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September 25, 2012 at 08:00 PM
The appeal and practicality of guaranteed income investments is rising. Your clients are willing to pay significant fees for the peace of mind they provide. Academic research shows that guaranteed income offers the potential for higher returns with less volatility over the long run. Product providers are committed to meeting the needs expressed by you and your clients. These ongoing changes demand your attention as you seek to help your clients live comfortably in retirement.
These trends are discussed in detail in “The Missed Opportunity: Guaranteed Income as an Asset Class,” a white paper based on a survey of 248 independent financial advisors in addition to interviews with two academic thought leaders and 11 leading providers of guaranteed income products. The research was conducted by the Aite Group, an independent research firm, and commissioned by NFP Advisor Services Group.
Your Clients Crave Guarantees
Research shows many Americans would like income guarantees. Almost half—61.5 million—of households said, “I would put most of my assets in an investment providing guaranteed income even if it provides a low return,” in a survey conducted for Strategic Business Insight’s 2010-2011 MacroMonitor. More than two-thirds of those surveyed—45 million households—held enough wealth to be served by a financial advisor.
This included 5.1 million households in the pre-retired (age 50-64) and retired (age 65 and older) wealthy (top 5%) and affluent (next 15%) categories.The pro-guarantee households hold a big chunk of investable assets—$10 trillion. Most of these assets are held by pre-retirees and retirees, the most likely candidates for products promising income guarantees (see Figure 1, left). The bottom line? You’re likely to have some of these security-craving households among your clients, and they may be seeking a new financial advisor who can satisfy their craving.
Guaranteed income products aren’t cheap, so you may wonder if clients will pay for them. The cost of the guarantee alone typically runs about 100 basis points (1%), without factoring in other expenses. Other fees may boost expenses to 3% or more. Advisors often cite fees as a reason to avoid the current generation of guaranteed income products. However, consumers “said they were willing to pay between 4% and 6% of assets to guarantee that they wouldn’t run out of money in retirement,” according to a 2007 survey by Alliance Bernstein. It seems likely that the market downturn of 2008-2009 increased this openness to paying fees to achieve peace of mind.
Despite individuals’ enthusiasm for guaranteed income, advisors—especially independent RIAs—aren’t sold on these products (see Figure 2, above). Roughly half (51%) of independent RIAs do not recommend income guarantees to pre-retirees facing longevity risk, according to the Aite Group survey. There are also some holdouts among advisors of independent broker-dealers and insurance broker-dealers.
The gap between individuals’ interest in these investments and some advisors’ reluctance to use them is striking. We asked Aite Group to examine academic research on the impact of guaranteed income on a portfolio designed for distribution in retirement.
The Academic Case: Higher Returns With Less Risk
Evolving academic research makes a case for incorporating guaranteed income into the portfolios of individuals preparing for retirement. Essentially, it lets retirees live better for longer. This is critical as more Americans face the risk of outliving their assets due to longer lives and volatile markets.
