Training

TODAY (5/26)! Portfolio Construction for Higher Inflation

May 24, 2022
Portfolio Construction for Higher Inflation
Thursday, May 26, 4 p.m. ET
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As we encounter higher inflation, doubts have risen about whether the asset allocation that advisors have constructed over the last two decades is still the most opportunistic as we look to the future. Please join us to hear from Fidelity’s Portfolio Construction Solutions team on how to build portfolios for a higher inflation environment.

Key Highlights:

– Explore the relationship of inflation and different asset classes
– Examine the forces driving future inflation potential
– Assess whether the interest rate increase by the Fed may cause a bond apocalypse as many have feared

Presented By:
Paul Ma
Vice President, Lead Portfolio Strategist
Fidelity Investments

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RILAs As Potential Bond Alternatives

May 24, 2022

Historically, bonds have served as excellent diversifiers and hedges for equities risk.  In many historical periods, bonds offered negative or low correlation to equities and provided investors with material yields to supplement their income needs.  However, persistent low interest rates and increased correlation to equities have impacted bonds and their effectiveness.  Specifically, according to Morningstar, the average core bond fund lost 5.89% in the first quarter, and the average core-plus fund dropped 5.72%, the worst declines for both categories since the 2008 financial crisis. 1 Despite the challenges bonds have recently faced, investors still need protection from market decline.  The recent market volatility is a stark reminder how market selloffs can be quick and painful.  What can clients do to hedge market decline risk?  Registered Index Linked Annuities, RILAs are variable annuities that have protection features to limit contract value losses in the event of a market decline.

To more fully examine how RILAs may be used as a bond alternative, let’s examine the pros and cons of both RILA’s and Bonds as potential assets within a client’s portfolio.

Bonds -Pros:

  • Individual bonds don’t have explicit asset management fees.
  • Do not have surrender charges.
  • Historically, bonds have realized low or negative correlation to equity risk.
  • Provide a predictable income stream.
  • Principal is generally returned at maturity.
  • Historically, bonds have generally exposed investors to less risk than equities.
  • Bonds typically have produced higher returns than bank CD’s.
  • A bond’s credit rating is generally consistent with its risk level, which can help the investor to accurately understand the principal risk they are assuming.

RILAs -Pros:

  • Have greater appreciation potential than bonds since performance is linked to underlying equity indices.
  • RILAs offer buffers which absorb up to a defined level of index decline.  Common buffer levels include, -10%, -15% and -20%.
  • Certain RILAs offer floors.  Unlike a buffer, RILA floors establish a maximum loss exposure.  The contract owner realizes the loss to the defined floor.  After the floor is reached, any additional index decline is avoided by the contract owner.  Common RILA floors include -5% and -10%. 
  • RILAs – like all annuities – offer potential tax-deferred growth of account values.
  • Certain RILAs offer guaranteed lifetime income benefits for clients that have income as a primary objective.  There is an additional fee for lifetime income benefits.

Bond – Cons:

  • Bond prices fall when interest rates go up.  Given the historically low interest rate environment and the Federal Reserve’s interest in controlling inflation, the likely direction for interest rates is up.
  • Longer-term bonds can be more susceptible to price fluctuations than shorter term bonds.  Given that investors have sought higher yields, investors may have greater exposure to longer term bonds.
  • Bond correlation to equities seems to be increasing, which provides less diversification and downside protection.
  • Over the last 30 years, there is a 96% correlation between the starting return and the subsequent 10-year nominal return.  If that forecast remains consistent, investors can expect 1 – 3% bond returns over the next 10 years. 2

RILAs – Cons:

  • RILAs can lose principal.
  • Some RILAs may have a capped upside,
  • RILAs have surrender charges, which normally last 3 – 6 years.
  • Certain RILAs may charge administration fees, which decreases the contract value.
  • Certain RILAs offer guaranteed lifetime income benefits that charge a fee and will reduce the contract value.
    • The income base is not guaranteed before initiating income and is based on account value. There is no guaranteed growth rate.
  • They may be challenging with rebalancing the overall asset allocation.

Now that we have addressed the pros and cons of both bonds and RILAs, it may be helpful to address how ESI’s Suitability team considers using RILAs as a potential alternative to bonds.

