The Distribution Problem Part 3 – An Alternative Solution

It’s been a busy and exciting fall season at USA Financial with all kinds of projects and opportunities on the horizon.  I’ve finally had a chance to circle back around to some of my musings on social media and in particular the distribution series.

In case you need a refresher, part 1 discussed the unique challenges of the distribution stage for investors.  Then in part 2 we elaborated specifically on sequence of returns risk and how that will present an even greater challenge to investors going forward.  Finally, as promised, I will suggest an alternative solution to this problem that many retirees are facing – a solution that is simple in concept yet profound in effectiveness.

The status quo of portfolio management in the distribution stage can be summarized primarily by two strategies.  Option 1 is a constant proportion method where the portfolio is rebalanced every year to a specific equity/fixed income mix – 60% stocks, 40% bonds as an example.  The other method generally gets more conservative as the client ages so that a 60/40 mix turns into a 40/60 mix over time – age-in-bonds and linear glidepath are a couple variations that take this approach.  The shortcoming of both of these approaches is that neither allocation strategy actually adjusts according to how the market has been performing.  In fact, both of these strategies in the distribution stage actually force equities to be liquidated while they are down in value, locking in those losses, and stunting their ability to ever come back in value.

An Alternative Approach

What if instead we built a portfolio where you didn’t have to liquidate equities while they were down in value, thereby mitigating sequence of returns risk?

Here is an overview of the approach we take with our Summit Series Descent Composites:

Descent Pic

The idea is to start with 3 years of a spending reserve bucket within the portfolio that is allocated to cash.  For example: 12% allocation to cash for a 4% spend rate, 15% for a 5% spend rate, 18% for a 6% spend rate, etc.  All withdrawals come from this cash component within the portfolio.  The remainder of the portfolio is primarily geared toward equities in order to generate the growth needed to sustain the spend rate over the course of a long retirement and to offset the silent risk of inflation.

Every quarter the portfolio will be rebalanced according to what the market has been doing.  If the market is up, then the cash reserve bucket will be replenished from the equity component.  However, if the market is down, the portfolio will not be rebalanced in order to give the portfolio more time to recover losses.

This all sounds good in theory, but I’m a numbers guy.  So how has this type of distribution strategy worked historically?  Our friends at Horizon Investments have put together a detailed research report comparing the effectiveness of an intelligent rebalance to the other prevailing distribution strategies out there.  Here is a summary of their findings:

Blog Pics

Source: Horizon Investments Research, Retirement Planning: Solving for the Major Risks in Retirement

Parameters

What Horizon calls Real Spend in green is the very same concept we are discussing here.  As you can see, probability of success (defined as not running out of money) is dramatically increased when using an intelligent rebalance strategy for distributions.  This objective study looked at all the rolling 20, 25 and 30-year periods going back to 1926, so as to not cherry pick any specific time period.

There are other income distribution strategies out there that are not discussed here (annuities, insurance, alternatives, etc.) and every strategy has pro’s and con’s that need to be considered, but for those investors and advisors seeking to utilize a more traditional mix of equities and bonds to generate income, this is a strategy that should be considered.  Feel free to reach out to me for more information regarding anything discussed in this series or to request a copy of the full research report or information on our composite models.

The strategies discussed do not guarantee a profit or prevent against a loss. Investing carries an inherent element of risk, and it is possible to lose money while utilizing any strategy that includes equity or bond investments. Past performance is no guarantee of future results.

The Summit portfolio may seek to allow more time for the portfolio to recover and postpone rebalancing, increasing the duration of market exposure and potential for loss.

Summit Portfolio Series is offered through USA Financial Exchange. A Registered Investment Advisor. Eric Gritter is an Investment Advisor Representative of USA Financial Securities. USA Financial Securities and USA Financial Exchange are affiliated companies.

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Official launch of 16 Ways from Sunday podcast : Exploring Financial Advisor Marketing From Every Angle

I’m thrilled to share with you the official launch of the 16 Ways from Sunday podcast. This podcast is a podcast for high-performing financial planning professionals that are committed to improving their craft. It takes a rifle-approach with a focus on financial advisor marketing and business building.

Mersman-Podcast-Profile-16.9_v01

Each episode provides actionable marketing ideas and insights, typically delivered through candid interviews with some of the top thought leaders in marketing and/or the financial advice industry. From digital marketing to traditional direct-response marketing, each episode delivers straight-forward and engaging content that any financial professional can use to improve their bottom line and grow their practice.

You can subscribe via iTunes, Google play, and a number of other podcast apps.

Visit my podcast home page to get all the details and check out past episodes.

The first three episode titles and links are below:

Episode 01: Mark Mersman: On the Sales and Marketing Funnel for High Performing Advisors

Episode 02: Mike Lover: On the Imporance of Process and Elevating the Client Experience

Episode 03: Brian Hart: On Turning Press into Profits: Simplifying Public Relations for Financial Advisors

I’m looking forward to this endeavor and anticipate at least two new podcasts to be released each month.

All the best,

Mark Mersman

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FMG Suite acquires Peter Montoya’s MarketingLibrary & MarketingPro, Platinum Advisor Strategies: The Good, the Bad, and the Ugly.

Seemingly in the middle of the night, FMG Suite made two significant “competitor” acquisitions last quarter. According to their website, the mission of FMG Suite is as follows:

“At FMG Suite, our business centers on helping you build yours. Through lead-generation websites and digital marketing tools, we help you accomplish more with your marketing, from retaining current clients to gaining more referrals.”

Their first acquisition was that of Platinum Advisor Strategies. This company was established in 2009 by brothers Robert and Thomas Fross. According to their website, their mission statement is “to create the financial industry’s finest branding, practice management, and marketing materials, while adhering to uncompromising levels of professionalism and service, both inside and outside our organization.”

FMG Suite’s second acquisition, which took place approximately a month after acquiring Platinum Advisor Strategies, was that of long time financial advisor marketing “guru” Peter Montoya’s company, MarketingPro. This company had two primary services, a library of marketing content for financial advisors (known as MarketingLibrary) and then a print/email automation solution that helped distribute that conent (known as the MarketingPro upgrade.)

Image result for financial advisor marketing

I’ve spend the past 15 years involved with financial advisor marketing, and have seen each of these companies evolve their business models, especially as the digital age has made its way into the financial services industry. Here’s my take on what this acquisition means to the industry and individual advisors (from the good and the bad to the ugly).

Setting the stage:

  • I don’t know anything about the financial details of the transactions. However, it’s safe to say that the two entities that were acquired are worth more to FMG Suite as a result of cross-selling possibilities than they would to entities that weren’t already entrenched in that space. More on the later
  • Interesting observation – I’ve seen Peter Montoya speak a few times over the years. I’ve always found his talks informative with some good ideas presented. There was, however, one thing that I always questioned about his philosophy (and now I find it extremely ironic). One of the central themes to his talk and his branding approach was “the brand called you.” His main point was that your clients do business with you (a true statement). As as a result, he was a huge proponent of you naming your firm after yourself. If your last name was “Maple,” then your company should be named “Maple Financial Services” or something to that effect. When Montoya named his company, it followed this same thought pattern: Peter Montoya was the brand. A few years back, he slowly faded away from using his name in the brand. He did an initial transition where it was “Marketing Library-Peter Montoya,” and then shifted entirely to “MarketingLibrary,” and then “MarketingPro.” I found a whole lot of irony in it while I watched the brand changes slowly take place. It’s long been my belief that a company is worth more to a buyer when the seller’s name isn’t embedded within it. Who knows how long Montoya had been staging an exit. It begs the question – if asked today, would he give different advice to the hundreds of advisors who he encouraged to use their name in the branding of their firm?
  • I don’t know a whole lot about Platinum Advisor Strategies. I’ve not heard much positive or negative about them, so my review of the impact of the acquisition takes this into account.
  • I’ve had extensive experience with MarketingLibrary and MarketingPro. They’ve been an entity that has been tied into our technology offering for years.
  • My knowledge about FMG Suite comes from a handful of interactions I’ve had with their team, my review of dozens of videos they’ve created, and feedback I’ve received from advisors over the years.

