Marketing/Advertising,
The Strongest Financial Brands Are…
Who has the strongest brands in the financial industry? According to the Cogent Research Investor Brandscape 2010 survey of affluent investors, the leading names are mostly household names: TIAA-CREF, Vanguard, Fidelity, Schwab, John Hancock, MetLife, The Hartford and American Funds (though not necessarily in that order).
But first place doesn't necessarily mean great. Cogent's survey showed low investor confidence in the financial services industry overall. Less than 40% of affluent investors polled were confident in their mutual fund provider, fund distributor or financial advisor.
| Fund Company | Rank | ||
|---|---|---|---|
| 2009 | 2008 | 2006 | |
| Vanguard | 1 | 2 | 1 |
| Fidelity Investments | 2 | 1 | 2 |
| American Funds | 3 | 3 | 3 |
| T. Rowe Price | 4 | 4 | 6 |
| TIAA-CREF | 5 | N/A | N/A |
| Franklin Templeton | 6 | 7 | 19 |
| Fidelity Advisor Funds | 7 | 6 | 11 |
| Oakmark | 8 | 29 | 31 |
| Morgan Stanley Inv. Advisors Funds | 9 | 8 | 9 |
| Schwab/LaudusFunds | 10 | 5 | 5 |
Among 39 mutual fund providers considered, the three highest-rated brands were Vanguard, Fidelity and American Funds. Franklin Templeton rose to 6th in 2009 from 19th in 2006, and Oakmark vaulted to 8th last year from 31st in 2006.
The three highest-ranked brands among 20 fund distributors were Charles Schwab, Fidelity and Morgan Stanley Smith Barney. Edward Jones jumped from 14th place in 2006 to fourth in 2009.
Among six exchange-traded fund (ETF) providers considered, Vanguard was ranked highest in all performance criteria. Among 14 variable annuity issuers, TIAA-CREF earned the highest level of customer loyalty, followed by Ameriprise Financial and Allianz Life. (See RIJ's Data Connection for top 10 VA issuers).
Risk-aversion rises
Aside from canvassing investors about specific providers of mutual funds, variable annuities and other products, the survey also registered trends in the risk appetite and financial product purchasing preferences among affluent investors, who represent only about 17.5% of U.S. households.
| Distributor | Rank | ||
|---|---|---|---|
| 2009 | 2008 | 2006 | |
| Charles Schwab | 1 | 2 | 3 |
| Fidelity Investments | 2 | 1 | 4 |
| Morgan Stanley Smith Barney | 3 | N/A | N/A |
| Edward Jones | 4 | 8 | 14 |
| Merrill Lynch | 5 | 4 | 1 |
| Raymond James | 6 | 5 | 10 |
| UBS | 7 | 9 | 2 |
| Vanguard | 8 | 6 | 6 |
| Wells Fargo Advisors/Wachovia Securities | 9 | N/A | N/A |
| Ameriprise | 10 | 11 | 12 |
Ownership of annuities has risen four percentage points, to 34%, and allocation of assets to annuities rose 3.6 points, to 9.65% since 2006 years, the survey showed. Fixed annuities showed stronger increases than variable. Ownership of fixed indexed annuities remained at 6% of those surveyed.
“Interest in annuities is also on the rise across all age and wealth segments, particularly Silent Generation investors,” the report said. (The survey did not differentiate between deferred and immediate annuities.)
Among variable annuity issuers, all but TIAA-CREF “have more detractors than promoters” and “few VA brands achieve both high awareness and favorability, and firms that are less well known earn the highest impression ratings,” the survey showed. In 2009, loyalty toward VA providers was higher than in 2008, however.
These days, even the comfortable are worried, apparently. The authors of the report were struck by the growing risk-aversion of those surveyed, who had a mean asset level, excluding real estate, of $740,000.
This was true even for those between ages 28 and 44. “Gen-X has a similar risk profile to the Silent Generation, and we wonder if that mind-set will remain consistent,” said Tony Ferreira, managing director at Cogent Research.
