Financial market returns in recent years have been challenging for income-seeking investors, according to the first-quarter issue of “The Cerulli Edge – Retirement Edition.” The report warns that a period of extended and historically low interest rates has called into question the viability of overweighting traditional fixed-income securities as a vehicle for generating retirement income.
Elizabeth Malin, an analyst at Cerulli, notes strong domestic equity markets have accompanied this period of low interest rates, pulling more assets into equity investments and negatively impacting the balance sheets of some insurance companies.
“In reaction to challenging financial conditions, the insurance and annuity industry is in the early stages of reinventing itself with a more diversified set of product solutions,” she suggests. “If positioned correctly, the evolution of the annuity industry can tie well with the emergence of a more interactive planning process.”
Cerulli’s report finds these secular pressures have a particular impact for financial advisers, in part because the client base of advisers tends to skew older than the working population as a whole. On average, Cerulli says 45% of an adviser’s book of business are clients older than 60, indicating that many advisers may have numerous clients who are retired and drawing income in a challenging environment.
Cerulli suggests advisers can add value to their practices and services by working closely with insurance companies during this turbulent time. Offering problem-solving insurance products to clients will improve satisfaction, outcome and loyalty, the report notes.
“Advisers find themselves forced to craft portfolios that, in certain instances, rely on more risky sources of retirement income,” Malin explains. “Notably, the two most prevalent retirement income products for advisers in 2014 were both equity-based, relying on dividends from individual stocks and equity mutual funds, and as a result, taking more risk than they intend.”
Cerulli concludes that retired investors in particular are likely to be more risk averse and less able to withstand market downturns. “Advisers can potentially mitigate these factors through prudent asset allocation and diversification strategies,” Malin explains, but they will also have to rely on continued product innovation among insurers.
Information on obtaining Cerulli reports is available here.