After a year when more than eight in 10 investors said that they could do all the right things to manage their finances and still be blindsided by outside events, it’s no wonder that investor optimism fell 19 percentage points to 36% in 2020 from 55% in 2019.
That is one of the findings in the Nationwide Retirement Institute’s sixth annual Advisor Authority study of more than 2,500 advisors, financial professionals and individual investors.
But the good news is that investors are seeking the help they need. In fact, the number of investors who said they work with an advisor or financial professional is on the rise in recent years, to 67% in 2020 from 51% in 2016, according to Advisor Authority. When asked why they work with an advisor or financial professional, investors said the No. 1 reason by a wide margin is to feel more confident in their financial future.
Which Way From Here?
The stock market’s COVID-19 crash in early 2020 rattled many investors. But those who rode out the bottom and held tight through ongoing volatility saw gains by year-end. Although the stock market has recovered, the economy still has a long way to go.
Months of social distancing and sheltering in place was a boon to e-commerce. But while some sectors surged, many others failed. Countless small- to medium-sized business struggled to keep their doors open, and the unemployment rate remains well above where it was this time last year.
The outlook for the year ahead is on the upswing. With the Federal Reserve continuing to maintain short-term interest rates near zero and vaccinations increasing in number and availability, the prospect for reopening the economy and returning to normalized growth seems likely.
As you guide your clients through the year ahead, there are bound to be rough spots. For the best chance of success, clients need a holistic financial plan and they need to stick to it. As Advisor Authority shows, 93% of investors said that having a financial plan helps them feel in control, even if they can’t plan for everything. So help your clients control what they can with a plan to protect assets against market risk, safeguard retirement income and manage tax-efficiency.
Have A Plan To Protect Against Market Risk
Last year, investors said their No. 1 financial concern was losses in their portfolio related to the pandemic, with protecting assets a very close second. But even as concerns about volatility and a bear market were on the rise, and protecting against losses outranked all other financial concerns, Advisor Authority revealed that only 64% of investors had a strategy in place to protect their assets against market risk, compared with 91% of all advisors and financial professionals. It’s clear investors could benefit from your help.
Diversification was the most prevalent solution among both investors and financial professionals who had a strategy to protect assets against market risk, according to Advisor Authority. But financial professionals were two to three times as likely as investors to use a diverse range of risk management solutions — from non-correlated assets (42% vs. 12%) and hedging strategies (42% vs. 16%) to liquid alternatives (39% vs. 23%) and smart beta exchange-traded funds (32% vs. 10%) — as well as a range of different annuities.
Advisor Authority also revealed that in 2020, annuity adoption was on the rise, especially among younger investors. More than half of all investors (57%), including nearly three-fourths of millennial investors (70%) and Generation X investors (71%), said they would feel more secure if a portion of their portfolio were invested in an annuity to protect against market risk.
Likewise, roughly half of all investors, including roughly two-thirds of millennials and Gen Xers, said they would choose an annuity in the next 12 months to protect against market risk as part of a holistic financial plan.
Annuities can be effective for clients across a range of different risk profiles, offering a combination of upside potential and downside protection. For example, there are fixed indexed annuities designed for the conservative to moderate investor, and registered index linked annuities for the moderate to aggressive investor. FIAs offer less upside potential than RILAs, but in exchange they offer principal protection, so your clients can’t lose their initial investment or credited earnings in a market downturn.
Note that gains may be curtailed by the level of protection levels chosen, or a spread charge, if there is one.
RILAs offer your clients more growth potential, in exchange for taking on more risk. While RILAs don’t provide full principal protection like FIAs do, clients can still benefit from a level of protection against market risk through a structure like a buffer or a floor. There are also RILAs with a buffer structure, which help mitigate losses from ongoing volatility. They offer even greater upside potential, but greater risk of substantial losses, should markets fall lower for longer.
Have A Plan To Protect Retirement Income
Despite current financial pressures caused by the pandemic, clients shouldn’t lose sight of their long-term retirement goals. Even though the vast majority of Americans across every generation believe the Social Security system is in need of change (82% of millennials, 85% of Gen Xers and 80% of baby boomers and older), according to the Nationwide Retirement Institute's seventh annual Social Security Survey, many expect Social Security to supplement their retirement, especially as pension plans continue to disappear.
In fact, Advisor Authority revealed that more than two-thirds of investors are likely to rely on Social Security (68%) among the leading solutions they use to protect against outliving their savings in retirement.
COVID-19 has also raised awareness about the benefits of annuities to provide protection in retirement, even among younger investors. According to Advisor Authority, 54% of all investors - including 72% of millennial investors and 65% of Gen X investors - said that given the impact of the pandemic, they would feel more secure if a portion of their portfolio were invested in an annuity to protect against outliving their retirement savings.
Likewise, three-fourths of millennials and more than two-thirds of Gen Xers, said they would choose an annuity in the next 12 months as part of a holistic financial plan to help protect against outliving savings.
And with qualified plans such as 401(k)s becoming a predominant vehicle for retirement savings, the demand for in-plan guarantees is also growing, whether to protect principal, to protect against outliving savings — or both. Advisor Authority revealed that two-thirds of millennial investors and Gen X investors are likely to incorporate in-plan guarantees within their defined contribution plans.
With the passage of the SECURE Act, it is easier for clients’ qualified savings plans to offer in-plan annuities that are designed for them to make regular tax-deferred contributions through pretax payroll deductions, with low or no minimum investment requirements and full portability should they change their employer.
Have A Plan For Managing Tax Efficiency
According to the Nationwide Retirement Institute’s Tax-Efficient Retirement Income Study, more than a third of current retirees (35%) did not consider how taxes would affect their retirement income when planning for retirement. Moreover, roughly one-third wish they had better prepared for paying taxes in retirement.
To help clients with a plan for managing taxes, start with the concept of tax diversification. Just as you help your clients diversify risk across a range of different asset classes, you can help them diversify taxation across a range of different taxable, tax-deferred and tax-free vehicles. Through tax diversification, clients can control not only how much they pay in taxes, but also when those taxes are paid.
Asset location can also mitigate the impact of taxes by locating assets between taxable and tax-deferred vehicles, based on their tax-efficiency. Locate tax-efficient assets in taxable accounts where they will benefit from lower long-term capital gains rates.
Locate less tax-efficient assets in tax-deferred or tax-free vehicles such as 401(k)s and Roth 401(k)s or traditional IRAs and Roth IRAs. After maxing these out, consider low cost investment-only variable annuities for even more tax-deferred growth. By minimizing the impact of taxes, without increasing risk, asset location can potentially generate substantial accumulation — especially for clients in higher tax brackets.
And after a year when market volatility created winners and losers within a client’s portfolio, rebalancing is crucial for ensuring their allocations stay on track. It also presents an opportunity to consider tax-loss harvesting to offset their investment gains while lowering their tax liability.
The start of a new year is the ideal time to connect with clients to help them set their financial goals for 2021 and beyond. It’s also the right time to help them develop a holistic financial plan so they can control what they can, by protecting their assets against market risk, safeguarding their retirement income and managing for tax-efficiency.
Craig Hawley is head of Nationwide’s Annuity Distribution. He may be contacted at [email protected].