“Even if they're only 40 or 41 years old, they're transitioning to lower risk tolerance products. And more are saying, ‘I want income but also some guarantees,’” he added. “We wonder if they have they been burnt so much in last ten years that they may never become more aggressive. That group is most likely to think they won't get Social Security or that they'll get reduced benefits or that they may have to wait longer or pay higher taxes on benefits.”
| Attitudes of Affluent Investors |
|---|
Source: Cogent Research Investor Brandscape, 2010. |
Ownership of mutual funds and participation rates in qualified plans are both down among affluent investors over the past three years, the report shows. Mutual fund ownership dropped to 78% in 2009 from 94% in 2006, a decline of 17%. Among fund owners, allocation to mutual funds has fallen to 44% from 53% since 2006.
Meredith Lloyd Rice, the project director of the Investor Brandscape study, pointed to several factors driving those trends: a shift to self-employment following last year's widespread layoffs, migration to certificates of deposits and fixed annuities, and asset decumulation by those out of work or already retired.
Indeed, the Urban Institute reported this week that 8.2% of men between ages 55 and 64 are out of work and have been looking for work—up from only 2.7% in November 2007. About 1.3 million 62-year-olds claimed Social Security in 2009, a record number, partly because of the many 62-year-olds and partly because of unemployment.
© 2010 RIJ Publishing. All rights reserved.
Company/Trade Group News,
New York Life Introduces ‘Lifetime Wealth Strategies’
Last summer, New York Life rolled out a new managed account solution that enabled its own agents and brokers to blend investments and insurance in a single portfolio, whose weightings would shift from stocks and life insurance to bonds and annuities over a client's lifetime.
“We launched it in the agency in the second half of last year. There's been a lot of excitement around it,” said Michael Gordon, first vice president in New York Life's U.S. life insurance and agency business, who has led the effort so far. “And we're seeing sales that are consistent with expectations.”
Now the firm, the world's largest mutual life insurer, plans to offer that solution to third-party distributors. The first version, called Lifetime Wealth Strategies, is designed for registered reps. A tweaked version, intended for fee-based advisors, is contemplated. The third-party partners haven't been named yet.
The new platform is significant on several levels. It's the latest of several insurance industry attempts—not all of them successful—to market retirement income processes instead of just products, in a variation of the old give-them-the-razors-and-sell-them-the-blades strategy. And it's the first to integrate both life insurance and annuities into investment portfolios.
Lifetime Wealth Strategies also represents major a push by the country's leading income annuity seller, and one of the healthiest insurance companies in the post-crisis world, to solve the “annuity puzzle” and convince the masses—or at least the mass-affluent—to embrace income annuities.
“Our goal is not to have a 25% of the [SPIA] market,” Gordon said, referring to the fact that, with $1.4 billion in SPIA sales through the first three quarters of 2009, New York Life alone has a quarter of the U.S. SPIA market. “Our goal is to have a smaller share of a much bigger market.”
Partnering with Ibbotson
The financial engineering that drives the program also has a noteworthy pedigree. The underlying formulas, which New York Life calls the “Protection Solution Decision Model,” as well as the client assessment questionnaire, were created through a partnership with Ibbotson Associates, the asset allocation specialty firm owned by Morningstar, Inc.
| Guiding Principles of Lifetime Wealth Strategies |
|---|
|
Laurence B. Siegel, the CFA Institute research director who invited Milevsky and the Ibbotson team to write that monograph, says they answered an important question: “How can people save for retirement in DC world where you have no obvious efficient market in the annuitization part of the solution.”
“You can't hold the index that you care about most—an index of your consumption,” Siegel told RIJ. “You sort-of can with a laddered portfolio of TIPs, but then you don't get any mortality pooling. Only an insurance company can do this, and the fact that New York Life is doing it is very reassuring. This really has a chance to change the way money is invested by individuals.”
Aside from designing the platform's gearbox, Ibbotson is also one of the asset managers. “There are four money managers, one is Morningstar Investment Services, who go for alpha. Then there's Ibbotson Investment Services. They bring an active/passive hybrid strategy that goes after alpha where alpha is feasible, but will go passive in areas where you can't beat benchmark,” Gordon said.
“Then there's Brinker Capital, which overweights to absolute return like an endowment, and Loring Ward, which partners with Dimensional Fund Advisors. They use a passive strategy. They don't believe in long bonds, and they weight to international equities instead of domestic to offset the short term bonds,” he added.
