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Dealing with Insecurity

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If you’ve been at something for a long enough time, you don’t encounter too many surprises. Yet, despite a decade of financial journalism, I was taken aback by one of the findings in our survey of financial advisors’ usage of alternative investment products (“What Alternatives Do Advisors Have?”). Survey respondents say that over the past five years, growth in alternative investment products has been driven by real estate and commodities. No surprise there. But in answer to the question as to what alternative investments will drive growth over the next five years, the top answer was “capital-protected and structured products.” Say what?

This was not something with which I had a lot of familiarity, so I did a little research. What I found was that there is a budding industry in the U.S. (and burgeoning industry in Europe) for investment products that protect investor’s capital while providing income that can meet an investor’s unique risk/reward profile. These products are financially engineered by traditional asset managers who compete with the insurance companies that create annuities. Advisors need to look at the alternatives and see what products will provide the best mix of income and benefits for their clients.

It will come as no surprise to FAs dealing with retirement clients that the hot sellers these days have been newfangled annuity contracts with a host of living benefits. According to finance professor and annuity expert Moshe Milevsky, the overwhelming majority of annuities sold these days contain minimum withdrawal guarantees — a remarkable shift in the retirement market given that these benefits did not exist a few years ago.

The popularity of these products and advisors’ insights as to the future direction of the market suggest a basic truth about investor psychology: People have a deep-seated desire for security. Indeed, the emerging field of behavioral finance has established that investors feel the pain of financial loss two and a half times greater than the joy of investment gain. There is a challenge in this for insecure investors and their advisors: Because inflation erodes the value of their income (and at a rate higher than the CPI because that index underweights retirees’ medical costs), advisors need to help their clients get more bang out of their investment dollars.

The simple approach to this, of course, is to step up your client’s equity investments, and for that advisors should carefully consider our other cover story, “Mutual Funds You Can Trust.” If insecurity is the problem, than trust and confidence is the optimal solution. Morningstar’s stewardship grades, based on specific criteria like how much the managers invest in their own funds, may speak to investors’ fears.

However, for the vast number of investors who cannot be convinced to invest in non-guaranteed investment products, we at Research are planning a unique new monthly feature that will address the analytics of lifetime retirement income, starting with our January issue.

Gil Weinreich


[email protected]


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