Pensioners across the pond are choosing to fill their retirement portfolios with annuities – just as British retirees scrap them. Lifestyle magazines in the US boast advertisements lauding the benefits of “protected income in retirement”.
Annuities’ rise in popularity is in part due to a shift in American’s investment process – relying less on stock market performance and instead preferring to opt for outcome-based solutions.
“The whole world is converging towards the same thoughts and processes when it comes to portfolio planning,” said Schroder’s North American CEO Karl Dasher, speaking at a conference in New York last week.
“In 2010 everyone was working off the model that diversification was enough to guarantee absolute returns. But in a world where central banks have warped the bond market, we need to think differently. Portfolio construction in 2015 must be outcome based rather than asset driven with the inclusion of yield orientated solutions, smart beta and holistic planning.”
Investors have changed their priorities since the global recession. Rather than choosing between income and growth, Dasher says US investors have three key goals, and it is up to the asset management industry to design funds and products to match these.
The first is safety, as investors across the developed world face the reality that perceived safe assets – such as government bonds, may not be as reliable as they have been over the past 30 years when yields have been falling and prices have been rising. Tax efficiency is increasingly important too, as is the sustainability of income.
These are not just challenges that face the American investor. Ever since the Bank of England dropped base interest rate to the record low of 0.5%, ISAs have proved essential to make sure UK investors benefit from any yield in its entirety, and safety – or capital preservation – is clearly a priority here too.
Despite significant equity rallies in the US and the UK, private investors have not moved on from the fear and sceptical sentiment brought about by the global crash of 2008.
This has unfortunately mean many have missed out on significant gains – and are now faced with the reality that bonds will struggle to deliver in the future.
“Investors need to take on risk if they want returns,” said Dasher. “Even though markets have recovered, investor confidence has not returned. There has been a shift from having faith in markets, to bending your portfolio to align with your long-term goals.”
US Investors Flock to Advisers – as Brits Shun them…
Only one in five Americans self-invest, despite the maturity of the investment market. Half of the remaining 80% use one of the 4 key national providers of investment advice, who offer independent whole-of-market guidance.
Similarly to the UK, investors only become attractive to advisers once they have built up a healthy investment pot of around $100,000, which is about £64,000.
Anyone with a portfolio of less than $100,000 can obtain investment advice from their bank, or use one of the increasing number of ‘Robo-advisers’. These are part-automated online services which can include the use of passive strategies, similar to the UK companies Nutmeg, Money on Toast or Wealth Horizon. The average value of the 401k, which is the US workplace pension savings scheme, is worth $64,000 – meaning for many Americans, as for many British investors, face to face financial advice is not a commercially viable option.
But Yanks Pay Less for Advice and Platforms
The sheer scale of the US investment market does mean that Americans are getting a significantly cheaper investment industry – whether it be face to face advice, online services or the fund management fees themselves.
A typical investment platform in the US may charge just 0.14% a year in to advisers to use their technology – where average fees in the UK are four times that amount.