Peng Chen, president and chief investment officer at Ibbotson Associates, thinks the program will bridge the insurance/investment divide for reps and advisors.
“Most advisors are either equipped to look at asset allocation or insurance, but its trickier to put them together,” he told RIJ. “We have a framework that gives them specific recommendations, and we put the recommendations together in an easily managed cohesive package.
“We've had great traction with this on the agency side. It happens seamlessly and automatically, so that as you get into the retirement stage, you begin to see withdrawals from the life insurance portion to fund the retirement income portion,” he added.
The program matches portions of the client's money with his risks, rather than with specific time-periods. “In the typical ‘bucket methods’ in the market today, you usually see a time-segmented approach,” Chen said. “That doesn't necessarily solve the issue, however. We're bucketing not in terms of time segments, but in terms of needs.”
On the account statements, the insurance and investment assets are integrated, with insurance assets counted toward the fixed income allocation of the portfolio. “A conservative investor might be assigned an 88% fixed income and 12% equity allocation, but the fixed income might be part insurance. So the allocation could be 10% insurance, 78% fixed income and 12% equities,” Gordon said.
On a mission
Other insurance companies have launched investment/insurance platforms, with mixed success. Nationwide and Envestnet launched a time-segmented program last summer called RetireSense among Envestnet's advisors. It's still too new to assess.
A few years ago, MassMutual introduced a tool called the Retirement Management Account, which came to naught as a result of the financial crisis and internal management conflicts.
Jerry Golden, who created the Retirement Management Account, which employed staggered purchases of income annuities in a rollover IRA, says the New York Life venture is most likely to succeed if it is led by a dedicated, focused marketing team that champions the managed account concept itself, not just the products in it.
If the team is made up of competing advocates of individual products, the whole effort could founder, he said. “If product sales are easier than program sales, then they'll take the path of least resistance,” said Golden, who left MassMutual after the RMA project imploded.
Before the financial crisis, Phoenix Companies partnered with Lockwood Capital Management on a unified managed account that attached a lifetime income guarantee to an investment portfolio. But New York Life's platform eschews living benefits in favor of the company's bread and butter SPIAs, which it calls “Guaranteed Lifetime Income” to avoid the word that continues to confuse and frighten consumers.
The company has steadily nurtured those sales during the first decade of this century.
In 2003, the company's SPIA sales were only $115 million. But that year, New York Life's current CEO, Ted Mathas, called for focus groups to help make the products more consumer-friendly. The company subsequently added liquidity features to the product, such as cash withdrawal opportunities and interest rate adjustments.
Sales rose. In 2004 and 2005, the insurer's SPIA sales reached $294 million and $439 million, respectively. In 2006, New York Life won the contract to market SPIAs through AARP, and sales grew faster. In the first three-quarters of 2009 alone, New York Life SPIA sales totaled $1.4 billion, including over $600 billion each through captive distribution and third-parties, and $138 million through AARP.
The Lifetime Wealth Strategies program is expected to help maintain the momentum.
“This should massively expand the market,” Gordon said. “It's like the evolution that the securities industry went through. Buying an individual security was a big deal before mutual funds came along. The process wasn't scaled yet. You needed Modern Portfolio Theory and asset allocation and then the technological revolution to make it happen. Our idea is that something similar will happen in annuities.”
© 2010 RIJ Publishing. All rights reserved.
Research, Technology,
The Trouble with Calculators
Anybody who has fiddled with retirement planning calculators knows they aren't flawless crystal balls. Each has unique idiosyncrasies, and their conclusions are only as smart as the people using them. “Garbage In, Garbage Out,” as the geeks say.
So no surprise that two researchers, after deconstructing a dozen popular calculators designed for “managing risks and resources in retirement,” accused them all of biases and blind spots that limit their usefulness, especially for the amateur investor.
In the 118-page study, “Retirement Planning Software and Post-Retirement Risks,” prepared for the Society of Actuaries and The Actuarial Foundation and published last month, Pension Policy Center economist John A. Turner and attorney Hazel A. Witte found that, to some degree, all the calculators:
- Produce inconsistent results from similar inputs.
