Historically, retirement investment didn’t come with any form of guarantee; investors were bound to the performance of the stock market, benefitting from a bull run, but similarly suffering from a bear market. That led to retirees taking fewer risks, and ultimately not have a high enough income to sustain them for the duration of their retirement. FAnews spoke to David Lloyd, Managing Director of Innovation at Liberty about being bold!
Q: David, what are your customers’ top priorities when it comes to preparing for their retirement?
Answer: Our customers, most investors in fact, want to harness the power of the market; they want to improve their standard of living and build a legacy. With the stock market being volatile though, many investors decide to take on what they see as less risk in the hope of getting a decent, albeit demonstrably lower, return.
Q: That’s been the case since the market’s inception – how do you propose to combat that?
Answer: By introducing a return guarantee on our customers’ choice of funds – by offering them a safety net. And that’s the Liberty Bold guarantee – it’s the first Linked Investment Service Provider (LISP) style Living Annuity product that features a five year 80% quarterly high-watermark return guarantee – this means that the returns of the investor’s mix of funds can never fall below 80% of its highest point. So, once the fund mix gives an aggregate return of 25% at a quarter end, investors know they can’t experience negative returns, even if they change the fund mix going forward, for the rest of the five years.
Also note that this return guarantee applies to whatever income withdrawal level one adopts (between the 2.5% and 17.5% that is allowed), as well as at the five year point. Our research told us that this return guarantee would make investors feel more comfortable about taking on an increased exposure to the top performing funds, so allowing them to harness more of the power of the stock market and substantially increase their expected long term returns.
Q: But how can Liberty guarantee a minimum return on any mix of funds? How much choice or flexibility is really in the hands of the investors?
Answer: Customers have as much choice and flexibility as they desire. This solution combines the complete flexibility to choose any mix of funds at any time from a broad range of asset managers, that LISP style products offer, with a return guarantee – something only a life company can offer. Bold makes it easier for investors to invest in their choice of the top performing funds, to better harness the power of the stock market, but without feeling so uncomfortable about the volatility of those funds. This means that they can look forward to good growth from their fund mix, as opposed to the current trend of retirees playing it too safe with the choice of funds for fear of loss.
Q: How does the 80% high-water mark guarantee work?
Answer: Bold looks at the cumulative return the investors’ choice of funds has achieved, and if a new return high is earned, the quarterly high-water mark that the return guarantee is set at is also increased. The quarterly high water mark never reduces, and that’s the Bold guarantee. At the very outset, before the mix of funds even starts producing a return, the high water mark is -20%. This is then increased by 80% of the new quarterly high. So, if one’s choice of funds return between them 25% then the return guarantee is no negative return and if the aggregate return reaches 50% then the return guarantee is 20% - even if one then changes the mix of funds.
It’s very exciting to be able to tell investors and advisers that with Bold they can make any choice of funds and change at any time, but once their selection produces an aggregate return of 25% from the outset, they can sleep peacefully knowing they cannot experience a negative return for the rest of the guarantee period, as measured from the outset - irrespective of which funds they may choose going forward.
Q: Surely this return guarantee proposition is quite expensive?
Answer: The challenge was that a quarterly high water mark guarantee is very valuable and therefore can be prohibitively expensive. But that’s what makes Bold so attractive: the guarantee only costs a once of 1% (less than 0.2% a year over the five year guarantee period), plus an additional 20% of the return above 14% each year, that only kicks in if the return guarantee has risen.
The guarantee can be stopped or restarted at any time, or rolled over after five years. The return guarantee applies both to income withdrawals and the return after five years.
This is the third such hybrid investment product from Liberty created under the leadership of Lloyd, who was behind the ‘pay-for-advice only when it performs’ investment product, Liberty Evolve, and Liberty Agile, the only RA that provides a guaranteed retirement income.
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