module 5 expanding the scope of investments a...

1©2015 Pershing LLC. Member FINRA, NYSE, SIPC. For professional use only. Not for distribution to the public. Please see disclosures at end. Proprietary and confidential.

A Comprehensive Modular Program

Module 5 Expanding the Scope of Investments

Foundational Concepts

Major Activities and Decisions

Advanced Strategies and Implementation

Module 7

Optimal Withdrawal

Strategies for Tax-

Advantaged Accounts

Module 8

Identifying Target Clients

and Building a Marketing

Strategy

Module 9

Tying It All Together

Module 1

The Transition Phase

of Retirement and

Your Business

Module 2

Framework for

Retirement Income

Planning

Module 3

Income Resources and

Budgeting Basics

Module 4

Tapping Into Social

Security

Module 5

Expanding the

Scope of Investments

Module 6

Additional Strategies for

Generating Retirement

Income

©2015 Pershing LLC. Member FINRA, NYSE, SIPC. For professional use only. Not for distribution to the public. Please see disclosures at end. Proprietary and confidential.

Module 5: Expanding the Scope of Investments

Income Planning for Clients Nearing Retirement


The Challenges of Investing for Income

Convergent Retirement Plan Solutions, LLC © 2015


Investing

for income is

fundamentally

different than for

accumulation

Need for near-term liquidity balanced with ongoing need for long-term growth

Unknown time horizon (longevity risk)

Need to balance income flexibility with income security

Increased dangers associated with market volatility


Income Versus Accumulation


Convergent Retirement Plan Solutions, LLC © 2015

The challenges of investing for income during

this phase of retirement call for a broad array

of investment options to:

• Pursue continued growth with

reduced portfolio volatility

• Secure income guarantees

when necessary

• Address tax risk and longevity risk

Don’t Limit

Your Tool Set


Guarantees apply to certain insurance and annuity products (not securities, variable or investment advisory products) and are subject to product terms, exclusions and limitations and the

insurer’s claims paying ability and financial strength.


Review Your

Client Base

Look for clients

entering the

transition phase:

• Who may benefit

from a written

retirement income

plan

• Who have low

tolerance for

market volatility

• Who have

significant equity

exposure

Income

Guarantees

Traditional

Investments

• Fixed income

• Equities

• Mutual funds and

exchange-traded

funds (ETFs)

• Commodities

• Limited

partnerships

• Real estate

investment trusts

(REITs)

• Royalty trusts

• Private equity

• Private mortgages

Alternatives

• Guaranteed

minimum

withdrawal

benefits

(GMWBs)

• Single premium

income annuities

(SPIAs)

• Deferred income

annuities (DIAs)

Three Broad Categories


Fixed Income Strategies

Steady stream of income

over successive time

periods

• Default risk (bonds)

• Market risk

• Income level may be low

• Reinvestment risk

• Market risk

• Default risk

• Income from certain

bonds may be taxable

under AMT rules

• Reinvestment risk

CD Ladders and

Bond Ladders

Predictable income and a

measure of inflation

protection

Predictable stream of

income exempt from

federal and, possible,

state income tax

Treasury Inflation

Protected

Securities (TIPs)

Municipal Bonds

Primary Benefit Primary Risks



Equity Strategies for Income

Source: Standard & Poor’s 500 Index from January 1, 1001 to December 31, 2014. An investment can not be made directly into an index. Returns are not adjusted for inflation

Past performance does not guarantee future results and an investment may be worth more or less than its original cost.


Preferred stock

dividend-paying

common stocks

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

Va

lue

$1

In

ve

ste

d

Year Ending 12-31-

1991 1995 1999 2003 2007 2012

Cumulative Return: Standard & Poor’s 500 Index

of Common Stocks

1991 to 2014

Without Dividends Reinvested

6.24% CAGR

With Dividends Reinvested

10.31% CAGR

1991 1996 2001 2006 2011 2014


Real Estate Investment Trusts for Income

• Must pay out at least 90% of their taxable income

as dividends

• 166 REITS are traded on the New York Stock

Exchange

• Market Capitalization: $786,502 million

• FTSE NAREIT All Equity REITs Index

– Average annual total returns

> 5 Years: 14.4%

> 10 Years: 7.05%

> 20 Years: 10.90%

– Dividend yield: 3.87%

– 30-Year Correlation to ML Government/Corporate

Bond Index: 0.19

• FTSE EPRA/NAREIT Global Real Estate Index

annual dividend yield: 3.60%

Source: National Association of Real Estate Investment Trusts (NAREIT) as of June 30, 2015..

An investment can not be made directly into an index. Past performance does not guarantee future results.


