From the January 2011 issue of Research Magazine • Subscribe!

FAs Reevaluate Retirement-Income Products

According to a recent survey of advisors done by Russell Investments, the vast majority of advisors — 86 percent — uses dividend-paying stocks and mutual funds to provide retirement income, and 70 percent say they use annuities. About 43 percent use bond laddering, while just 15 percent of advisors responded that they use managed payout accounts, also referred to as target distribution funds.

Russell’s Financial Professional Outlook, published in December, is written by Phill Rogerson of the company’s consulting and client services unit. This latest FPO survey of 200 advisors at 100 firms finds that providing income in retirement is a very different problem for FAs than that of providing income during the accumulation phase. As such, it requires different solutions, mainly the need to avoid running out of money, provide stable income and maintain flexibility.

“The fact that advisors are optimistic while their clients are pessimistic about the direction of the capital markets is not surprising to Russell, given the amount of cash that remains on the sidelines, out of the investable markets,” writes Rogerson in the study. According to an Investment Company Institute report, he notes, investors withdrew more than $33 billion from U.S. stock market mutual funds in the first seven months of 2010.

In addition, “Advisors have told us that their clients continue to distrust the markets and Wall Street, and that they do not feel confident that regulatory reform will protect the ‘average investor,’ ” the author explains. Investors also distrust the ability of the world’s leading economies to create reasonable fiscal and monetary policies, and they fear that currency manipulations will be used to achieve unfair trade advantages. Furthermore, on top of all these worries, investors fear a possible double-dip recession.

The conundrum, according to Rogerson, is that the market tends to come back in advance of an overall economic turnaround by anticipating economic change, so for many investors, “waiting to get back in” may turn out to be “waiting too long.” Thus, he suggests that when it comes to economic recovery, “an important message for advisors to convey to their clients is: the global economic recovery may not be as big and bold as we might like, but it is underway nevertheless.”

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