Let me ask you a question. Assuming your goal is to create a reliable source of income during retirement, would you be upset if your investment adviser recommended, in exchange for a reasonable annual fee and a premature distribution penalty, or surrender charge, that you invest a small portion of your investment portfolio in an investment vehicle that has the following six contractual features:
- it will provide you and your spouse, if married, with sustainable lifetime income;
- your income start date is flexible;
- the longer you defer your start date, the more income you will receive;
- a separate investment component with upside potential is included;
- there’s no downside investment risk; and
- a potential death benefit will be paid to your beneficiaries?
If you answered “no” to this question, you’re not alone. In a recent survey conducted by Phoenix Companies at the National Association for Fixed Annuities’ annual symposium, nearly 70% of annuity professionals said that guaranteed lifetime withdrawal benefits (GLWBs) were a “must have” feature for fixed index annuity sales over the last 12 months. In addition, 62% of respondents believe the “need for guaranteed income in retirement” is the #1 feature for clients.
Solutions that not all advisers provide
Given the fact that GLWBs have been the most popular fixed index annuity rider in the recent past, and in line with my personal experience as a retirement-income planning professional, these findings aren’t surprising to me. If the need for sustainable lifetime income in retirement is so important, why aren’t more investment advisers recommending investment solutions that are designed to fulfill this need to their pre-retirement and retired clients?
What about timeliness? Given the fact that the Dow Jones Industrial Average closed at an all-time high of 15,680 last Tuesday, is up 20% this year, 35% since 2010, 50% since 2009 and 140% since it closed at a low of 6,547 on March 9, 2009, why aren’t investment advisers recommending to these clients that they transfer a portion of their unsustainable gains into investment vehicles that provide sustainable lifetime income? Have advisers who witnessed the 17-month free fall of the stock market between October 2007 and March 2009 learned from their experience?
The bigger and perhaps more disturbing question from a fiduciary perspective is: Why are many investment advisers who are purportedly doing retirement planning not transitioning their strategies and recommendations from those that are retirement asset-based to those that are retirement income-oriented, for clients who need and are demanding this?
Compensation models influence recommendations
The answer to the foregoing questions is grounded in the fact that there has historically been a retirement-income planning disconnect in much of the investment-adviser world when it comes to how retirement planning is practiced. This disconnect is directly tied to the compensation model used by most traditional, stand-alone investment management firms, particularly registered investment advisers.
While many firms charge financial-planning fees, the lion’s share of compensation earned by these firms is derived from assets under management, or AUM. Under the standard version of this model, an ongoing quarterly investment management fee that’s equal to a percentage of the value of a client’s investment portfolio is deducted from the portfolio. The percentage that’s applied generally decreases at specified breakpoints of increasing levels of AUM.
An AUM model, while it’s appropriate for assisting clients with asset accumulation needs, limits an investment firm’s ability to recommend and implement retirement income planning solutions unless it’s supplemented by other compensation models that are designed for this purpose. This is especially true when it comes to recommending and implementing sustainable lifetime-income strategies, including single-premium immediate and deferred fixed-income annuities. Fixed-index annuities (FIAs) with GLWBs or income riders and deferred-income annuities (DIAs) fall into the latter category.
Non-AUM compensation models are predominantly commission-based. Unlike the AUM model that provides investment professionals with ongoing management fees that are deducted from clients’ portfolios, annuity commissions are generally paid by life insurance companies to life insurance agents in a lump sum as a percentage of premiums received at (a) a standard rate or (b) a reduced percentage with a small annual trail. Commission-based models are subject to state insurance licensing and regulation and require specialized training and continuing education in insurance topics, including fixed-income annuity strategies.
Is your adviser afraid of losing AUM?
As stated in Is Your Investment Advisor Afraid of Losing AUM?, most AUM-driven firms are reluctant to refer clients to advisers like myself who offer a total retirement-income planning approach since, in addition to the obvious revenue loss, this would be tantamount to admitting that they’re unable to provide a comprehensive retirement-income planning solution. Until these types of firms adopt a retirement-income planning mind-set and either (a) associate with, or recommend, licensed insurance agents who specialize in fixed-income annuity solutions or (b) ensure that their own professionals obtain the requisite licensing, training and experience, clients’ financial needs, expectations and best interests may not be served in many cases.
Final question: Assuming your goal is to create a reliable source of income during retirement, would you be upset if your investment adviser didn’t recommend the type of investment described at the beginning of this article as part of your retirement-planning solution?
Robert Klein is licensed as a Resident Insurance Producer in California (License #0708321). Bob is also president of Retirement Income Center, a registered investment adviser.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.