The Advisor Toolkit features perspectives, outlooks, and expertise from thought leaders across the industry to help you, the advisor, keep a pulse on important topics across every facet of your business, and ultimately serve your clients better.
Rates are well below historical norms and finding income remains a key challenge for advisors.
Get the latest news and complete coverage of all things related to serving clients, prospecting, staffing, and more.
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A cooler housing market and changing interest rates mean advisors and clients should rethink their approach to real estate investing and debt.
Real Estate Alternatives
Tax legislation and changes are on the horizon, ensure your clients have what they need to be prepared this tax planning cycle.
As interest rates continue to rise, finding yield has become less challenging.
Terms & Conditions
Terms of Conditions
Get a practical understanding of what this investing movement means for your clients, your practice, and
the rest of the world.
Get a practical understanding of what this investing movement means for your clients, your practice, and the rest of the world.
It’s time to look beyond the markets for income.
It’s time to look beyond the
markets for income.
Smart investors will spot way to limit risk and seize opportunities at this intersection.
ESG & Real Estate
The urge among clients to help is just getting stronger. Learn the best ways to support them now.
How Custom Indices Work
Learn why this innovative option inside fixed indexed annuities is so popular.
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Get a practical understanding of what this investing movement means for your clients, your practice, and the rest of the world. Hear from thought leaders on must-know topics and current debates.
Learn the fundamentals of this important—and
Differentiate yourself, deepen client engagement, and build more resilient investment solutions.
How it helps advisors
The question overlooks a simple truth: Both sides have a role to play in sustainability innovation.
Sustainable Investing Brief:
Public or private?
Uncover your clients’ green investing goals and learn how (and what) to report back to them.
Must-have client conversations
The backlash isn’t likely to limit sustainable investing’s future. Here’s why.
Sustainable Investing Brief:
The anti-ESG movement
Value-signaling without real results is a problem—
but informed advisors can easily sidestep it.
Sustainable Investing Brief:
For additional resources from Envestnet, Click here
How to Restore Retirement Confidence During a Volatile Market
Advisors find themselves challenged to support clients who are about to start relying on their portfolio for income. Protective explains why they should look to guaranteed income.
Last year’s stock market roller coaster has investors’ nerves on edge. For those nearing or in retirement, such market volatility triggers anxious calls to financial advisors and worries about future income. To discuss the role that guaranteed income solutions can play in relieving investor anxiety and potentially improving retirement outcomes, InvestmentNews Create recently connected with Jim Wagner, Chief Distribution Officer, Retirement Division, at Protective.
InvestmentNews Create: How does market volatility affect retirement confidence?
Jim Wagner: Volatile markets can generate fear and anxiety among investors generally, but especially among retirees, who rely on their portfolio for retirement income. It's not surprising that investors react to sharp market declines by selling and then waiting to return to the market until conditions improve and they feel better. Of course, that approach typically leads to selling and buying at the most inopportune times.
The U.S. equity market briefly entered bear market territory last year, which historically happens once every six years. But even though investors know that the market’s long-term trajectory is upward, the normal volatility along the way may be too much for many pre-retirees and retirees to handle emotionally.
But these drops affect more than emotions. A downturn, especially at the start of retirement, can devastate what seemed like a solid income strategy. There may not be enough time for a portfolio to recover from a downturn if a retiree continues taking withdrawals while the portfolio is decreasing in value.
Retirees whose pension or Social Security benefits cover their fixed expenses are less worried about market volatility. For many others, however, a market decline prompts hard questions: Should I take on more risk? Should I reduce my spending? Will I run out of money? Should I look for a retirement job or change my retirement plans?
InvestmentNews Create: What can advisors do to help boost retirement confidence when markets are volatile?
Jim Wagner: Here’s a scary statistic: 40% of Americans fear running out of money in retirement more than they fear death itself, according to the 2021 Zety Fear of Retirement study. It’s clear, therefore, that running out of money really worries people — and that helping clients feel secure about retirement income represents a great opportunity for advisors.
In a study we conducted last year, nearly 90% of advisors surveyed who used annuities agreed that guaranteed lifetime income makes their clients happy and allows clients to sleep easier. Most of these clients want 100% of their retirement income guaranteed so that even if their investment portfolio goes to zero, the income benefit from their annuity is still protected and continues. This also leads to clients who report being more satisfied with their advisors.
That’s especially true when a downturn occurs at the start of retirement and client income needs require drawing down a portfolio precisely at the worst time. Income guarantees remove that worry. Especially during market volatility, using an annuity for a portion of your client’s investments can help boost their confidence in having a successful retirement.
InvestmentNews Create: How else can guaranteed income products boost retirement confidence?
Jim Wagner: Since an annuity can help address some of the key risks leading into or during retirement — longevity risk, market risk and sequence of return risk — by transferring them to an insurance company, it can preserve other parts of the portfolio that may have been earmarked for other financial goals.
When they have the essentials taken care of through income from an annuity, investors can take a deep breath, relax and know that that they can invest their portfolio for their other retirement goals.
InvestmentNews Create: Clients may like guaranteed-income products in theory but feel anxious about buying them. How should advisors approach the discussion?
Jim Wagner: Annuity products should be discussed as part of a client's overall financial plan, and I’ve got a specific tip on that: Bring it up after your client has gone through the exercise of looking at costs and priorities for their post-career years.
