The Federal Reserve last week reaffirmed its commitment to a "highly accommodative" monetary policy, maintaining a near-zero federal funds rate at least through the end of next year. While that is great news for individuals and businesses taking on more debt—such as home buyers and refinancers—low rates remain a significant challenge to retirees and their financial advisors.
A new study by the consultants Howard Schneider of Practical Perspectives and Dennis Gallant of GDC Distribution Consulting examines the challenge of low rates (and other topics) in their report Trends in Advisor Delivery of Retirement Income–2012. Schneider and Gallant presented their findings on a live webinar April 25 sponsored by the Retirement Income Industry Association.
The Trends report, based on 377 completed advisor surveys, found that "85 percent of advisors perceive that low interest rates have impacted their ability to support retirement income clients." Low rates have impacted all advisor channels, though RIAs and insurance advisors appear less affected than wirehouse, regional, independent and bank advisors.
Indeed, the Trends report found that "nearly nine in 10 advisors have taken specific action in response to low interest rates," adding that the most typical responses were the "increased use of dividend paying equities and expanded usage of guaranteed solutions such as variable annuities with living benefit income riders." Other common responses include increased use of higher-yield investments, alternative investments and non-traditional income solutions.
Notably, curtailing investment income because times have been unfavorable has not been an option for most retirement clients. The survey found that just one-fifth of advisors reduced income or cash flow to retirees.
The Trends report found that, in advisor responses to low rates, there was once again a difference between RIAs and insurance advisors on the one hand and everybody else. Wirehouse, regional, independent and bank advisors all stepped up dividend paying equities the most; guaranteed solutions were the second most popular response, followed by higher yielding investments.
