Data & Research January 22, 2015

Cost of Retirement Income Jumped in 2014

A quarterly analysis from BlackRock finds the cost of purchasing lifetime income units increased significantly in the last 12 months, putting pressure on pre-retirees planning for life after work.
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The sharp rise in lifetime income costs means many workers in their 50s and early 60s are less financially prepared for retirement than they were 12 months ago, despite 11% gains in equity markets over the same time period. Even a strong 14% return for the average 55-year-old retirement investor examined by BlackRock couldn’t keep pace with the relative increase in lifetime income costs.

Chip Castille, BlackRock’s chief retirement strategist, says markets in 2014 were mostly friendly to investors at the retirement horizon, despite some volatility. Portfolios held by 64-year-olds grew an average 19% in 2014 and outpaced the cost of future lifetime income, which rose a more modest 11%. BlackRock explains that, with just over $282,000 in median lump sum savings, this group of late-career workers has the equivalent of slightly more than $12,000 in estimated annual retirement income.

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Castille says the CoRI Retirement Indexes demonstrate ongoing shifts in annuity and income product markets, as well as the impact of wider market moves on retirement-specific portfolios. “Projected income gives a much clearer picture of retirement savings and a new way to manage portfolio performance,” he adds.

The indexes offer investors ages 55 to 64 a daily estimate of the “price” today of a dollar of annual retirement income starting at age 65. The CoRI Indexes, composed largely of U.S. government and investment-grade bonds, use current interest rates, annuity prices, inflation expectations, life expectancy and other factors to set the daily price estimates.

The final quarterly CoRI analysis for 2014 shows that, for workers around age 55, a dollar of estimated annual retirement income would have cost $12.47 a year ago. Twelve months later the cost is $16.62. As a result, workers’ median nest egg value of $280,000 could only generate estimated retirement income of $16,849 a year starting at age 65, the analysis shows. 

“What’s interesting (and counterintuitive) about that result,” BlackRock says, “even though the savings portfolio grew in value, it would be on track to generate almost $3,000 less in annual retirement income than the smaller nest egg 12 months ago.”

BlackRock says the main factor behind the increase in lifetime income costs was the continued slump in interest rates. The last year saw yields on 10-year U.S. Treasury notes fall “a staggering 28.62%,” the analysis explains. Jeffrey Rosenberg, BlackRock’s chief investment strategist for fixed income, adds that predictions of rising rates from many investment experts in 2014 did not play out. 

The firm notes that the BlackRock 2015 Outlook predicts that “long-term interest rates may inch up this year,” but BlackRock expects rates to be low for some time to come.

BlackRock offers a summary of the fourth-quarter 2014 CoRI results here. The index findings are powered by BlackRock’s CoRI Retirement Indexes, together with U.S. retirement savings data from the Employee Benefit Research Institute (EBRI). 

In Practice January 22, 2015

Adviser Headcount Not Growing With Assets Managed

Total financial adviser headcount continues to decline despite strong asset growth for the advisory industry in recent years, according to Cerulli Associates.
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Across all channels tracked by Cerulli Associates, the financial adviser industry grew assets by 12.9% in 2013. The registered investment adviser (RIA) and dually registered channels experienced the strongest growth, explains Kenton Shirk, associate director at Cerulli, noting that advisers are drawn to the “economic advantages and flexibility inherent in these models.”

The findings are from the first quarter 2015 update of “The Cerulli Edge – Advisor Edition,” which also shows the RIA and dually registered channels are the only advisory channels that have experienced positive adviser headcount growth in recent years.

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“Much of this expansion [for RIAs and dully registered advisers] results from adviser movement, rather than new advisers entering the industry,” Shirk says.

According to Cerulli, the overall industry headcount shrunk 1.9% in 2013. Moving forward, Cerulli predicts a slight headcount increase of 1% annually. Shirk says the potential turnaround in headcount losses will result from employee-based advisory firms reinstating training programs and independent practices hiring junior advisers as revenues increase with rising markets.

The broker/dealers, custodians, and asset managers that can effectively help advisers “tackle their pain points” will also have success attracting and retaining adviser partners, and thus client assets, the research finds. This trend represents both a challenge and an opportunity for advisers as they give up some control of assets to other investment services providers.

Cerulli’s analysis finds the growth rate for the wirehouse segment of the advisory industry, which Cerulli says continues to be dominated by “the four massive firms,” has been less robust than the RIA space. But large wirehouse firms continue to have productive adviser forces, Cerulli explains, even with growing momentum in the RIA segment.

“[The top four wirehouse firms] are now well positioned with the largest and most productive adviser forces,” Cerulli explains, “with average assets under management of $124.7 million per adviser.”

Cerulli finds MetLife dropped more than 2,000 advisers in recent years, and that decline accounted for a 0.7% drop in the industry headcount. Despite an aging workforce, only a small percentage (4%) of advisory pros indicates a desire to retire or exit within the next five years. Looking further into the future, however, Cerulli reports more than a fifth (21%) of advisers could retire within 10 years.

Information on how to obtain Cerulli research is available here.

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