Displaying items by tag: income

Advisors have to offer personalized solutions for their clients’ financial needs. Of course, this presents an inherent conflict for any advisor who wants to grow their practice as these efforts are often not scalable. 

Unified managed accounts (UMA) are a potential solution for advisors to offer low-cost and customized solutions by outsourcing these functions from professional asset managers. UMAs provide an open structure for advisors to toggle between managed account programs, asset allocations, portfolio management, and trading in order to become more efficient and increase the speed of implementation. 

Advisors can leverage UMAs to reduce complexity and provide more holistic advice for clients while freeing up time and energy to focus on business development. In contrast to mutual funds or ETFs, UMAs and separately managed accounts (SMA) provide more customization and tax efficiencies. However, SMAs often lead to more administrative burdens since each account generates its own statements, tax documents, and portfolio management needs. 

In contrast, UMAs offer access to multiple strategies in a single account while enabling tax savings through tax-loss harvesting. There is more efficiency given that there is less paperwork while also providing a more holistic view of a clients’ financial situation. 

Finsum: UMAs can lead to more efficiencies for advisors, leading to less paperwork and tax complications. It also leads to a more holistic view of a clients’ finances. 

According to a study of retirement accounts by Fidelity, most older Americans are too heavily invested in the stock market. This is a potential risk especially in the event of a market downturn. 

One posssible solution is for investors to increase their allocation to fixed indexed annuities. These are annuities that guarantee the principal but offer more growth potential than traditional fixed-rate annuities. They are best suited for investors with a time horizon of longer than 5 years. They are less risky than equities but offer higher returns than most types of annuities.

Fixed indexed annuities follow a market index such as the S&P 500 or Dow Jones Industrial Average and interest is deposited based on annual gains of the underlying index. However when the index declines, there is no loss of principal or of previously accrued interest. 

Of course, there is no free lunch. The drawback is that most fixed indexed annuities have some sort of formula which limits the amount of gains that are captured. There is also a maximum rate of interest which limits the amount of total gains that can be captured. For instance, some have a maximum rate of interest of 12% which means that the annuity would only see a gain of 12% even if the underlying index was up 20%.  

Finsum: Fixed indexed annuities are one potential way that older investors can reduce portfolio risk and boost diversification. 

Demand for annuities has soared along with rising rates. Owners of annuities, prior to 2021, would be very happy if they purchased variable annuities which increase along with inflation, while those with a fixed annuity would see the purchasing power of their income diluted by inflation.

Despite the risks, annuities are a great option for clients with low levels of risk tolerance and who value the certainty of having an income. The biggest benefit is for clients who don’t want to worry about not having enough income, or how the financial markets are performing. 

According to Kirsty Anderson, the pensions specialist at M&G Wealth, “An annuity gives absolute certainty. You know exactly how much income you’ll receive, and you’ll receive this for the rest of your life – unless you’re purchasing a fixed term annuity.” Currently, the average annuity rate is 6.7%. This is nearly 50% more than the average rate since the financial crisis. 

There is a wide variety of annuities to fit the needs of clients. Some options include varying durations, flexibility, and protection against inflation. Many clients will opt for a blended approach, when they use annuities to cover basic living expenses while keeping the remainder of their money invested in the markets. 

Finsum: Annuity sales are strong due to high rates and nervousness about the economy and inflation. Here are some considerations for annuities in retirement planning.

The combination of high rates and an uncertain economic outlook have resulted in record sales for annuities. In the first three quarters of the year, total annuity sales were up 21% compared to last year for a total of $270.6 billion according to LIMRA’s US Individual Annuity Sales Survey. To compare, there was a total of $255 billion in sales in 2021 which was the last year of the ZIRP era.

In Q3, sales were up 11%, reaching $89.4 billion. LIMRA is forecasting another record year of sales for 2023, exceeding 2022’s record sales of $313 billion. Within the category, fixed indexed annuities continue to dominate, accounting for $23.3 billion in sales in Q3, a 9% gain from last year. YTD, these annuity products have accounted for 26.5% of total annuity sales.

Single premium immediate annuities and deferred income annuity sales saw the biggest increases at 20% and 88% compared to last year’s Q3, respectively. LIMRA is bullish on income annuities which tend to rise with interest rates. According to the group, “Income annuities will hit record levels in 2023, with sales in this category expected to exceed $16 billion for the year.”

Finsum: Annuity sales are hitting new records. Most of this can be attributed to the rising rate environment and risk-aversion among many investors.

A combination of factors has led to the worst housing affordability in decades. During the pandemic, there was a surge in real estate prices as many moved out of urban locations to the suburbs due to the rise of remote and hybrid work arrangements. 

This increase in demand also coincided with a tight supply-demand dynamic as new home construction has lagged population growth ever since the Great Recession and subprime mortgage crisis. Another factor supporting demand is that Millennials are entering their peak consumption years in their 30s and 40s. 

Additionally, after more than a decade of low rates, current monetary policy is at its most restrictive in decades. Thus, mortgage rates are now hovering above 7%, while they were at 3% for most of 2020. 

According to Andy Walden, the VP of enterprise research for ICE Mortgage Technology, household incomes will have to increase by 55%, home prices decline by 35% with mortgage rates back to 3%, for affordability to revert back to historical norms, or some combination of these factors. 

Of course, such dramatic developments are unlikely. Walden believes that inventories are a key leading indicator for home prices. In recent months, there has been a modest bump in listings, but nothing significant enough to affect affordability. 

Finsum: A combination of factors has led to housing becoming unaffordable for many prospective buyers, creating a major challenge for the real estate market.