Wealth Management
(New York)
The term “hybrid annuity” gets thrown around in casual conversation all the time, unfortunately including in sales pitches to clients. However, one would be better off calling it what it is—a fixed index annuity. “Hybrid annuity” gives a false sense of the product, lending the impression that there is full principal protection AND unlimited upside. The reality, of course is that while principal protection full exists, there is quite limited upside that is constrained by the annuity contract.
FINSUM: A contractually limited 4% max annual upside via an option contract on an index is not unlimited upside.
(New York)
Morgan Stanley was due to make some big pay changes for advisors starting April 1st. The changes would mean a reduction in compensation for similar production levels. However, in light of the Coronavirus outbreak, the firm has said it is pushing the implementation date for the changes back to October 1st. Directly addressing the firms 15,000+ advisors, the head of field management said “We know that you are facing enormous challenges personally and professionally while at the same time taking great care of your clients in a very difficult environment”.
FINSUM: These changes are tough to begin with, and doing them right now would have been downright draconian (and might have caused some extra departures).
(New York)
Advisors who might be thinking of moving—now may be the time. Big crises are often a catalyst for advisors changing firms. The reasons why are numerous. Some advisors grow unhappy with the support their current firm gives them during a hard period like this one. Others see a big drop in revenue and need the bonus check of signing with a new firm in order to keep their team intact. Others try to sell soon after a crisis hits because their valuation (based on AUM/production) will likely not be higher for years.
FINSUM: Generally speaking, one would think that there would be a lot of moves in the next several months. However, one issue right now is that advisors cannot have face-to-face meetings with their clients to take their temperature on a move. All that said, if you are considering a move, many firms are ready to cut checks.
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(New York)
Merrill Lynch is giving its herd of advisors a break on their incentive compensation. Brokers at Merrill have a piece of incentive compensation which gives them a bonus if at least 30% of clients use three specific services. But instead of making the cut off for meeting those quotas July of this year, they have extended it to January 2021, giving brokers an extra 6 months to meet those goals. Merrill Lynch says that the change will allow advisors to focus on best serving clients in this volatile period.
FINSUM: Even with the six-month extension, given the market volatility, it will likely be difficult to cross-sell clients into new products.
(New York)
Many people who are thinking about annuities don’t realize that many of them are sellable products—they don’t necessarily have to be held forever (even if that is often the best strategy). So which annuities are sellable and which aren’t? In general, SPIAs (single premium immediate annuities), DIAs (deferred income annuities), and QLACs (qualified longevity annuity contracts) are not sellable; VAs (variable annuities), FIAs (fixed index annuities), and MYGA (multi-year guarantee annuities) are usually sellable. Each of those latter products have surrender charge time periods in them, so it may cost something, but it does mean money is not locked in them forever.
FINSUM: Since selling would usually not be the best idea, this is more of a peace of mind factor than anything else, in our opinion.
(New York)
Many RIAs across the country are worried right now. With fee levels often tied to AUM, revenue seems likely to take a ~30% hit this year. That is enough to break many RIAs, especially those who were previously running only 10% profit margins. So how can RIAs cope? Firstly, those who have been very tight on budgets are in better shape. Those who were operating at 30% profit margins should be okay. A few of the key aspects to consider right now are: reaching out to vendors to “share the pain”, changing compensation structures towards lower fixed pay and more incentive-based pay, and switching to a quarterly budget, which will better align expenses and income.
FINSUM: We might go through a long period of lean times, so RIAs need to act fast to get their fixed costs under control.