The job of a financial advisor has become more challenging in recent years as the coronavirus pandemic, geopolitical unrest and rising cost of living turned long-producing portfolio strategies on their heads, leading many advisors to change priorities and test comfort levels as they look to provide consistent returns and peace of mind.
“The pandemic was an unusual and an unprecedented time, but certainly brought into the spotlight concerns about mortality risk, probably even more so the longevity risk,” Allianz Life President and CEO Jasmine Jirele said during the Wealth Management EDGE conference in Florida last month. “We saw a lot of other disruptions in terms of how consumers were managing their finances, not to mention the impacts of inflation.”
On behalf of international insurance and asset management company Allianz, WealthManagement.com’s affiliated research division Wealth Management IQ surveyed 381 advisors in 2022 and 514 in 2023 to gauge trends in retirement planning, including sentiment on the economic outlook, areas of focus, retirement strategies and interest in guaranteed lifetime income products—otherwise known as annuities. The study also touched on another risk-mitigated investment option—defined outcome and buffered ETFs.
In each of the last two surveys, advisors identified risk management and creating a holistic plan as the top priorities when developing a financial outlook for their clients. In 2022, 96% of advisors identified risk management and 86% identified holistic planning as very or somewhat important, compared with 95% and 83% this year, respectively.
The results are consistent with other research projects Allianz has conducted, according to Allianz Life Financial Services President Corey Walther, who added they were not unexpected given post-pandemic market conditions.
“How many clients or individual investors thought that they would ever lose potentially 10-plus percent sitting in fixed income?” he noted during a webinar discussing the survey. “Whether it be those issues or just coming to their own realization that they're older, especially for that baby boomer demographic segment [that doesn’t] have 10 years to weather some of those losses if there happens to be a black swan or an unforeseen event.”
A large majority of advisors—81%—expect there will be a recession over the next two years, although sentiment varied on how severe it might be. A plurality of 42% expects a mild recession, followed by a slow and modest recovery while 21% believe it will be a mild recession followed by a swift recovery; 15% think it will be a deeper-than-expected recession followed by a slow and modest recovery; and just 3% predict a severe recession and quick recovery.
On the other end of the spectrum, 12% of respondents said there will be no recession and the economy will remain relatively flat, while 7% anticipate stronger-then-expected economic growth.
Most respondents—62%— expect to see markets post gains between 2023 and 2025, but only 12% expect those gains to be strong. Advisors are more divided on the question of interest rates, with 43% expecting the Federal Reserve to continue hiking rates until inflation has abated and 40% predicting Chairman Jerome Powell will hit pause once the economy shows signs of shrinking. Another 16% think the Fed will start cutting rates once the economy slows and unemployment increases.
On the question of inflation, 71% of advisors believe it will slow over the next 2 1/2 years, while roughly a quarter still think prices will remain relatively high over the same time.
“Inflationary concerns are down year over year according to our results, but still very acute,” said Walther. “I think people are well aware of just what the price of eggs are, what the price of bacon is right now as compared to where that used to be a few years ago.”
Respondents identified investment management and retirement planning as the most provided services to individual clients in both 2022 and 2023. Investment management took over the top spot this year with 66% of respondents—up from 59% in 2022. Retirement planning dropped year over year, from 66% to 60%. Financial planning was a close third in both years, dropping from 58% of respondents to 55%.
Walther said Allianz research has found more than half of investors—regardless of age—are keeping investable assets out of the markets due to ongoing economic uncertainty and concerns about retirement and other major anticipated expenditures. He suggested that may have increased the importance of investment performance in client relationships over the last year.
“They’re just sitting on the sidelines, unsure,” he said. “A lot of these themes and results around investment management, active money management and so forth, I think really speaks to people are looking for active participation support, help from their financial advisors.”
The top four primary risks to client retirement income plans remained the same year over year—but have changed places. Inflation, the top concern last year with 53% of respondents, dropped to third place with only 37%, tying with medical expenses, which fell from second place with 45%. Long-term care was a top concern for 42% of advisors in both years, rising from third to second place. In 2023, longevity was considered the primary risk to retirement, according to 47% of respondents, up from fourth place with 38% last year.
Unsurprisingly, those were the same top factors influencing product selection in both years—in the same orders—while risk-adjusted returns, total returns, fees and volatility remained the top considerations. At the same time, advisors have begun to decrease initial withdrawal rates slightly, with the number of advisors starting clients out at less than 3% climbing from 2% to 13% and the overall average dropping from 7.3% to 6.5%.
Walther pointed out that interest in defined outcome/buffered ETF products has doubled since last year. Already used by 55% of respondents in both years, twice as many advisors not using them are now thinking about it, leaping to the top of the “investment products not in use but under consideration” list with 29% of respondents.
Usage of and interest in all types of annuities has also increased slightly, but enthusiasm for them was more muted. In 2023, 65% of respondents were using annuity products in client retirement plans, down from 68% the previous year. Variable annuity products were most used, followed by fixed index and fixed annuities. Registered index-linked products are the least used but considered the most interesting to advisors thinking about introducing annuities.
“We've modeled a few different situations using Monte Carlo analysis that say the combination of a registered index-linked annuity that is integrated into the plan, and if we are using that at a certain point in time in the plan and at a certain level, it improved the probability of success by 17%,” said Jirele. “That's really important.”
“If you look at defined outcome ETFs along with the registered-index-linked annuities ... what is the commonality across both of those? I would categorize those as solutions that have an element of risk management in them,” Walther said, pointing out that Allianz provides both.
“We've challenged ourselves to think about different ways in which we can develop and innovate in products beyond annuities to be able to bring solutions that would allow people to actively get into the equity markets and do it with a level of protection and some level of risk mitigation in them,” he said.
Jirele said Allianz' buffered ETFs are designed to weather “multiple product or market conditions” and provide upside potential with downside protection.
“Not to mention this notion of being able to define an outcome for part of the portfolio,” she said. “Given the fact that the ETF vehicle is more liquid and, in many cases, more flexible, advisors are telling us it's a great alternative for clients leaving too much money on the sidelines.
“I think we're going to continue to see that market grow in the next few years,” she said.
Noting an increase in the perception that fees on guaranteed lifetime income products are too high, Walther said it's hard to put a premium on risk-managed financial planning and advice—especially as nearly half of advisors are planning on their clients being in retirement for more than 30 years.
“Getting even something like Social Security wrong or optimizing a strategy there can really have a significant impact on somebody's ability to design an optimal or ideal retirement income plan,” he said. “I think a lot of it is educating clients and showing them sometimes the value that's there and some of the things that we're able to do to help them avoid some missteps in retirement.”