In a time where many meetings are still being canceled or postponed, it was great to see many of you in person at Straight Talk in September. The touch-and-go nature of fall meetings and the format in which we held ours, in-person and an online version, is a microcosm of what the economic outlook looks like as a whole. Many aspects of the economy, such as business travel, are working toward “getting back to normal,” but it’s unclear what normal means anymore. Organizations can save money and reduce risk by having virtual conferences. Consumers are used to more and more daily items being delivered – many like seeing new releases in the comfort of their own homes instead of going to the movies. The labor force participation rate still hasn’t recovered^[1]. Many things were upended by pandemic shifts, and it’s still not clear how the dust will settle. 

The biggest thing on many minds is the inflation rate and whether or not this is expected to persist. Jerome Powell still thinks the inflation pressure we’re dealing with will settle down, but it is unclear when that will happen^[2]. Supply chain disruptions have persisted longer than anticipated earlier this year^[3]. That combined with the fiscal stimulus of the last 18 months and increasing demand is causing prices to spike. Once persistent inflation becomes an expectation, it can often become a self-fulfilling prophesy as businesses start to raise prices anticipating higher input costs. Higher inflation expectations can drive down valuations in equities as future expected cash flows are discounted at a higher rate. Inflation typically has an outsized impact on growth stocks because interest rate assumptions cause discounted cash flow valuations to be much lower for growth stocks as their major cash flows are expected to occur farther into the future^[4]. Also, because labor force participation hasn’t caught up to pre-pandemic levels, we’ve seen times where fewer people were looking for a job than job openings^[5]. This causes upward pressure on wages as employers are required to offer more to hire and retain talent, which then can exacerbate the severity of inflation. If inflation persists, the Fed may not have any choice but to start to raise rates once again earlier than originally anticipated^[3] . 

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^[1] Labor Force Participation Rate. FRED. (2021, September 3). Retrieved October 1, 2021, from https://fred.stlouisfed.org/series/CIVPART. 

^[2] Davidson, K., & Timiraos, N. (2021, September 30). Powell says Fed Faces ‘difficult trade-off’ if inflation doesn’t moderate. The Wall Street Journal. Retrieved October 1, 2021, from https://www.wsj.com/articles/powell-says-fed-faces-difficult-trade-off-if-inflation-doesnt-moderate-11633017666.

^[3] Timiraos, N. (2021, September 29). Powell says supply-chain bottlenecks could lead to somewhat longer interval of high inflation. The Wall Street Journal. Retrieved October 4, 2021, from https://www.wsj.com/articles/powell-says-supply-chain-bottlenecks-could-lead-to-somewhat-longer-interval-of-high-inflation-11632934764?mod=article_inline.

^[4] Zucchi, K. (2021, September 8). Inflation’s impact on stock returns. Investopedia. Retrieved October 4, 2021, from https://www.investopedia.com/articles/investing/052913/inflations-impact-stock-returns.asp.

^[5] Long, H., Fowers, A., & Dam, A. V. (2021, September 8). Why America has 8.4 million unemployed when there are 10 million job openings. The Washington Post. Retrieved October 4, 2021, from https://www.washingtonpost.com/business/2021/09/04/ten-million-job-openings-labor-shortage/.

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Ben Tiller, Principle Financial Officer

None of us can disagree that cryptocurrencies have grabbed investors’ attention. What is a point of discussion is whether they are suitable for most investors. Let’s start with a general overview of cryptocurrency. According to Investopedia, a cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.^[1] Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. The first blockchain based cryptocurrency was Bitcoin. It was launched in 2009 by an unknown individual under the pseudonym Satoshi Nakamoto. As of March 2021, there were over 18.6 million bitcoins in circulation. It is capped at 21 million coins. While Bitcoin is the most well-known cryptocurrency, there are many others such as Etherum, Litecoin, Cardano and Dogecoin.

The rapid rise in these currencies’ values – and the publicity surrounding them – have increased interest in them. But they remain a speculative investment. Cryptocurrency has a low correlation to other assets which is a motivation for adding to portfolios, however, it also does not have a store of stable value, so it can decrease for no apparent reason as well. 

