Financial Services and Product Innovation

[chinaco]

It appears to me that we have entered into an age of a lot of financial product and service innovation that is focus and targeted at the end consumer. Look at the structure products markets.

Traditional Investment services companies are about providing products and the investor takes all the risk.

Traditional Insurance companies are about managing risk. It seems that many of them are beginning to try to position their core competencies to provide products and services for Asset Accumulation to build a personal pension and to helping with providing an income when one retires.

My question is related to the retirement scenario. What type of product (probably of an Annuity variety) would you need to entice you to buy an annuity. What would the features be. Obviously one factor would be that it would need to be competitively priced to compete with substitute solutions. In other words, what risks would the product need to take care of for you? Longevity is one common risk. Inflation is another. Minimizing losses if the markets go bad is another.

Aside from the cost of the product, is the loss of the assets when one dies the remaining aversion to those products?


What kind of risks do you want to avoid? and How much are you willing to pay for it?

 

[2B]

Aside from the cost of the product, is the loss of the assets when one dies the remaining aversion to those products?


What kind of risks do you want to avoid? and How much are you willing to pay for it?

There are insurance products that will result in a substantial estate upon one's death.

Risk to avoid - depending on an insurance company long term
Willing to pay - nothing to an insurance company other than to protect against major loss/disaster

I think there are a near infinite choice of insurance products to create the illusion of almost anything you can imagine in the "investment" arena. I just don't trust the insurance companies to be even close to doing it yourself.

 

[FinanceDude]

It appears to me that we have entered into an age of a lot of financial product and service innovation that is focus and targeted at the end consumer. Look at the structure products markets.

Traditional Investment services companies are about providing products and the investor takes all the risk.

Traditional Insurance companies are about managing risk. It seems that many of them are beginning to try to position their core competencies to provide products and services for Asset Accumulation to build a personal pension and to helping with providing an income when one retires.

My question is related to the retirement scenario. What type of product (probably of an Annuity variety) would you need to entice you to buy an annuity. What would the features be. Obviously one factor would be that it would need to be competitively priced to compete with substitute solutions. In other words, what risks would the product need to take care of for you? Longevity is one common risk. Inflation is another. Minimizing losses if the markets go bad is another.

Aside from the cost of the product, is the loss of the assets when one dies the remaining aversion to those products?


What kind of risks do you want to avoid? and How much are you willing to pay for it?

The only risk worth "insuring" is the risk of outliving your income. While this is a concern for nearly everybody at some point, most do not do anything to mitigate the risk. Sound asset allocation and revisiting that allocation on a timely basis can mitigate a LOT of that risk away.

I for one would entertain an SPIA if I needed a set amount of money coming in along with SS. I am willing to let half my money or so ride in the markets, but one of my clients said it best (77 years old).

"The older I get, the more guarantees I want".........

 

[ladelfina]

This may not be valid in terms of an answer, but some people may find this new type of investment animal interesting:

Fidelity "Income Replacement Funds"
Fidelity to offer income replacement funds - InvestmentNews

There was just something about them in the Oct. SmartMoney magazine (behind subscription wall online). Didn't see anything on Fidelity's site as yet. ?0.65 expense ratio. Set the horizon way out and you should have something left. Advantage to me would seem to be that you can sell/bail out/change strategy at any time (in addition to the simplicity of set it, forget it, get a check "in the mail").

This is not the same as the annuity, which while paying out less, 'guarantees' an income stream even if you live to 120. I gather some annuities have tax-deferring properties (but so do capital gains and retirement accounts) while others don't (even your cap.gains are taxed as regular income). The new Fidelity funds describe taxes on p.30 here:
https://fiiscontent.fidelity.com/B-CARWI-PTB.PDF

This was also interesting:
Extend Your Retirement Savings (Insurance: Personal Finance) | SmartMoney.com
"Longevity" insurance (basically just a cheaper annuity pushed entirely out into the 'waning years'). Could make sense if the thought of running out of cash at 90 makes you lose some serious sleep and you are not worried about leaving some money on the table in the event of your demise.


Since insurance companies have to make money just like financial companies seems it just depends on how you choose to dole it out to them if you don't want to DIY.

 

[chinaco]

Thanks ladelfina. Interesting. More companies are adjusting their services to accommodate retirees. And Products to at least attempt to mimic certain aspects of a pension fund.


For me there are 6 primary concerns:

1. The Insurance Company will not go bust and is rock solid (narrows the universe of targets substantially). And if they did, I will be made whole.
2. Longevity (life expectancy), will my money run out.
3. Inflation, can I maintain my standard of living (even if hyperinflation occurs for several years)... Guaranteed!
4. If for some reason some other need arises, can I back out of the deal and get to my money and not get scr3wed.
5. I would not like the idea of a premature death and leaving a lot of money to the insurance company.
6. If the 5 items above were available, a lot of money to accomplish it.
7. Down-side protection with upside (growth) participation if it occurs in the markets.

Item 1 is probably not even available... (i.e., made whole)
Item 2 is commonly available.
Item 3 is very expense and covers all but temporary hyperinflation.
Item 4 I am not sure this can be done once it is annuitized. But new products are emerging all the time.
Item 5 May be available. With options like 20 year certain.
Item 6 Insurance companies want a large profit. Plus the pooling of money is expensive.
Item 7 Somewhat available.


Basically I want to sell off all the down-side risk, participate in the upside, and have access to my money if my situation change. And I want it cheap... Dirt Cheap!

 

[2B]

Basically I want to sell off all the down-side risk, participate in the upside, and have access to my money if my situation change. And I want it cheap... Dirt Cheap!

Everything has a price. From what I've been seeing, all the new products that are coming out are really new ways to package the fees. Vanguard is leading the way forward on lower cost annuities but I don't think they are low enough. The only way anyone can justify the fees is to point to the "can't outlive my money" aspect. I, personally, don't expect to out live my mortality table since neither of my parents and only one grandparent did.

Everyone wants a guarantee but life doesn't really have one on anything. I just feel more secure in my own abilities than I can ever trust an insurance company to cope with change and protect my interests.

I would really like annuities and variable annuities to be a good investment. It would make life so much simplier but they are not.

 

[FinanceDude]

I would really like annuities and variable annuities to be a good investment. It would make life so much simplier but they are not.

VG, T.Rowe Price, and others have LOW expenses. If one of those low cost providers would be willing to offer low cost riders to guarantee an income stream regardless of market conditions, it would sell like hotcakes. Maybe they are leery of how to reinsure the risk??