Let’s get to it:

The Good:

Each of these three entities bring complementary services to the table. In theory, this should provide for a more comprehensive offering made available to advisors. Each of the three entities has certain strengths; if each of these strengths can be harnessed and integrated effectively, it could be an impressive offering for advisors.

Each of the entities likely has relationships and connections with an extensive network of broker-dealers. As a result, this could provide access to new services to an a larger number of broker-dealer affiliated representatives. With that said, it could present new challenges (covered in a bit).

With FMG Suite’s service offering lineup being enhanced, it likely means that competitors will look to step up their games. Regardless of what provider(s) you select for websites, marketing content, and/or marketing automation services, this is a good thing.

The Bad:

Too much : with the higher volume of services being made available, this could invite confusion as to what services make the most sense for you to invest in for your practice. In addition, it will be interesting to see how the merging of three firm’s services and user interfaces come together. Change is difficult, and there’s no doubt the user interface will change soon.

Compliance issues: Our firm owns and operates three RIAs in addition to an independent broker-dealer. Compliance is a big deal to us, and finding marketing tools that are easy for our compliance department to work with make the lives of our advisors easier. MarketingPro’s compliance interface was a tool that was very compliance/advisor friendly system. FMG Suite’s compliance interface leaves A LOT to be desired. Our sense has always been that FMG Suite was built more for the advisor that didn’t have an active entity operating in a compliance review capacity. If they can take a queue from the user interface of MarketingPro, this could be a boon for advisors working with an entity that reviews content from a compliance standpoint (broker-dealers and/or corporate RIAs).

Isolating integrations: Software tools like FMG Suite, MarketingPro, and Platinum Advisor Strategies rely upon their ability to integrate with other software platforms that are used by its customers. One example of this is AdvisorWebsites, one of the leading providers of websites for financial advisors. Prior to the acquisition, there was an integration in place between MarketingLibrary/Pro and AdvisorWebsites. This made the lives of advisors’ easier. Since FMG Suite offers websites, this integration will undoubtedly be shut off. Who knows what other integrations may be discontinued as a result of this acquisition. Advisors lose here.

Volume isn’t always a good thing: typically speaking, volume is a good thing. It can result in lower costs and improved services. My suspicion is that the increased volume could water down the website offering, forcing a more cookie-cutter approach in order to keep up with the higher numbers. As of today, it’s not hard to tell what is an FMG Suite website. That’s not necessarily a knock on them, as they are professionally done, but the amount of unique content vs. “universal” content is pretty limited. In order to differentiate ourselves in the financial services space, unique content is critical.

The Ugly:

Cost: If I were a betting man, costs will go up. Costs for MarketingPro services and Platinum Advisor Services. The’ll also likely be pushing hard to sway advisors who don’t have an FMG website over to use their services, arguing that they need to “bundle” their services. I’ll be curious to see what services they’ll continue to offer a la carte.

Questionable business practices: As an independent broker-dealer and three corporate RIAs, we were shocked that we were given no heads up that this acquisition was taking place. In fact, we didn’t even find out until an advisor of ours brought it to our attention. We immediately worked to have a call with our contacts at the company. We had a conversation with the President of FMG Suite, and were promised that we would be notified in advance before they started to make changes in their offerings. Within two weeks of that phone call, two things took place:

  • One of the critical integrations our advisors relied upon was eliminated, despite us being told that it would take place until 2019. There was no warning or communication made about this.
  • We heard from multiple advisors that FMG Suite’s sales representatives were targeting our advisors pitching them to change their website platforms. To be honest, we expected that. Why else would FMG make the acquisition? However, we didn’t expect them to use our compliance person’s name as a part of their sales pitch, stating that “NAME HERE approved the transition to FMG” and basically implying that it was going to happen anyways. To say that it was a deceptive sales practice is probably being kind. This is the sort of thing that other firms will have a difficult time accepting when they are seeking partners they can trust.

 

There’s a lot that we’ll want to keep an eye on in the months to come with this acquisition. My personal opinion is that it could be a good thing for the industry, but has been poorly executed thus far, and there’s a long way to go before trust and confidence can be restored.