- Overstate rates of return, often ignoring fees and other frictions.
- Favor stocks, skate past Social Security benefits and ignore annuities.
- Assume an unrealistic level of financial literacy among users.
- Overstate the percentage of their pre-retirement income that retirees will need.
Ouch! To be fair, this study attacked something of a straw man. The retirement income planning process entails so many variables and unknowns, is so individualized and has so many unresolved theoretical issues, that no calculator—free or professional-grade—could be perfect. It should also be assumed that most free calculators are intended mainly to generate sales leads or to make websites stickier.
Still, retirement planning calculators in general cry out for a makeover, and this aggressive study, which builds on a similar 2003 study, is an overdue wake-up call. It describes easy ways to improve calculators. It also shows how to improve the retirement income planning process itself. [An 11-page Highlights Report is also available.]
‘You need to save more’
Turner and Witte looked at five free online calculators for consumers, one consumer program that charges a fee, and six programs designed for financial advisors. All are commonly used and were chosen non-randomly.
The advisor programs, not surprisingly, tended to be more detailed and better suited for the complex needs of high net worth investors. The consumer programs were simpler, but generally failed to reflect recent findings that many Americans don't understand basic concepts like compound interest.
“One of the newer developments in economics is behavioral economics,” said Turner, a former government economist who worked for AARP before starting the non-profit Pension Policy Center in Washington, D.C. two years ago. “It's been a surprise to most economists how little most Americans know about investments and financial markets. A key problem with the calculators is that they haven't taken that insight into account.
“The calculators assume that the typical user knows a lot more than he does, and therefore they allow users to make errors studies predict they will make. They don't offer the appropriate feedback when people make errors. That's a fundamental but easily fixable problem.”
Overall, calculators emphasized offensive strategies (i.e., investing and accumulation) over defensive strategies (i.e., risk assessment and mitigation). That is, they reflected the still-prevalent assumption that to ensure a secure retirement you must amass a modest fortune of $1 million or more.
“Typically, calculators do a calculation and then tell you that you need to save more,” Turner said. “But they should also say, ‘You may need to retire later or buy an annuity or spend less in retirement.’” Asked if this might reflect the business goals of investment companies, he said, “There is an element of that going on.”
That bias tends to encourage bullish growth assumptions. “One of the areas we looked at was the appropriate rate of return to use. For instance, if you input an expected return of 21%, the calculator will say, ‘that's too high.’ But you can input up to 20% percent and get no feedback from the calculator. It would be better if they provided a cue that told people to underestimate > their returns.
“When the market was doing well, people in general or on average somewhat overestimated the rate of return they could expect to receive. It wasn't unusual for them to say think that they'd receive 10% going forward. Even after the last few years, I still think people have a tendency to overestimate their returns,” Turner told RIJ. [The calculator on T.Rowe Price's site assumed an after-expenses average return of 8.8% for stocks, 5.75% for bonds, and 4.1% for short-term bonds.]
The more-is-better mantra also expressed itself in the calculators' assumption that retirees need 70% of their pre-retirement income. Turner agrees with Larry Kotlikoff, the creator of ESPlanner retirement software package, who has argued that retirees can live on far less.
“The target replacement rates do seem to be very high, and that seems to be a pervasive problem, Economists assume that people want the same standard of living when they're in retirement as when they are working,” Turner said.
“But let's say you had two kids while you were working, and that your kids were using up a lot of income. That's a simple point but none of the calculators take the number of children you have into account. That's not a difficult problem. It just adds another line to the program. But that one change would be a significant improvement.”
Annuities and Social Security get short shrift
Reflecting the pro-investment tendency, these retirement-oriented calculators don't even hint at the possibility of using annuities. Nor they do help people understand how to integrate the annuity that everyone has—Social Security—into their income planning.
“Hardly anybody, even the insurance companies, tends to push annuities,” Turner said. “None of the mutual fund companies have anything to say about annuities. They don't sell them and their assumption is that you will stay with their mutual funds. The only questions how much you have to save or how much you can consume out of what you have saved.
