Lockwood plans a UMA with an income guarantee

An insurance policy that provides an income guarantee to holders of a unified managed account at Lockwood is in registration at the Securities and Exchange Commission.

Known as a Guaranteed Retirement Income Solution, the insurance policy is underwritten by Phoenix Equity Planning Corp., a unit of The Phoenix Cos. Inc. in Hartford, Conn.

After SEC approval, which is expected by the end of the month, GRIS policies will be offered to clients who have established a Lockwood Investment Strategies account with a minimum of $250,000, according to one of three non-volatile asset-allocation strategies.

“A [guaranteed income stream] is the next step in the UMA,” said Leonard Reinhart, president of Lockwood, a Malvern, Pa.-based unit of Pershing LLC in Jersey City, N.J. “We can manage the investments and diversify, but the clients are coming back and saying, ‘Can you guarantee that I won’t run out of money?’”

Mr. Reinhart declined to speak specifically about the GRIS product.

According to the filing, investors can start receiving income from a GRIS at age 65, taking as much as 5% of the retirement income base each year.

As they withdraw assets, in-vestors reduce their income base. Even if the account value is depleted by permitted withdrawals “and/or poor investment performance,” investors can continue collecting annual income payments for the rest of their lives, the filing stated.

Fees for the policy, which the filing said is expected to be treated as an annuity for tax purposes, will range upward from 0.85% annually on the amount selected as the retirement income base. Fees are de-ducted from the account.

While not referring specifically to the Lockwood product, Frank Campanale, chief executive of Campanale Consulting Group LLC in Birmingham, Mich., said that in-vestors and advisers should welcome an opportunity to have insurance and investment products as part of one strategy.

“You’re talking about integrating all these products into one strategy and then consolidating information so that it’s comprehensive,” he said. “If you accomplish that by yourself, it’s a major step.”

Although Lockwood may be among the first to embed an annuitylike guarantee in an investment account, it may not be alone. Mr. Campanale said he is working with a pair of firms who are interested in developing a similar strategy.

However, there may be a few bumps in the road as the Lockwood/Phoenix product wends its way through the SEC.

“There is a host of regulatory questions with the relationship between the UMA and the application of the insurance,” said William M. O’Connor, a partner at Washington-based law firm Crowell & Moring LLP. “The insurance company gets its revenue based on the fee that’s being charged. The regulators will want to know how the fees charged relate to the return that’s being paid.”

With a typical managed account, there are management fees and advisory fees, and an optional insurance component could be tacked onto the series of costs.

“The client is seeing clearly that these are the fees being charged,” Mr. Campanale said. “Some clients don’t care how it all breaks down, but the point is that an all-inclusive fee would have everything, and that’s what their total fee would be. Who gets what should be available in a comprehensive fashion.”

“Regulators will also want to check out how these fees are disclosed to the investors, and ensure that the guarantee is being provided by a quality underwriter, Mr. O’Connor said.

Regulators will want to see how the guarantee is being funded, according to Mr. O’Connor.

“You’d have to go state by state to check with the insurance commissioners,” he said.

Another problem for the product could come in the way advisers present it to clients.

“A lot is going to depend on whether someone told the client that this is a risk-proof investment,” Mr. O’Connor said. “There’s always risk, even with the insurance.”

In regard to managed accounts with guarantees, Mr. Reinhart said that the key is for firms to remember that they are selling an investment process, and not insurance. “I can see advisers saying, ‘We’re guaranteeing the value of the account,’” he said. “You’re not; you’re guaranteeing an income stream.”

The concept of attaching insurance to a managed account is new enough that the National Association of Insurance Commissioners in Kansas City, Mo., hasn’t yet addressed it.

“Generally, we hear there are more combination products being created, and they cross the jurisdictional lines of security and insurance regulators,” said Julie McPeak, chairman of the NAIC’s life insurance and annuities committee. The regulators would most likely limit their review to the insurance contract and step away from the details of the accounts, said Ms. McPeak, executive director of the Kentucky Office of Insurance

“On the regulatory side, when one state does something innovative, that commissioner usually talks to the rest of us about it, but I haven’t heard anything yet,” she said.

Ms. McPeak may catch wind of the regulators’ approach toward the product soon, since hybrid insurance securities accounts are the wave of the future, in Mr. Campanale’s opinion.

“The mutual funds are di-nosaurs,” he said. “They were the technology of the day 70 years ago.”

Darla Mercado can be reached at [email protected].