 

 

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The three questions you must answer for prospective clients (and the two questions to answer to keep them as clients)

The three questions you must answer for prospective clients (and the two questions to answer to keep them as clients)

Many will argue that “sales is sales.” I’ll contend that the financial services industry has two paths that professionals can take when approaching new client acquisition (sales): the transaction-based sales path or the consultative sales path.

In a transactional sales model, the value is found within the product and price is often the focus. The consultative approach to sales puts the value emphasis on the planning services offered, with the product and price being secondary.

The transactional relies more on emotion and solving “a problem.” In the financial services world, it tends to be very short sighted and singularly focused. People who do business with these types of financial services providers tend to be customers, not clients.

The consultative approach tends to have a much longer sales cycle, puts a heavier focus on a the relationship, and results in a relationship that is more aptly categorized as a client.

Prospective clients who follow an advisor-driven consultative approach to sales have three primary questions they want answered from an advisor:

  1. Do I like this person? It sounds simple, but a prospective client needs to like you if they plan to do business with you from a consultative standpoint. A transaction customer puts far less importance on the answer to this question. Think about it like this… when I go to buy a new stove or pair of jeans, I don’t really care that much about whether I like the salesperson. Don’t get me wrong, it helps… but it’s not the basis for my decision
  2. Do I trust this person? Trust is at the core of any relationship, especially when it has to do with money. There are plenty of things you can do to earn one’s trust. Third party validation and credibility are one. Quality time is another. Study after study suggests that you need to spend a certain number of hours with somebody before you can trust them. Translation: the one or two call close just ain’t gonna get it done.
  3. Do I think they can get me to the bright, sunny future that I hope for? This is far more important than you may realize. This is where honesty is important. You can tell them that it can happen, but if you aren’t being honest with them, they won’t remain a client for long (keep reading to find out way. Show them how to help them reach their future goals… but don’t start doing this until questions number one and two have been answered yes.

 

Once they’ve become a client… they need you to continually answer two questions:

  1. Am I still OK? 
  2. Is my bright, sunny future still in tact?

Those two questions have plenty of overlap, but those need to be the focus of every review you have with your clients if you want them to remain clients. I’ve oversimplified things a bit, but if you can put your focus on being able to continually answer these questions for prospective clients and existing clients, you’ll be in a much better spot to continue to build a referral culture within your practice. At the end of the day, a clearly defined sales process can be one of the most important marketing tools you possess.

Enjoy!

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Cutting through the noise part 2 – the best marketing email I’ve received in the past 12 months

If you haven’t had the chance to read my previous post about the best direct mail piece I’ve seen this year, I invite you do so, as it ties in closely with why I loved this email.

The subject line was as follows: Michigan State vs. the Buckeyes.. Friendly wager?

This email came from a gentleman I had never heard of, nor did I know of his company. He sent it on the Wednesday before a big football game between my alma mater (Michigan State) and Ohio State. Here was the first paragraph of his email to me:

Hey Mark,

As a lifelong Buckeyes fan, I wanted to reach out with a friendly wager. I’ll give you the Spartans to cover the spread as of game time Saturday and I’ll take the Ohio State to beat it. If you win, I’ll send you some Michigan State swag or make a donation to a charity of your choice. If I win, I’d like the chance to have a short call to introduce Tenfold.

He then shared a quick sentence about his company, and then above his signature, he signed off by saying:

Let me know if we have a bet!

Here’s what I know…  he probably sent that same email to a list of other MSU grads in a similar business/job capacity. As you can see from his email, he didn’t even go to school there… so it could have even been totally made up that he was a fan. BUT… he got my attention. I replied to him and explored what his company did. Here’s what I loved about this strategy:

  • Highly personalized. I’m an MSU alum and football fan. He did his homework (that homework isn’t that hard to do, especially with LinkedIn and all the other data sources out there).
  • It was different. It was completely outside the box and not the same old company pitch I get ALL THE TIME.
  • The subject line FORCED me to open it. Enough said. That’s the name of the game.
  • It was a win-win for him. Even if he had to send me “swag” as he put it, it was a drop in the bucket for his company to continue engagement with a potential client.
  • His signature line had a direct link where I could schedule a call with him. Highly effective use of his time and I’d betcha he got a bunch of calls scheduled as a result of it.
  • It was time sensitive and highly opportunistic – I responded to him before the game (within a day or two of his email being sent). He capitalized on a big event.
  • It gave him an immediate icebreaker conversation that wasn’t about business. Let’s face it, people prefer to do business with people they enjoy talking with (especially things that aren’t business related).
  • It’s highly repeatable. His favorite school has a dozen football games a year and even more basketball games.