RILAs may have a place in the portfolios of certain clients who have acknowledged the considerations previously mentioned.  With any annuity transaction, the Suitability team views each case on its own merits and the individual circumstances of the transaction.  Below are just some of the general points to keep in mind when deciding whether this strategy is right for your client: 

  • Awareness of annuity concentration (total value of client’s annuities subject to a surrender penalty as compared to liquid net worth) 
  • Cash flow and client liquidity needs outside of annuities 
  • Surrender penalties or loss of living/death benefit features if an annuity is being replaced 
  • Client sophistication and ability to understand a product that may be more complex 
  • Documentation of the overall strategy and how a client’s other portfolios may be adjusted in conjunction with the use of the RILA 

Resources:

Below are links to some videos which address some of the material discussed and may be a potential resource: 

Allianz 

Equitable

Jackson

Lincoln Financial

If you have additional questions, please contact ESI Business Development, 800-344-7437.

  1. How the Largest Bond Funds Fared in the First Quarter, Morningstar, April 5, 2022
  2. Research affiliates based on data from Bloomberg and FactSet as of Dec. 31, 2019. Proxy: Bloomberg Barclays U.S. Aggregate Bond Index. Past performance is not a guarantee or a reliable indicator of future results.

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AAM Viewpoints: Staying the Course

May 24, 2022

It is no news to anyone that the markets have been extremely volatile this year. The S&P 500 has closed either up or down by at least 1% on 65 of the last 89 trading days as of 5/10/22, outpacing the average 1% moves of the past 50 years (shown in the table below). On top of that, over 50% of the S&P 500’s members are off at least 20% from their all-time highs, putting them in bear market territory. So, what is the prudent investor to do in such an environment? We believe the answer is the stay the course. We create plans during the good times in order to not panic during the hard times.

CLICK HERE TO CONTINUE READING

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RILAs as Potential Bond Alternatives

May 10, 2022

Historically, bonds have served as excellent diversifiers and hedges for equities risk.  In many historical periods, bonds offered negative or low correlation to equities and provided investors with material yields to supplement their income needs.  However, persistent low interest rates and increased correlation to equities have impacted bonds and their effectiveness.  Specifically, according to Morningstar, the average core bond fund lost 5.89% in the first quarter, and the average core-plus fund dropped 5.72%, the worst declines for both categories since the 2008 financial crisis. 1  Despite the challenges bonds have recently faced, investors still need protection from market decline.  The recent market volatility is a stark reminder how market selloffs can be quick and painful.  What can clients do to hedge market decline risk?  Registered Index Linked Annuities, RILAs are variable annuities that have protection features to protect contract values in the event of a market decline.

To more fully examine how RILAs may be used as a bond alternative, let’s examine the pros and cons of both RILAs and Bonds as potential assets within a client’s portfolio.

Bonds -Pros:

  • Individual bonds don’t have explicit asset management fees.
  • Do not have surrender charges.
  • Historically, bonds have realized low or negative correlation to equity risk.
  • Provide a predictable income stream.
  • Principal is generally returned at maturity.
  • Historically, bonds have generally exposed investors to less risk than equities.
  • Bonds typically have produced higher returns than bank CD’s.
  • A bond’s credit rating is generally consistent with its risk level, which can help the investor to accurately understand the principal risk they are assuming.

RILAs -Pros:

  • Have greater appreciation potential than bonds since performance is linked to underlying equity indices.
  • RILAs offer buffers which absorb up to a defined level of index decline.  Common buffer levels include, -10%, -15% and -20%.
  • Certain RILAs offer floors.  Unlike a buffer, RILA floors establish a maximum loss exposure.  The contract owner realizes the loss to the defined floor.  After the floor is reached, any additional index decline is avoided by the contract owner.  Common RILA floors include -5% and -10%. 
  • RILAs – like all annuities – offer tax-deferred growth of account values.
  • Certain RILAs offer guaranteed lifetime income benefits for clients that have income as a primary objective.  There is an additional fee for lifetime income benefits.

Bond – Cons:

  • Bond prices fall when interest rates go up.  Given the historically low interest rate environment and the Federal Reserve’s interest in controlling inflation, and the recent interest rate increases, the likely direction for interest rates is up.
  • Longer-term bonds can be more susceptible to price fluctuations than shorter term bonds.  Given that investors have sought higher yields, investors may have greater exposure to longer term bonds.
  • Bond correlation to equities seems to be increasing, which provides less diversification and downside protection.
  • Over the last 30 years, there is a 96% correlation between the starting return and the subsequent 10-year nominal return.  If that forecast remains consistent, investors can expect 1 – 3% bond returns over the next 10 years. 2

RILAs – Cons:

  • RILAs can lose principal.
  • Many RILAs may have a capped upside on the indexing strategies
  • RILAs have surrender charges, which normally last 3 – 6 years.
  • Certain RILAs may charge administration fees, which decreases the contract value.
  • Certain RILAs offer guaranteed lifetime income benefits that charge a fee and will reduce the contract value.
    • The income base is not guaranteed before initiating income and is based on account value. There is no guaranteed growth rate.