At Protective, we recently developed a goals-based retirement income planning program for advisors with retirement expert Dr. Michael Finke. It includes a white paper, a workbook and a worksheet to help build a goals-based income plan in four steps. It starts with helping a client set lifestyle and legacy priorities, then estimating the cost of the client's retirement lifestyle, and then honestly evaluating a client's willingness to spend less if markets don’t perform as well as hoped. For some clients, cutting back is not a problem; for others, it’s a huge blow. Advisors must understand how flexible clients truly are willing to be in their spending.
It all comes together in plan creation, in which the advisor details how fixed and flexible expenses will be funded — and this is the time to discuss the benefits and confidence-boosting aspects of incorporating an annuity. After going through the planning process, a client can better appreciate how an annuity can help prevent having to worry about cutting back later in life. When they clearly see the alternatives, they are better able to make an informed decision about an annuity.
Chief Distribution Officer, Retirement Division
Learn more from Protective
Explore Other Topics From Adviser Toolkit
Michael Finke, PhD
The American College
Explore Other Topics From Advisor Toolkit
Building a retirement vision to support a more holistic client plan
Address risk to help protect retirement
Retirement planning basics
Help clients navigate key retirement decisions
Take a holistic approach to retirement planning
Boost retirement confidence with guaranteed income
What ESG means for smart real estate investors
* Harvard T.H. Chan School of Public Health. Press release: “Office air quality may affect employees’ cognition, productivity,” Sept. 9, 2021.
Risk Considerations Investing involves risk including the risk of loss. The value of equity securities is sensitive to stock market volatility. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry including REITs. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, currency exchange rates or other conditions. In emerging countries, these risks may be more significant. There is no guarantee that any investment strategy, including those with an ESG focus, will work under all market conditions. Investors should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.
This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.
Executive Director, ESG Research
Calvert Research and Management
Read more from Calvert
Investor Perspective Series: Todd Williams on Essential Housing
Essential Housing: Resiliency in a Time of Scarcity
The Durability of Resiliency-Focused Portfolios
Investor Perspective Series: Clay Grubb on Investor Experience
The Future of Multifamily Development: Creating Value and Mitigating Risk in the New Age of Rising Interest Rates
Investor Perspective Series: Clark Spencer on Opportunity Zone Investing
One asset class plus one important investing theme could add up to way more than two for advisors and their clients who are looking for long-term growth.
Hunt for Annuities
What is essential housing, and how can it help to alleviate the US housing crisis?
What does real estate investing have to do with environmental, social, and corporate governance (ESG) concerns? InvestmentNews Create spoke with Brendan McCarthy, Executive Director, ESG Research, at Calvert Research and Management, to answer this question and understand what it means for advisors and their clients—whether they’re primarily real estate-focused or values-driven investors.
InvestmentNews Create: How does real estate investing intersect with sustainability?
Brendan McCarthy: Real estate is central to the economy. Shopping in a grocery store, ordering goods from a warehouse, using a cell phone or the Internet—
real estate is a key part of all of those economic activities. In terms of ESG, real estate connects largely on the environmental front with energy efficiency, water efficiency and greenhouse gas emissions.
Becoming more efficient reduces costs as well as the volatility of expenses. For example, we've seen brownouts in Texas and elsewhere, and droughts in the Southwest. Scarcity of energy and water supply increases price. If you’re more efficient, you're typically less exposed to that volatility as well as just ongoing lower operating bills.
Greenhouse gas emissions create a cost that society has to bear. Because of that, it is getting regulated around the world, and the scrutiny is coming not just from governments but from investors, who may make emitters pay more for capital, and from tenants, who increasingly ask real estate owners about their energy efficiency, water efficiency and building certifications. Tenants often have their own sustainability goals to meet as well, whether they’re corporate or individuals.
Ultimately, this creates a risk of stranded assets or significant brown discounts for real estate properties that are not investing in efficiency or reducing their emissions.
But the social aspect of ESG matters in real estate too. Human capital—the people involved
in a real estate investment, especially REITs—should be very important to investors. REITs are basically portfolios of buildings, and as with any portfolio, the people make the difference. You need to have the smartest, most productive, and most engaged employees to outperform your peers. So at Calvert, we look at what a company is doing to attract, retain and develop their talent.
Real estate lags other sectors in terms of its performance on governance issues such as diversity and inclusion. But it is improving, and it ties into the social elements of managing human capital. Governance also includes shareholder rights and protections and aligning the incentives of the management with the ultimate owners of the business, so we consider real estate investments from that angle as well.
InvestmentNews Create: What opportunities do you see for investors in that intersection of real estate and ESG concerns?
Brendan McCarthy: By focusing on ESG, especially green elements of buildings, investors can reduce regulatory risk and climate risk—for example, green buildings may qualify for lower insurance premiums, which reduces another cost, or may be more water-efficient during a drought.
You can use ESG to capture potential opportunities as well. For example, in the market for office space, there's a growing bifurcation between high-quality (green certified and healthy building certified) and low-quality assets (which aren’t). Post-covid, as commercial tenants are rethinking their leases, they're flocking to high-quality buildings.
Another ESG opportunity in real estate is nontraditional sources of income. For example, warehouses and self-storage buildings, which tend to have expanses of unused roof space, can generate their own power and potentially sell it by installing solar panels or leasing those rooftops to solar providers. And timber REITs have found they can delay harvest of low-yielding timber to sell carbon offsets.
