Month: December 2023

Don’t Be Afraid of Annuities

“Why would I give my clients’ money to another advisor - what would be my value?”

That line dominated the early years of today’s advice industry workhorse, the managed account. Financial advisors have amassed more than $11 trillion of client assets in a product idea once so abhorrent that I was threatened with the loss of my job in two firms and banned from branch offices by managers convinced their revenue would collapse.

The annuity is now the Rodney Dangerfield of financial advice - based on its share of retirement assets - getting no respect. Eerily similar treatment to that given the first managed accounts. So skeptics of annuities persist, despite the new reality of products designed to protect client assets more efficiently than a portfolio.

Check out the parallels:

Managed accounts are too expensive. The first managed accounts sported annual fees of 3% per year, which seemed high to portfolio managers providing institutional clients the same service for much less. But to most stockbrokers, 3% was inadequate compared to commissions on stock trades or 8.5% front end loads on some mutual funds, 4% on a bond and something in the middle for a unit trust.

Reality: Competition brings down costs - to the benefit of the consumer - and managed accounts now average closer to 1% per year, the 8.5% loads are gone and commissions are zero at Fidelity. Likewise, “annuities” are not all priced the same and advisors remembering heavier variable products are usually surprised by the current pricing.

Selling managed accounts will cut my income. The managed account was a trap door for the industry, said advisors and their managers used to the instant gratification of product sales and commissions. Purchasing annuities on most platforms reduces the advisor’s AUM.

Reality: More forward thinking types saw the potential for building assets, leveraging the markets for growth of AUM and providing more time to work with clients and find new business. They traded the short-term hit to current income in favor of building for the long-term.

Likewise, the addition of protected income strategies is very often viewed by clients as an additional service - and advisors report success in capturing assets currently held away from the primary advisor. So protection strategies can increase overall client share of wallet.

Managed accounts are too complicated. Complaints rained in on advisory headquarters from advisors howling about the need for “multi-page!” investment policy questionnaires, client signatures (“They gave me the OK over the phone”) and additional registration as an investment advisor agent. Multiple asset classes and “too many” sub-advisor names were “confusing” to clients - “Why can’t we use just the managers beating the market?”…

Reality: A new level of professionalism was replacing the stockbroker. The managed account is not a product, industry pioneer Len Reinhart would often say, it is a service. Consulting units like his at Smith Barney had duplicated the investment approach used by corporate pension funds and endowments. Clients now had not just a personal advisor, but also a consultant selecting managers and tracking performance, and full time investment teams managing their money.

Advisors who manage only investments miss the opportunity to contribute to clients’ net income and equity by addressing their expenses and liabilities. That’s no longer an option. Clients feeling confident about their $1 million nest egg may not be considering their potential longevity and the prospect of funding a retirement that stretches three decades - or more. The reality is that very few retirement aged clients have sufficient assets to fund their longevity, including the highly variable costs of healthcare and life care. Leveraging limited assets is a fast growing theme for a new level of advisor professionalism that seeks to ensure the protection of clients, not just investment returns. The definition of a “financial advisor” is changing once again - beyond “investment advisor”.

No one is asking for a managed account. My personal favorite and the perennial foe of any entrepreneur introducing anything new. The classic responses include “People riding horses never asked for cars” or the more contemporary version when Apple combined our music and a camera into a portable telephone.

Reality: Products rise to meet consumer demand. The stockbroker never really answered the nagging question, “How am I doing?”. As more clients became responsible for their retirement - IRAs, 401(k)s - they became more concerned about returns. Independent investment managers and trust companies were only too happy to provide custodial services and performance reports. Clients were looking for a better, more reliable and more transparent solution. It was less important for clients to fully understand or appreciate the role of asset allocation and risk management and multiple asset classes. Stockbrokers working for commissions didn’t meet the standards of a “process”.

“Annuities” have matured to meet consumer demand. More than 100 products in a couple dozen categories filled the annual Barron’s guide to the best annuities. Income streams can extend to cover a lifetime, begin at specific ages to match liabilities, add features to offset inflation, incorporate death benefits and name specific heirs.

The real power of consumer demand is that consumers may not be able to name what they want but they sure can describe what it should do. Savvy marketers interpret and great innovators build the solution. The best advisors using annuities do not rely on complicated illustrations or labor over the lengthy applications, they talk to the clients about what they want to accomplish. Protection is an emotional topic - the solution is an emotional decision. Peace of mind is not an intellectual compromise for the advisor.