Pools of equity

shares of

companies

that invest in

commercial

properties or

mortgages


Mutual Funds and Exchange-Traded Funds for Income


Mutual funds and exchange-traded funds (ETFs)

offer many benefits for investors seeking income

• The ability to receive an income stream from dividends

or interest, without redeeming shares

• Depending on the type of mutual fund or ETF, income

may be ordinary taxable income or tax-exempt income

• These investments are highly liquid

• There are thousands of choices with varied objectives,

many with low-cost expenses


Income guarantees

without actually

annuitizing

• Longevity risk

• Penalties/fees for

early or excessive

withdrawals

• Loss of flexibility

• Inflation risk

unless payments

are indexed for

inflation

• May not live to

collect benefit

Guaranteed

Minimum

Withdrawal

Benefits

(GMWBs)

Potentially cost

effective way to

manage longevity risk

Income that is

guaranteed for life

Deferred

Income

Annuities

(DIAs)

Single Premium

Income

Annuities

(SPIAs)

Income Guarantees

Guarantees apply to certain insurance and annuity products (not securities, variable or investment advisory products) and are subject to product terms, exclusions and limitations and the

insurer's claims paying ability and financial strength.


Review Your

Client Base

Look for clients

entering the

transition phase

who:

• Are likely to have

an income gap at

retirement

• May be unable

to cover baseline

income needs from

other reliable

sources

Primary Benefit Primary Risks


Pays a guaranteed withdrawal every year for life,

by applying a withdrawal percentage to the contract

cash value or premiums, whichever is greater

Guaranteed lifetime

withdrawal benefit

Guaranteed minimum

payments benefit

Guaranteed minimum

income benefit

Guaranteed

accumulation benefit

Allows investor to recover total premium through

annual payout even if the contract cash value is less

than the premium

Pays a minimum yearly income even if the annuity

contract decreases in value due to poor subaccount

performance

Guarantees the return of the investor’s premium (less

withdrawals) at the end of a stated period, regardless of

the investment performance of the subaccounts

Additional Annuity Benefit Rider Options

Variable annuity issuers policies may include riders that guarantee specific benefits.

Investors usually pay additional fees to purchase benefits. Examples include:



Setting Up Annuity Policies

Ownership, annuitant

and beneficiary designations

can make a difference in

living and death benefits

This is a complex area of

the tax code, so seek advice

from a qualified professional

or experts at the insurance

company


Some common pitfalls

to watch for include:

• Contracts jointly owned by spouses

• Naming a trust as beneficiary

• Naming someone other than the owner

as annuitant



Qualified vs.

Nonqualified Annuities

Some annuity contracts are designed specifically for

tax-qualified savings

QLACs

(Qualified Longevity

Annuity Contracts)

Tax-qualified savings invested in QLACs may be disregarded

when calculating required minimum distributions

QJSA

(Qualified Joint & Survivor

Annuities)

Some qualified plans are required to offer a joint & survivor

annuity payout as the default form of benefit payment at

retirement

QPSA

(Qualified Preretirement

Survivor Annuity)

Some qualified plans are required to offer a single life annuity

payout to spouse beneficiaries of plan participants who die

before starting benefits

Setting Up Annuity Policies

Special Considerations When Purchasing Annuities With

Tax-Qualified Savings


Alternative Investments

• Publicly traded investments

Type Features

Hedge fund-

like mutual

funds

• Employ long-short, arbitrage and other investment strategies that offset or

complement long-only strategies

• Mutual fund format addresses accreditation and liquidity issues for mass-market

investors

Commodities • Futures or mutual funds

• Prices fluctuate with prices of underlying commodities or commodity-related

company stock




• Publicly traded investments

Type Features

Master limited partnerships (MLPs)

• Combine the pass-through tax benefits of limited partnerships with the liquidity of

publicly traded securities

• Must earn 90%+ of income from qualifying sources

– Primarily businesses engaged in natural resources, extraction and

transportation

– Less commonly, operating real estate businesses

• Must pay contractually stated quarterly distributions or risk default event

Royalty trusts • Trusts that receive and pass through income from royalty payments on energy

production

• Cash flows fluctuate with production levels and commodities prices

• High, tax-advantaged yields

• Income ends when resources are depleted




• Investments for clients with substantial investable assets

– Require high minimum investments and longer investment periods

– Generally complex and not easily marketable Type Features

Hedge funds • Employ long-short, arbitrage and other investment strategies that offset or

complement long-only strategies

Limitedpartnerships

• Private securities that represent fractional ownership of commercial properties

or business (e.g., oil and gas production, equipment leasing, cable systems

development)

• No taxation at the business level; net income and any tax credits associated with

the business are passed to the limited partners

Private equity • Investments directly in private companies or to take public companies private

• Business income is taxable to the company

• Investors share operational risks but also rights to all net profits or gains on sale

Private mortgages

• Individuals lend money to others (who may not qualify for institutional financing)

to purchase real property

• The loan is secured by the real asset

• Interest rates can be higher than those charged by institutional mortgage lenders




Use Securities Lending to Generate Additional Income

Review Your

Client Base

Do you have clients

that want to:

• Earn additional

income from their

portfolios and

maintain a

minimum balance

of $250,000 in their

brokerage accounts

Fully Paid Securities Lending

• Provides a potential income opportunity for

clients with hard-to-borrow, fully paid-for

securities in a brokerage account

• Clients receive cash collateral in return and

substitute payments in lieu of dividends

• Clients control the securities and can sell

loaned shares at any time

• Clients will not have proxy voting rights,

but profits and losses, tax-lot accounting

and hedging positions are unaffected

Please keep in mind that securities lending programs will vary and investors should consult the loan agreement for details, including minimum account balances. There is also no

guarantee that an investor’s securities will be borrowed.


