Data & Research October 26, 2015

Income Planning Requires Annuity Know-How

Two in three older advisory clients are seeking help with income planning, but only one-third of financial professionals actively advise about indexed annuities.
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A recent survey by Saybrus Partners, which bills itself as an insurance partnership firm serving and supporting the advisory industry, finds a strong majority of financial professionals cite “retirement income distribution planning” as a key goal for pre-retirees.

Yet the same survey finds many advisers are overlooking opportunity in this area, with just 27% frequently recommending fixed-income and/or indexed annuities to clients. Granted, these investing approaches will not be a good fit for all advisory clients at all times, researchers note, but with the prevalence of income planning questions and the likely retirement income shortfall faced by many in the U.S., knowledge of these areas will clearly be a value add.  

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The survey found that nearly two-thirds (65%) of financial professionals identified “retirement income distribution planning” as the biggest goal for clients in their 50s and 60s. Given the numbers, financial professionals may not be recommending annuities as often as they should or could for pre-retirees, says Mark Fitzgerald, national sales manager for Saybrus Partners.

Researchers also found that the most frequently recommended products by financial professionals were mutual funds and “advisory services/actively managed funds,” which were both selected by 60% of respondents, followed closely by managed accounts (54%). Variable annuities and life insurance were less commonly the top recommendation, at 35% and 15%, respectively.

The poll was taken during 2015 FPA Annual conference held in Boston in late September, so there is an element of selection bias to the results. When asked what clients in their 50s and 60s consider to be the biggest risk to their retirement portfolios, more than half (58%) said “outliving their savings.” Significantly fewer respondents reported risks such as a major health crisis (17%), market volatility (16%) and taxes (6%).

When asked what products and support they would like to add to their offerings to better address clients’ retirement needs, better education and better technology were both selected by six in 10 respondents. Other products and support they said they were seeking included: “more innovative/comprehensive products” (54%), “multi-solution products” (35%), and “better wholesaling support” (27%).

“The data suggests … there is still a tremendous opportunity for both manufacturers and wholesalers to provide more comprehensive support for financial professionals,” Fitzgerald says.

The Markets October 26, 2015

Portfolio Concentration Better than Diversification?

University researchers found institutional investors using concentrated investment strategies fared better than more diversified investors.
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Traditional asset pricing theory implies that diversified portfolios are optimal and suggest investors do not take advantage of international diversification opportunities, but more recent studies argue that portfolios can be under-diversified but optimal if they are formed on information advantage, say researchers from the University of Wyoming, the University of Wisconsin-Madison and Brock University.

The researchers’ own study shows that concentrated investment strategies in international markets can be optimal. Their results suggest that investors rationally choose to overweight certain markets and industries because of information advantage from specialization and economies of scale.

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Using data about security holdings of 10,771 institutional investors from 72 different countries, the researchers tested whether concentrated investment strategies resulted in superior abnormal returns. They measured three measures of portfolio concentration: home bias, foreign country concentration and industry concentration, and they used two measures of performance: overall portfolio performance and performance of the part of the portfolio invested in a target country.

Overall, the results indicate that portfolios more concentrated in a few countries and industries perform better than portfolios more diversified across countries and industries. The researchers say the result is particularly strong for portfolio concentration in foreign markets and industries. “These findings suggest that investors have some information advantage when forming concentrated portfolios, which results in better portfolio performance and risk-adjusted basis,” the researchers wrote in their paper.

While the sample in the study consisted of different types of institutional investors, mutual funds dominated the sample, so the researchers did their analysis separately for mutual funds. Results were the same, showing that portfolio concentration in country and industry is beneficial for the performance of mutual funds as well as other types of institutional investors.

The research report is here.

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