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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
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Module 5: Expanding the Scope of Investments
Income Planning for Clients Nearing Retirement
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The Challenges of Investing for Income
Convergent Retirement Plan Solutions, LLC © 2015
Module 5 Expanding the Scope of Investments
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
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Income Versus Accumulation
Module 5 Expanding the Scope of Investments
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
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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.
Module 5 Expanding the Scope of Investments
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
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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
Module 5 Expanding the Scope of Investments
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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.
Module 5 Expanding the Scope of Investments
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
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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.
Module 5 Expanding the Scope of Investments
Pools of equity
shares of
companies
that invest in
commercial
properties or
mortgages
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Mutual Funds and Exchange-Traded Funds for Income
Module 5 Expanding the Scope of Investments
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
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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.
Module 5 Expanding the Scope of Investments
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
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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:
Module 5 Expanding the Scope of Investments
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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
Module 5 Expanding the Scope of Investments
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
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Module 5 Expanding the Scope of Investments
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
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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
Module 5 Expanding the Scope of Investments
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Alternative Investments
• 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
Module 5 Expanding the Scope of Investments
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Alternative Investments
• 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
Module 5 Expanding the Scope of Investments
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Module 5 Expanding the Scope of Investments
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.
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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.
Module 5 Expanding the Scope of Investments
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
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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
Module 5 Expanding the Scope of Investments
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.
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Some Conclusions
Module 5 Expanding the Scope of Investments
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
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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.
Module 5 Expanding the Scope of Investments
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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.
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