David Battisto isn't a power hitter. Instead of swinging for the fences, he views his role as the "scrappy" player (as the sportscasters would say) who always seems to get on base. That is, he pays attention to the basics and keeps clients in a balanced portfolio instead of going for the gusto.
That's why Battisto, an advisor at Community First Bank in Harrison, Ark., traditionally veered towards safer options-think bonds and annuities-until now. Given today's market he feels that investments with lower fees than most variable annuities, and less risk than some of the bonds out there now, are what his clients need.
"I try to stay in the game," he says. "I'm not a home run guy." (Raymond James is the TPM for Community First Bank.)
Indeed, home runs are not what most banking clients, like Battisto's, aim for either. Instead, advisors understand that investors in the bank channel tend to be of a conservative bend. They've saved through traditional means such as certificates of deposits and savings accounts, and are very familiar with the idea of the FDIC -and that agency's promise of insuring deposits.
So when it's time to start setting aside funds for retirement and building an income plan, banking clients are often very careful with the nest egg they've spent a working life to accrue.
Hardly surprising that variable annuities have traditionally been a favorite in this space, offering guaranteed payments, plus living benefit and death benefit riders.
In the bank space, $17.7 billion worth of variable annuities sold in 2012, and $19.7 billion the year prior, according to Bank Insurance & Securities Research Associates' (BISRA) annual report for 2012. That's down from the $25.2 billion sold in 2007.
But with changes in recent years, including higher fees from insurance companies, plus the ways the firms have structured the products, both advisors and their clients are beginning to eye variable annuities with more scrutiny.
Sales are still strong with $9.5 billion sold in the first half of this year according to BISRA's quarterly report. Yet, bank advisors say they're stepping into the products with more trepidation.
The bond market too is getting its tires kicked by advisors especially long-term bonds that have the risk of locking client funds away for a stretch of time. No one wants to see the value drop, and given today's environment of rising interest rates that's a strong possibility.
So advisors are inspecting other pastures for clients' hard saved assets with REITs, structured notes, step-up bonds and annuities from indexed to deferred income annuities (DIA) all on the rise. Life insurance? That's gaining attention too.
Granted, each are very different options and provide a unique hedge for clients. But as advisors look to protect clients' principal, and lock in steady dependable income for conservative investors, they're changing the ingredients they bring to the table.
Popularity of REITS
Once quite difficult for bank advisors to access for their clients, REITs are an option that has them buzzing today. Experts say sales aren't that high yet, but from signs in the market, they believe growth of REIT sales is inevitable in the banking channel over time.
"All of a sudden REIT players are getting very active in the [bank] market," says Scott Stathis, managing director at BISRA, a research group for the bank and credit union channels. "We've never had REIT players sponsoring executive summits. Now we have a lot."
That rush to get in front of advisors from REIT players is coming as the bank channel is embracing both illiquid REITs, and publicly traded. For non-traded REITs, advisors like the dividends that the products throw off, plus their ability to gain value.
Monthly dividends, which can come in as high as 7% annualized, are particularly attractive as advisors believe they can help clients make up the income gap from the returns they're not seeing today among bonds, CDs and other less risky products.
"We see that bank advisors are allocating more client assets to real estate related investments as well as hedge funds compared to other advisor types," says Sophie Schmitt, a senior analyst on Aite Group's wealth management team, by email.
Russ Cesari is buying REITs for his clients because of his concern around fixed-income investments like bonds. He admits 2012 was a great year for bonds. But today? There's too much uncertainty. So Cesari is shopping for yield but without as much dependency on the market. Illiquid REITs as well as traded REITS are filling that niche.
Cesari, an advisor at Herndon, Va.-based Northwest Federal Credit Union, is very careful because REITs are far from a slam dunk. He's seen some that have declined in value in recent years, he says. Finding those with a good trail takes research and time. (LPL Financial is the TPM for Northwest Federal.)
"I'm only using high quality [REITs] with a good track record," says Cesari. "Some have gotten beaten up because of the 2008 fiasco."
And while Cesari understands his clients are not looking to beat the stock market, he knows they want some long-term return with downside protection. So when adding REITs into a portfolio, he's very thorough in explaining to clients just how sensitive this kind of investment can be both for good and bad.
He recently had two illiquid REITs "come to fruition," he says and investors made money on them by not only collecting dividends from their investment but also through capital gains as their initial investment increased. When the REIT was marked to market, it's value was higher than it was initially.
"But a lot have gotten killed, so I am careful," he says. "I need [clients] to understand what [REITs] are and what segment of the industry that REITs are in. They need to understand the illiquidity of it initially, how these are run, all the pieces, before I go into it."
The Power of Structure
Thomas Petrus is also cautious with clients, particularly as he sees the level of uncertainty in the market right now plus interest rate fluctuation from the Federal Reserve.
To him, diversification is key, and that means employing a mix of mutual funds, fixed rate annuities and structured notes. For clients focused primarily on protecting their assets. Petrus, an advisor of about 17 years, the last five at Key Bank in Avon, Ohio, likes structured notes for the hedge they offer, with some potential for growth as well.
Structured notes present a hybrid of options and are usually packaged with some debt and a derivative, giving some downside protection to the investor.
They've recently grown in popularity in the retail market for certain clients, like the middle to mass-affluent area where his fall, are a good option, believes Petrus. He knows they want to ensure their money lasts throughout retirement.
"[Structured notes] have become a viable note depending on the specifics of the client," Petrus says. "These are options for clients who are very concerned about the principal protection and preservation of their investment."
Annuities Still Being Eyed
Of course the staple for clients long concerned about principal protection has been annuities a staple in the spice drawer for any bank advisor because of their ability to hedge against volatility.
