As more products that aim to deliver regular payouts in retirement hit the market, many advisers are taking a wait-and-see approach before recommending them to their clients.
"There is some skepticism around them," Chuck Gibson, president of Financial Perspectives of Newark, Calif., said of so-called managed-payout funds. "I am going to hold off, and let's see what they do."
Funds with managed-payout features are designed to pay monthly income with the potential to keep up with or outpace inflation. The funds, which could compete with annuities, are intended to relieve retirees of the task of figuring out how much money they can safely spend each year.
So far, demand for such funds appears to be coming mostly from individual investors, Mr. Gibson said.
"I don't think there is a whole lot of demand from advisers," he said.
"Buyer, beware," said Lou Stanasolovich, president of Legend Financial Advisors Inc. in Pittsburgh. "I think you will have problems in the long run. You'll have the managed payout, but they are not guaranteeing performance. It won't bode well in a bad market, because you'll be eating away at your principal."
The concept is good, but investors may see a cut in their income at some point, Mr. Stanasolovich said.
"It depends on how they're set up," he added. "I think these things will develop. I will not be an early jumper."
Managed-payout funds could be "a useful solution for investors seeking income in retirement," said Greg Carlson, a fund analyst at Chicago-based research firm Morning-star Inc.
"But the devil is in the details," he added. "What are the costs? What funds are they investing in? How does the payout plan work?"
Adviser skepticism isn't stopping fund companies from launching managed-payout funds.
Charles Schwab Investment Management Inc. of San Francisco last week unveiled the Schwab Premier Income Fund.
Fidelity Investments of Boston on Oct. 3 launched 11 target date funds with managed-payout options. Days before that,
The Vanguard Group Inc. of Malvern, Pa., filed with the Securities and Exchange Commission to launch three such funds.
John Hancock Financial Services Inc. of Boston last month also filed to offer two similarly designed funds.
"Certainly, there are other products in the market with higher risk to get the high yield," said Patrick Waters, director of retirement investment products at Charles Schwab. "I think six months or a year from now, a number of advisers will have adopted it based on their yield."
The Schwab fund, which began accepting money Oct. 31, is designed to allow investors to draw on their dividends rather than their principal.
The product will generate a monthly income and try to "recreate the paycheck they left behind at work," Mr. Waters said.
The fund's first goal is to create the payout, and its second is to achieve capital appreciation, he said.
The initial strategy will be to invest in fixed income, though the fund may expand its investment reach.
"There is the potential to purchase equity products, depending on the market, to create the investment stream," Mr. Waters said. "Beyond bonds and [certificates of deposit], it allows the managers to invest in other products and vehicles."
The product is not structured to draw the principal down.
"The income will fluctuate over time," Mr. Waters said. "The investor is paid a monthly
dividend. It's not paying the money out of the principal. They're living off their investment as opposed to digging into it."
There is also no penalty if the retiree decides to withdraw from the principal, Mr. Waters said. "An investor could sell a portion of their shares to get some of that principal to spend."
There is, however, a redemption fee if the investor cashes out within 30 days of purchase.
There are three classes, including an "investor class" where the minimum investment is $100; the others have minimums of $50,000 and $500,000, respectively.
"With any investment, there is market risk," Mr. Waters said. "This fund is designed to take on a little more risk. The investor has to be willing to accept the risk for the higher yield."
The
portfolio management team also manages five other Schwab funds. "They are a seasoned team and well established," Mr. Waters said.
Educating the investor is an important consideration, Mr. Carlson said.
"If the product is designed to be a return on capital, [fund companies] need to be very clear on how that works — that the balance is not going to be zero, and that what the investor is getting back is not all gains on that investment which is what they typically expect," he said. "I think the return on principal is a bit trickier for investors to understand."
The Schwab fund group, established in 1989, has 59 funds and had $201 billion under management as of June 30.
Sue Asci can be reached at [email protected].