InvestmentNews Create: What makes those opportunities compelling in what we expect to continue to be a very volatile market, especially against the backdrop of debates about workers returning to the office?
Brendan McCarthy: Real estate is such an integral part of the economy that it's always going to be a key asset class, regardless of a bear or bull market. The important consideration is, are companies or asset managers factoring in ESG to pick leaders and avoid laggards within real estate?
Take the bifurcation in office space. Employees of a public company might be more willing to return to the office if it had better sustainability characteristics, such as better air ventilation. A 2021 study from the Harvard T.H. Chan School of Public Health* showed that better air ventilation correlates with improved productivity. And buildings with green certifications may command premiums if that is perceived to help office tenants get their employees back
to the office.
InvestmentNews Create: Why might investors want to maintain exposure to real estate
in their portfolio?
Brendan McCarthy: Because real estate is hard assets that are integral to the economy, it’s often seen as an inflation hedge as well. It's unlikely that people will ever not need real estate.
InvestmentNews Create: What are some ways advisors should seek to capitalize on the opportunities that we've discussed?
Brendan McCarthy: There are currently a small but growing number of ESG real estate strategies. It’s a growing space, as interest in ESG grows and new real estate strategies start to incorporate an ESG focus.
And that brings me to a point worth clarifying: the definition of ESG. I want to reiterate that ESG at its heart is about pricing in externalities. That simply means factoring into valuation the financially material environmental, social and governance costs and benefits a company bears on other stakeholders, which will likely be internalized by the company over time.
Fixed Income Opportunities Emerge in an Uncertain Environment
Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index.
This material contains current opinions of the portfolio manager /sub-adviser and such opinions are subject to change without notice. Aegon AM US is under no obligation, expressed or implied, to update the material contained herein. This material contains general information only on investment matters; it should not be considered a comprehensive statement on any matter and should not be relied upon as such.
There is no guarantee these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest over the long-term, especially during periods of increased market volatility. All investments contain risk and may lose value.
This material contains "forward-looking statements" which are based on the firm's beliefs, as well as on a number of assumptions concerning future events, based on information currently available, and are subject to change without notice. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance and actual outcomes and returns may differ materially from statements set forth herein.
Fixed income securities are subject to risks including credit risk, interest rate risk, counterparty risk, prepayment risk, extension risk, valuation risk, and liquidity risk. The value of fixed income securities generally goes down when interest rates rise, and therefore the value of your investment in the fund may also go down.
*Aegon Asset Management US (Aegon AM US) is the marketing name of the sub-adviser. The legal entity name of the sub-adviser is Aegon USA Investment Management, LLC.
Aegon Asset Management US is a US-based SEC registered investment adviser, and is part of Aegon Asset Management, the global investment management brand of the Aegon Group.
Transamerica Funds are advised by Transamerica Asset Management, Inc. (TAM) and distributed by Transamerica Capital, Inc. (TCI) member of FINRA. Aegon USA Investment Management, LLC is an affiliate of Aegon companies. Transamerica companies are part of the Aegon group.
©2022 Aegon Asset Management or its affiliates. All rights reserved.
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CFA, Head of Multi-Sector Portfolio Management Aegon Asset Management*
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Transamerica Short-Term Bond
About Transamerica Mutual Funds
Rising inflation is driving interest rates higher, which makes finding yield an interesting pursuit. Find out where to look and what to consider.
Thought Leadership with Brian Westhoff
The past two years have been marked by rising inflation, and the Federal Reserve’s swift moves to combat inflationary pressure are likely to continue. This dynamic might usher in a period of slowing economic growth—which is not necessarily bad news all around, believes Brian Westhoff, CFA, Head of Multi-Sector Portfolio Management at Aegon Asset Management*. Aegon Asset Management serves as the sub-adviser for Transamerica fixed income strategies. In an interview with InvestmentNews Create, Westhoff explains where he sees opportunity for fixed-income investors in the current economic environment, and where he sees risks.
InvestmentNews Create: What is your outlook on the economy, inflation and interest rates?
Brian Westhoff: In general, we're starting from a healthy spot with low unemployment and a growing economy. Unfortunately, excess demand and constraints on supply have caused inflationary pressures that central banks continue to react to. As a result, we do think the economy is on the path to slowing down, likely through 2023. There may even be a chance of a mild recession. That said, the inflationary backdrop is improving—we are likely seeing elements of peak inflation—so as we get into 2023 and a slowing growth environment, the Federal Reserve will likely be able to slow its pace of rate hikes going forward.
InvestmentNews Create: What are your main concerns about the current economic environment?
Brian Westhoff: My chief concern is that the Fed will raise interest rates too aggressively, slowing the economy too quickly. I’m also concerned about energy supply. While oil prices have dropped, any extra pressure on the market now could exacerbate inflation, creating problems that could push interest rates higher.
InvestmentNews Create: Where should investors be looking for yield in fixed income?
Brian Westhoff: Over the last 10 years, we were in a near-zero interest rate environment—or even in negative territory for some central banks. During that time, it was hard to find opportunities for yield. Now that the Fed has raised rates, we're starting to see very attractive yields on the front end of the yield curve where investors can potentially get good risk-adjusted returns, especially in short-term corporate bonds from investment-grade companies with good liquidity and strong balance sheets.