Now that we have addressed the pros and cons of both bonds and RILAs, it may be helpful to address how ESI’s Suitability team considers using RILAs as a potential alternative to bonds.

RILAs may have a place in the portfolios of certain clients who have acknowledged the considerations previously mentioned.  With any annuity transaction, the Suitability team views each case on its own merits and the individual circumstances of the transaction.  Below are just some of the general points to keep in mind when deciding whether this strategy is right for your client: 

  • Awareness of annuity concentration (total value of client’s annuities subject to a surrender penalty as compared to liquid net worth) 
  • Cash flow and client liquidity needs outside of annuities 
  • Surrender penalties or loss of living/death benefit features if an annuity is being replaced 
  • Client sophistication and ability to understand a product that may be more complex 
  • Documentation of the overall strategy and how a client’s other portfolios may be adjusted in conjunction with the use of the RILA 

Resources:

Below are links to some videos which address some of the material discussed and may be a potential resource: 

Allianz 

Equitable

Jackson

Lincoln Financial

If you have additional questions, please contact ESI Business Development, 800-344-7437.

  1. How the Largest Bond Funds Fared in the First Quarter, Morningstar, April 5, 2022
  2. Research affiliates based on data from Bloomberg and FactSet as of Dec. 31, 2019. Proxy: Bloomberg Barclays U.S. Aggregate Bond Index. Past performance is not a guarantee or a reliable indicator of future results.

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DOL 2.0 Spotlight on Defined Contribution and Defined Benefit Rollover RECOMMENDATIONS

May 10, 2022
In our DOL communications ESI has discussed the work we are doing to ensure adherence to disclosure and notification requirements set forth as part of the SEC regulation Best interest, as well as the Department of Labor rules governing retirement plans and Individual Retirement Accounts.
ESI has updated three forms for use when representatives are making a Recommendation to a client to rollover their retirement plan to an IRA, and when recommending the purchase of an Annuity.
The forms are titled:The Defined Benefit Recommendation formThe Defined Contribution Recommendation formThe Annuity Purchase and Exchange Disclosure.You may already be familiar with these forms since they are currently in use. However, recent updates to the regulations have resulted in updates to the disclosures and information provided on these three forms IF making a recommendation (vs education) to rollover from Qualified Plan to an IRA.
This DOL spotlight is designed to make you both aware of the updates to the forms, as well as provide guidance on how to complete the newly added sections of the Defined Contribution and Benefit Recommendation and the Annuity Purchase and Disclosure Forms.
Transition Period May 9th – June 29thThe newly updated forms are available starting May 9th, in both Merrill as well as Docupace. ESI is launching the forms weeks in advance of the requirement date, to provide time to learn how best to complete these forms when making a recommendation to rollover plan assets.

Pay special attention to the new sections of these forms which are now requiring more detailed documentation regarding the rationale for the recommendation as well as a cost comparison if the rollover is from a 401K plan.

ESI strongly encourages representatives to become familiar with how to complete the new sections of these forms, IF recommending (vs educating) a rollover. This will help to ensure new business is not delayed due to incomplete or missing information.




New Section on the Annuity Purchase and Exchange Disclosure
Frequently Asked QuestionsWhen are these forms required?The defined Benefit or defined contribution RECOMMENDATION forms are used when RECOMMENDING (vs educating) a client rollover their assets out of their plan into an IRA, and the IRA will purchase any product other than an Annuity.

The Annuity Purchase and Exchange Disclosure Form is always required when an annuity is being purchased, however the new section V on page 5 , is only required to be completed when a recommendation is made to rollover from a 401k plan.
These forms are not new; what are the updates to the form?In summary, the forms have been updated to  document rationale for recommending the client leave their current plan as well as rationale for the account type being recommended. In addition, a cost comparison analysis between their current plan and the product/service recommended has been added.
Is the Best Interest Supplemental Worksheet required as well?If you are using one of the above-mentioned rollover recommendation forms, you do NOT need the Best Interest Supplemental Worksheet, as the information provided is redundant. However, it is always required for annuity purchases regardless of the funding source.
How do I know the costs associated with their current plan?You will need to request a copy of the plan’s participant fee disclosure document which is called the 404(a)(5). This document will provide the detail needed to complete the form.
When is the deadline for using the new forms?The new forms will be available and generated in Docupace starting May 9th but are not REQUIRED by regulation until June 30th. Forms that have been signed May 8th and earlier will be accepted through May 31st.
Can I continue to submit the current version until June 29th?ESI encourages use of the new forms right away. Doing so will give you time to better understand how to complete the new sections and if an error is made, it can be corrected. However, starting June 1st ,  the new versions of all forms must be used regardless of when they were signed. Beginning, June 30th, if an error is made on the form, it is outdated, or it is missing, the business may need to be rejected per the regulation since disclosure must occur pre-transaction.

