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Market Forces Driving Advisors Towards Riskier Portfolios

Market Forces Driving Advisors Towards Riskier Portfolios


New research from Cerulli Associates found that the annuity industry is in the middle of a significant change, and it’s impacting the way advisors craft portfolios.

Elizabeth Malin, an analyst at Cerulli, said low interest rates are challenging the traditional strategy of using fixed income to generate retirement income.

Low rates are also putting stress on insurance company balance sheets, with some getting out of the variable annuity business completely. Jackson National, for example, ranked first in VA sales (at $18 billion) through the third quarter of 2014. Then in September the company temporarily suspended sales of its richest living benefit. Others have re-priced products and aren’t including the same rich benefits they did in the past.

The factors are driving advisors away from these products. Cerulli said that VAs have fallen from the most popular retirement income product among advisors in 2011 to fifth in 2014. Fixed income isn’t even on the list anymore.

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Advisors, who have an average 45 percent of clients older than 65, are instead turning to riskier sources of retirement income.

"Notably, the two most prevalent retirement income products for advisors in 2014 were both equity-based, relying on dividends from individual stocks and equity mutual funds, and as a result, taking more risk than they intend,” said Malin. “Retired investors in particular are likely to be more risk-averse and less able to withstand market downturns.”

Malin recommended advisors use prudent asset allocation and diversification to mitigate these factors, but the lack of risk-controlled, income-producing options has created a gap in retirement income products. The solution, Cerulli concluded, could be goal-based financial planning, an approach that allows advisors to be more dynamic and interactive and creates opportunity for insurance companies to educate advisors on new products.

“Cerulli believes [goal-based planning] has potential as a solution for investors near or in retirement and beginning to use their investments as a source of income,” Malin said. “We argue that withdrawal rates need to be dynamic, particularly in poor markets, to ensure that retired investors do not eat into their principal.

“Given the masses of plan participants approaching retirement with inadequate savings, Cerulli urges asset managers and plan sponsors to create planning tools and education to address this need.”

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