A registered investment advisor in Waltham, Mass., has launched a model portfolio for use by financial advisors that provides guaranteed income to their clients while allowing the advisors to keep control of assets. One of its features is that it comes wrapped in a contingent deferred annuity.

The product was created by Massachusetts’s Pension & Wealth Management Advisors, and was designed to assuage investors wary of the current market turmoil and encourage them to invest. The firm’s annuity wrapper is provided by RetireOne, a San Francisco company that provides insurance products to RIA firms.

The product, known as the PWMA Portfolio Income Insurance Program, is a traditional portfolio, but it comes wrapped in RetireOne’s contingent deferred annuity. The wrapper provides a guaranteed income regardless of the value of the portfolio.

“We're able to provide a lifetime income guarantee for the end client without moving the assets,” said Jeff Cusack, chief distribution officer at RetireOne. “The assets stay with the advisor who continues to manage them [and] continues to bill on those assets just as they did before.”

The advisors who work with Pension & Wealth Management serve mass affluent clients with half a million to $5 million in investable assets. The firm said it heard from its advisors that investors are sitting on the sidelines, too afraid to invest their money, said George Webb, the firm’s CEO.

Most retirees, he said, “understand that staying in cash over the long run can be very damaging in terms of the inflationary impact, but they also don’t want to allocate to the markets either because of the perceived capital loss risks associated with it. So they’re caught in this in between two different kinds of risks and don’t know how to safely navigate that kind of environment.”

To solve the problem, the firm partnered with RetireOne and incorporated its annuity wrapper for the portfolio. The contingent deferred annuity, called Constance, gives advisors the ability to offer lifetime income for their clients while still allowing the advisors to make asset allocation decisions based on their clients’ goals and interests. 

The annuity provides a 5% guaranteed payout percentage on the initial investment. The investor is guaranteed that amount even if the portfolio declines in value. If the value of the investment increases, so does the payment, and that becomes the guaranteed amount even if the value of the portfolio declines to zero. The insurance coverage provides that income, Cusack said.

Many advisors have been unwilling to provide guaranteed income to their clients, since funding such a benefit would mean sending a portion of the clients’ assets to an insurance company, Cusack said, and advisors focusing on assets under management were reluctant to go for such a plan.

“For a 5% payout guarantee … if advisors wanted to generate $50,000 of guaranteed retirement income for a client annually, they would have to liquidate $1 million of the assets and send them off to an insurance company,” he said. “If you work with RIAs and you know they'll do business on assets under management, that can be a nonstarter.”

The two companies said that advisors using the new product can remove the wrapper or put it back in at any time. 

“It allows you to comfortably maintain a higher equity allocation,” Cusack said. “If after 10 years your portfolio performed well, you may not need the insurance protection provided by Constance anymore, and you have the option to just turn it off.”

Since the advisors are still controlling the assets and the allocations, their client relationships should remain strong, Webb pointed out. 

“You can have your advisor managing an institutional caliber portfolio … while also having the ability to custody the assets wherever you prefer,” he said. “So essentially you keep the relationship with your advisor—and wrap the financial guarantee around your existing accounts and relationships.”

The product is offered exclusively through advisors, Webb said, and the fees associated include the normal advisor fees, which are about 1% along with a 75 to 160 basis point fee from the insurance company, depending on equity allocation and coverage options, according to Cusack. The two companies believe the product serves a need that the industry has been looking for, with Webb calling it a modern pension plan.

“It is a very streamlined insurance certificate that is attached to the portfolio and provides that lifetime income guarantee,” he said. “The net result is that you end up with an arrangement that is highly transparent, flexible and where you can select the best-in-class providers for asset management and custody.”