(New York)

Interest rates are still very low. So low that retirees are being starved of income. With that in mind, some are employing annuities in unique ways to help increase interest income. In particular, one strategy being employed for older investors who want to boost income in the “safety” portion of their portfolio is to use multi-year guaranteed annuities (MYGAs) to boost interest income. MYGAs typically pay well in excess of what CDs and other cash management products pay. This is because the insurer behind the annuity can invest the capital in a diversified portfolio, including longer-term holdings. MYGAs are not FDIC insured like CDs, but they do come with contractual guarantees and are often from companies with great credit ratings.

FINSUM: This is a very good strategy for certain investors who can afford to tie up capital in an annuity and are looking for ultra-safe but above-market interest income relative to similar instruments.

(New York)

Most investors had their eyes on growth, particularly in the rebound of the pandemic, but things are starting to look good for value stocks. Investors at Columbia Threadneedle Investments said that stimulus from the Fed and Government put investors' value metrics on pause, but as the economy continues to normalize and rates rise, value stocks will be the beneficiaries. Companies like Citizens Financial Group Inc., United Community Banks Inc., and Sunstone Hotel Investor Inc. are all small-cap value companies that Tugman of Columbia Thread Needle finds attractive. P/E ratios are better for small and mid-cap value stocks, and are trading at heavy discounts compared to the broad S&P.

FINSUM: As life returns to normal stocks might do the same, which would be a return of value investing and attractive price-to-earnings ratios.

(New York)

Any advisor reading ESG headlines over the last year will have seen some big numbers coming out of the sector (e.g. ESG sees $x trillion of asset flows). One such headline recently was “one third of U.S.-domiciled, professionally managed assets addressed ESG considerations as of the end of 2019”. The report, from US SIF Foundation, claimed that $17.1 tn was parked in sustainable investing strategies. However, this can be highly misleading. The reason why is the criteria for what can be considered “ESG” is quite broad. While the US SIF report did have some rigor in defining ESG, the way it conducted its study meant that any managers taking into account any number of considerations that could theoretically be considered related to ESG, were called “ESG” assets.

FINSUM: ESG is growing nicely, but there does seem to be a lot of “fudge” in the asset reporting. Part of this likely comes down to what we might call “de facto” ESG. In other words, a lot of ESG funds are dominated by tech stocks/assets. Many of these inflows have little to do with ESG imperatives (they are more pure return-driven), but can nonetheless be referred to as “ESG” since they are technically environmentally-friendly.

(Washington)

One of Biden’s most important campaign promises was that he would not raise taxes on the middle class, or more specifically those earning less than $400,000. Accordingly, it is a surprise to see a new proposal from Democrats that would do exactly that. Biden and the Democrats appear to be going after “stepped up basis” in inheritance taxes as a way to raise tax revenue and fund the infrastructure bill. Right now, when inherited assets get transferred, their basis resets to whatever the market value is at the time of inheritance. In this way, heirs only pay capital gains on the increase in value that occurs while they hold the asset. Biden and his administration wants to change the rules in order to keep the basis in place from when the original buyer purchased the asset. This change would not only affect the wealthy in a big way, but also the middle class, as the basis for many assets would suddenly be very low, meaning large taxes would be due no matter the size of the estate being transferred. A good example might be an inherited condo from a parent that was bought 30 years ago and has appreciated from $100,000 at purchase to $600,000 now. Under the current system, a middle class earner who inherited and decided to immediately sell the condo would pay almost no taxes. However, under the new proposal, almost $100,000 in taxes would be due because basis would be applied to the original purchase price!

FINSUM: This is a big change that advisors need to be watching closely!

(New York)

401(k)s and annuities are two of the most prominent retirement savings products in the US. However, clients often have a hard time distinguishing one’s advantages versus the other (and disadvantages). In reality, they are quite different products. The only cross-over between them (for now) is that they are both geared towards retirement, and that one can cash out a 401(k) and use it to buy an annuity. The big advantage of 401(k)s is that there are no sales incentives/commissions for a client to take part in an employer’s plan, as well as the fact that they can benefit from employer’s matching their contributions, something that cannot happen in annuities. Annuities, however, have the big advantage of guaranteed income, and because of the ability to choose which annuity one buys, there is more freedom in investment selection. Both have similar terms for early withdrawals.

FINSUM: These products are also great in concert with one another. For example, using part of a 401(k) cash-out to buy a deferred annuity, allowing upside in the 401(k) and guaranteed income in the annuity. Soon enough annuities will be allowed in 401(k)s.