Satisfying clients’ emotions is not enough to overcome doubters among mostly left-brained, analytical advisors. But clients - and their families - are very much emotional beings and become more so as retirement arrives. The benefits of early retirement are eventually replaced by the reality of surviving longevity. Longevity is the looming spoiler for folks mostly now enjoying the “go-go” years of retirement. In 2024, more Americans will turn 65 than ever before - Peak65(tm) according to research by the Alliance for Lifetime Income. At a median age of 68, the 70 million boomers are still mostly robust and well funded relative to where they may find themselves in a few years. That’s the trend we’re not ready for - and the one that will test the loyalty of clients now hearing about their chances according to Monte Carlo.

Start small. Very few of the managed account converts went in 100% at the start. Most focused on discrete uses - especially retirement accounts. And the clients needed to be open to a different approach.

Annuities have similar opportunities and adoption challenges. Start by complementing investment portfolios. How about reducing exposure to MRDs? Investing for retirement after maxing out on plan contributions? Maybe a supplemental income stream beginning at 80 and running for life? Younger clients can benefit from tax deferral of gains. (A more complete list, The Top Planning Uses of Annuities, can be found at TBD). The added value is to more efficiently solve for specific risks or objectives than can be accomplished by investing. That’s also the explanation for clients used to investment products - this is a better use of your capital.

No one likes change. New ideas and processes are clunky - especially in the early years as demand builds and the inevitable friction points are smoothed by technology and common sense. According to one of the nation’s largest wealth management firms, advisors who are leading this adoption curve are earning as much as 4x the net new assets and 100% more revenue growth than non-users of protection products. That’s a return on investment even a stockbroker would recommend.

by Steve Gresham

Stop! Your 2024 Plan Needs These Six Actions

Stop doing these six things now to help pave the way to your future growth

1. Stop the sloppy segmentation.

Start using segmentation that means something - to the segments. Two issues here trip up companies.

First, tighten up your target markets and use a more durable approach including how and why they buy. Research shows that the buying process is now more important to most consumers than the product itself. Make fans of your clients and business partners based on how you treat the process of becoming a client of yours.

Second, clients are not solo. The retiring boomer age wave means every individual client has family members, friends and business associates you will want but they may have very different needs and preferences. Don’t lump them in with the primary client - offer them options.

2. Stop hiding.

Your visibility is invaluable in a world where information is readily available. What consumers and advisors know about you makes a difference. Don’t be the ubiquitous stock fund manager or financial advisor. Show your stuff - have opinions - tell your story. What are your values? Who are your (happy) clients? Why should we do business with you?

With consumers doing more and more of their own research of investment and financial solutions, you want a good reputation, which will also be a benefit to your business partners like financial advisors.

3. Stop measuring only results

Don’t be the lazy manager that just tells people to produce more. Know exactly how the results you want are created and focus your time on improving the ability to drive results. But be thorough - there are probably layers here worth exposing before you isolate the real drivers that matter.

For example, the sales process of managed accounts and life or annuity products include illustrations and proposals - often tracked as drivers. But those are later stage drivers. Look farther upstream to the use of planning capabilities and make those offers more central to client engagement - and capture the added benefits of additional solutions. Replace the target of managed account sales with new assets and referrals that encourage the bigger win of better relationships.

4. Stop serving marginal clients

The historic bull market run and shifting demographics have likely earned you lots of clients - and even more one-time customers. Time to weed the garden, as they say.

Many “clients” are just people who bought a single product or gave you a small portion of their assets. So they are really just partial clients not devoted clients. Pareto knew about this phenomenon - the 80/20 rule. Connect better with the 20 percent of your clients - secure that base against rising competition. Don’t let the 80 percent distract you. But now purposefully design solutions for the 80 percent. Or let them go. The Big Box stores of financial services are perfecting the scale game. Don’t fight a fight you can’t win in favor of building a “moat” of attention around your ideal clients and make them your castle.

5. Stop offering marginal products

Marginal products are easy to find but hard to stop. They make some money, they may have a great history, they may be someone’s baby. But they tarnish your reputation and hold you back from deploying resources and energy into something better. Who wants to be the portfolio manager of your worst performing fund?

Create the space and redirect the resources - including the people - to something worthy of their best efforts.

6. Stop marketing your brand

First, this is not a conflict with #2 above because the important part of marketing is to connect each of your capabilities with the people who value them - without confusing the clients with other capabilities they don’t want. Your overall brand reflects a higher level set of values and strengths - the products and services and service models need laser focus on the ideal consumers. Clients seeking solutions get a “feeling” from a brand - so double down on that effort outlined above, but make equally sure your individual offerings are noticeable, understandable and resonate with the ideal clients you built them for.

by Steve Gresham