Variable annuities in particular have enjoyed a long stretch of popularity, and still do. But anecdotally, advisors like Jamie Richardson are questioning whether they make sense anymore given the way terms have changed.
"With increased costs, lower payouts and restrictions I have scaled back quite a bit," says Richardson, a bank advisor at ViewPoint Bank in Plano, Texas. "Indexed annuities, however, have improved."
With clients accounts averaging $100,000 to $250,000, Richardson knows that every dollar counts as they build income for their retirement. Since most of his clients are CD buyers, he knows they're conservative and looking to play it safe. But in today's market there just isn't enough yield from CDs and traditional money markets, he says. (Raymond James is the TPM for ViewPoint Bank.)
So Richardson spends a lot of time talking with investors so they understand why he's making decisions to increase their income stream.
While they'll occasionally come in and ask about different options, more often he will hold seminars and educate his clients about alternatives. They don't often come to him naming specific products they want for their portfolio and in turn Richardson is careful not to offer too many complicated options as his clients, he says, are looking for more simple products.
To him, the investment that fits that bill is the indexed annuity.
"They're certainly not getting yield from CDs and money market accounts," Richardson says. "So they need to look at alternative products and most of them are amenable. There's always concern about risks and they want to know all the risks. And we try to explain that to clients."
Indexed annuities, along with hybrid indexed annuities have popped up more among bank advisors in recent years. Sales of indexed annuities reached a record high of $2.9 billion in 2012, a 49% increase from 2011, according to numbers from BISRA. Because they can lock in a range of returns, even as they limit their upside, they're appealing to a range of advisors.
Brian Locke, for example, recently started integrating fixed indexed annuities into his clients' portfolios for the first time in seven years.
Locke, an advisor at Employee Credit Union in Tukwila, Wash., says 90% of his business is from clients over the age of 60. And he understands how they've spent years building their nest eggs, often in the $500,000 to $600,000 range, through 401(k) plans and cannot afford to lose principal at this late stage of the game. (LPL Financial is the TPM for Boeing Employee Credit Union.)
Fixed indexed annuities are very attractive to Locke and to his clients as he can lock in a portion of their principal at a specific rate of return, and then have the rest poured into the market, through the annuity, but not lose the invested principal should the market drop.
In the end, then, clients always come out ahead through interest payments alone.
"I think the appealing thing is when advisors spell out [to clients] that they cannot lose money, of course based on the insurance company's ability to pay," says Locke, who has been an advisor for 23 years, the last seven at BECU. "[Clients] like the fact they will absolutely get more than what they started with."
Todd Eyler, research director for Boston-based Aite Group's insurance practice, says it is understandable that clients find these products appealing, particularly older clients who are watching the market fluctuate. "In a market we are in, where rates are low and volatile, it's appealing to boomers in particular to lock in decent rates of return," he says.
Stepping In with Step-Up Bonds
As an advisor in a town of 25,000 people in Northern Arkansas, Battisto has worked with generations as older clients introduce him to their children. He feels very invested in the idea of protecting their concerns.
That's a crucial reason he's navigating the bond market carefully today, believing long-term bonds may fall in value in coming years. Yes, the interest payments will stay steady for the duration of a bond. But the value of the bond itself could fall greatly when those notes come due. That's not where he wants to leave his clients or a situation he feels they'd want their children to inherit.
"This is a difficult time for bonds and you have to be more careful selecting them," he says.
So Battisto is working with step-up bonds. These products pay interest for a set period of time, usually shorter than longer-term bonds, and when that passes, the issuer can pay them off to the investor, or extend the bond.
But they must then pay the investor a higher dividend. Assets can be locked in for a long period, but rates continue to rise.
"They live off their money and don't want to lose it," he says of his clients. "People who need income don't want increased volatility."
Life Insurance Resurgence
Low volatility is practically a definition of life insurance. And that's one reason that it has started to come back in vogue.
Often considered a "plain vanilla" option, sales hit a record high in 2010, but then trailed off by the first half of this year, according to BISRA. Yet many in the bank channel both analysts and advisors alike believe these products could increase sales as the search continues for safer options.
"We saw life insurance explode," says BISRA's Stathis, referring to 2010. "I know banks are trying to do a better job of selling life insurance."
One program manager in the bank channel sees life insurance as another gateway for clients who want to make additional investments outside of maxed 401(k) plans and other tax-deferred accounts.
In particular, he believes there's an opportunity to use life insurance policies with clients in the small business sector, for example, as this niche begins to focus on issues of succession planning as they get closer to their retirement years.
Variable universal life insurance is one product that Stathis believes clients can use to accumulate assets, then defer payments to use the proceeds later tax-free. And he knows that banks are trying to do a better job of selling life insurance today, as another offering for clients to put their assets.
Most advisors would agree that having access to investment tools and understanding how to best use them is the way to best serve their clients. Whether that's life insurance, step-up bonds, REITs or other options, having a deft hand at knowing how to mix these into a financial plan is needed particularly in today's market, with volatility continuing, recent chatter about debt ceilings being breached, and the bond market in uncertain territory.
Communicating to clients what can be achieved and what may not be able to come to fruition is crucial as well. With investors close to retirement or already in that stage of their life, large returns are often less on their radar than the stability of their portfolio. For advisors, keeping their clients content and feeling secure- while also protecting their investments-is the mix they strive to create.
"I think this business is about managing clients expectations," says Battisto.
"So when [clients] buy something they know what to expect and are building trust over time. If you do a good job, people stay with you a long time. If it blows up, they leave and tell everyone."