We’re also looking closely at structured securities, including non-agency mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities, which benefit from healthy consumer and real estate markets. These can be a good source of risk-adjusted return for investors. Some structured securities may even provide bigger yields than bonds from the corporate universe.
InvestmentNews Create: Speaking of real estate, what short-term effects will the sector likely have on markets?
Brian Westhoff: We’ve seen a lot of rapid changes in the housing market over the last few years, both in terms of housing prices and now in mortgage rates. Homeownership has gotten more expensive and more out of reach for many consumers, which may put a damper on new home sales. It could be a tougher environment for homebuilders, but I don’t feel the market will experience anything like the major cracks it did in 2008 with its backdrop of questionable financial products and “liar loans.”
InvestmentNews Create: What differentiates Aegon Asset Management in the fixed-income space?
Brian Westhoff: We are a global fixed income manager with deep resources. As such, we have built strong research teams covering a full range of sectors across the quality spectrum. Within the fund, an asset class of growing interest given the current rising rate environment, we leverage these resources to identify investment opportunities across a broad opportunity set that can offer a yield advantage over short-term government bonds and may provide diversification benefits to investors.
We also develop a deep understanding of the business cycle, including the factors that drive growth and central bank policy, to help us navigate market volatility, identify multiple sources of alpha and mitigate downside risk.
How Charitable Planning Has Evolved
The urge among clients to help with emerging causes and longstanding passions hasn’t diminished—it’s just getting stronger. Advisors need to know the best ways to support them now, especially since it has become table stakes.
InvestmentNews Create: Historically, charitable giving has been correlated with market performance. After a bruising 2022, it seems like charitable giving would not be top of mind for clients or advisors. Are clients truly not interested in charitable giving?
Fred Kaynor: We have actually seen clients responding to difficult times with increased charitable giving. At Schwab Charitable, donors increased grants to charity in 2022 to more than $4.7 billion with a record 995,000 grants to more than 117,000 charities. The dollars granted to charities represent a 7% increase, or nearly $300 million more for charities compared to 2021.
For philanthropic clients, giving comes from the heart. This year, advisors can expect them to want to continue supporting their favorite causes and responding to disasters, crises and other immediate needs. Schwab Charitable works with The Center for Disaster Philanthropy to provide donors with lists of pre-vetted charities supporting relief and recovery efforts for crises across the world as they occur. In 2022, despite a nearly 20% drop in the S&P 500, donors increased the number of grants to organizations recommended by the CDP by 33% compared to 2021.
Advisors should feel confident their philanthropic clients will want to hear about the many ways they can benefit from a wealth management plan that incorporates charitable giving.
InvestmentNews Create: How are advisors handling those conversations—and how should they handle them?
Fred Kaynor: Meaningful wealth management and planning discussions often start with understanding your client’s dreams and goals. For many clients this also means their philanthropic goals. To initiate or deepen the charitable giving conversation, explore your client’s charitable giving goals and motivations. You can ask how they give to charity today and if they have considered donating assets besides cash. Explore whether or not creating a charitable legacy is important to them. You can help build a connection by sharing insight into your own philanthropic interests.
Advisors should also remember that there are tools and resources available to them to help them guide the conversations with clients. For example, the Schwab Charitable Giving Guide is a comprehensive, interactive guidebook designed to help clients and their families create and manage a charitable giving plan. The associated Advisors’ Guide provides helpful tips to consider when discussing charitable giving with clients using the Giving Guide. Schwab Charitable also has a deep bench of charitable consultants that can offer expertise to advisors and clients.
InvestmentNews Create: Alternative investments are playing a bigger role in investing. What does that mean for charitable giving?
Fred Kaynor: Client portfolios are incorporating more assets beyond traditional equities and fixed income. This creates more opportunities for advisors to identify non-cash assets which may make sense as tax-smart charitable contributions.
Donating non-cash assets directly to charity can increase the amount available for charity by up to 20% by allowing donors to eliminate capital gains tax liability on the assets. In 2022, 60% of contributions to Schwab Charitable were non-cash assets, such as publicly traded stock, private business interests, and alternative investments.
We expect non-cash assets including alternative investments to continue to grow in popularity as charitable contributions because they are tax-efficient and increase clients’ impact on the causes they support.
InvestmentNews Create: Why have donor-advised funds become a popular tool for advisors? Is this just a case where advisors are doing what’s easy for them? Why not just set up a foundation for a client?
Fred Kaynor: According to Schwab’s latest RIA Benchmarking study, 85% of independent advisors report offering charitable planning to clients. In other words, charitable planning has become a standard service. The next question for advisors is how to optimize their own charitable offering to differentiate and grow their practices.
A donor-advised fund is a simple, tax-smart solution for charitable giving that makes strategic giving accessible to advisors and clients of all sizes. Donor-advised funds are convenient and easy to use, have no minimum account requirements, offer tax-free growth of invested account assets, and help unlock more dollars for charity.
Donor-advised funds can also simplify the process of contributing non-cash assets by handling the sale of the assets. Plus, recordkeeping of all donations is handled by the donor-advised fund and provided to the donor in a consolidated year-end statement. This simplifies gathering of tax receipts.
