Marketview – Auto Changes

Sep 28, 2015 | Blog, Blogs, Daily Financial, In the News, Market Commentary

Terry Sawchuk
Founder & Chairman

The Markets

Seems like the fall we are getting around here, is the fall in the stock market.   While the warm weather and beautiful sunshine is a welcome little surprise, the same cannot be said for what we are seeing in equities.  If you’ve been following our commentary, you’d know that we didn’t think the Fed would raise interest rates this month.  There are a lot of opinions as to what the Fed should do, but when you look at the facts, it’s hard to make a case that rates should/will rise anytime soon.  The primary mandates at the Fed are to control inflation, moderate long-term interest rates and to foster employment.  As many of us experience on a daily basis, while there is spot inflation in certain things like food or other commodities, in general, they are offset by falling energy prices, falling phone bill costs etc.  There simply isn’t any real threat from inflation at this time.  As for employment, jobs have increased, but we all know that the U.S. is nowhere near full employment on any level.  Finally, as for long-term interest rates, the Fed has two big challenges.  First, the Federal Debt is so large, that any meaningful increase in interest rates could be a problem for the budget.  Second, when you’re trying to foster spending and job growth, in part by encouraging consumers and businesses to borrow, raising rates seems counter-productive.  My guess is it could be a long while before we see rates move up.  Japan has been mired in near zero interest rates since the late 1990’s.  While we aren’t exactly Japan, some aspects of our current situation are more alike than we would like to admit.

To coin a phrase, “change is constant”.  In our business, we are no exception. Technology redefined the investment landscape, in some respects it has really helped investors, and in others we’re not so sure. Over the last few years, I think we would all agree that the size of government has expanded radically and its newly formed tentacles are gripping many industries including ours.  The regulatory environment has gotten more aggressive in the last 18 months a predictable outcome given the finger pointing and blame placing in the aftermath of the financial crisis, Ponzi schemes the housing collapse and so on.  The Federal regulators have been under enormous pressure to explain themselves for the apparent lack of ongoing oversight in the aforementioned problems.  Needless to say, the pendulum is swinging the other way.  One particular focus of the regulatory increase has been variable annuity products.  Variable annuities have become much more complicated, with many different types of living and death benefit riders.  With the extra features and benefits, the costs have risen as well.  With increased complexity and cost, comes increased regulatory scrutiny.   Insurance companies have been forced to take measures to hedge against low interest rates and potential volatility by placing various restrictions and limitations on their investment sub-accounts.  Some companies limit equity exposure, others have simply reduced their investment offerings to a small number of asset allocation funds, in other cases they are using their own algorithms to reduce risk and volatility, all of which has made trying to effectively manage annuity sub-accounts quite difficult.  We have found that variable annuity products with these types of restrictions are designed to discourage active management of their funds, and are best suited for a more traditional asset allocation and rebalancing methodology.  As a firm, we have made the strategic decision that it is no longer a viable option for us to continue to provide discretionary investment services in the variable annuity space.  In plain English, what that means to you, is that we will no longer be making market-timing based automatic changes to any variable annuity sub-accounts on a go-forward basis.  To be clear, your accounts will still be managed and maintained, simply in a different way.   We have established new models for each insurance company, and once your money is reallocated to the new model, it will be set up for an automatic quarterly rebalancing program.  To reiterate, we have made the corporate decision to modify our approach to handling variable annuity sub-account management, and will no longer be making monthly changes, the accounts will be reallocated to a new asset allocation model and set up for automatic quarterly rebalancing.   Any changes outside of these parameters will have to be authorized verbally, meaning we cannot make any changes to your accounts without actually speaking to you first, email will not be an acceptable form of communication in this regard.  Hackers and identity thieves have become much more sophisticated, and it is impossible for us to verify identity through email, so all future investment changes will have to be processed with a verbal conversation.

With respect to our active management service using a brokerage account with exchange traded funds, nothing has changed there.  We maintain discretionary trading authority and will continue to actively manage those accounts as we have in the past.  We will continue to provide monthly commentary and report any changes that have been made to these accounts.  Again, if you have an advisory service brokerage account with us, nothing will change.

Our primary objective when it comes to the accounts that we manage is to provide our clients with the absolute best opportunity for optimal performance, while keeping risk as low as possible along the way.  We have thoroughly reviewed all available options and this change is necessary and gives us the best possible chance to deliver desirable long-term results in our variable annuity contracts.  As your financial planners and advocates, we are constantly looking for ways to improve our performance and deliver a relationship that exceeds your expectations.  While we have no control over what the investment markets will do, we do have control over the strategies we implement, the service we deliver and the interpersonal communications we engage in.  Rest assured we are always reviewing and staying current on ways to use technology to enhance our long-term results and that won’t change.  We thank you for your ongoing trust and confidence, and will work very hard to continue to earn it on a daily basis.

We have updated our website with new models for each of the annuity contracts.  Please review the models and CALL OUR OFFICE (248-269-9700) with your authorization to update your accounts to the new models.  As noted previously, we need our verbal authorization to proceed.

Best regards,
Terry Sawchuk

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Securities offered through First Allied Securities, Inc., A Registered Broker/Dealer, Member FINRA/SIPC. Advisory services offered through First Allied Advisory Services, Inc. A Registered Investment Adviser.

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  • Past performance does not guarantee future results.
  • Variable annuities are long-term investment alternatives designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax, and if taken prior to age 59 ½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Partial withdrawals may also reduce benefits available under the contract as well as the amount available upon a full surrender. An investment in the securities underlying variable annuities involves investment risk, including possible loss of principal. Your contract, when redeemed, may be worth more or less than the total amount invested. Past performance is no guarantee of future results.