Dr. Roger Ibbotson - Why Advisors Should Consider FIA's as a Bond Alternative
In the inaugural episode of the PowerTalks Podcast, host Jack Martin, strategic marketing consultant and founder of Elite Advisor Group, talks with Dr. Roger Ibbotson about his latest research and why financial advisors should consider Fixed Index Annuities as a bond alternative. Dr. Ibbotson is an economist and creator of the iconic "Stock, Bonds, Bills, and Inflation" chart. He is Professor Emeritus of Finance at the Yale School of Management. He is a Member and the Chairman of Zebra Capital Management, LLC. We are also joined by John Holmgren who is the President of Zebra Capital Management. FULL TRANSCRIPT Suzanne Lynn: 00:01 Welcome to our PowerTalks Podcast, where leading advisors find the fuel to drive their Business Alpha. InsurMark is an advisor development organization. This is the next step in our 35 year history of aligning the independent financial advisor with best of breed resources and services, from a dedicated professional team, product partners, technology vendors, practice management leaders, and business development systems. 00:31 Today, Jack Martin, our Strategic Management Consultant and Founder of Elite Advisor Group will be talking with Dr. Roger Ibbotson about his latest research, and why financial advisors should consider the fixed index annuity, a bond alternative. Dr. Ibbotson is an economist, and a creator of the iconic Stock, Bonds, Bills, and Inflation chart. He is Professor Emeritus of Finance at the Yale School of Management. He is a member and the Chairman of Zebra Capital Management, LLC. 01:05 We are also joined by John Holmgren, who is the President of Zebra Capital Management. And now, let's join Jack and Dr. Ibbotson. Jack Martin: 01:14 Hello, Dr. Ibbotson. Hey, thanks for joining us on the Jay Talks Podcast today. It looks like Yale might win the Ivy League in football again. Roger Ibbotson: 01:23 Well, I'm certainly hoping so, but I'm not gonna be an expert on that although I have attended a game already, so. Jack Martin: 01:30 Yeah, so today what we wanna talk about is your white paper. We wanna talk about Fixed Annuities and Bond Alternatives. You started your career as a Bond Manager at the University of Chicago, right? Roger Ibbotson: 01:45 Yes, I actually managed the bond portfolio at the University of Chicago, and it was a very interesting time. It was a time when bond deals were still rising, but they were about ready to hit their peaks in the early 1980s. And they got into the double digits, so it was an interesting time but not exactly like today, because today's yields are much lower of course. Although we may have the rising yields. Jack Martin: 02:10 Right. So what's your thinking about where interest rates and the bond market are today? Roger Ibbotson: 02:16 Well, you know I think they are really low actually, because bonds have actually, yielding around three percent today. And this is after a long drop in yields from the early '80s when they were double digits, falling all the way to three percent, so it's been a time when people historically have really yielded great returns on bonds. Because during that period of drop, they actually had a high yield, plus they actually got a capital gain from the drop in yields, but the way a bond works is, you get the yield and then when the yield drops, you're practically, you're holding the higher yielding bonds and your bonds go up in price. So, people for decades have really realized not only that yield, but substantial capital gains in bonds. Jack Martin: 03:09 In the title of your white paper, you use the term bond alternatives. So, help our audience understand what that means and why we need to be thinking about those today. Roger Ibbotson: 03:17 Well, you can see why we might need the bond alternative when you think of today's yields now, because now they are at that three percent, where are they gonna go from here? They're much more likely to go up than down. And if they go up, you end up with a yield plus a capital loss. And so you financially have negative returns on your bonds. So, we need an alternative actually, and that's why we looked at this whole situation because we need to look at some other way of actually taking less risk, at the same time getting a decent return. So we need another way to do this, which we don't wanna have capital losses in our bonds, which we might very well have. We need an alternative. Jack Martin: 04:02 Do you think investment advisors and investors generally maybe have a little bit of a blind spot about those bond risks? Roger Ibbotson: 04:09 Well, they do because they've been so used to actually getting positive big returns on their bonds. So, they've viewed bonds as a really a substantial source of returns. But that's not what's gonna happen going forward. Even the three percent is probably a high estimate of what you'll get going forward, because as bond yields rise, you're gonna have capital losses. So, yes they do have a blind spot, and for good reason. They're looking at history, and certainly bonds have served everybody very well, historically. It's just that today, times are a little bit different, and that today at that low yield, you're not gonna get those high returns anymore, and you may even have capital losses. Jack Martin: 04:53 So, is there something in the way that we're wired or is there something behavioral, you know behind why people are still so in love with bonds, based on what you just said? Roger Ibbotson: 05:05 Well, people tend to extrapolate of course. Whatever happened to them last year or last decade, they expect that to happen again. But what actually, you know bonds have a structure to them. You know that's not gonna happen again. We actually know what the yield is today. So when you actually know what that yield is, you know that the only way you're gonna get a capital gain is if the yields fall further. There's not too much further they could actually fall. But they could rise definitely. So behaviorally, people tend to look back at the past and think that's the future. But obviously that's not the case in the bond market. Jack Martin: 05:42 When you were at Ibbotson back in 2007, you wrote a monograph titled, Lifetime Financial Advice, and in that you discussed investing over one's life cycle. So, should investors be concerned about longevity risks with that in mind? Roger Ibbotson: 05:59 Well, they certainly should, and actually you know when you think of the whole life cycle that somebody invests in, actually the insurance can kind of play a role in every piece of it. In the early years, people have steady wage income typically, and they could take on a lot of equity risk. But the other thing they often need is life insurance. So, life insurance pays a role. Roger Ibbotson: 06:21 Now, as you start approaching retirement, you actually have to take less risk and here again, insurance can play a role, and here now we're looking at accumulation annuities, such as FIAs can play a role in accumulating your capital in a less risky way. And then when you get into retirement, annuities can also play a role, because here the retirement people need continual income streams. They can have payouts. They don't know how long they're gonna live though, because that's part of the ... that's what longevity risk is all about. Of course, we want to live for a long time, but if we do there's some chance we would run out of money, and actually the pay out annuities actually help to solve that problem because they pull everybody together, so that each one of us can actually get an income stream for the rest of our lives. Jack Martin: 07:14 So, just to follow up on that, conventional wisdom says that as we approach retirement, we wanna invest a little bit more conservatively. So, what makes those years right before retirement so critical? Roger Ibbotson: 07:26 Well, those years are, we've been saving up for retirement and actually, those are the years to actually have your sort of your maximum financial wealth because as you start into retirement, you start withdrawing from that, and paying for your retirement. Now, if you have a loss when you have the biggest amount of money at stake, that loss actually can ruin your retirement really. So, they're really important years. And that's why we're recommending in general, and I've always recommended, that as you start approaching retirement, you need to de-risk. You need to take less risk in that portfolio, and of course the conventional way that's been done is with bonds. But I guess now, now we have other instruments like Fixed Index annuities. Jack Martin: 08:14 And so, there's been a lot of conversation about those first few years after retirement, and the risks associated with that sequence of returns and those kinds of things. So, are the risks different? Should we have a different perspective on those first few years after retirement? Should we invest a little differently? Roger Ibbotson: 08:33 Well they are especially critical because we no longer have the wage income, and we are actually typically making these withdrawals. So, the combination of having that relatively large financial stake and withdrawals taking place, and then superimposing it on a return, if you have a bad return here, it's actually gonna take a large c