Many ultra-high net worth clients have also found that opening a donor-advised fund to complement a private foundation helps them achieve their philanthropic goals. Donors may set up a donor-advised fund in their family’s name for use by multiple donors and establish a succession plan to continue their philanthropic legacy beyond their lifetime. The fees for donor-advised funds tend to be significantly lower than the significant expenses private foundations carry for legal and tax activities, investment management, and staff salaries.
InvestmentNews Create: Are clients interested in charitable giving primarily for the tax benefits? What else might drive them, and are those really just secondary concerns, or are they as important as (or sometimes more important than) the tax considerations?
Fred Kaynor: Clients who give to charity are primarily motivated by causes near and dear to their hearts. Tax-smart giving allows them to maximize their impact on those causes. Advisors who incorporate a strategic charitable plan into wealth management can help clients unlock tax benefits that mean more opportunities for giving, and more dollars for charity.
Donors may also be inspired by a desire to pass on values to a younger generation and extend their charitable legacy. This can connect families in meaningful ways and make the giving experience even more joyful.
Charitable planning offers advisors an opportunity to help clients achieve their aspirations in an area that is deeply personal. The result is often deeper client relationships and referrals. And when the whole family gets involved in charitable giving, advisors can build a bridge to a younger generation that will inherit trillions of dollars in the coming years.
Managing Director, Relationship Management, Marketing & Partnerships
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Jean is a donor of Schwab Charitable™ and Cathy is an independent advisor. They were not compensated by Schwab Charitable for their comments. The experience described may not be the experience of all clients and is not indicative of future programs, services, performance, or success. Schwab Charitable does not provide specific individualized legal or tax advice. Please consult a qualified legal or tax advisor where such advice is necessary or appropriate.
Schwab Charitable Fund™ is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Please be aware that Schwab Charitable has exclusive legal control over the assets you have contributed. Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization which has entered into service agreements with certain subsidiaries of The Charles Schwab Corporation.
©2023 Schwab Charitable Fund. All rights reserved. (0323-3UMP)
Tax-smart charitable giving tips to share with your clients
Ways to invest clients’ charitable assets
How a Schwab Charitable account works
A comprehensive guide to create a giving strategy
Why charitable giving matters to clients
Jean is a donor of Schwab CharitableTM and Cathy is an independent advisor. They were not compensated by Schwab Charitable for their comments. The experience described may not be the experience of all clients and is not indicative of future programs, services, performance, or success. Schwab Charitable does not provide specific individualized legal or tax advice. Please consult a qualified legal or tax advisor where such advice is necessary or appropriate.
Schwab Charitable FundTM is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Please be aware that Schwab Charitable has exclusive legal control over the assets you have contributed. Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization which has entered into service agreements with certain subsidiaries of The Charles Schwab Corporation.
©2023 Schwab Charitable Fund. All rights reserved. (0323-3UMP)
How one advisor and her client created impact
How one family created a legacy
Why charitable giving matters for your practice
Why charitable giving matters for your practice
REAL ESTATE ALTERNATIVES
Rising Interest Rates:
Good or Bad for Real Estate?
The Federal Reserve’s recent moves to raise interest rates with intention of cooling inflation have triggered a sell-off in equities. The moves also have led to higher mortgage rates, which often can make home-buying more expensive. But what do higher rates mean for real estate investors? To find out, InvestmentNews Create recently met with Todd Williams, Chief Investment Officer at Grubb Properties, a developer, owner and manager of essential housing, which it defines as multi-family residential properties positioned between affordable housing and luxury housing. His edited comments follow.
InvestmentNews Create: Before we discuss why revisiting the traditional 60/40 asset allocation mix may make sense, explain why it has proven popular and useful for so long.
Todd Williams: A rising rate environment can be challenging for investors, but it still affords many opportunities. Investors should look for managers with experience getting through these environments, and for managers that consider the debt requirements of each project as well as their entire loan portfolio. The goal is finding a portfolio that applies the best financing structure to each project and protects assets for the long term.
The interest-rate characteristics of the debt portfolio supporting real estate investments are complex, and at Grubb Properties we view ours through four metrics: The proportion that is fixed rate, the proportion that is floating rate, and the real and nominal rates on the total portfolio. Real rates are adjusted for inflation while nominal rates aren’t. In this high-inflation environment, real rates should be considered to understand the true value the loan portfolio is creating.
In addition to those four metrics, two other important debt characteristics should be considered in volatile times: term (the length of a loan) and leverage (the loan as a percentage of the total cost or value of the asset). Rapidly rising interest rate environments can lead to volatility in capital markets which affects lender behavior with respect to existing loans and to their willingness to provide new lending. During these periods of volatility, loan expirations and triggering loan covenants can have significant repercussions to borrowers. High-leverage loans can breach loan covenants when values drop or lease income is affected. These changes can trigger requirements for additional equity investment, an event known as curtailment, or the paying down of the loan either in full or in part. Likewise, if a loan expires at a time new lending is limited or temporarily non-existent, refinancing an asset can be extremely challenging.
At Grubb Properties, we maintain significant discipline with respect to both total leverage and loan maturity. With respect to leverage, we typically use debt for 55% to 65% of a project’s cost, which translates into equity of between 35% and 45%. This provides coverage even during times of distress like we saw during the Global Financial Crisis when values dropped by as much as 30%. Our financial team aggressively manages debt expirations so that most of our portfolio has expirations 10 or more years out, with some properties having maturities as long as 42 years. In addition, we make sure that we have very limited exposure to any loan terms with less than three years remaining.
