As we continually achieve higher levels in equities, clients express concerns about where the markets and our economy are headed. Is the upside potential still there? Will we see a recession? Will the Federal Reserve lower or raise interest rates? How much longer can we continue with appreciable gains on our stocks? Because fixed index annuities base crediting rates on indices, our prospects for these products ask the same questions.
We even might have these same questions ourselves. Since 1983, my company, a Registered Investment Advisor, has "trimmed the sails" to the prevailing winds for clients, responding to shifts and changes in the economy by reallocating mutual fund, variable annuity (VA), and variable life sub-accounts into those investments that have exhibited recent price strength and by avoiding those whose recent performance has lagged. And while equities will have their share of "soft patches" and draw-downs, we believe three major factors are in place that favor extraordinary equity returns through the next decade and beyond.
Baby Boomers
We knew it would happen. They have been telling us for years. Many of us are part of it, and there is no way to stop it. It started on Jan. 1 at 12:00 a.m., and with every 10 ticks of the secondhand for the next 18 years, it will continue. And on Dec. 31, 2024, just like that, it will stop, never to happen again.
Baby boomers, those born between Jan. 1, 1946, and Dec. 31, 1964, the largest generation ever in the United States, the approximately 75 million people (currently 28% of the U.S. population) who inspired many marketing manias from hula hoops to muscle cars, disposable diapers to the digital age, are starting their seventh decade.
People view the world differently at different ages. Forty-year-olds are at the cusp of middle age, many still passing for the thirtysomethings they recently have left behind. They have children, mortgages, and job changes about which to worry, plus a 20- to 25-year investment horizon.
When people reach their 50s, the children move on, they pay off the house, and they begin to turn their attention toward themselves and their spouse and finishing their career as they had envisioned.
At age 60, people think differently than they did at 40 or 50; they are more risk averse, more circumspect, less willing to "try," more trusting of their experience, and mindful of life's lessons. There are no investment "Hail Marys" here; they want to get across the goal line in one piece. They now have a new set of issues with which to deal.
Examples are 80-plus-year-old parents who might be healthy -- for now. But will their children and grandchildren be OK? Should the 60-year-olds help a grandchild get into a better college, and what about an advanced degree? They begin to ponder their own mortality and health.
Many experts predict many robust years ahead as boomers turn to such traditional investments as VAs, fixed index annuities, and variable universal life (VUL) to guide them into retirement. These years will not be entirely rosy, however, as many events will occur that affect equities.
At my company, our active asset allocation approach will respond to changes that occur and position clients' assets to take advantage of all that these favorable trends might offer. We agree that the overall effect of this sizeable group generally will be positive, and this fact coupled with others gives us a favorable environment for investing.
Global Capitalism
When the U.S. was locked in the Cold War, the Soviet Union attempted to seduce the world's other countries into a communist ideology by dressing their economic numbers (zero unemployment!) and showing "off the chart" growth and stability.
We now know that this was propaganda. Back then, fewer than 20 countries had free-market economies or democratic forms of government; today that number approaches 80. This transformation was in no small part because of our resolve and commitment to democratic ideals and free markets and the use of diplomacy and sometimes our military to quell dictators and oppressive regimes.
What it means today is that we have more than four times the trading partners and potential customers, including Russia and China, than we had only 20 years ago. Freedom and free markets have won the great debate; capitalism has no rivals.
As countries become freer, they also have become wealthier. The 20% of the world's countries with the largest amount of economic freedom produce, on average, more than 10 times as much wealth per capita as the 20% with the least economic freedom. This globalization was turbocharged by the Internet and communications technology advances so that today, people all over the world interact and trade with greater speed and efficiency than ever before.
Clients can own part of this progress, and many do -- in the form of a mutual fund, VA, or VUL. Investing in these vehicles, however, is only the first decision that's necessary, for most funds and VAs have 25 or more sub-accounts, and our economy changes daily. How can you be sure you are allocated in the most advantageous accounts?
For more on this interesting subject, please pick up a copy of The Best Is Yet to Come by Dr. Barry Asmus. You'll enjoy his insights and observations.
Passing the Baton
In 1999, researchers at Boston College issued a report entitled "Millionaires and the Millennium; New Estimates of the Forthcoming Wealth Transfer and the Prospects for the Golden Age of Philanthropy." The report estimates a $41 trillion to $126 trillion intergenerational wealth transfer between 1998 and 2052 ($15 trillion in the next 15 years). Who will be receiving these inheritances?
Baby boomers will receive the lion's share. At about the same time as they start to turn 60, these 75 million people will have access to the largest wealth transfer ever in the U.S. The huge effect of this extended event is difficult to estimate, but few believe it will be negative.
These trends are here. It's happening now. Clients must grasp the importance to their long-term financial security of VUL, VAs, and products that base fixed returns on the performance of indices. Producers should make the recommendation, whenever suitable, that their clients include VAs, VUL, and fixed index annuities in a portion of their available investment dollars that benefit from deferral of current taxation and are intended, at some point, to provide income or death benefits. By doing so, clients can participate in what we believe will be one of the best landscapes for equities that we ever have seen.
At my company, we believe that:
o Baby boomers will seek ongoing active asset allocation services to stay current with economic shifts.
o During the next decade, the U.S. will see some of the best times yet, and clients need to know that their accounts are looked after as they complete their careers and then pursue an active retirement.
o Clients will need careful planning, thoughtful advice, and asset allocation services on handling and investing inheritances. We know we can provide active asset allocation to clients with efficiency and integrity and take full advantage of all that these favorable trends might offer.
Richard Dobson, Jr., CFP, is executive vice president of American Financial Management, Ltd., an SEC Registered Investment Advisor, who since 1983 has specialized in third party asset management for variable annuity, variable universal life, and mutual fund sub-accounts.
