Data & Research September 27, 2023

Investment Advisers Assume Lower Market Returns, See ‘Safe’ Withdrawal Below 4%

A number of advisers to RIAs are predicting lower historical growth rates on stocks and bonds, posing challenges for retirement income plans, according to a survey by RetireOne and Allianz.

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The results of a survey of investment advisers could make a case for adding a guaranteed income annuity to a retirement portfolio, but it could also just signal less to count on for long-term retirement savers.

In a report released Wednesday by annuity provider RetireOne Inc. and insurer Allianz Life Insurance Co. of North America, about 70% of 200 investment advisers expect long-term fixed income to be two to four percentage points off historical averages, and nearly half (48%) predict the same for equities.

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That pessimism may also explain why more than one-third of investment advisers who took the survey believe a “safe withdrawal” rate assumption should be lower than the oft-cited 4% rule to be realistic for retirees. This is not a new claim, with analysts from Morningstar suggesting 3.8% as the “safe” rate of anticipated withdrawal at the end of 2022.

“Whether the safe withdrawal rate be adjusted for inflation to 3.3%, stay at 4% or get more aggressive at 6%, the problem remains that financial advisers are challenged when it comes to keeping their clients’ retirements on track,” David Stone, founder and CEO of RetireOne, said in a statement with the report. “With inflation anticipated to stay higher for longer, [increasingly high] healthcare costs, uncertainty around social security benefits, in addition to today’s geopolitical concerns, it’s only gotten to be a more complex issue for advisers to solve.”

Peak Worry

Advisers in the RetireOne and Allianz survey expressed concerns about helping clients have enough to live on as the country nears “peak 65” retirement in 2024, when more Americans will reach retirement age than any previous year. Those worries include inflation, which 97% of advisers cite as a concern for clients’ retirement portfolios, the inadequacy of Social Security to meet income needs (87%) and worry that employer-provided retirement benefits may be insufficient (63%).

“Lower capital market assumptions may present challenges for retirement income plans,” researchers wrote in the report, quickly pivoting to the benefits of adding a secured income annuity to retirement plans. “Protected accumulation and income solutions can improve failure rates and boost clients’ confidence in their retirement plans.”

Many of the investment advisers surveyed (59%) report allocating a portion of client portfolios to annuities both for purposes of a regular paycheck in retirement and as a substitute for fixed income. But almost 20% of advisers are still skeptical of the solution, according to the report.

Annuity Skepticism

Those advisers “reluctant to use annuities are concerned about fees, liquidity, opacity, and complexity,” RetireOne and Allianz wrote in the report. “Given that advisory solutions have largely addressed these objections, it would appear that awareness is low: three in ten respondents report that they are unaware that there are fee-only annuities today that, in some cases, do not have any surrender charges and are much lower in fees compared to their commissionable peers.”

RetireOne and Allianz recommend that advisers consider using registered index-linked annuities and fixed-index annuities to combat retirement income outcome concerns.

“Rising interest rates have been challenging for investors,” Stone said. “The upside is that annuity guarantees and payout percentages have also risen, which, in turn, brings down the cost of creating lifetime income streams.”

The firms also recommended that advisers who do not have insurance licenses to provide annuities can partner with outsourced insurance distributors who do.

“Nearly half of IARs who recommend annuities appear to maintain insurance licenses presumably to write commissioned annuities for clients,” according to the researchers, but some “may not be aware that they can partner with OIDs to provide advisory solutions, bill on those assets and simplify their firm structures, while boosting AUM and firm valuation.”

The 2023 RetireOne + Allianz RIA Protected Accumulation + Retirement Income Survey was conducted in May with 200 investment adviser representatives.

Compliance September 27, 2023

Fund Advisers Reject SEC Aiding and Abetting Charges

The adviser for a mutual fund argues against alleged Liquidity Rule violations because the company was not responsible for the fund’s liquidity status classifications.

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The advisory firm cited in a mutual fund Liquidity Rule violation case brought by the Securities and Exchange Commission rejected the claim that the firm aided and abetted the fund in breaking the SEC’s liquidity requirements. The case represents the first enforcement action taken by the SEC under the Liquidity Rule, enacted in 2016.

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In a September 25 filing, defendants argued that the SEC must prove that the firm contributed to the misclassification of the assets as opposed to merely not preventing it.

The SEC initially alleged in May that Pinnacle Advisors LLC and the independent trustees for a mutual fund, the NYSA Series Trust, intentionally misclassified assets in the fund as “less liquid” when they should have been classified as “highly illiquid.”

This is an important distinction, because SEC liquidity requirements cap the amount of “highly illiquid” assets, defined as those that cannot reasonably be sold within seven days, at 15% of a fund’s total value. This is to ensure that mutual funds can meet investor redemptions within seven days, as required by federal law. Mispresenting the liquidity status of an asset can make a fund that is not compliant with this rule appear compliant.

The SEC alleged that the fund, now a liquidating trust, held more than 15% of its assets in equity of a private medical device firm, the shares of which had sale restrictions which could take as long as 28 days to satisfy before the shares could be sold to other investors.

In July, the defendants answered that Pinnacle did not aid and abet the fund. They argued that the fund informed investors that the assets in question were indeed illiquid in disclosures and that the fund sent a “preliminary” letter to an SEC staff member informing the SEC the assets were “less liquid.” The preliminary note was not reviewed nor approved by the trustees, according to the filing, and the trustees therefore did not aid or abet the alleged violation, because inaction cannot be aiding and abetting.

Additionally, the trustees, most of whom are affiliated with Pinnacle, argued that the current Liquidity Rule is vague in its application and relies on the subjective judgment of fund experts, to which the SEC should be more deferential. Pinnacle’s filing further argued that the SEC tacitly acknowledged this problem by proposing a new liquidity rule, sometimes called the Swing Pricing Rule, which the defendants say is more objective in character: “The SEC has proposed material amendments to all three provisions of the Liquidity Rule at issue in this case in tacit admission that the rule lacks clarity.”

The swing pricing proposal is pending SEC review and finalization and is not in effect.

The SEC, in a response filed in August, argued that inaction can be aiding and abetting if the party in question has a “duty to act.” The SEC argued that Pinnacle and the trustees ignored advice from the fund’s counsel, who allegedly resigned over the issue, and that the fund misclassified the assets to avoid having to sell them in order to return to compliance. The SEC noted that it has been four years since the classification took place, and the liquidating trust still has not been able to find a market for the private shares in question.

As for the clarity of the rule, the SEC argued that the new proposal is just a proposal and cannot be used against an existing rule as evidence that the current rule in unworkable.

On Monday, attorneys for two of the trustees answered that the SEC needs to argue that the trustees offered “substantial assistance” to support an aiding and abetting case and that case law does not support the SEC’s “duty to act” assertion. The trustees further argued that the Liquidity Rule does not require trustees to classify assets by their liquidity status; instead, that is the duty of the fund itself.

The case, filed in U.S. District Court for the Northern District of New York, is SEC vs. Pinnacle Advisors, LLC; Robert F. Cuculich, Benjamin R. Quilty, Mark E. Wadach and Lawton A. Williamson, case number 5:23-cv-00547.

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