Financial Markets – Financial Writers Called Upon To Practice Financial Reporting With Due Diligence
June 1, 2011 by Steve Salerno
Media reporting on retirement products is conveniently slanted to reflect the “Wall Street view.”
Periodically, when financial writers tire of explaining why their fail-safe prognostications didn’t come to pass, they fall back on another favored hobby: bashing any alternative investing philosophy that diverts money from the stock market. So it is with the latest round of talk urging “due diligence” on fixed index annuities and advocating more regulation of same. Although this type of annuity is just one possible component of a well-designed strategy for nest egg protection, it bears defending just on principle.
Given the clear ties between much of the financial press and Wall Street, no one should be shocked that the usual coverage of FIAs makes it sound as if they’re typed out on a rusty IBM Selectric by some shadowy figure who peddles them to gullible seniors while managing to stay just a step ahead of the Feds. Reality check: Sales of FIAs crossed the $32 billion threshold for the first time in 2010. The issuing firms today include some of the most solvent companies in America. Point being, this is no fringe enterprise. The undisputed rise of the fixed index annuity does not mean that anyone has “gone rogue” or that large numbers of retirees are being duped. It may well mean that retirees are wising up.
But speaking of due diligence, try this: An ambitious research project done at the prestigious Wharton School of the University of Pennsylvania suggests that fixed-index annuities not only track in more orderly fashion than stocks but have easily outpaced the S&P 500 since 1997. The FIAs yielded a rolling annualized five-year return approaching 6%—in no case dipping below 4%—despite being theoretically tethered to a whipsawing market that was, at times, losing half its value or more. “There is no asset category that outperformed them” was the bold pronouncement from study coauthor David F. Babbel, PhD, Wharton professor emeritus of insurance and risk management.
What makes this all the more interesting is that FIAs have long been maligned as a lily-livered Plan B for those who are too risk-averse to shoot for the “real growth” of the stock market. Well, at least in the period tracked by the Wharton team, the only “real growth” took place in FIAs.
Where was that headline in the financial press?
In their reporting on FIAs, the media make countless mistakes large and small. For starters, it’s downright devious to compare the yield from indexed annuities to that of the stock market at its bullish best. That’s like assessing the merits of gambling by focusing exclusively on the jackpots. Another myth about FIAs is that there’s no liquidity. “You’re locked in.” Following are two scenarios. In the first, the consumer with a sudden need for cash who must liquidate his 10-month-old FIA. He likely pays a penalty (as does a consumer who “breaks” a CD prematurely). But the rest of his principal endures; we know this because FIAs do not lose money.
Compare that to a situation where the same consumer must raise cash by liquidating stocks. If the market is up he has brokerage commissions and other possible fees—and if he’s in multiple positions those fees can be substantial. If the market’s down, however, he must take a loss that can be far worse than a mere penalty. Plus the fees and commissions.
Neither financial advisors nor their clients are psychic. If the need for liquidity is rooted in planning for some emergency, how can anyone know in advance what the market will be doing when that fateful moment arrives? A consumer in a cratering stock market is effectively more “locked in” to that investment than any FIA holder—unless one is prepared to take a hit of catastrophic proportions. Besides, FIAs are becoming more consumer-friendly as new companies enter the fray and competition heats up. Most FIAs make provisions for a penalty-free withdrawal of up to 10% in emergency cash, and some issuers will return to customers all of their funds in the case of a serious health or other emergency.
In a bear market, how many brokerages will waive all fees and make the seriously ill investor financially whole again?
Then again, this discussion misses the larger point, which is that today’s enlightened retirement-phase advisory firms aren’t the one-trick-pony “product-pushers” the financial media imply. A solid retirement financial strategy put together by a competent retirement-phase advisor is a process that encompasses a seamless matrix of financial instruments. A knowledgeable advisor diversifies the mix as well as the associated crediting methods on the products in the matrix so that clients have access to cash for crisis management and can also reap a livable yield.
But by far the greatest crime in the media’s pro-market reporting is to discount the human factor. Younger people can afford to weather The Street’s perpetual cycle of ebb and flow: make money, lose money, make money, repeat. They can absorb several “corrections” and still land on their feet in time. Older Americans cannot make that bargain.
And they know it. If there’s one trait besides age that characterizes the retiring Baby Boom hordes, it’s an abiding fear that cuts across all socioeconomic lines. Retirement angst was a major theme that emerged from the January 2011 Bank of America/Merrill Lynch Affluence Insights Quarterly survey, which polled attitudes among those with a minimum of $250,000 in investable assets. Over half of the men and almost two-thirds of the women feared that their money would run out at some point during retirement. In a broader 2011 poll by the Employee Benefit Research Institute, 28% of Boomers don’t expect to have enough money to meet basic retirement expenses. To this generation, there may be no more valuable a currency than simple peace of mind.
That can’t be had in the stock market at any price.
Contact:
Steve Salerno
ssalerno@firstseniorfinancialgroup.com
610-783-7750