So… can you get creative with something like this in your practice?

Here’s my action steps/thoughts for you:

  1. Find your team/sport/passion. It helps to be genuine with this one.
  2. Have fun with the offer/challenge/bet (and make sure your compliance folks are OK with it).
  3. Use Linkedin as a starting point for finding the people you may want to do this with. (Translation: don’t buy an email list).

If I can be of any assistance to you with your efforts, feel free to contact me.

In the meantime… GO GREEN!

All the best!

Mark

The post Cutting through the noise part 2 – the best marketing email I’ve received in the past 12 months appeared first on 16 Ways from Sunday.

Cutting through the noise part 2 – the best marketing email I’ve received in the past 12 months

If you haven’t had the chance to read my previous post about the best direct mail piece I’ve seen this year, I invite you do so, as it ties in closely with why I loved this email.

The subject line was as follows: Michigan State vs. the Buckeyes.. Friendly wager?

This email came from a gentleman I had never heard of, nor did I know of his company. He sent it on the Wednesday before a big football game between my alma mater (Michigan State) and Ohio State. Here was the first paragraph of his email to me:

Hey Mark,

As a lifelong Buckeyes fan, I wanted to reach out with a friendly wager. I’ll give you the Spartans to cover the spread as of game time Saturday and I’ll take the Ohio State to beat it. If you win, I’ll send you some Michigan State swag or make a donation to a charity of your choice. If I win, I’d like the chance to have a short call to introduce Tenfold.

He then shared a quick sentence about his company, and then above his signature, he signed off by saying:

Let me know if we have a bet!

Here’s what I know…  he probably sent that same email to a list of other MSU grads in a similar business/job capacity. As you can see from his email, he didn’t even go to school there… so it could have even been totally made up that he was a fan. BUT… he got my attention. I replied to him and explored what his company did. Here’s what I loved about this strategy:

  • Highly personalized. I’m an MSU alum and football fan. He did his homework (that homework isn’t that hard to do, especially with LinkedIn and all the other data sources out there).
  • It was different. It was completely outside the box and not the same old company pitch I get ALL THE TIME.
  • The subject line FORCED me to open it. Enough said. That’s the name of the game.
  • It was a win-win for him. Even if he had to send me “swag” as he put it, it was a drop in the bucket for his company to continue engagement with a potential client.
  • His signature line had a direct link where I could schedule a call with him. Highly effective use of his time and I’d betcha he got a bunch of calls scheduled as a result of it.
  • It was time sensitive and highly opportunistic – I responded to him before the game (within a day or two of his email being sent). He capitalized on a big event.
  • It gave him an immediate icebreaker conversation that wasn’t about business. Let’s face it, people prefer to do business with people they enjoy talking with (especially things that aren’t business related).
  • It’s highly repeatable. His favorite school has a dozen football games a year and even more basketball games.

So… can you get creative with something like this in your practice?

Here’s my action steps/thoughts for you:

  1. Find your team/sport/passion. It helps to be genuine with this one.
  2. Have fun with the offer/challenge/bet (and make sure your compliance folks are OK with it).
  3. Use Linkedin as a starting point for finding the people you may want to do this with. (Translation: don’t buy an email list).

If I can be of any assistance to you with your efforts, feel free to contact me.

In the meantime… GO GREEN!

All the best!

Mark

The post Cutting through the noise part 2 – the best marketing email I’ve received in the past 12 months appeared first on 16 Ways from Sunday.

Cutting through the noise – The best direct mail marketing I’ve received this year

At least once a week I hear expressions like “direct mail is dead” or “there is so much junk mail.”

If you know anything about me, you know I’m a fan of direct mail. If there is one thing that I focus on when it comes to direct mail (regardless of quantity or the call to action) is that a message to market match is the most critical aspect to direct response marketing. This is true whether you’re a financial advisor or an automobile dealership.

