The demographic wave of 76 million boomers entering retirement over the next two decades is crashing into a set of circumstances that threatens retirement security for millions of people.
Pensions and Social Security are under threat. Historic low yields and the potential for inflation from growing government deficits pose additional obstacles.
And after two significant market declines in the past decade, as well as growing concerns about outliving their money, many investors are looking for new ways to secure a lifetime of income.
For clients of fee-only financial advisers, guaranteed-retirement-income options historically have been few and far between. Insurers traditionally have focused on building products structured for commission-based sales, leaving many fee-only advisers with a negative impression of these products.
But with the registered investment advisory marketplace now managing $1 trillion in client assets — and with client demand for retirement income increasing — products and services designed for RIAs are evolving to meet new market demands.
Not surprisingly, much of this demand is being driven by the fundamental shift in investment strategy that occurs once clients flip the switch from accumulation to deccumulation. Although different investing strategies can address income needs in retirement, there is growing evidence that income guarantees can help advisers and their clients maximize the potential for client income while reducing the risk of loss in retirement.
Research by Aria Retirement Solutions suggests that adding a lifetime income guarantee through a contingent deferred annuity to a retirement portfolio can reduce or eliminate the risk of a retiree's outliving assets, while also increasing the portfolio's internal rate of return.
The increase in the internal rate of return is attributable to an increase in equity exposure in the years leading up to retirement and during retirement, which is an indirect benefit of having a lifetime income guarantee on the portfolio that can protect future income in the event of a market decline.
An updated study by Ibbotson Associates Inc. reached a similar conclusion. According to Ibbotson, adding a lifetime-guaranteed-minimum-withdrawal benefit to a traditional retirement portfolio can increase retirement income potential while decreasing income risk.
WHAT RIAs WANT
In working with individual fee-only advisers and investment committees at RIA firms, we have found that RIAs look for three characteristics when it comes to retirement income products.
First, they want a product that is of great value to clients — a guaranteed product that is investor-friendly, low-cost and allows clients to exit without penalty, should the need arise.
Second, they want a product that fits the RIA business model. That means commission-free products without surrender charges and other costs associated with lifetime- income products, open access to adviser-friendly mutual funds and exchange-traded funds, and products that put advisers squarely in control of managing assets.
And finally, advisers need a platform and partner that will take care of client needs over the long haul. These are products designed to serve clients for a lifetime, and that level of commitment from the guarantee provider is crucial.
Increasingly, products are entering the RIA marketplace with the aim of meeting these adviser demands.
For example, some of the new variable annuities aimed at fee-based advisers eliminate commissions and reduce the fee complexity associated with VAs. Others address long-term care by combining an annuity with a separate
LTC insurance policy.
Although these variable annuities may not address issues of investment control or limited fund selection completely, they are clearly a step in the right direction.
New retirement income offerings are breaking out of the VA box, as well.
In a recent research paper, Tamiko Toland, managing director of retirement income consulting at Strategic Insight, reported on a new non-VA product “custom-tailored” for the fee-only marketplace that adds a retirement income guarantee to a portfolio of mutual funds or ETFs. The paper, “Bringing Retirement Income to the World of Fee-Only Advice,” notes that assets remain within the RIA's advisory practice, so no “orphaned” assets are sent to an insurer for custody.
David Stone is chief executive of Aria Retirement Solutions.