“We know that most people don't annuitize, and it's not the fault of mutual fund companies that people don't annuitize, but it's still a fundamental problem with the programs,” he added. [The MetLife calculator has a link to an income annuities page and to an illustration of Social Security claiming strategies. In a footnote, the T. Rowe Price calculator has a direct link to the Social Security Administration site.]
While more detail is often good for an advisor-oriented calculator, the doctrine of less-is-more may serve consumer-oriented calculators better, Turner said. People love horoscope books, which provide reams of purported insight based on no input other than the reader's birthday. Why not devise a retirement income planning calculator that requires minimal inputs?
“It would be interesting to ask, 'What would the ideal calculator be?' assuming that you only asked 10 questions, and that you provided have cues and suggestions for answering them. Questions like, 'How many children do you have? What is your age, your income, your gender, and when do you want to retire?'” Turner speculated. [One of Fidelity's tools, "Find retirement income products," is a decision tree that leads users to products based on their answers to just four questions.]
Call it the paradox of consumer questionnaires. “The problem with online calculators is that if they take more than five minutes they won't be used, but if they take five minutes or less they won't have much value,” Turner said. “There is that tradeoff. But even in the ones with modest goals, there's room for improvement.”
© 2010 RIJ Publishing. All rights reserved.
Industry Views,
Roth IRA Conversion Promotions Are All The Rage Online
On January 1, 2010, all of the advantages offered by Roth IRAs — tax-deferred growth, tax-free distributions and no required minimum distributions — became available to a new demographic of investors thanks to a provision in TIPRA (Tax Increase Prevention & Reconciliation Act of 2005).
Previously, individuals who had modified gross adjusted incomes above $100,000 a year or were married and filed separately were unable to convert their traditional, SEP or SIMPLE IRAs to Roth IRAs. Signed into law in 2006, the TIPRA provision eliminates these restrictions, extending Roth IRA eligibility to the higher earning investors that are coveted by top firms.
In anticipation of the impending Roth IRA conversion opportunity and the subsequent influx of higher net worth investors, more than half of the firms we cover have introduced focused Roth IRA sales campaigns and resources online over the last six months. Firms have aggressively targeted both prospective investors and financial professionals in an attempt to establish footing with these key audiences.
John Hancock and Pacific Life have been the most active firms, rolling out impressive online sales campaigns equipped with engaging education and sales resources. John Hancock's 2010 Roth Opportunity campaign is publicly available and targets prospective investors and clients. Pacific Life's Roth IRAS: Take a New Look campaign is featured exclusively on advisor websites and focuses on advisor sales support.
Homepage promotions, a page dedicated to Roth IRA education, an educational series of videos and four new calculators make up the comprehensive John Hancock Roth IRA Opportunity campaign. The homepage promotional images, which have been running since September, link to the informative Roth IRA Center page. A comparison table highlighting differences between Traditional and Roth IRAs is presented along with a list of nine investor suitability considerations.
John Hancock Roth IRA Center
The aforementioned Roth IRA-focused videos and calculators are also accessible from the Roth IRA Center. The three part video series looks at key strengths, investor suitability considerations and potential retirement and estate planning benefits related to the Roth IRA Conversion. The four calculators help users perform detailed comparisons between Roth and Traditional IRAs, breakeven analysis and hypothetical legacy planning.
The Pacific Life Roth IRA Conversions: Take A New Look campaign is advisor-focused and offers a diverse selection of engaging client and advisor education resources and sales materials. The firm has been promoting the campaign on the homepage for nearly three months using a variety of colorful images.
Pacific Life Roth IRA Conversions: Take A New Look Homepage Promotion
Homepage promotions all link to a campaign-exclusive sales resources page that has been frequently updated over the past three months. Advisor education brochures are made available along with a variety of sales materials for use with clients including informational brochures, pamphlets, prospecting letters and marketing flyers.
Pacific Life Roth IRA Conversions: Take A New Look Sales Resources Page
It is no secret that the past 15 months have been unkind to the financial services industry. The Roth IRA conversion represents an excellent opportunity for firms to add new clients and bolster their businesses in the new year.
© 2010 Corporate Insight, Inc. All rights reserved.
Industry Views are special reports that are sponsored and independent from RIJ's editorial content.