Traditional wealth management practices for retirees haven’t always deeply integrated longevity risk – the risk of outliving one’s assets – into their investment strategies for their clients. Indeed, historically, the approach has been somewhat formulaic, often based on generalised assumptions about life expectancy, risk tolerance and the expected returns of different asset classes.
But for many wealth managers, the reality of their clients living longer is forcing them into something of a rethink; a rethink that ties directly into the expertise of the life settlement industry.
Life settlement asset managers and providers have access to a wealth of life expectancy information as a result of their activities in analysing, and consequently bidding for – or not – policies in both the secondary and tertiary markets. The data they have accumulated – which, in many cases, spans tens of thousands of lives, each with their own specific, underlying features, such as certain medical conditions – is changing the way that wealth advisors are able to refine their approach to retirement investment portfolio construction for their clients.
This approach is not technically new, of course – target date funds are a thing, and have been for years. But they don’t necessarily have the same access to longevity-related data, which could make them more susceptible to being wrong.
“Target date funds are well established, but they are guessing on the most important underlying factor, which is time. Firms like ours have data that helps us to better understand when someone might run out of money based on their retirement pot – which is their number one concern,” said Jay Jackson, CEO at Abacus Life.
Being able to better identify how long someone will live is only the first step towards the final destination of a fully integrated longevity-based retirement plan. The next is constructing a portfolio and implementing a rebalancing structure that can be adaptive to the individual.
Doing so in the wealth management space means recognising one indisputable trend – the use of ETFs by wealth managers. Even when considering that most individuals that are advised by a wealth manager would not qualify for investments that are the domain of ‘accredited investors’ – private funds such as hedge funds, private equity funds and real estate funds, for example – the sheer rate of adoption of these products in the past two decades by the wealth management community means that any longevity-based approach will also need to consider this trend.
“RIAs use ETFs because of the low cost and the liquidity profile, and these two factors won’t change,” said Jackson.
He emphasises, however, that this trend is not a negative one; indeed, it can be supportive to a holistic retirement planning strategy.
“There is another benefit to using ETFs from a longevity perspective, which is that you can be flexible. A longevity-based approach to a retirement plan also means re-underwriting the life of the client every few years. Indeed, on some occasions, the expected lifespan of the client will increase. So, you will be able to change the make-up of the portfolio more dynamically than the more traditional approach,” he said.
On the surface, wealth managers would seem to be a natural bedfellow for the life settlement industry, given their relationships with American seniors. But they rarely get involved in either the life insurance primary market or the life settlement market for regulatory reasons; both sales processes usually require a license to do so, and not all wealth advisors have one. Nor do they seek them; the fee-only model most wealth managers employ is at odds with the commission-based model of selling life insurance or life settlements.
Still, that does not necessarily mean these seemingly overlapping groups are playing in totally different sandboxes. According to Jackson, the awareness of the influence of longevity is growing generally and wealth managers are open to conversations around the topic.
“Longevity as a topic and a concept is getting more and more attention. You see books based on life span and longevity on the New York Times bestseller list, for example,” he said.
“You can also see this in the annuity space – annuity sales are now at record highs. The largest and most sophisticated RIAs are very open conceptually to anything that adds value to their clients and the longevity story is one that separates firms like ours. People are starting to pay attention.”
Whether there would ever be an ETF constructed with a pure play longevity asset, such as a life settlement ETF, remains to be seen. ETFs and illiquid assets are not always compatible, after all. But for Jackson, the bigger picture is more around the mindset than the asset itself.
“I think that longevity and lifespan investing is the conduit to several asset classes as opposed to being one,” he said. “When you’re customising an investment product, the customisation always comes back to the same thing – the use of the lifespan data that we have. It is this that is really going to be the next step in the longevity space to provide customised solutions for financial planning.”