InvestmentNews Create: How do rising rates affect investment real estate differently from those buying a home as a residence?
Todd Williams: For residential home buyers, a mortgage with a higher rate — whether that mortgage is fixed or variable — means a higher monthly mortgage payment. With a fixed-rate mortgage, of course, that higher payment is unchanged, but with a variable-rate mortgage the payment could go up if interest rates rise.
The same holds true for a multifamily property, except that the property owner may be able to increase rents to help offset all or some of the rising mortgage cost. For properties that have long-term, fixed-rate financing, like the majority of the Grubb’s portfolio, rising rates don’t impact property performance. In fact, one distinct advantage of commercial, long-term, fixed-rate loans is that they are generally fully assumable by future buyers. That is not true with most single-family home loans. As a result, a commercial loan on a multi-family property secured with a fixed-rate loan can actually add value to the property if interest rates have risen significantly, because a buyer would pay more to the seller to assume such a low-interest loan.
InvestmentNews Create: What advantages does multi-family real estate have for investors in the current environment?
Todd Williams: Multifamily housing historically has been an effective hedge against inflation compared with other commercial real estate asset classes. Lease terms are generally shorter and more favorable, which gives investors the opportunity to reprice rents as costs increase. Of course, as inflation rises, the cost of living does too. That can push housing further out of reach for many workers. The current housing crisis, driven by both generational demand and a lack of supply, means there will be continued need for more housing for years to come. For that reason, Grubb builds what it defines as ‘essential housing’ – housing that is affordable to those making between 60% and 140% of an area’s median income. We believe that part of the market offers investors a resilient strategy.
InvestmentNews Create: Where does such real estate fit in a portfolio?
Todd Williams: Working with an advisor is the best way for an individual investor to figure out how real estate might best be utilized in a portfolio, or if doing so is appropriate at all. That said, real estate can often be valuable as an asset class that has low historic correlation to publicly traded bonds and equities. Often, real estate can generate income and capital appreciation over time along with certain tax benefits. It is important to recognize, however, that private real estate investments — those not listed on a public exchange — typically are illiquid. While they can have advantages in terms of appreciation, illiquid investments generally are not be suitable for those who may need ready access to their capital.
InvestmentNews Create: How different is each geographic market in terms of inflation and supply/demand characteristics?
Todd Williams: Since real estate is inherently local, submarket and metropolitan market dynamics are very much a factor in supply and demand analysis. Nationally, the U.S. is significantly under-supplied by multifamily housing, but each market is vastly different. During the pandemic, for example, gateway markets such as New York City, Los Angeles and San Francisco saw temporary relocation by their residents, resulting in low occupancy and falling rents. At Grubb Properties, we saw this as an opportunity to acquire sites at a discount in those markets so we would be favorably positioned when the markets recovered. Conversely, high-growth markets in the Southeast saw booming demand, substantially driving up rental occupancies and rents. We elected to sell several mature investments in those markets in 2020 and 2021, and recognized above-market returns for those assets. Managers with a long-term perspective who have experienced inflation and recessions can be successful contrarians when temporary dislocations appear.
Chief Investment Officer
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At a time when investors are struggling with rising interest rates and falling equity values, Grubb Properties explains why multi-family residential real estate could offer an attractive alternative.
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How Custom Indices Work
Custom Indices Fuel Fixed Indexed Annuity Popularity
InvestmentNews Create: So just to level set, what does a fixed indexed annuity do for a client?
Adam Politzer: When you talk to pre-retirees, they'll tell you that they want a product that allows them to participate in the market, but they don't want any market risk. And that is exactly what a fixed indexed annuity does—it protects principal, meaning the client can’t lose any money, plus it's a tax-deferred product, meaning the client can't lose any money due to market loss. And the customer has some potential for growth potential based on the performance of the underlying index. All in all, we view it as a better bond alternative.
InvestmentNews Create: Why is it important for a financial professional to understand the inner workings of an FIA? Isn't it enough to just know what it says it does?
Adam Politzer: We view its primary usage as a way to supplement a retiree's fixed income portfolio. But it surprises me just how few financial professionals are aware of how much it can really do. Understandably, we’ve had so much innovation in FIAs during the last 10 years that it has been hard to keep up. The more that financial professionals learn about what’s under the hood, the more the product impresses them.
For example, we're deploying better asset strategies than we ever had in the past, which generates more yield potential that we're able to pass on to their clients. All the index innovation is truly amazing. And that just means that we have more tools to deliver more stable renewal rates to them as well.
InvestmentNews Create: Why would someone look for a fixed indexed annuity that includes a custom index?
Adam Politzer: Well, keep in mind that custom indices have been built specifically for FIAs, based on sound financial principles and investment strategies that can lead to better performance. Benchmark indices are certainly very popular and we like them a lot because they're transparent, but they're not designed specifically for FIAs. Custom indices can help smooth out performance by controlling volatility. The volatility control has also allowed us to offer competitive participation rates, which gives us more potential for growth in these indices.
Custom indices also provide diversification, which increases the confidence that you're going to get a return in any given environment. We're even able to add artificial intelligence to some of the custom index designs to help make better financial decisions inside the index. That also allows us to look at more data, which helps create better volatility control.
And the diversification and better risk control help deliver more consistent performance for clients, including steadier renewal rates. That’s why some of the innovation in custom indices now focuses on creating even more diversification inside the index, which really helps with seeking a better risk-adjusted return, which once again translates into better client value.
