Fee-only fiduciaries are passionate about putting clients first. Sitting on the same side of the table as their clients has precluded them from using insurance solutions in the past, because these products have traditionally been offered for commissions—a conflict of interests.
Without fee-based insurance solutions, some have had to outsource this side of their wealth planning practices to insurance agents who aren’t obligated to act in their clients’ best interests, and whose goals and objectives may not be in line with the advisor. They ceded control and visibility of the assets because there haven’t been other choices.
Now, with the recent growth of fee-based insurance solutions, they can maintain control of that portion of their clients’ plans. Built with insurance protections, these tools help manage the behavioral components by mastering bad investor behavior, and inspiring confidence while offering a solid, grounded path to and through retirement.
The Behavioral Side
Investors are often the victims of their own worst impulses. Standard investing wisdom says to ‘buy low and sell high,’ but fear and greed move us to act against our own best interests. We sit on the sidelines until markets heat up so much that we can’t stand it. Fear of missing out moves us to impulsively invest when equities are overpriced, and as markets correct themselves, we wait too long to cut our losses and sell, irrationally, at the bottom. We lose.
The cryptocurrency mania of late 2017 provides a perfect example. Investors were so distracted by the bitcoin wave, that they scrambled to invest in digital artifacts that aren’t regulated in any way, are tied to nothing of tangible value, and cannot easily be traced. And while cryptocurrency is a fantastic idea, with some promising supporting technologies (blockchain), like all investment trends it may not have been understood well enough by the folks investing. The result is that some investors took massive losses in that digital currency scrum.
Greed makes us not only vulnerable to hyped investment trends, which in and of themselves may be relatively harmless, but it also makes us vulnerable to Ponzi schemes and bad actors. As the role of financial advisors evolves, one thing remains central to the provision of solid financial advice and planning: keeping investors disciplined and following a plan, not chasing performance, or trendy investments. Building trust in client relationships is vital.
John Waggoner, interviewing Vanguard CEO Tim Buckley last year (http://www.investmentnews.com/article/20180122/FREE/180129989/vanguards-buckley-fee-compression-is-coming-advisers-way), points out that “Three areas of traditional investment advice — rebalancing portfolios, ensuring tax efficiency and selecting low-cost investments — are easily automated.” What can humans reliably do that robo advisors cannot? “The one part that resists automation — and the part that gives the biggest boost to investor returns — is behavioral coaching, Mr. Buckley said.”
This new generation of low-cost, fee-based insurance and investments offering guaranteed income, principal protection, and/or guaranteed growth are tools RIAs may use to manage client behaviors by growing their confidence and resilience, even in volatile markets.
A Rising Tide Lifts all Boats
Secular trends in the last decade have led to a tremendous democratization of investment advice. Investors demand investments that deliver true value, at a lower cost. Sales of low-cost ETFs are surging. Inflows in 2017 grew to a record $464 billion from $288 billion in 2016. And inflows for 2018 topped $300 billion. For comparison, mutual funds saw inflows of only $91 billion in 2017 (source: https://www.marketwatch.com/story/etfs-shattered-their-growth-records-in-2017-2017-12-11)
Investors have also begun to recognize the value of the fiduciary advice model, and advisors are increasingly moving to fee-based structures. When advisors sit on the same side of the table as their clients, their best interests are coupled, and a rising tide, as they say, lifts all boats.
While the commission model is transforming, or abandoned, investment solutions have no choice but to evolve. Manufacturers of insurance investments, like variable annuities, are building liquid, zero-commission, transparent products and solutions that deliver true client value, at a lower cost. This transformation is happening quickly, and the winners are RIAs AND their clients.
Converging market disruptions, and their attendant innovations have come at the right time. Americans are living longer, paying more and more for healthcare, and funding longer retirements without pensions. Fewer workers are supporting a growing population of retirees in the Social Security system, and the trust fund is predicted to be exhausted by 2034 (leaving American savers on the hook to fund 11% more of their retirements than in the past).
All the while, traditional investing strategies and allocation models may not work the way they’ve worked in the past. Historically-low interest rates have hampered fixed income strategies, and forced advisors to seek alternatives, for example.
Addressing principal risk, improving accumulation by maxing out tax deferral, creating reliable and predictable income streams in retirement (to replace pensions), and ensuring the smooth and efficient transfer of wealth are things that typically would have been addressed with insurance investments in the past. But those products have traditionally been opaque, expensive, and difficult to understand. RIAs loathe them for their cost, complexity, and hidden fees.
Shoring up accumulation strategies by controlling what can be controlled is fundamental. The growth in popularity of investment-only variable annuities can be directly tied to a growing need for low-cost, tax-advantaged saving. As more annuities and other insured retirement investing solutions, built for the fiduciary model, enter the marketplace, investors will certainly benefit, and so will their advisors.
This new breed of insurance investments is created to inspire investor confidence, allay fears, and ground them in their pursuit of retirement in a post-pension world—To help maintain their discipline, and reach their goals. It is time to get acquainted with this new generation of insurance solutions. They are now more ‘boat,’ than ‘anchor,’ when the tides rise, and offer a measure of protection when they fall.Edward J. Mercier is President of RetireOne, the leading independent platform for fee-based insurance solutions. He has more than 25 years of experience spanning investment and insurance products, including sales, distribution, clearing, and general management. He has held multiple senior leadership positions at Charles Schwab & Co., most recently as General Manager of Investment Management Distribution and Clearing Services. In prior positions at Schwab, Ed was General Manager of Insurance Services, and General Manager of Mutual Fund Clearing. Previously, he worked in strategic institutional sales at Liberty Financial Services.