In Profile- September 2013: David Lau

Tactical Asset Management

by Carolyn Ellis, Features Editor

Ms. Ellis is Features Editor for LIFE& Health Advisor. Connect with her through e-mail:

Jefferson National has introduced a tactically managed model portfolio for the Monument Advisor variable annuity. We spoke with JeffNat’s COO David Lau about the strategy and their efforts to reposition variable annuities as an asset management tool. Their innovation creates a tax-advantaged
environment for investments that manages today’s market volatility and enhances risk-adjusted performance for the clients of fee-based advisors.

L&HA: What was the genesis of Jefferson National’s new investment strategy for variable annuities?
DL: Variable annuities historically have been built around guarantees like income, death benefit, and withdrawal guarantees. Basically the products are a transaction. You’re buying $400,000 or $1,000 a month in income for a lifetime. With our new tactically managed model portfolio, we’ve gotten rid of guarantees, surrenders, and the complexities of a typical annuity. We’re just offering the ability to invest in funds on a tax deferred basis. Advisors can use this as an asset management tool.

LHA: What’s the nutshell definition of tactically managed model portfolio?
DL: A portfolio that is actively managed generally using signals that indicate when to move into or out of positions or asset classes.

L&HA: Will tactically managed model portfolios bring new money or new investors to VA’s?
DL: Consumers who have gotten into annuities are generally people who are worried about their retirement and want a specific, guaranteed income from month to month. Advisors sell annuities to solve that problem for a client and get paid a big commission. We introduced the industry’s first flat-insurance fee variable annuity with the largest selection of underlying tax-deferred funds. It’s like a mutual fund platform with tax deferral.

L&HA: Was the call for this product from advisors or consumers, or did you anticipate this need?
DL: We saw the need for the annuity industry to be remade. Many people really dislike annuities. For advisors who are fiduciaries, annuities are a four-letter word. The distribution model is expensive, and the press often isn’t kind to annuities. We thought a lot could be changed for the better. The real value is in tax deferral and annuities weren’t being used for that.

L&HA: Does this require education or at least a new mindset for advisors?
DL: It requires some education because advisors who are fiduciaries or asset managers would never have contemplated using a variable annuity for their clients. When we approach them saying we’ve got this great new VA, we have to overcome their perception of what the product category is and what it does. We explain that this is the next generation; it’s designed to meet your business practice.

L&HA: Are there others in the marketplace?
DL: We are not alone. There’s some competition out there.

L&HA: To meet your objective of capturing upside and avoiding downside, key words that come up are diversity and non-correlation. Can you comment?
DL: We have almost 400 investment options while traditional annuities have about 35. Some popular choices are these non-correlated and diverse asset classes. In 2008 everyone thought they were diversified between stocks and bonds because typically when stocks went down, bonds would go up and vice versa. In 2008 everything went down at the same time. There developed a critical need to have tactical strategies or non-correlated, diversified investments through funds that are truly un-correlated to the market. A whole new series of liquid alternatives mutual funds came to market which mirror hedge fund strategies. We put those into our product; they’re tax-inefficient. They operate with lots of trading inside the funds to maintain that non-correlation. People haven’t been using these funds as much as they would like because of the tax-inefficient nature, so we solved that problem by offering the funds in a tax deferred vehicle.

L&HA: Is this a way for people to be in that segment of the market who otherwise wouldn’t?
DL: Either they wouldn’t be in or wouldn’t be in with as much depth as they would like. An advisor might think the client should be allocated 20 percent to liquid alternatives but only allocates 5 percent because of the tax consequences.

We saw the need for the annuity industry to be remade. Many people really dislike annuities. For advisors who are fiduciaries, annuities are a four-letter word. The distribution model is expensive, and the press often isn’t kind to annuities. We thought a lot could be changed for the better. The real value is in tax deferral and annuities weren’t being used for that

L&HA: Can there ever be too many investment options?
DL: In the mutual fund world there are 15,000-20,000 funds, so our 400 options is a small subset. If you’re an advisor who is strictly a low-cost investor we have funds from Dimensional, Vanguard and Fidelity. If you’re an active manager we have funds from Rydex and ProFunds. If you’re looking for liquid alternatives we have more than 70 alternative funds. As I said, a traditional annuity only has 35 investment options, many of them proprietary.

L&HA: You’ve made some innovations in distribution.
DL: RIAs (Registered Investment Advisors) are the primary distribution channel and fee-based advisors are also targeted. By the nature of the product we get some consumers coming directly. We aren’t paying commission, so commission agents won’t be interested. The cost of the product is cheaper than traditional annuities. According to Morningstar data from December 2012 the typical VA charges an asset-based insurance fee (M&E) averaging 135 basis points each year, whereas our product is a $20 per month flat fee regardless of asset size. On our average policy of $240,000 to $250,000, that’s 10 basis points.

L&HA: For tax planning, what elements are important to understand?
DL: There are many studies that demonstrate that tax deferral is worth 100-200 basis points of better performance, including one we did with Professor Ira Weiss from the University of Chicago in 2008 and one published by Morningstar in March 2013. Within a portfolio there are certain asset types which are more tax-inefficient so are more beneficial to be tax-deferred. Those include fixed income (which generates ordinary income), REITS, commodities, liquid alternatives, anything that generates short term capital gains or any strategies that are tactical which means they have lots of turnover. Those types of investments perform much better within the tax-deferred, annuity wrapper so they can be used in companion with your taxable investments to create a more robust, better-performing portfolio.

L&HA: If these products are designed for accumulation, what about the payout once the investor has retired?
DL: We believe the way to provide for the best possible retirement income is to maximize accumulation. There are no silver bullets if you haven’t accumulated enough assets. Through our product you can maximize assets because 1) the fees are low, so as a customer you are getting to keep your assets rather than pay them to an insurance company; and 2) we offer investment choices that are either very low-cost or they have some protection mechanism, some down-side designed and built into them similar to the types of investments insurance companies use for their riders and guarantees. When you start taking distributions we’ve got funds that are designed to generate income. However, we believe you’re never out of an accumulation phase. When people start taking income from a portfolio, typically they are taking 3-4 percent, so that leaves 97 percent that should be accumulating to maintain and grow assets.

L&HA: How did you choose your partners CMG and Braver?
DL: CMG is one of the firms that we use as model managers within the Monument Advisor product. CMG has a long history of tactical management, with a proven track record of strong performance and several industry awards. We find their approach to be thoughtful and data-driven. Braver Capital Management is another very strong firm we have on the platform. They haven’t recently come to the game because it’s the hot thing; they have 20 – 25 years of tactical management experience.

L&HA: In the future what would make things better for you or not so good?
DL: My answer differs depending on whether I’m home or at the office. Increasing tax rates increase the urgency of looking for tax deferral. For example, the Bush tax cut sunsets and the rise in short-term and long-term cap gains rates work in favor of the business. I don’t like them so much when I’m at home paying my taxes. The other trend that’s good for our business is the move by advisors from transactional or commission-based business to fee-based. Fee-based is the largest growing segment, and the advisory model is working in our favor.