July 2012 | accounting today 25
New tools for your planning arsenal
Retiring Baby Boomers drive development of new PFP products
BY John napolitano
Many financial advisors tout their independence and ability to choose from the large pool of
products created for clients by the manufacturers and distributors of financial products.
Industry insiders know two things that are
very critical about this.
First is that many advisors are not truly
independent, and can only make products
available for their clients to the extent that
their firm or custodial firm has an agreement with that manufacturer or distributor.
Ironically, sometimes the household-name
behemoths in the industry have more proprietary and less independent products than
others. And while this may indeed limit your
options as an advisor, it does not necessarily
hurt your client.
The second is that even if a firm has a huge
selection of products, it is nearly impossible
for an individual advisor to be knowledgeable
about all of the choices. As a result, it is common for advisors to concentrate their client
service efforts using the products that they
are familiar with and use frequently.
The huge selection for clients and the
never-ending flow of new products are both
good news and bad news for advisors. The
good news is that you do have a lot to choose
from for your clients. But the bad news is that
you really need to understand all of the options to truly offer your clients independent
advice, and that in and of itself can be an all-consuming task.
For the purposes of this column, I’ll focus
on the newer products that seem to be getting a lot of attention today. And as you may
expect on the heels of the “Lost Decade” and
the Baby Boomers’ work careers ending with
thousands of employees retiring each week,
many of today’s innovations in products are
focused on two major issues: capital preservation and income generation.
but that either limit or prevent losses.
Income generation is a close second as
Boomers retire from work and many realize
that their nest egg is not as cushy as they once
thought. As soon as their financial planner
starts talking about safe withdrawal rates,
reality sets in pretty fast and they must either postpone retirement or look for ways to
reach for yield in the hopes of hitting their
needed rates of return to have their assets last
for their entire life.
Once upon a time, financial products were
pretty much classified into a few broad cate-
and also realize that the guarantee is only as
good as the guarantor. Should the guarantor
fail, your guarantee may also be worthless or
provide lower benefits than guaranteed.
is the cry of the day for
the Baby Boomers.
your upside. Insurers limit your upside by
either stating a cap on the maximum amount
that you’ll be able to earn in any given year
or by reducing your index’s rate of return by
an amount that is called a spread. Partly because of today’s low-rate environment, caps
are historically low and spreads are historically high, leaving a fairly limited upside to
purchasers of index annuities today.
A highly regulated product, index annuities
have been a sore spot for financial planners
largely because of insurance-based advisors
who use the index annuity as the be-all and
end-all for their client portfolios. Like any financial product, index annuities used for a
part of an allocation may make sense.
The variable annuity, another product
frequently bashed by the popular press because of the high expense structure, is also
frequently used as a principal-protection
strategy. We could write a book on the topic of
annuity pros and cons, but for our purposes
here, we’ll address the most common uses.
First is pure principal protection. One may
purchase a variable annuity, invest in equity
or fixed-income investment sub-accounts
and, like an index annuity, participate in any
investment upside with limited or no loss on
the down side.
More popular in the variable annuity space
are living benefits. The living benefit options
are generally designed to provide income
benefits to purchasers for their lifetime. Early
objections to these products have been their
inability to keep pace with inflation over a
lifetime, but many of the newer products
provide the potential for increasing income
Right now in the variable annuity marketplace, insurers are dealing with headwinds
that include a low-interest-rate environment
and the high cost of derivatives, which are frequently used as the hedge tool that may help
to limit losses for the underlying portfolio of
the insurer. As a result, benefits are dropping,
with some even disappearing completely
from the annuity landscape.
WHAT THE BOOMERS WANT
Capital preservation is the cry of the day for
many of the same Boomers who demanded
20 percent per year during the go-go technol-
ogy days. These clients went from thinking
that a monkey throwing darts could achieve
at least a 10 percent per year return to beg-
ging for products that may offer some upside
gories. Stocks, bonds and cash were the main
three classes that the average investor used
to diversify their holdings. In addition to the
original three in the eyes of your clients, other
asset classes sometimes held a prominent
role in your clients’ lives. These included their
closely held businesses, their investment real
estate and their insurance portfolios. These
additional asset classes — the backbone of
true wealth-building for many clients — were
frequently ignored by advisors when design-
ing allocations for the remaining liquid port-
folio of assets.
Structured products are not that new to the
marketplace, but are relatively new to retail
investment. A structured product is set up
much like an index annuity, where an investor may participate in an upside of the chosen
index available within the structured product
that one purchases. The upside frequently
has a cap. On the downside, investors are fre-