An advantage of cryptocurrency includes being easy transfer between parties. Transfers are secured by the use of public keys and private keys that have timestamps and other proof of work systems that eliminate the need for third-party financial institutions and their fees. The technology built to accommodate digital assets may provide an easier and more efficient way to handle transactions. Many experts see blockchain technology having potential uses such as online voting and crowdfunding, as well as lowering transaction costs by streamlining payment processing.^[2]

Disadvantages are many. Currently crypto has very limited use. Tesla was one of the few major companies that accepted Bitcoin for purchases – until this May, when Elon Musk announced they would stop accepting it for payment due to concerns over its energy usage. According to the Cambridge Center for Alternative Finance, Bitcoin currently consumes .55% of global electricity produced, or roughly equivalent to the annual energy draw of small countries like Malaysia, Sweden, or Chile.^[3]  Some of this energy is renewable, but much of it is not, so this can be a concern for clients who favor low-carbon assets. Since cryptocurrencies are not issued by any central authority, they are theoretically resistant to government interference or manipulation. But the United States Securities and Exchange Commission is currently reviewing how to regulate them. This could result in over-regulation that will make the currencies difficult to trade or under-regulation that could make them more subject to fraud and illegal use.^[4]

As a financial professional, part of your job includes managing your emotions and those of your clients.  Studies show that clients are more likely to buy risky assets after a sharp rise in their portfolio.^[5] Unless their risk tolerance and investment objectives have changed, it is not in their best interest to increase the risk in their portfolios. You need to make sure neither you nor your clients get swept up in the fever surrounding cryptocurrencies. We suggest you review some materials provided by product sponsors.^[6]

At this point, The Leaders Group views these as highly speculative instruments which make them an unsuitable choice for most clients. We will allow you to invest in cryptocurrencies for yourself, but not make any recommendations to clients. Be assured, we will continue to monitor digital assets and are open to adding them if we determine they are in the best interest of clients.

Jane Riley,
Chief Compliance Officer

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^[1] https://www.investopedia.com/terms/c/cryptocurrency.asp

^[2] https://www.jpmorganchase.com/news-stories/could-blockchain-have-great-impact-as-internet

^[3] https://cbeci.org/

^[4] https://www.wsj.com/articles/crypto-needs-regulation-but-it-doesnt-need-new-rules-11623007528

^[5] http://www.aleprevitero.com/wp-content/uploads/2021/05/FinancialAdviceRiskTaking_20191115.pdf

^[6] https://www.capitalgroup.com/advisor/insights/articles/how-talk-clients-about-bitcoin.html; https://seic.com/knowledge-center/why-we-currently-dont-buy-bitcoin-or-any-other-cryptocurrency

The implementation of AG 49A has increased the initial attractiveness of VUL products offering IUL sub-account options. VUL is not subject to AG 49A; hence, it permits the carrier to maintain these IUL strategies within the VUL chassis free from actuarial guideline constraint. As the leading broker-dealer for VUL, we have taken a keen interest in this space and its developments. However exciting it may be, we need to first issue a pressing warning to all point-of-sale and wholesale professionals along with the BGA community. Every great offer you hear generally comes with a “restrictions apply” message, and this is no different. 

It is important to remember that any time you have exposure or investment in the carrier’s general account, several aspects can be subject to change. That is with almost any parameter in the life insurance contract such as COI, charges, riders, cap-rates, participation rates, persistency bonuses, etc. Carriers are under a substantial amount of stress with the current environment pertaining to their general accounts. We must remember this also applies to the fixed account sub-account options along with any IUL sub-account option within a VUL product. 

I have two separate, very specific warnings to give. The first being that if this is a guaranteed no-lapse VUL product, these IUL sub-account options should not be considered and certainly not recommended at time of sale. This would be a Lincoln VUL ONE, Prudential VUL Protector, AIG Platinum Choice VUL II, or Securian VUL Defender type of lifetime no-lapse design (minimum premium for maximum death benefit). The customer is assuming substantial cost for the no-lapse guarantees already with these products, and it takes care of the downside risk of the cash value. It makes no logical sense to utilize the IUL sub-accounts until or unless the customer decides to take income to limit sequence of return risk on withdrawals in the later years of the policy. That would be the only instance. If the customer is insistent on utilizing an IUL sub-account, reference the below.

The second warning applies to the accumulation product design and sale. The name of the game here is disclosure. As the trusted insurance professional, you absolutely must inform the writing agent, along with the customer if given the opportunity, that investment within these IUL styles of accounts come with restrictions from the carrier that can be altered at any time. First being that you will be locked into the strategy for at least one year in most cases, which is the length of most “segment maturities” for the strategies with no option to exit prior. The second being that you may be subject to restrictions on withdrawal even after the segment matures. For instance, with one carrier’s IUL sub-account option, a customer is restricted to 25% per year transfer out of the account, meaning that it will take a total of four years to fully exit the strategy. As the insurance professional, it is up to you to become familiar with the restrictions of the product you are marketing and to disclose that to the writing agent and customer. 

To summarize, for no-lapse guaranteed VUL sales, these IUL sub-account options should not be considered at time of sale. For accumulation sales, you need to become familiar with the applicable restrictions on the product you are marketing and disclose those restrictions. This is for all our protection, and as we say at The Leaders Group, “Doing the Right Thing is Always the Right Thing^TM.” And this is certainly the right thing to do. 

Contact Charles Arnold at The Leaders Group for more information.