InvestmentNews Create: So to get a little deeper into that point, why would you say a custom index is a complement to but not a replacement for the benchmark S&P 500™ in a fixed indexed annuity?
Adam Politzer: I think everybody knows that diversification matters. So having indices that are designed to perform even when the top 500 stocks don’t is going to create a better opportunity for credit in any given market environment. And given the way that these products are manufactured, by purchasing options, we know that diversification within the custom index adds value. That gets clients better returns per unit of risk and that helps create better outcomes for them.
At Athene, we've developed a product with a wide range of indices. We've selected our different indices to complement each other so that one index may perform in one environment and other indices will perform in another environment. Depending on the client’s goals, it might make sense for clients to put a portion of their funds into each index to maximize their potential for steady credits throughout the life of the contract. It's too difficult to try to predict when each index is going to perform, so you may be better off taking a diversified approach.
Senior Vice President and Chief Product Officer
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
For financial professional use only. Not to be used with the offer or sale of annuities.
Guarantees provided by annuities are subject to the financial strength of the issuing insurance company.
Indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an index nor any market-indexed annuity is comparable to a direct investment in the equity markets.
Athene Annuity and Life Company (61689), headquartered in West Des Moines, Iowa, and issuing annuities in 49 states (excluding NY) and D.C., and Athene Annuity & Life Assurance Company of New York (68039), headquartered in Pearl River, New York, and issuing annuities in New York, are not undertaking to provide investment advice for any individual or in any individual situation, and therefore nothing in this should be read as investment advice.
INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, THE BANK OR ANY BANK AFFILIATE • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
Have you been keeping up with fixed indexed annuities (FIAs)? They’ve evolved, and that’s one reason for their popularity. One of the most important innovations in the last several years is the use of custom indices as part of their crediting strategies. To understand this development and what financial professionals need to understand about it, InvestmentNews Create recently connected with Adam Politzer, Senior Vice President and Chief Product Officer at Athene.
Listen to more insights from Politzer in our exclusive interview.
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Please note: This content is intended for financial professionals.
HUNT FOR ANNUITIES
THE ERA OF LOW INTEREST RATES
New Year, Same Challenge:
The Search for Income Continues
With rates well below historical norms, finding income remains a key challenge for advisors. Here’s why non-commissioned annuities may be the solution.
One of the most pressing challenges heading into 2022 is one that has confounded advisors for more than a decade: The search for income. With rates tethered well below historical norms, many investors have ventured into riskier alternatives in search of yield or tilted their portfolios even heavier toward equities. A new approach is required, says David Lau, Founder and CEO of DPL Financial Partners. In an interview with InvestmentNews Create, he explained how non-commission annuities have removed barriers advisors traditionally associated with the product set, and why they may be the optimal solution for today’s retirement income challenges.
InvestmentNews Create: Give us the 10,000-foot view of the challenge low interest rates present, and some perspective on how far away we are from a normal rate environment.
David Lau: We’ve been stuck in a low rate era – not low-rate environment at this point, but era – for 13 years. I don’t think many investors appreciate how far we are from a normal rate environment. Even if we continue to see inflation, and the Fed responds by raising rates, we’ve got a long way to go before the yield on a 10-year Treasury reaches its historical average, which is around 5.1%.
As we’ve been stuck in this era of low interest rates, we’re seeing two dynamics. First, many investors are getting heavily over weighted toward equities. Traditionally a retiree may have a 60/40 or even 50/50 stock and bond portfolio. Now we’re seeing that allocation creep up to 70/30 or 80/20. In other instances, advisors are allocating “safe” assets to riskier credit strategies or alternatives in search of yield. Both mean taking on a lot more risk in the portfolio.
InvestmentNews Create: What do low interest rates mean for a client’s financial plan?
David Lau: Many advisors’ financial plans may be far too optimistic because of the assumptions they are making about fixed income returns. For example, if you build a financial plan that has a 90% probability of success using various assumptions that include a 5% interest rate, and then change no other variable except to bring the interest rate assumption in line with today’s 1.5% yield for 10-year Treasuries, the probability of success falls from 90% to 37%. That’s a striking difference.
InvestmentNews Create: DPL is in the camp that annuities should replace bonds as the go-to income source. Make the case for why.
David Lau: We believe advisors often constrain themselves to the investment world when it comes to income planning. If an advisor opens themselves up to other products – which we believe you have to given today’s fixed income reality – an annuity is purposefully built to generate income and it does it very well. Commission-free annuities produce income 40% more efficiently than a bond portfolio today.
InvestmentNews Create: That’s an attention-getting statistic. Explain what you mean when you say annuities produce income 40% more efficiently than a bond portfolio.
David Lau: Think of it as buying income for your client. If you were to buy $50,000 worth of annual income for your client, and expect that income to last 30 years, at today’s interest rates, you’d need a $1 million (or more) bond ladder. You could fund that same income level with an annuity for about $600,000. That’s a massive difference.
InvestmentNews Create: As you know, many advisors have been hesitant to embrace annuities. What’s changed?
David Lau: Commission-free annuities change everything. Getting rid of commissions makes some comparable products 80% cheaper than a commission-based counterpart. Fee-based annuities also have removed much of the complexity around product features. Commissions have at times led to adding bells and whistles to products that may not have been that useful, but were added so sales teams had something new to sell. Commission-free products are bought, not sold, and so have been simplified, focusing on what’s usable, not what’s “sellable.”
