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Pershing, Phoenix launch a UMA with annuity rider

Thomas Coyle

17 March 2008

The firms hail LIS2 as a first-of-a-kind retirement-income managed account. Pershing's third-party investment platform affiliate Lockwood Capital Management is working with insurance-, annuity- and investment-product provider Phoenix to give advisors a way to offer clients unified managed accounts that include lifetime-income guarantees.

Lockwood's Longevity Income Solutions asset-allocation models blend separately managed accounts, mutual funds and ETFs and, thanks to Phoenix, provide downside protection -- in effect an annuity rider -- in the form of a guaranteed 5% annual payout. They're meant to help investors -- especially retirees -- manage their lives by providing them with predictable income payments regardless of the actual performance or value of the account.

Boomers

"Baby boomers are the first generation in modern history responsible for managing their own retirement plans," says Lockwood's CEO Jim Seuffert " want like their parents' defined benefit plans provided."

Given the sheer number of boomers out there and the fact that they'll be tipping into retirement for the better part of the next three decades, Lockwood and Phoenix may be on to something. Boomers account for about a third of the U.S population, and they own about 40% of all U.S. private assets.

And, as a group, boomers are expected to live longer than any previous generation, thanks to higher levels of personal fitness and improving medical care. In 1955 the average retirement age for Americans was 68 and average life expectancy was 72. Now the average retirement age is 62 and average life expectancy has jumped to 80. More starkly, 65-year-old man has one chance in four of seeing his ninety-second birthday; a 65-year-old woman is as likely to get past age 94.

In addition to being long-lived, boomer-generation retirees face rising health costs. Out-of-pocket costs beyond Medicare ranging from $125,000 to $300,000, according to the Employee Benefit Research Institute -- and that's not counting nursing-home expenses.

"It's clear we need new ways to help our aging population attain a comfortable and satisfying retirement, and these solutions need to be simple, low cost and flexible," says Phoenx' CEO Dona Young. "Through this strategic alliance with Lockwood Capital Management, we can apply features of life insurance and annuities to investment products and offer investors a unique approach to guaranteeing an income for life."

Perceptions

The tie-in with Lockwood also gives Phoenix a chance to provide annuity-like services to high-net-worth investors without having to call them annuities, according to Joe Fazzino, spokesman for the Hartford, Conn.-based insurance company.

"With annuities there is a perception of complexity, a perception of high costs and a perception that the investors loses control of the assets," says Fazzino. "When we describes annuities to high-net-worth focus groups, the typical reaction is 'That sounds great,' but when we say they're annuities, some people pull back because of these perceptions. is a way we feel advisors can give their clients the benefits of annuities without the perceived negatives."

Fazzino says LIS2 will cost the end investor a fee of about 255 basis points on account assets, all in. That compares with an all-in fee of 320 basis points to 350 basis points for a typical variable annuity.

And LIS2 may confer tax benefits as well. The income stream comes initially from the asset base -- the principal, if you will -- which is taxed as a capital gain. Only after that's drawn down does income derived from the structure become taxable as ordinary income. Traditional annuity payments are usually taxed as ordinary income across the board.

Phoenix and Lockwood say LIS2 is the first product of its kind -- and Fazzino says its newness caused some head scratching at the SEC.

But Retirement Income Industry Association chairman Francois Gadenne saw such products coming several years ago. In a 2006 interview with FWR, he said that retirement-income products would probably end up being combinations of traditional investment offerings, specialized accumulation vehicles and insurance products -- a fair description of LIS2.

Phoenix' head of business development Jack Sharry says the word he's getting from advisors is that "they want to help their clients guarantee a lifetime income stream. In response, we developed a simple, cost-effective solution by wrapping a managed account from with an income guarantee offered by Phoenix."

Jersey City, N.J.-based Pershing is a subsidiary of Bank of New York Mellon. -FWR

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