The Federal Reserve last week reaffirmed its commitment to a “highly accommodative” monetary policy, maintaining a near-zero federal funds rate at least through the end of next year. While that is great news for individuals and businesses taking on more debt—such as home buyers and refinancers—low rates remain a significant challenge to retirees and their financial advisors.
A new study by the consultants Howard Schneider of Practical Perspectives and Dennis Gallant of GDC Distribution Consulting examines the challenge of low rates (and other topics) in their report Trends in Advisor Delivery of Retirement Income–2012. Schneider and Gallant presented their findings on a live webinar April 25 sponsored by the Retirement Income Industry Association.
The Trends report, based on 377 completed advisor surveys, found that “85 percent of advisors perceive that low interest rates have impacted their ability to support retirement income clients.” Low rates have impacted all advisor channels, though RIAs and insurance advisors appear less affected than wirehouse, regional, independent and bank advisors.
Indeed, the Trends report found that “nearly nine in 10 advisors have taken specific action in response to low interest rates,” adding that the most typical responses were the “increased use of dividend paying equities and expanded usage of guaranteed solutions such as variable annuities with living benefit income riders.” Other common responses include increased use of higher-yield investments, alternative investments and non-traditional income solutions.
Notably, curtailing investment income because times have been unfavorable has not been an option for most retirement clients. The survey found that just one-fifth of advisors reduced income or cash flow to retirees.
The Trends report found that, in advisor responses to low rates, there was once again a difference between RIAs and insurance advisors on the one hand and everybody else. Wirehouse, regional, independent and bank advisors all stepped up dividend paying equities the most; guaranteed solutions were the second most popular response, followed by higher yielding investments.
In contrast, insurance advisors—naturally—put the emphasis on guaranteed solutions, while RIAs, who also favored dividend-paying equities, differed from the majority of channels in turning next to alternative investments and non-traditional solutions before looking into higher yield investments.
In an interview, Schneider said that “RIAs tend to have wealthier clients who may be less concerned about generating income [and] tend to be more total-return oriented.” He added that insurance advisors who are already pre-disposed to annuity products have tended to be “very happy with annuities and riders set up over the past 10 years.”
The Trends report also looked at the issue of market volatility and risk, and found that advisors’ response to this concern has exactly matched their response to low interest rates—through increased usage of dividend-paying stocks and guaranteed solutions such as variable annuities. Once again, insurance advisors and RIAs were outliers. RIAs’ top action in response to volatility has been increasing client cash. “This likely reflects the positioning of RIAs as money managers employing a more tactical orientation to asset management,” the report finds. Insurance advisors turned first to guaranteed solutions. Bank advisors, along with RIAs, were unique in their greater willingness (25 percent of respondents) to stay the course by not responding to volatility.
Schneider told webinar participants that he saw an opportunity for annuity companies to create products that provide greater peace of mind to retirement clients. “We don’t find any advisors that use [annuity products] universally,” he said. Many advisors gripe about benefit features being cut back and worry about products they would like to use being pulled out of the marketplace, Schneider added.