“The problem is too often; we simply accept conventional wisdom, which prevents us from considering other alternatives.”
Roger Ibbotson, PhD
It’s very telling that years after Roger Ibbotson developed the foundations of what we now consider to be “conventional money wisdom,” he has re-evaluated his position.
Ibbotson, a respected economist, and former university professor, created the “Stock, Bonds, Bills and Inflation” (SBBI®) chart that underpins much of what we have come to accept as the “truth” about money. It’s the industry standard for performance data and has detailed records dating back as far as 1926. SBBI covers everything from long-term government bonds to treasury bills, to common stocks.
For many financial advisors and retirement planners, the SBBI is the go-to authority when they design plans, providing essential information such as riskless rate of interest, equity risk premium, bond default premium, other data needed to analyze asset class performance.
For years, the information presented in the SBBI has seemed to indicate that there was little to no place for fixed indexed annuities in a modern portfolio. This is one of the reasons why conventional financial planners often seem so dead-set against annuities. Many try their best to talk clients out of purchasing fixed indexed annuities or relegate them to a very insignificant place in the planning process.
Ibbotson’s initial work revolved around an idea which I am sure you find familiar: as you take on higher risk, you will get a higher return. However, the risk you take involves volatility. The closer a person is to retirement, the less he or she can afford the risk of exposing their wealth to the market’s ups and downs.
Now, however, due to new research by Ibbotson and his team, we are experiencing changes in the financial landscape where fixed indexed annuities are gaining more favor with advisors and their clients and can provide a more efficient way to de-risk in a low-interest-rate environment.
In a new white paper titled “Fixed Indexed Annuities: Consider The Alternative,” Ibbotson says that shifting market conditions, along with longer life expectancies and anxiety about the future of Social Security, have made a significant impact on the economy.
Writes Ibbotson, “In recent years, we recognized the potential of these conditions to result in a perfect storm where investors may be left with insufficient funds to carry them through retirement.”
In other words, someone in the mainstream financial world has finally acknowledged that conventional money wisdom may very well cause some people to run out of money in retirement- a problem I believe fixed indexed annuities (FIA’s) are uniquely positioned to solve.
The new research conducted by Roger Ibbotson and his team echoes that same belief: FIA’s can help control equity market and longevity risk and have the potential to outperform bonds in the very near future.
Ibbotson ‘s white paper indicates that given dramatic market changes, a conventional approach that sees the majority of investors de-risking portfolios and moving into bonds as they approach retirement may no longer be accomplished using bonds. FIA’s need to be reconsidered by financial advisors and their pre-retiree clients as perhaps the better choice.
According to Professor Ibbotson, FIA’s offer a more attractive, tailored risk profile than do bonds. They can capture some of the growth offered by stocks while lowering overall market risk.
Ibbotson’s data, which considered interest rates, dividend rates, and historical volatility, drew many interesting conclusions, including:
• Bond investors are unlikely to see as high returns from capital gains in the next ten years as they have seen in the past years. Ibbotson says that if interest rates rise, we could see capital losses.
• Had they been uncapped, FIA’s would have outperformed bonds on an annualized basis for the past 90 years!
• FIA’s can offer the ability to capture a portion of market growth while mitigating overall risk. (I have been telling my clients this for years!)
• FIA’s have the potential to smooth out the return patterns in portfolios because of their downside protection.
• It may not be long until we see FIA’s outperforming bonds.
Many in the industry are calling Ibbotson’s latest work the most significant contribution to financial planning in the last 25 years.
Certainly, those of us in the annuity business, who have been including these fantastic products in our clients’ portfolios for years, already know the power of these financial tools. Still, it’s heartening to see that mainstream financial planners are slowly, but surely, starting to see things our way.
It certainly proves the point I have been trying to make for years:
