Retirement income products just can't get adviser love

Like Goldilocks, financial advisers can't seem to find many new retirement income products that are "just right." They complain that manufacturers' creations are too complex, too costly and too inflexible. Manufacturers acknowledge the advisers' criticism, and some even question the need for "new" products in the first place. Others say they are trying to anticipate customer needs, yet they admit they face marketing challenges. "Most of our product development makes us look like mad scientists who aren't talking to anyone," said Srinivas Reddy, vice president of retirement income strategies for Windsor, Conn.-based ING U.S. Wealth Management. Advisers agree. The biggest mistake product manufacturers make is that they don't talk to advisers, said Mark Cortazzo, a certified financial planner and senior partner at Macro Consulting Group of Parsippany, N.J., whose firm manages nearly $400 million in assets. "I just wish product developers would get more feedback from advisers," he said. "They keep building this stuff and trying to jam it down everyone's throat and telling advisers how they should use the product, instead of going to advisers." Mr. Cortazzo said that he doesn't like products that require advisers to use a particular investment model instead of giving advisers the flexibility to create their own. In particular, while he likes the concept of having income solutions inside 401(k) plans, he isn't a huge fan of Richmond, Va.-based Genworth Financial Inc.'s ClearCourse product, because the investor "is buying retirement shares that are 20 years out. You're buying income units, and there's not much upside," Mr. Cortazzo said. However, a similar product that Prudential Financial Inc. of Newark, N.J., created provides participants with potential for gain, he said. Another factor by which advisers judge new retirement products is cost, and here advisers are particularly critical. Most variable annuities — even those with newer income guarantees — are simply too expensive, said Mark Kenison, a CFP, chartered life underwriter and owner of Turning Point Financial of Charlotte, N.C. He started his firm in October 2004 and manages about $30 million in assets. "Internal expenses and fees can be pretty high for variable annuities," Mr. Kenison said. "It's not uncommon for them to be 2.5% or 3%, which is the biggest reason I'm not crazy about them." Still, Mr. Kenison believes in the concept of annuitization and likes lifetime fixed-income annuities for a portion of his clients' portfolios. Similarly, he likes period-certain fixed-income annuities, which can provide a monthly paycheck for a specified period of time. "It's like having a pension that lasts for a certain period," Mr. Kenison said. Cost is also an issue for Beth Blecker, chief executive of Eastern Planning Inc. in Nanuet, N.Y. "If we are in a low-return era and we have to give up 4% in expenses, that would severely hurt our returns," she wrote in an e-mail. Ms. Blecker said that her firm uses principal protection annuities from The Hartford (Conn.) Financial Services Group Inc. and Jackson National Life Insurance Co., and she likes John Hancock Financial Services Inc.'s products as well. "We use the annuities for the equity portion of a portfolio when our clients are too nervous to invest in the stock market. Once again, it is because they have reasonable fees and good investment options," Ms. Blecker wrote. Cost is a reason why her firm doesn't like target retirement date products, she wrote.
Unnecessary complexity is what irks Gary E. Stroik, a CFP and chief investment officer of WBI Investments, a registered investment advisory firm in Little Silver, N.J., who thinks that most retirement income solutions already exist. "We don't need to have a solution in search of a problem," he said. "What's the problem with retirement income? If we can agree what on what the problem is, then we can decide if we've got solutions already or if we need to cook something up," Mr. Stroik said. He thinks that managed accounts offer the most flexibility to meet a client's rising income need in light of inflation throughout retirement. Mr. Stroik said that some annuities offer features that can make them part of an overall retirement funding plan. Todd Pack, senior vice president of operations for United Capital Financial Advisers Inc. in Newport Beach, Calif., said that he avoids products with long surrender periods, adding that anything over seven years typically isn't appropriate. New features often are tacked on as riders "at a cost that often is not worth it to the client," he wrote in an e-mail.

DISTRIBUTION FOCUS

Part of the problem for manufacturers trying to respond to adviser criticism is that product-marketing efforts still focus on accumulation, said Aamer Baig, managing partner of the financial services practice at Diamond Management and Technology Consultants Inc. in Chicago. "Product manufacturers have geared their entire marketing and product development around helping people accumulate assets, and not around distributing them," he said. "That's placing some stress." Mr. Baig's firm recently found that financial firms can serve baby boomers better by adopting a broader vision of the services they offer as well as a more precise view of the customers they serve. "The problem [the manufacturers] are trying to solve isn't new," he said. "I think there needs to be rethinking in developing a product that consumers feel comfortable with that allows them to get income." It is an issue that troubles product manufacturers, said Richard Choi, an attorney in Washington with Miami-based Jorden Burt LLP. "There are relatively complex products that offer unique and valid ideas, and then there's the notion that people should go with more-simple solutions," he said. "It's hard to know what will dominate." Mr. Choi thinks that consumers do need new products. "The products are getting more complex, but they're complex like a watch is complex. An adviser should be able to explain it to you," Mr. Choi said. Perhaps the problem is that a single product can't be the universal solution, said Fred Barstein, chief executive of 401kExchange Inc. in Lake Worth, Fla. "I think in the decumulation phase, it's a service solution," he said. "A lot of people are saying the solution is retirement income. That's not true. People want to talk to a financial adviser who can help them plan for their future," Mr. Barstein said. The marketplace ultimately will provide an answer, as investors choose the solutions that work for them, said Patrick Waters, director of retirement investment products for Charles Schwab Investment Management Inc., a unit of Charles Schwab & Co. Inc. of San Francisco. His firm launched retirement-income-based mutual funds March 11 that have more than $54 million in assets. "I think you can help them get to the right products. I think concise and clear communication can help," Mr. Waters said. "Retirees face a huge number of opportunities and challenges," he said. "It can be very overwhelming to be presented with a bond ladder, for instance, when you don't have a history of dealing with fixed income." Mr. Reddy believes in the importance of communication as well. "Many of the products that come out may be great, but the explanations of them aren't worth anything," he said. For Mr. Cortazzo, communication isn't about slick packaging. "I don't care what the label is or what you call it," he said. "I want to know the ingredients." E-mail Lisa Shidler at lshidler@investmentnews.com.