The Operations Team may send reminder emails and/or call to remind reps of the upcoming changes while in the transition period. What if I cannot get a copy of the 404(a)(5)?ESI has created a reference chart which will be posted on the National Life Agent Portal under the ESI Tools section, which gives you the estimated cost data.

Reminder!  DOL education and training is available on the National Life Portal.  Simply click on the lighting bolt located in the upper right side of the main menu bar and scroll down to DOL Training Page. 

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DOL 2.0: Spotlight on New Forms

April 26, 2022

You may recall in all communications relating to the Department of Labor, ESI has referred to doing business under two Prohibited Transaction Exemptions, also known as PTE 84-24 and PTE 20-02.

Compliance with PTE 84-24 took place in December of 2021.  It was largely focused on disclosure of third-party compensation from the recommendation to purchase insurance products such as fixed-indexed or variable annuities. 

PTE 20-02 has a compliance date of June 30th, 2022. By utilizing 20-02, reps can continue to receive third-party compensation for advice related to ERISA and IRA-based accounts, as long as certain criteria are met.  PTE 20-02 will be used for brokerage, mutual fund, and advisory business.  To comply with PTE 20-02 ESI has updated disclosures on various forms and created two new forms: the IRA-to-IRA Disclosure Form and the IRA Transfer of Assets Form.

New Forms
IRA to IRA Disclosure Form (Direct Mutual Fund and Advisory Business)

This form will be required when all of the following apply:

  • A transaction is occurring in an IRA account (new business or subsequent deposit)
  • Will be funded with transfer/rollover from another IRA
  • The destination of the funds is a non-annuity product.
  • Note: This form will also be utilized for Brokerage and Illuminations accounts that are being funded with an IRA through means other than a Transfer of Assets (60-day rollover, indirect rollover, Roth Conversion Rollover)

IRA Transfer of Assets Form (Brokerage and ESI Illuminations)
This form will be required when all of the following apply:

  • A transaction is occurring in an IRA account  (new business or subsequent deposit)
  • Will be funded with a Transfer of Assets from another IRA
  • The product used is either:
    • Brokerage Account
    • ESI Illuminations Account

Forms Availability
The form(s) will be available starting May 9th.  Although the deadline for using the new form is June 30th, making them available over one month early, gives time to get into the practice of using the form (s).  They will be found under the Optional Forms section in Docupace and can be added to the work item. They will also be available in Merrill.   

How to Complete the Form(s)

Reminder!  DOL education and training is available on the National Life Portal.  Simply click on the lightning bolt located in the upper right side of the main menu bar and scroll down to DOL Training Page. 

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ESI Leadership Call – Sign Up Today!

April 19, 2022

Please join Ata Azarshahi and ESI’s Leadership Team for our Quarterly Field Update series. In this session, we’ll be reviewing the activities and results of Q1 and providing insight into what lies ahead through 2022.

As always, we want to take this opportunity to hear from you and answer any questions you may have for ESI’s Leadership Team. Please help us plan the meeting by submitting your questions to ESIBusinessDevelopment@nationallife.com. The deadline for submissions will be Monday, April 25th.

Meeting Details:

Thursday, April 28th – 2:00 PM EST

Register in advance for this meeting: https://nationallife.zoom.us/j/98781749251

After registering, you will receive a confirmation email containing information about joining the meeting.

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Save the Date for This Pacific Life Webcast!

March 15, 2022

STATE OF THE CONSUMER: With a Focus on Women, Money, and Retirement

Be one of the first to hear how consumers currently feel about retirement and how you as a financial professional can help ease their financial stress. Additionally, Jean will share specific insight on female consumers. With 70% of the $41 trillion of intergenerational wealth being transferred to women, you won’t want to miss hearing what women need and want from their finances.

Date: Tuesday March 22, 2022

Time: 9:00am PT/ 12:00pm ET

CLICK HERE FOR INVITE AND REGISTRATION LINK

Jean Chatzky is Author, CEO & Co-Founder  of HerMoney.com, Retirement Ambassador for AARP, and Former Financial Editor of  NBC’s Today Show.

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