Please note that this is a hypothetical example, and not all securities lending programs are the same.

Investors should consult the loan agreement for more information about a specific program.


An Example of Fully-Paid Securities Lending

A Hypothetical

Example:

How Securities

Lending Works

1

2

34

5

6

To register for a

securities lending

program, the investor,

advisor and borrower

sign a loan agreement

that covers the terms of

the program

The investor’s eligible

securities are loaded

automatically into a

lending system.

Securities in the

system can be

borrowed at any time

When the securities

are borrowed, the

investor can still see

them listed in the

account, with a

notation that they

are on loan

The remainder of the

loan fee is shared

with the lending

agent and often the

investor’s broker-

dealer (the investor

generally receives a

larger percentage)

A percentage of the

loan fee for the

securities borrowed,

and potentially a

portion of the interest

earned on the cash

collateral, is

deposited to the

investor’s brokerage

account

Once the borrower

returns the

securities, the “on

loan” notation is

removed


Review Asset Allocations

• Total equity exposure

• Overall portfolio

volatility

Consider Reducing Consider Adding

• Fixed income

exposure

• Cash positions

• Low-correlated

asset classes

• Dividend- or

income-generating

investments

• Hedging strategies

• Lifetime income

solutions

Focus on client goals, risk tolerance and diversification


Review Your

Client Base

Check for clients

that:

• Have significant

equity exposure

• Have significant

shortfalls in

retirement assets

• Do not have written

retirement income

plans

• Cannot withstand

market volatility

Note: Asset allocation doesn’t assure against market loss and, as with any investment, there is no guarantee that a diversified portfolio will protect against loss in a declining market.


Some Conclusions


Introduce more diverse investments and products

to help address the risks of income phase

Educate clients on traditional investments, insurance products

and alternative investments designed to generate income

Consider other sources of retirement income,

such as securities lending

Review asset allocations, reducing equity

exposure and overall portfolio risk


Resources

Industry Resources

Retirement Income Industry Association Institutional Investor Journals

CNN Money Guide to Annuities Institutional Financial Advisory Services Group, Inc.

Seekingalpha.com REIT.com

Spark Institute REITS on Investor.gov

Pershing Resources

Pershing Investment Solutions Pershing Lending Solutions Brochure

Pershing Fund Solutions Fullypaidlending.com

ETF Center in NetX360® Pershing Alternative Investment Center in NetX360

Subscribe® Participating Insurance Companies Alternative Investment Solutions landing page in the

Marketing Center in NetX360 (keyword: AIS)

Additional Resources

Standard & Poor’s (S&P) MarketScope® Morningstar®

Third party sites provided for convenience, Pershing does not endorse these sites or their content.


http://riia-usa.org/

http://www.iijournals.com/

http://money.cnn.com/retirement/guide/Annuities/

http://www.iasg.com/articles/education/alternative-investments

http://www.seekingalpha.com/

http://www.reit.com/

http://www.sparkinstitute.org/content-files/summary_of_final_qlac_regulations.pdf

http://investor.gov/investing-basics/investment-products/real-estate-investment-trusts-reits

http://www.pershing.com/assets/brochures/investment-solutions.html

https://www.pershing.com/_global-assets/pdf/lending-solutions-brochure.pdf

http://www.pershing.com/assets/brochures/FundVest_Participating_Fund_Families.html

http://www.fullypaidlending.com/

https://www.pershing.com/_global-assets/pdf/subscribe-insurance-companies.pdf

http://www.marketscope.com/SP/msa/login.html

http://www.morningstar.com/


Important Disclosure Information

• This presentation and the information or opinions contained herein has been prepared by Pershing LLC

for informational purposes only without reference to any specific person's investment objectives or

financial situation. The presentation and the information are for reference purposes only and are not

intended to be a recommendation with respect to, or solicitation or offer to buy or sell any particular

security, financial instrument, or investment product, or to participate in any particular trading strategy in

any jurisdiction in which such offer or solicitation, or trading strategy would be illegal. Pershing LLC and its

affiliates do not intend to provide investment advice through this presentation and do not represent that the

securities or services discussed are suitable for any investor. Pershing LLC and its affiliates do not, and

this presentation does not intend to, render tax or legal advice.

• Tax laws are complex and subject to change. The information contained herein is based on current federal

tax laws in effect at the time it was written. Pershing LLC and its affiliates do not provide tax or legal

advice. The presentation and information provided herein were not intended nor written to be used for the

purpose of avoiding tax or penalties that may be imposed on the taxpayer. Individuals are urged to consult

their tax or legal advisors to understand the tax and related consequences of any actions or investments

described herein.

module 5 expanding the scope of investments a...

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