I love receiving mail and reviewing the “gut impact” it has on me (and others). Frankly, most of it sucks. And the reason why people may utter the words “direct mail is dead” is because there is a lot more noise today and far more people and things vying for our attention than there was 20 years ago (on top of the fact that we all have shorter attention spans nowadays).

So when I receive something that stands out amidst the sea of mail, it warms my marketing heart. Earlier this week I received a piece of direct mail marketing that is currently sitting atop my personal list of impactful marketing efforts for 2018.

IMG_4460

I received this in a UPS box, so it certainly made it to my desk. It came from somebody who had sent me a couple of emails previously, but I had not responded to him. My guess is that he knew that I opened them, and he may have even known that I forwarded one of his emails to a colleague of mine. This is likely what triggered in his system that I might be a somewhat interested prospect (even though I hadn’t reached out to him).

Inside the UPS box was a hand written envelope with my name on it, along with a short note to me. The gentleman is selling suite packages for concerts and sports events being held in New York City. He likely targeted me as the CMO of a financial institution that may host events where we would use suites to entertain clients and/or prospective clients.

The really cool part of this was that he included an autographed picture of Magic Johnson dunking in the NCAA championship game. What makes that particularly impactful is that I’m a Michigan State Alum and a fairly big MSU sports fan. This immediately increased the perceived value of the “gift.” He even included the certificate of authenticity.

Talk about cool. In the grand scheme of things, the autographed picture wasn’t likely that expensive (I found them online for around $50-100). But because of who I am, the value is far higher… and I certainly shared the story with colleagues of mine.

You might be asking… will we do business with him? I have no idea. To be honest, we don’t do that much in the way of suites (especially not in NYC). But I can assure you that I feel a sense of obligation to reply to his next email or call. I’m likely even going to send him a thank you note, and may even keep my eyes peeled for a way to “repay” him in some way.

I realize you won’t spend this kind of money for a big group of people, but I would encourage you to think about creative ways that can break through the noise of all the junk mail your ideal clients receive.

And since it’s football season, there’s only one fitting way to end this post… GO GREEN!

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Not All Guarantees Are Created Equal

Not All Guarantees Are Created Equal – An Independent Review of the Brighthouse Financial Shield Annuity

financial comparison

Ever since Brighthouse Financial was established by Metlife, they have been on a marketing blitz.  I’ve seen Brighthouse ads pop up several times during various sports broadcasts.  Last summer, I was walking through the Charlotte airport and felt like there was a Brighthouse banner every ten feet – granted they are headquartered directly outside of Charlotte.

Every top selling product in the financial services industry has a good story to go along with it.  The Shield VA from Brighthouse is no exception to this principle and has been one of the company’s most successful product lines.  Right on their brochure it states, “Growth is realized in up markets… Protection is provided in down markets.”  Oh, and it comes with no annual fees.  If I didn’t know any better, I would think this is a brochure for their latest Fixed Indexed Annuity.  With that in mind, I set out to compare the Shield annuity to a run-of-the-mill FIA to determine if the product is as good as the story.

The way Shield works is fairly simple – there is an 11% cap on the upside of the S&P 500.  On the downside, Brighthouse will eat the first 10% of any loss for the contract year.  Any gain beyond 11% in the market will be forfeited and any loss below 10% will have a negative effect on the account value.  The annuity offers other term lengths and protection levels as well.  However, for the best “apples to apples” comparison, I am solely looking at annual resets based on the S&P 500 for both Shield and the FIA.  I did not use a specific FIA product, rather just made some assumptions based on what is generally available in the FIA space right now.  Current participation rates on FIAs are approximately 45% of the upside and, by definition, there is no downside risk.

