Industry Leader Interview Continued from page 16 Question: It also seems that, as longevity increases, the challenge of inflation gets worse. Combine that <strong>with</strong> being fearful about investing in a volatile stock market, and you’ve got problems. <strong>Hueler</strong>: People don’t become confident investors until their basic needs are met. People who are not fearful are better investors, and those investors will have better prospects for the long term. To the extent an annuity provides underlying security, it can make people more confident investors <strong>with</strong> the rest of their assets. The other issue that one of our plan sponsor clients talks about is the “miser effect.” It’s the fear people have that they won’t be able to maintain their lifestyle in retirement and that their accumulated wealth won’t last. Because of this, they don’t live the retirement they could live. Having that built-in income floor will give them the confidence and freedom to do great things <strong>with</strong> the rest of their lives. Question: Moving in another direction, let’s talk about annuities from a perspective of independent RIAs. Advisors are constantly hearing that they are in a fight <strong>with</strong> other types of financial advisors for 401(k) rollover assets. How does the marketing of annuities today fit into the rollover environment? <strong>Hueler</strong>: This is something we’ve studied and addressed in a paper I cowrote <strong>with</strong> Anna Rappaport, FSA, MAAA, called “The Role of Guidance in the Annuity Decision-making Process,” that was presented earlier this year at the Pension Research Council Symposium hosted by the Wharton School. Some of the information in the paper was presented again before the ERISA Advisory Council in June. We found that some asset gatherers and certain retirement plan administrators have created clear barriers to the use of low-cost annuities. The plan administration business is not profitable based on administrative fees alone; instead, success depends on administrators earning fees for a variety of other services. Sometimes this occurs in conjunction <strong>with</strong> advice providers. These advice providers offer managed accounts and reallocation services for 50 or 60 basis points per year and facilitate only late-inlife deferred annuities. When an advisor’s and/or administrator’s revenue model is dependent on keeping assets in the managed account until participants reach age 80 to 85 and/or selling retail-priced annuities in lieu of lowcost alternatives, this creates a dangerous conflict of interest. What we see in these situations is participants being given the advice that they should not annuitize until late in life, even though purchase data clearly shows people’s preference for partial annuitization throughout their 60s and 70s. When a plan administrator offers retail annuities rather than low-cost alternatives, data tells us that participants are being dissuaded from rolling over to the low-cost programs offered by plan sponsors or other distributors. Instead, participants are being encouraged to buy higher-margin annuity products that benefit the administrator rather than the individual. Employers want to look out for their employees’ interests, but they might not be aware of the agenda of their plan administrator and/or advice provider. Here’s where NAPFA members come in, because they are objective and are experts at differentiating between investment options that are in the best interest of their clients, instead of in the interests of distributors or manufacturers. The other difference is that a fiduciary RIA is not trying to capture rollover dollars through financial products. The objective advisor’s job is to help the client use his or her resources to the greatest advantage. Sometimes that is under the advisor’s management, and sometimes it includes going elsewhere for financial products. We have been very fortunate to partner <strong>with</strong> Vanguard in delivering lowcost annuity alternatives to their clients. Vanguard’s Annuity Access program that is powered by Income Solutions ® not only makes low-cost annuitization available but encourages staged or partial annuitization that can be integrated <strong>with</strong> other lifetime income options. Vanguard also makes the program available to advisors, and they have licensed professionals available to assist both advisors and individuals. Question: Given consumers’ interest in secure income, do you think annuities will become more important in the 401(k) rollover world? <strong>Hueler</strong>: Yes. Look at the trend. A number of financial services firms and insurance companies are aggressively selling retirement income services as a very effective means of capturing IRA rollover assets. Their pitch is “retirement income,” and annuitization is a key aspect of that pitch. My question is where are advisors going to be if they do not have the knowledge and tools to compete? An independent advisor, at a minimum, will have to rethink his or her strategy around building retirement income and what services are being provided to clients. To be successful, advisors will have to show that they are knowledgeable, independent, and have access to low-cost lifetime income products. To combat the flashy advertisements and glossy product brochures, independent advisors need to demonstrate that, <strong>with</strong> their objective advice and cost-effective retirement income strategies, a better outcome can be created for the client. Question: Concluding observations? <strong>Hueler</strong>: In investing, everything is a tradeoff. If you strip off the labels from the various retirement products and just look at the underlying characteristics of each—such as volatility, liquidity, security, provider credit quality, cost and so on— then you could really look at how the individual product can work in a person’s total portfolio. I believe that if you could get to a place where labels weren’t the focus, but rather product characteristics, you would have advisors behaving differently, and the simplicity of having an annuity for some amount of baseline income would be highly appealing. 18 <strong>Napfa</strong> Advisor October 2012
SENSABLEs <strong>Napfa</strong> Advisor SEPTEMBER 2012 19
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