Firms eye embedded guarantees to lure advisers

Pimco, Hancock mull mutual funds that offer guaranteed income or principal protection

Oct 18, 2009 @ 12:01 am

By Jessica Toonkel Marquez

Many firms, including Pimco, Russell Investments and John Hancock, are planning or discussing the addition of guarantees to their mutual funds to provide scared investors with a floor on their investments, but advisers are skeptical about such promises. With the baby boomers retiring and many still shell-shocked from severe market losses, companies see adding guarantees on funds and managed accounts as the next big market. The types of guarantees being developed range from promising investors a level of income for life, or a given period of time, to protecting principal. Although many firms over the past 12 to 18 months have launched funds and managed accounts attached to an annuity to provide a guarantee, Pimco and John Hancock are discussing embedding the guarantee within a mutual fund. “Everyone is talking about how they can put products together to provide guarantees,” said Jack Sharry, chief marketing officer of LifeYield LLC, a tax-optimization software provider. Mr. Sharry was a senior vice president with The Phoenix Cos. when it teamed up with Lockwood Capital Management Inc. last year to launch the first managed-account product with a lifetime guarantee.
While advisers like the idea of guarantees, particularly for retiree clients, they get squeamish when they hear the guarantee would be backed by an insurance product, according to a study released last month by Cerulli Associates Inc. Titled “State of Retirement Income,” it found that while half of responding advisers outside of the registered investment adviser channel are searching for more guaranteed-income sources, less than a third of all respondents view an insurance guarantee as an “essential retirement income characteristic.” “They are looking for a guarantee, but advisers seem conflicted about whether they want it to be insurance,” says Tom Modestino, a senior analyst at Cerulli. Advisers are skeptical of insurance guarantees for two reasons: the costs and the creditworthiness of the insurers. Most of the guarantees mutual funds are considering promise a lifetime income stream and cost 1 or 2 percentage points on top of the investment expenses, said Tamiko Toland, a principal re-searcher at Annuity Insight, a provider of annuity research.

Those costs are almost -double what they were 18 months ago, due to the troubles the insurance industry has faced, said Lori Lucas, executive vice president and defined-contribution practice leader for Callan Associates, an institutional-investment consultant.

“If they can figure out a way to do these products while keeping the costs down and addressing the counterparty risk associated with the insurance companies, I could be interested,” said Scott Leonard, chief investment officer at Trovena LLC, a registered investment adviser with $400 million in assets under management. “However, I would much rather someone else came up with something than have to try to find a way to do it myself.”

Next year, Pacific Investment Management Co. LLC expects to add a deferred annuity to its Real Income Funds. The funds, which it launched last month, use a laddered portfolio of Treasury inflation-protected securities to provide investors with monthly distributions of principal and interest until the funds' maturity dates, which are 2019 and 2029.

The addition of a deferred annuity will allow investors to get a stream of income for the rest of their lives, even after the maturity dates, said Tom Streiff, executive vice president and retirement product manager at Pimco.

The company is in talks with insurers to provide the annuity, and hasn't yet made a decision. Net annual expenses for the funds range up to 1.29%, depending on the share class, and Mr. Streiff said he expects the annuity option to be in line with the industry expenses.

Ultimately, Pimco wants to create a mutual fund that would have a guarantee embedded in it, said a person familiar with the discussions, who added that the company would like to use its parent company, Allianz SE, as the insurer of the product to keep costs down.

“The big nut is the regulatory aspect,” the insider said. “We are still trying to figure out how the process would work.”


But if Pimco can work out the kinks, its product would be more transparent and probably easier to digest for advisers, who tend shy away from annuities, the source said.

Similarly, John Hancock Financial Services Inc. in April 2007 filed an exemptive order with the Securities and Exchange Commission to use its own insurance to provide guarantees of principal and guarantees of income for its open-end funds — including funds of funds — and closed-end funds. Hancock needs an exemptive order from the SEC because it wants to provide the insurance itself to cut costs.

“We have looked for many years at structures that are provided by external parties, but they are all very expensive,” said a company insider.

Andrew Arnott, chief operating officer at John Hancock, confirmed that the company had applied to the SEC for an exemptive order, but declined to elaborate.

Executives at Russell Investments are talking about adding guarantees to their funds, particularly their managed-payout funds and target date funds. But like others, the company is concerned about the costs to investors, said Richard Fullmer, a senior portfolio strategist.

“We have talked to some insurance companies about adding guarantees and we have received some pricing,” he said, declining to say what the pricing would be. “The cost of guaranteeing things has gone up and the question you have to ask is "Will people pay that much?'”

If these firms do end up coming out with their products, no matter how transparent they are, advisers say that they will need a lot of reassurance.

“The idea of integrating mutual funds with insurance just scares me,” said Phillip Settembrino, an associate partner with Professional Financial Consultants, an RIA firm.. “What happens if the insurance company gets into financial problems, will the mutual fund have those issues too?”

E-mail Jessica Toonkel Marquez at


What do you think?

View comments

Upcoming event

Nov 20


Future of Financial Advice

An innovative conference dedicated to improving the client experience by enhancing digital technology, mainstreaming healthcare and optimizing wealth management strategies.The Future of Financial Advice will provide a forum for... Learn more

Most watched


Schwab's Jeff Kleintop: Prep for volatility given China trade uncertainties

China could be considered a developed market in five to seven years , according to Jeff Kleintop, chief global investment strategist, Charles Schwab.


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

Funding for Reg BI, other SEC advice reform efforts denied in Waters amendment

House likely to approve measure that effectively kills rule package, but it faces uphill battle in Senate

Wall Street lashes out at Sanders' plan to pay off student debt with a securities trading tax

Financial pros argue that a transaction levy will hurt mom-and-pop investors along with investment houses.

GPB paid B-Ds and reps steep commissions to sell troubled private placements

GPB paid commissions of 9.3%, or $167 million altogether, on the firm's private placements.

Give us a break, active managers say

Seven portfolio managers share their outlooks for the rest of the year, generally agreeing that it's been hard for active managers to stand out.

GPB Capital reports decline in value of two biggest funds

One has dropped by 25.4% and the other by 39%, according to the company.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print