New annuity-wrapped managed account sparks interest, confusion

The first income guarantee wrap-per around a managed-account portfolio hasn’t even been sold yet, but its mere existence has sparked growing interest in retirement income products within the managed-accounts industry.

Since the March launch of Longevity Income Solutions (marketed as LIS2) by Lockwood Capital Management Inc. in partnership with The Phoenix Cos. Inc., at least two other firms have started work on their own versions of the annuitylike wrapper.

Envestnet Asset Management Inc. of Chicago and Genworth Financial Investment Services Inc. of Richmond, Va., are building their own income guarantee wrappers for managed accounts, to be rolled out later this year.

The basic concept of this product involves adding an annuity option to a managed-account portfolio which will provide a guaranteed income stream in retirement.

Malvern,-Pa.-based Lockwood and Hartford, Conn.-based Phoenix spent two years figuring out how to attach a traditionally commission-based annuity product to a fee-based managed-account portfolio.

“It was actually modeled after the old defined benefit plans, because we realized that baby boomers want what their parents had so they won’t have to worry about running out of money in retirement,” said Len Reinhart, who retired in January as president of Lockwood and is still working as a consultant to the company.

Beyond the minutiae of navigating through three separate regulatory layers — the Securities and Exchange Commission, the Financial Industry Regulatory Authority Inc. of New York and Washington, and state insurance regulators — to enable brokerage reps and advisers to sell an insurance product, a key element was turning a 7% annuity commission into a 1.25% asset-based fee that is paid to the insurance company guaranteeing the income stream.

“This is a hot-spot area right now, and it’s going to be difficult to make it look simple,” said Jack Sharry, senior vice president in charge of alternative-investment solutions at Phoenix.

AVOIDING THE A WORD

A big part of that effort involves avoiding the use of the word “annuity” when describing the concept of the guaranteed-income option to both advisers and their clients.

“We’ve found that if you describe an annuity to a consumer without using the word “annuity,” they want it,” Mr. Sharry said. “So we don’t use [that word] a lot.”

Annuities have a reputation for being expensive and confusing. They are usually sold by insurance agents.

As more products are developed, the details are likely to vary, but the LIS2 version is structured to provide a 5% annual income stream on a minimum portfolio balance of $250,000.

The payouts begin once an investor reaches 65 and continue until he or she dies, at which point the balance of the account is passed on to heirs.

The guaranteed-income component, Mr. Reinhart said, should help investors feel more comfortable about being more aggressive with their investments, regardless of their age.

Another incentive to prevent clients from overweighting portfolios toward conservative fixed-income products is the high-water mark that locks in investment gains beyond the original investment.

If, for example, a client chooses the income guarantee option on a $250,000 portfolio at the minimum age of 50 and the portfolio grows to $350,000 by the time the client can start receiving income payments, those payments will be based on the larger portfolio balance, regardless of market conditions.

“If you’re going to do this, you should invest more aggressively,” Mr. Reinhart said. “The balanced-portfolio approach is almost like buying double insurance.”

To avoid running afoul of the regulators, for the next six months, Lockwood will review all sales of LIS2 by meeting with any investor introduced to the product through any of the more than 100 brokerage firms affiliated with the managed-account platform.

MMI BUILDING ALIGNMENT

The Money Management Institute in Washington has identified the new retirement income wrapper as a turning point for the managed-accounts industry, and last month, it formed a committee on retirement income to try and get out ahead of what it expects will be a wave of new products.

“We’re in a period of innovation, and we don’t even have a defined language yet, and that could be confusing to the marketplace,” said Bill Crager, president of Envestnet Asset Management Inc., a Chicago-based managed-account platform with $45 billion under management.

“At this point, the products have the potential of just becoming confetti in the marketplace,” he added. “MMI is trying to build some alignment, because any product solution that isn’t supported by a process doesn’t add a lot of value.”

In the broadest sense, retirement income products will encompass everything from target date funds and life cycle strategies to traditional variable annuities.

“Insurance companies, sponsor firms and asset management firms have never communicated at this level,” said Christopher Davis, president of the MMI.

Leading up to the committee’s next meeting in September, when about 100 industry executives will gather in New York, Mr. Davis said the MMI will be coordinating data collection to gauge the depth and breadth of the retirement income market, and will start to develop industry standards for products and nomenclature.

“We want to consider any potential problems or shortcomings that could bedevil the industry,” he added.

In addition to his role on the MMI’s committee on retirement income, Mr. Sharry is now working exclusively on helping the annuity rider gain traction in the managed-accounts space.

“We took a benefit that was very popular in the annuity space and applied it to managed money,” he said.

“Now we’re elevating the selling proposition to the point where an adviser can talk about money management and then at the end of the conversation ask the client if they want an income guarantee.”

E-mail Jeff Benjamin at [email protected].

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