For Advisors, Daring to Be Different Can Be a Game Changer

By Mark Petersen

Be different. Think different. Act different.

It seems everyone’s mantra these days has something to do with being anything but traditional. And for good reason. In such a fast-shrinking world, there’s more of just about everything. More people. More products. More competition. As a result, standing out from the crowd requires more than simply having a great product, industry expertise, or even decades of proven results. This reality is changing “business as usual” for everyone from manufacturers to film studios to (you guessed it) financial advisors.

In our industry, it wasn’t that long ago that standing out from the crowd didn’t matter quite so much. Before the Great Recession, as long as you built in a bit of diversification and took the time to rebalance assets once a year, you could build investment portfolios using a standard 60/40 mix of stocks and bonds and expect to see an annual return of anywhere from 8% to 10%. With that level of success, investors were generally happy with the guidance they were given, and no one was complaining.

But oh how times have changed! In today’s environment, that old rule of thumb is not only outdated, it could threaten your ability to adhere to new fiduciary standards. The reasons include a fierce combination of three factors that have changed how advisors need to approach portfolio construction in order to achieve optimal outcomes.

1. Globalization

Like it or not, we live in a smaller, more connected world. From an investment management perspective, this means vehicles that were traditionally uncorrelated have reversed course. (For more on how changes in correlation are impacting returns, see Bill Acheson’s blog Looking for the right alternative investments? Be sure you’re dipping your toes in the right place!) This means that stocks and bonds in almost every category are more correlated than in the past. And while this means that if the market is up, everything is up, it also means that when the inevitable downturn comes, the value of a portfolio using the old 60/40 model will plummet.

2. Changing Demographics

Remember when Baby Boomers were still in mid-career and busy throwing assets into their retirement portfolios? Those were the glory days when a simple discussion about the power of dollar cost averaging got every investor excited about the future and the promise of a ballooning nest egg to support their “golden” years. But now that Baby Boomers are pulling assets out of their portfolios, dollar cost averaging is working in reverse—a situation that’s made even worse by extreme market volatility and some residual post-recession investing blues. Plus, with life spans increasing, those portfolios have to last longer than ever.

3. Low Interest Rates

You know the stats: historically low interest rates have brought bond yields to historic lows as well. A 10-year US Treasury bond currently yields less than 1.7%, delivering an annual return of just $170 from a $10,000 investment. Compare that to pre-2008 when bond yields were sitting at about 5%, and the 1990s when 10-year bonds were delivering as much as 7%. Low interest rates have brought tough times to the bond world.

In these conditions, it’s no wonder many advisors are finding it challenging to talk to clients, especially aging Baby Boomers, about the long-term outlook for their portfolios. But the need to achieve higher yields is very real, and reaching those yields typically involves taking on much more risk than most retirees can stomach—or that their portfolios can endure. At this point in their lives, your clients are no longer focused on buying and selling at the right time. Their number-one goal is to be sure they have income to pay their bills each month. So how do you deliver?

Now is the time (as Steve Jobs said) to think different. If you look at traditional 60/40 portfolios, data shows their returns are 200 basis points lower on average than portfolios that include alternatives in the mix. According to a recent McKinsey report, to make up for a 200 basis point difference in average return, a 30-year old “would have to work seven years longer or almost double his or her savings rate.” To increase portfolio yield (and save your clients from that fate) leveraging the power of alternative investments is key.

Of the many alternatives available, one that particularly stands out from the crowd is owning pools of life insurance. The reason: while most alternative investments offer opportunities outside the boundaries of traditional stocks and bonds, only secondary life insurance directly addresses the three factors that have advisors seeking change in the first place. Globalization. Changing demographics. And low interest rates.

As I mentioned earlier, globalization’s impact on correlation among investments is significant. But unlike typical alternatives, secondary life insurance returns are based not on the economy, but on policyholder longevity, so it is inherently non-correlated. From a demographics perspective, life insurance offers the diversity and, again, the absence of correlation that can help your clients’ portfolios grow right when they need it most—when retirement distributions are depleting their assets.

And when it comes to combating the painfully low bond returns resulting from sustained low interest rates, when properly structured, secondary life insurance can yield anywhere from 4-7% annually—potentially more than tripling the returns on that “other” low-risk vehicle. And the benefits don’t stop there. By using a non-traded asset, it’s much easier to help your clients take the emotion out of investing (at least some of the time!), and by including a non-liquid asset like life insurance, you are building in “trigger protection” by removing the option to sell immediately in reaction to a daily market swing.

Ultimately, including pools of secondary life insurance in your clients’ portfolios gives you the ability to attract and retain clients by being, thinking, and acting different from the competition. Even more importantly, secondary life insurance gives you the ability to move beyond the outdated 60/40 stocks and bonds model to deliver more valuable advice—and potentially a richer retirement outcome—to every one of your clients.

Mark Petersen has over 25 years of experience leading distribution and sales efforts in the financial services industry. His background includes managing retail and institutional securities sales as well as national accounts, and he has forged strong relationships with brokers/dealers and financial advisors throughout his career. Currently Executive Vice President at GWG Holdings, Inc., Mr. Petersen is also a partner at Emerson Equity. His previous roles include co-president of Behringer Securities LP and executive sales and marketing positions with CNL Fund Management, Franklin Square Capital Partners, and Madison Harbor Capital. He holds an MBA in finance from Baylor University and a B.S. in business administration from the University of Texas at Arlington.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.