At the 2014 MDRT annual meeting in Toronto, NU Senior Editor Warren S. Hersch interviewed Peter Magni, a financial representative of Wellesley Financial Group & Insurance Agency, based in Wellesley, Mass. The following are excerpts of the interview.
Hersch: What topics being discussed at this year's MDRT annual meeting can be of most benefit to you in your practice?
Magni: Succession planning is definitely high on the list. Like myself, so many boomer advisors are now entering their mid- to late-60s and exiting their practices. This is an issue not just for the advisors, but also the industry. There are not enough new advisors coming into the pipeline to make up for those leaving the business.
Hersch: How are you endeavoring to address the issue in your practice?
Magni: I joined MDRT's mentoring program a number of years ago and have been mentoring a life insurance professional new to the business. This year, he qualified to join MDRT for the first time. I'm also mentoring another advisor, and probably will mentor two more. Eventually, I'll transition my practice to one or two of these people.
Hersch: Part of this transition, I understand, entails valuing the business and securing a fair market price that can help fund your retirement. Will this be a challenge?
Magni: This part of exit planning is hard to do. You need to have someone young who is the same type of person as you are to serve your clients. And you want those clients to be comfortable with the transition. Otherwise, they might bolt, reducing the practice's revenue stream and, thus, the value of the business.
Though a successful transition is difficult to achieve, the alternative to not doing exit planning is worse -- for the advisor and the advisor's clients. They become orphan policyholders to be turned over to whomever the insurer assigns to them.
Hersch: Why are not enough new life insurance and financial service professionals joining the industry?
Magni: The compliance aspect of the job is a key factor. When I joined the business, regulatory concerns didn't extend much beyond having to pass tests and secure licenses to sell insurance and securities. Now there are so many other compliance issues to deal with -- and they now take up about a third of my time.
I'm very concerned about this issue. Many of my counterparts in the U.K., Australia and New Zealand can no longer sell on commission; their compensation now derives solely from fees for services.It's very difficult for a new advisor to make money with commissionable products while also complying with regulations. The ultimate losers are clients because there may be no one to serve them.
As a result, many advisors now won't work with people in the middle market who can't pay their fee. Regulators that imposed new compliance requirements to protect consumers in these countries forgot about the middle market. And so many middle income folks end up underserved or not served at all.
Hersch: Are many of today's compliance requirements in your view unjustified?
Magni: The regulators are trying in large measure to attack to the wrong problem -- going after scumbags and pyramid schemers like Bernard Madoff. The real problem is advisors entering the business through independent channels who don't have a proper understanding of insurance and financial planning. And as a result, they're making costly mistakes.
This issue has grown in tandem with the decline of career agencies that can provide new advisors with the sales and technical training they need. Fortunately, we still have four major mutual insurance companies -- New York Life, MassMutual, Guardian Life, and Northwestern Mutual -- that can provide the requisite training for new agents. But independent brokers are out there, on their own. They don't know what they don't know.
Hersch: What's your assessment of the current tax regime? Given, for example, the current estate tax exemption levels -- now pegged at 5.25 million -- are there fewer estate planning opportunities than you might have enjoyed in prior years?
Magni: Yes, there be less of a need for estate planning at the federal level, but this isn't necessarily true at the state level. In my home state of Massachusetts, the estate tax exemption is $1 million. A couple with a decent size home plus cash in the bank could have an estate valued at $2 million-plus. So planning to avoid a state estate tax may be necessary.
Hersch: Is estate planning a big part of your practice?
Magni: Not as much as in years past. Clients are less concerned today about legacy planning than they are about having the money need to preserve their lifestyle in retirement. Ten years ago, a couple retiring at age 65 had a 25 percent chance that one of the spouses would reach 90. Now there's a 50 percent chance one will reach age 90; and a 25 percent chance of reaching 95. So the focus is increasingly on longevity and ensuring that your retirement nest egg outlasts you.
Hersch: How has rising longevity impacted the retirement planning you do? Have you had to revise recommendations about how much money clients must save or spend in retirement?
Magni: The Wall Street Journal published a study about 15 years ago indicating that if you drew down your retirement fund by 4 percent annually, then you could expect to maintain a nest egg through age 85 or so, depending on your life expectancy. Recently, the Journal redid that study and determined that retirees could only take out 2 percent per year to be safe.
And these assumptions don't factor in market fluctuations that can impact the value of the retirement fund. If a couple retires this year and the market drops for three consecutive years, they'll run out of money within 20 years. If, conversely, they retire this year and the market rises for three consecutive years, they'll have money for the rest of their lives -- if they stick to the 2 percent annual withdrawal formula.
Hersch: And how many people will do this? Do boomers have realistic expectations about what they can draw down in retirement?
Magni: Most people in a recent study thought they could take out 10 percent annually and have enough money to last them through retirement. This is what we're up against: a lack of financial education, a lack of understanding about longevity, and a lack of understanding about how much they can spend each year when they get to retirement.
Hersch: What new products are you exploring at the MDRT annual meeting that might better help clients meet their retirement income objectives?
Magni: The key products on the market now are guaranteed income annuities. My own company has an annuity with a really good guaranteed minimum withdrawal benefit rider. I recommend this product a lot. Let's say you retire now. The product will guarantee an income stream for the rest of your life or the rest of your spouse's life.
To maximize income in retirement, I'll typically recommend a retirement plan that calls for two annuities featuring different guaranteed living benefit riders: a guaranteed minimum income benefit for half of the retirement fund; and a guaranteed minimum withdrawal benefit for the balance of the fund.
Hersch: Are you satisfied with the current crop of annuities? What new products would you like to see come to market?
Magni: The current guaranteed income annuities are very good. I'd like to see more products featuring a long-term care benefit. A number of annuity providers now offer this option, but state regulators have been slow to approve the products.