FIA Return Difference by Period
Starting Year 5-year 10-year 20-year
1988 -5.4% -4.3% 0.2%
1989 -4.1% 1.5% 47.3%
1990 -5.2% -1.7% 45.0%
1991 -1.5% -1.5% 38.2%
1992 -3.9% 0.8% 37.1%
1993 1.1% 19.2% 34.1%
1994 5.8% 24.6% 42.1%
1995 3.7% 19.0% 34.6%
1996 -.1% 12.6% 29.5%
1997 4.9% 9.5% 25.4%
1998 17.9% 4.7% 19.7%
1999 17.8% 45.1%
2000 14.7% 47.5%
2001 12.7% 40.3%
2002 4.5% 36.0%
2003 -11.2% 12.6%
2004 23.2% 14.0%
2005 28.6% 13.1%
2006 24.5% 15.0%
2007 30.2% 14.5%
2008 26.7% 14.3%
2009 -7.5%
2010 -12.0%
2011 -7.6%
2012 -12.1%
2013 -9.8%
Average: 5.2% 16.0% 32.1%

(Values show in each of the 5, 10 and 20-year columns are illustrative and represent the hypothetical excess return (over the Brighthouse Shield Annuity) of a Fixed Index Annuity with a 45% participation rate when applied to a rolling period of S&P 500 index performance beginning January 1 of the starting year)

Going back 30 years, I looked at all the rolling 5, 10 and 20-year periods and determined the cumulative outperformance of an FIA compared to the Shield annuity.  As you can see from the chart, there were 15 periods – only 35% of the time – where the FIA underperformed the VA.  All of those periods were within the 5-year timeframes.  Put another way, as you stretch out the time horizon, there were only a few rolling periods over a 10 or 20-year timeframe that the VA even came close.

Before I move on to an explanation for the outperformance of an FIA vs. the Shield VA, I want to address what many readers may be thinking: “Is this comparison intellectually honest?”  After all, neither of these products were available for the last 30 years.  Furthermore, I am assuming constant cap and participation rates for both products.  True enough – varying interest rates and volatility would have had a significant impact on the options pricing behind both of these products.  But that’s the key here.  I’m more interested in the comparison on a relative basis, not so much on an absolute basis.  Any swings in interest rates and volatility would have had a similar effect on both products.

Getting back to the reasoning, it seems as though the Shield annuity was designed around both recent history as well as the average return on the market.  If the S&P 500 has averaged roughly 9-10% historically, it should stand to reason that the annuity with an 11% cap rate would capture nearly all of the upside of the market.  Except that’s not even close to being accurate.  In fact, over the last 90 years, the S&P 500 returned between -10% and +11% in only 30% of the years.  For the other 70% of the time the client would have either eaten losses below -10% or forfeited gains above 11%.  More succinctly put, markets don’t move up in a straight line.

In case there are still questions about the pricing comparison of the annuities, Brighthouse initially offered a Shield annuity with 100% downside protection.  However, the trade-off is a lower cap rate of 2.8%. In essence,  this structure is  an FIA.  FIAs structured with a cap rate (as opposed to participation rate) have been in the range of 4%-6% over the last year.  Brighthouse has since stopped offering the 100% downside protection level, likely because it shed too much light on their poor competitive pricing.

As with all sales literature, it pays to dig into the numbers behind the brochure.

Disclosure:

It is important to note that there are a number of important factors used in determining and calculating an annuity’s policy values. These factors can drastically differ insurance carrier by insurance carrier and product by product.

This hypothetical index annuity example used the following assumptions:
1) FIA product returns based on the SP500 Index generally use price returns.  Since the Brighthouse annuity also uses price returns, the historical S&P500 data used in the analysis are based on price returns, which do not include dividends.  SP500 values are for illustrative purposes only, since investors cannot directly invest in the SP500 index. Past performance is not a guarantee of future results. 2) Annuity performance is calculated using an annual point-to-point measurement. 3) The index annuity shown used a 0% asset fee.  4) The index annuity shown is calculated using annual participation rates on the interest that is credited, at 45%. Index annuity participation rates are based on a number of factors, including but not limited to: whether or not the policy offers any bonus, as well as the surrender charge percentage and duration of the surrender schedule.

In applying the information provided in this material, you should consider your clients’ other assets, income, and investments – such as the equity in their home, Social Security benefits, any IRAs, savings accounts, and other plans that may provide retirement income, as those other assets may not be included in this discussion, model, or estimate.

This analysis should not be interpreted as a recommendation or as investment advice. Before recommending any investment company product, please review and provide a copy of the prospectus.