PIMCO last month teamed up with product and technology platform provider Aria Retirement Solutions and insurer Transamerica Advisors Life Insurance Company to market contingent deferred annuities to asset-based fee-only registered investment advisors. The name of the new product: RetireOne Transamerica II.
The partnership reflects the burgeoning RIA market and the insurance industrys desire to capitalize on it. The growth of the RIA market, after all, is hard to miss, as Baby Boomers are retiring in huge numbers and seek financial advice. According to research by Cerulli Associates, RIA assets are expected to account for approximately a quarter of the financial advisor asset market share by the end of next year.
Yet, the word annuity has become a dirty one in the advisory business, with both advisors and clients often resistant to such investment vehicles for their higher taxes, longer lock-ins, and investment restrictions. The success of the partnership will depend on its ability to overcome this obstacle of annuitys reputational black eye and attract RIA popularity. While the product has the potential to give their clients freedom from financial worry, a valuable consideration in the real world, RIAs question whether the guarantee is actually a good deal.
Will This Fit Into the RIA Business Model?
In contrast to a variable annuity, with the PIMCO/Aria product portfolio assets remain under the control and management of the RIA, David Stone, chief executive officer of Aria says. There is no tax deferral for non-qualified accounts, the fees can be significantly lower than retail variable annuities, and the product design enables advisors/clients to terminate the income guarantee at any time without a surrender charge.
According to Stone, that decoupling, which allows for the invested assets to be held (custodied) away from the insurance company allows the RIA to have full control over the management of the portfolio. He says that the RetireOne product is essentially income insurance and by adding it to a portfolio it provides benefits and protections that have not been available to fee-only advisors. Citing volatile markets, interest rates at historic lows, and people living longer, Stone says that with this new product, RIAs can give their client the peace of mind of a guaranteed income stream for life.
That guarantee, however, does come at a price. The additional guarantee fee is between 80 and 235 basis points for the RetireOne Transamerica product, with most portfolios in the 100 to 135 basis points range, according to Stone.
With all that said and to put things into perspective, take this hypothetical example: If a 65-year-old man who is ready to retire wraps his $1 million investment account with RetireOne Transamerica, exactly how much would the product guarantee him? At current interest rates that person would be allowed to withdraw $40,000 per year for life (net amount after all advisory and guarantee fees) with the potential for higher annual withdrawals if markets and/or interest rates rise, according to Stone.
Also, if held in a taxable account, any earnings withdrawn may also be eligible for long-term capital gains treatment. If the account runs out of money, the insurance kicks in and the insurance company will continue to make the annual payments for as long as the person is alive.
In terms of how the compensation structure of this product may make this more attractive to RIAs, Stone notes that: As fiduciaries, RIAs do not offer commission based products. We wanted to offer a product that was as low cost as possible without distribution expenses and commissions increasing the cost. The advisor should be compensated for effectively managing their clients assets and not for recommending an insurance product.
While RIAs acknowledge that PIMCO/Arias aspect of decoupling has the potential to change how advisors approach annuities, the aspect of a guarantee for life has no meaning unless the guarantee is superior to what investors can achieve by investing conservatively. The $40,000 per year guarantee for life for the retiree with $1 million shows RetireOne is giving less guaranteed income than what research has already shown to be safe without a guarantee, some RIAs say.
According to Michael Kitces, a partner at Pinnacle Advisory Group, a guarantee of $40,000 per year from a $1 million account at current interest rates doesnt sound incredibly appealing as a cost-benefit trade-off. The safe withdrawal rate research of 4% of your own investment funds already shows that taking $40,000 per year and adjusting for inflation has survived any 30-year time period in history, he says.
In other words, that retiree with $1 million will get less income guarantee from the RetireOne solution ($40,000 per year flat, instead of $40,000 per year increasing for inflation) than just investing and spending conservatively, while paying a non-trivial cost for that guarantee.
In fact, a quote from ImmediateAnnuities.com shows that for a 65-year-old couple, you can already get $57,708/year from an immediate annuity with a lifetime level payment, or alternatively that a couple could get the same $40,000/year lifetime guarantee for only $693,145 of their million dollar portfolio and then invest the other $306,855 any way they wish at a lower cost to get the same guaranteed outcome.
Kitces argument? Theres a difference between paying for a guarantee that gets you more than you would have otherwise, versus paying for a guarantee that doesnt improve investors outcomes but just, maybe, helps you sleep a little better at night.
Other RIAs highlight that the growth in popularity of annuities and other forms of retirement income products have been a result of attempts to capitalize on investor fears of the market, especially following the 2008 financial crisis. "You could have a non-guaranteed portfolio with 40% stocks, which might give you the same expected final wealth as a guaranteed portfolio with 70% stocks...the difference is peace of mind for the consumer," says Wade Pfau, professor of retirement income at American College.
That peace of mind is often achieved through higher fees over the long term, he says. Pfau adds that while hes generally not a fan of income guarantees, they could have uses in cases when they prompt a client to be willing to include stocks in their portfolio or as a means of providing downside protection in the years leading toward retirement or just after retirement when the portfolio is at the most risk.
NAPFA-registered Morgan Smith of Trovena Wealth Management adds that the RetireOne product caters to retirees emotions, citing the products lack of surrender charges, inflation protection, and RIA ability to control the assets as most appealing. My philosophy on safe withdrawal rates is that if you invest correctly and keep withdrawal rates within acceptable limits, in many cases you don't need a lifetime guarantee because the portfolio will sustain itself, says Smith.
But this isnt necessarily a decision based on numbers. If people want to eliminate risks, they can satisfy that emotional need, for a fee, and get flexibility as well.
Lukas Dean, financial planning program director at William Paterson University, echoes Pfau and Smiths sentiments. Clients want their fears assuaged, he admits, and they want to feel secure psychologically to hear "guaranteed retirement income", regardless of market performance. The product does solve some problems of annuities for RIAs but there are probably cheaper ways to accomplish the same thing with lower fees than this product, he says.
The word guarantee has the potential to confuse and blind advisors and their clients, many RIAs note. While a guarantee of being able to live comfortably throughout retirement may be appealing, advisors and clients must assess every insurance product with skepticism and against the alternatives available.
With behavioral biases and the attraction to the word guarantee, consumers are often their own worst enemies, Dean says.