InvestmentNews Create: Any additional thoughts on why annuities deserve a closer look?
David Lau: It’s become a lot easier to integrate annuities into all the components of an advisors’ technology. The annuity can be integrated into a portfolio management system. We’ve developed product discovery tools that allow advisors to easily compare annuities to each other or to a fixed income portfolio. Technology makes it easier to identify annuities that best meet an income need or other needs in the portfolio, like asset growth or protection. And importantly, technology has made it a lot easier for an advisor to show their client what the plan looks like with and without an annuity, and let them decide how they want to fund their retirement income. Once you give commission-free annuities a look … you can’t unsee it. The annuity advantage is right there. In 2022, we believe advisors should take that look.
Founder and CEO
DPL Financial Partners
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Rethinking the 60/40 Portfolio
The simplicity and time-tested effectiveness of the 60% equity/40% fixed-income portfolio allocation mix have been key reasons for its endurance. But times change. With market conditions in the foreseeable future unlikely to produce results that made the mix so successful in the past, this may be the right time to consider a modified approach to portfolio allocation. To look at new ways to reach clients’ investment goals, InvestmentNews Create recently sat down with Nic Millikan, Managing Director and Head of Investment Strategy at CAIS, the alternative investments platform. The discussion, edited for length and clarity, follows.
InvestmentNews Create: Before we discuss why revisiting the traditional 60/40 asset allocation mix may make sense, explain why it has proven popular and useful for so long.
Nic Millikan: The short answer is that, for much of the population it has worked. From March 2009 through the start of the recent stock market volatility, a 60/40 portfolio has returned 11.1% a year, on average, with a standard deviation of 8.4% and a Sharpe ratio of 1.27%. That can be really attractive on a risk adjusted basis, so it’s no wonder that the performance and relative simplicity of the 60/40 portfolio has helped endear it to investors. But the recent past has offered an almost perfect set of conditions in that equities were rising at the same time that bond prices were rising. So investors not only benefitted from bonds providing a safety cushion, they also provided a boost to performance. But interest rates now have gone as low as they can hypothetically go and equities appear to be fully priced, so the party that has lasted for 13 years has likely ended. Unfortunately, many investors may not realize that.
InvestmentNews Create: How should investors and their advisors adjust their thinking?
Nic Millikan: First, it’s important to recognize that changing one’s approach isn’t easy, especially since equities loom so large on the minds of investors. They see news and commentary about stocks on TV and talk about stocks with friends. And since we’ve been in a strong bull market, despite dips, for 13 years, many investors have greater confidence in their own stock-picking ability; others have concluded that professional active management provides little added value. As for bonds, the inverse relationship of yield and price may confuse investors.
Despite the challenge of investors’ current mindset, it’s important to note that banks and asset managers have lowered their assumptions about future equity returns and foresee slightly higher interest rates as well. That translates into an investment environment that is likely to be different in coming years, meaning this is a good time to reassess the 60/40 portfolio and look into the use of alternative investments, whose performance is not typically dependent on the direction of markets.
InvestmentNews Create: Why should an advisor consider adjusting an asset allocation strategy to include alternative investments?
Nic Millikan: Alternatives provide an opportunity to look at a wider opportunity set. The investments that come under the alternatives umbrella have varied characteristics and are actively managed, which may help overcome headwinds. What’s more, some alternative strategies and vehicles — like long-short investing or venture capital, for example — don’t need equity markets to go higher in order to be successful. They can often zig when the market zags.
InvestmentNews Create: What are some of the key considerations when investing in alternatives?
Nic Millikan: The biggest issue is suitability; do alternatives fit an investor’s profile? The degree to which an investor is willing to forego some liquidity for the potential of higher returns is likely to be a consideration since some alternative investments, such as private equity, have holding periods that may be eight to ten years in length, while others, such as hedge funds, may require only a one- to two-year commitment. In addition, performance dispersion among alternative asset managers is generally several times greater than among managers of traditional mutual funds for example. Manager selection, therefore, can be very important, and since there tends to be some persistence of return among alternatives managers, due diligence to identify the skills that persist is very important.
InvestmentNews Create: How should advisors frame the conversation about alternative investments with their clients?
Nic Millikan: I would start by saying that allocations that worked in past may not work in the future, and ultimately may turn out to have been riskier than adjusting a portfolio to contain assets where performance is not correlated to the movement of markets. Fortunately, because of technological developments, there are now new tools that advisors can use to access a wide range of alternative asset classes and strategies. What’s more, these alternative choices have become democratized in recent years as a result of innovation and are more accessible to a wider range of investors than ever before.
InvestmentNews Create: How can advisors find the tools they need to support their clients in exploring an alternatives strategy?
Nic Millikan: Advisors need an easy-to-access resource. At CAIS, we specialize in providing advisors with the resources, tools and education they can use to help their clients maximize the value of alternative investing. Knowing what to say and how to say it, advisors can have the confidence they need to prepare their clients for the different market environment that lies ahead.
Nic Millikan, CFA, CAIA
Managing Director and Head of Investment Strategy
Learn more about CAIS
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Please note, as you listen, we use the terms financial professionals and financial advisors interchangeably, even though they have slightly different meanings.