In 2022, the S&P 500 experienced its worst first half of the year since 1970. Inflation has reared its ugly head, cresting to a 40-year high at 9.1 percent for the 12 months ending June 2022 and driving up the cost of everything from oil prices to groceries to homes. And volatility remains an issue well into the fourth quarter. Little wonder, then, that we’re seeing increased anxiety among investors, particularly those who are nearing retirement.
Markets are cyclical by nature, but when an investor who is approaching or entering retirement sees their portfolio drop by 20%, it can be difficult to stay calm and ignore the noise. Behavioral finance experts recognize that most human behavior is driven by fear, isolation, and uncertainty, and those concepts have become so ubiquitous that I felt it was necessary to write an entire article about it. Clients are (understandably) making rash, emotional decisions, and advisors have their hands full convincing those clients to stay the course. In an environment of extreme volatility, when clients are watching their retirement accounts shrink, how does an advisor demonstrate the value of the fees they charge?
Retirements at risk
Clients are growing increasingly skittish as markets continue their descent from the highs reached late in 2021. A recent survey (2022 RIA Protected Accumulation + Retirement Income Survey) conducted by RetireOne and Midland National Life Insurance Company, confirmed this sentiment, finding that 82% of registered investment advisors (RIAs) said that clients are concerned about outliving their retirement savings, with 64% reporting worries that retirement timelines could be delayed.
These aren’t unfounded concerns. Sequence risk — significant market losses in the early years of retirement combined with regular withdrawals — can drastically shorten the lifespan of a portfolio. Longevity risk is also at play as retirement horizons lengthen due to improved diets and healthcare. After a record bull run, these are new risks that many advisors haven’t had to come up with strategies for. Now the proverbial wolf is at the door, and clients want answers.
Traditional havens aren’t safe
The survey found that advisors are guiding clients toward bonds (72%), money market funds (59 %), or CDs (41%) over fixed annuities (42%) and fixed-index annuities (40%), despite the latter two options offering the potential for higher returns as interest rates rise. Some advisors are even placing clients in cash (48%), hoping to avoid the 20% plus market decline. How can advisors generate income for clients who could outlive their retirement savings? Traditional solutions are looking less and less like a safe bet, as old standbys like the 4% rule and the 60/40 split become increasingly insufficient.
Holistic planning includes insurance
With inflation chewing up the paltry gains that traditional safe havens offer, advisors seeking to shelter clients from volatility should consider insurance protections. For advisors without an insurance license, insurance is still an option. Outsourced insurance desks (OIDs) offer a seamless way to add value for clients by enabling RIA firms access to insurance and annuity solutions for a more holistic, comprehensive financial services offering.
Insurance solutions are not only often in clients’ best interests, but insurance and annuity capabilities may contribute to firm AUM growth and revenue growth. Research from Dimensional Fund Advisors reveals that insurance is a key differentiator between bottom quartile and top quartile firms (as measured by Net Promoter Scores). And yet nearly 40% of respondents to the 2022 RIA PARI survey refer insurance to an agent down the street or ignore it altogether.
Partnering with an OID allows advisors to offer advisory insurance options that help them retain control of and transparency into their clients’ financial lives. OIDs also work with each advisor on a one-to-one basis to ensure that clients are only using insurance solutions that are truly suited for their unique financial situation. Many OIDs even allow advisors to give their clients access to traditional insurance products such as life and disability insurance, rather than referring that business elsewhere. In the end, the OID offers advisors the ability to transfer risk for their clients to an insurance company, while also transferring the firm’s transactional risk to the OID’s broker-dealer, whose reps then become Agent of Record on every policy.
Volatility demands protection
Guaranteed income provided by annuities can be a critical component of a client’s portfolio. With retirement horizons growing longer, it is incumbent upon advisors to take a hard look at these types of insurance options during the accumulation phase, to protect their clients’ retirement during decumulation. Survey data reinforces that line of thought, with more than 64% of advisors likely to place clients in annuities, should the vehicle suit their needs. A fixed, guaranteed stream of income for life can help mitigate both sequence and longevity risk, enabling the client to remain invested a higher allocation to equities without fear of losing the income that their nest egg was built to provide.
Of particular note are contingent deferred annuities (CDAs). CDAs are tailored to confront the current challenges that advisors are facing with clients in terms of outliving their portfolios, and they allow RIAs to wrap client brokerage accounts like IRAs or Roth IRAs with lifetime income protection to combat longevity and sequence risk. CDAs also enable advisors to continue to oversee client assets as they enter their retirement and start the decumulation phase.
Engaging with an OID can help insulate a portion of a client’s income against market volatility, and it can also help an advisor demonstrate value. OIDs can be a key differentiator during an uncertain time, allowing advisors to offer access to a complete suite of options to suit a client’s unique financial situation. At a time when advisors are struggling to demonstrate value to their clients, an OID provides a way to offer the kind of value that matters most: peace of mind.
David Stone is CEO and Co-Founder at RetireOne, an Outsourced Insurance Desk offering an independent platform for fee-based insurance solutions.
