented challenges to this generation and their financial quarterbacks.
David Lau, COO of Jefferson National, tells me that “When social security was introduced, the average life expectancy was actually less than 65 years of age. By 1950, a man retiring at 65 could be expected to live until he was 75. Today, a man retiring at 65 is expected to live until he is 84.”
According to a survey by Allianz Life Insurance Company of North America1, “87 percent of 1,425 people between the ages of 55 and 65 questioned preferred a financial product that guarantees a 4-percent return over one that has an 8-percent return with the possibility of losing value in market downturns.”
Why then do only 25 percent of people in that same survey report owning an annuity? What drove companies such as The Hartford, Sun Life and MetLife to exit or scale back their annuity business?
Articles of interest
1 Financial Advisor Magazine
Baby Boomers Seek Income Over Returns
New survey from Allianz Life Insurance Company of North America
“Now more than ever, the key to a financially successful retirement is wealth accumulation”, says David. “The more you can accumulate, the more and the longer you will be able to fund your retirement.” He tells me that traditional variable annuities try to address these needs through insurance guarantees, such as income benefits or withdrawal benefits.
“The cost of these guarantees is steep, and their complexity typically requires hundreds of pages of prospectus disclosure. In short, they are not very consumer friendly.” David tells me that the trouble with traditional annuities is that the cost of “peace of mind” is typically very, very steep.
“One thing advisors can do to help educate investors about annuities is to disclose costs to ensure their client is making an informed decision,” David says. “If that 4 percent guarantee costs you 3 percent a year, do you really get what you pay for?” David says it’s important to inform clients that there is now a different approach to variable annuities—some next generation VAs are designed for asset management using investment strategies that can minimize downside and provide the “smooth ride” clients are seeking, with the benefit of tax deferral and without the burden of high fees.
“Today, more advisors are changing their investing strategies to manage ongoing volatility,” says David. “Recent research has shown that roughly two-thirds are increasing their use of non-correlated assets and alternative strategies.” Managing these high-turnover strategies in a tax-advantaged vehicle can improve performance by 100 basis points or more according to Morningstar data.
Reporting on Annuities
Among the many challenges for advisors and their aging clients is the burden of reporting on an increasing array of financial instruments at multiple custodians, and doing this in an increasingly transparent and efficient way. Some advisors don’t have electronic access to the tax-deferred assets of their clients for reporting purposes.
ByAllAccounts has a direct feed to Jefferson National’s Monument Advisor flat-fee annuity. Clients who utilize this annuity can contact ByAllAccounts to have the annuity data delivered directly to their portfolio accounting system without manual data entry.
David says that by using ByAllAccounts to aggregate these tax-deferred assets alongside taxable vehicles, it allows advisors to provide more holistic and more comprehensive financial advice. I wholeheartedly agree.
David Lau is COO of Jefferson National.
You might also be interested in:
How Automation and Scalability Can Keep You Compliant (Blog post by James Carney, CEO, ByAllAccounts)
How to Pass a Regulatory Exam (Complimentary Whitepaper)
Due Diligence Primer for Asset Managers (Interactive eBook)comments powered by Disqus