Module 5 Expanding the Scope of Investments A...

Your Business Without Limits® © 2013 Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation

(BNY Mellon). Trademark(s) belong to their respective owners. For professional use only. Not for distribution to the public. The information contained

herein, including any attachments, is proprietary to, and constitutes confidential information of Pershing. It may not be reproduced, retransmitted or

redistributed in any manner without the express written consent of Pershing LLC.

A Comprehensive Modular Program

1

Module 5 Expanding the Scope of Investments

Foundational Concepts

Major Activities and Decisions

Advanced Strategies and Implementation

Module 7

Optimal Withdrawal

Strategies for Tax-

Advantaged Accounts

Module 8

Identifying Target Clients

and Building a Marketing

Strategy

Module 9

Tying It All Together

Module 1

The Transition Phase

of Retirement and

Your Business

Module 2

Framework for

Retirement Income

Planning

Module 3

Income Resources and

Budgeting Basics

Module 4

Tapping Into Social

Security

Module 5

Expanding the

Scope of Investments

Module 6

Additional Strategies for

Generating Retirement

Income

© 2013 Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners. For professional use only.

Not for distribution to the public. The information contained herein, including any attachments, is proprietary to, and constitutes confidential information of Pershing. It may not be reproduced, retransmitted or redistributed in any manner

without the express written consent of Pershing LLC.

Income Planning for Clients Nearing Retirement

Module 5: Expanding the Scope of Investments





The Challenges of Investing for Income


Convergent Retirement Plan Solutions, LLC © 2013

Need for near-term liquidity balanced with ongoing need for long-term growth

Unknown time horizon (longevity risk)

Need to balance income flexibility with income security

Increased dangers associated with market volatility

Investing for

income is

fundamentally

different

than for

accumulation





Income Versus Accumulation

The challenges of investing for income

during this phase of retirement call for

a broad array of investment options to:

> Pursue continued growth with

reduced portfolio volatility

> Secure income guarantees

when necessary

> Address tax risk and longevity risk

Don’t Limit

Your Tool Set


Convergent Retirement Plan Solutions, LLC © 2013





5

Review Your

Client Base

Look for clients

entering the

transition phase:

– May benefit from

a written

retirement

income plan

– Who have low

tolerance for

market volatility

– Who have

significant equity

exposure

Income

Guarantees

Traditional

Investments

> Fixed income

> Equities

> Real estate

investment trusts

(REITs)

> Mutual funds and

exchange-traded

funds (ETFs)

> Commodities

> Limited

partnerships

> Master limited

partnerships

> Royalty trusts

> Private equity

> Private mortgages

Alternatives

> Guaranteed

minimum

withdrawal benefits

(GMWBs)

> Single premium

income annuities

(SPIAs)

> Deferred income

annuities (DIAs)

Three Broad Categories

Guarantees apply to certain insurance and annuity products (not securities, variable or investment

advisory products) and are subject to product terms, exclusions and limitations and the insurer's claims

paying ability and financial strength.






Fixed Income Strategies

6

Steady stream of income

over successive time

periods

> Default risk (bonds)

> Market risk

> Income level may be low

> Reinvestment risk

> Market risk

> Default risk

> Income from certain

bonds may be taxable

under AMT rules

> Reinvestment risk

CD Ladders and

Bond Ladders

Predictable income and a

measure of inflation

protection

Predictable stream of

income exempt from

federal and, possible,

state income tax

Treasury Inflation

Protected

Securities (TIPs)

Municipal Bonds


Primary Benefit Primary Risks





Equity Strategies for Income

7

Source: Standardandpoors.com, Jan. 2013 An investment can not be made directly into an index.

Past performance does not guarantee future results.


> Preferred stock

> Dividend-paying

common stocks

1992 1996 2000 2004 2008 2012

Cumulative Return: Standard & Poor’s 500 Index

of Common Stocks

12-31-1991 – 12-31-2012

Without Dividends Reinvested

5.73% CAGR

With Dividends Reinvested

8.80% CAGR

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

Va

lue

$1

In

ve

ste

d

Year Ending 12-31-

1991 1995 1999 2003 2007 2011 2012





Real Estate Investment Trusts for Income

> Pools of equity shares of companies that invest in commercial properties or mortgages

> Must pay out at least 90% of their

taxable income as dividends

> 162 REITS are traded on the

New York Stock Exchange

> FTSE NAREIT All REITs Index

– Average annual total returns

5 Years.: 7.55%

10 Years.: 11.86%

20 Years.: 10.12%

– 2011 dividend yield: 4.11%

– 30-Year Correlation to ML

Government/Corporate Bond

Index: 0.14

> FTSE EPRA/NAREIT Global Real Estate Index 2012 Yield: 4.86%

8

Source: All data from National Association of Real Estate Investment Trusts (NAREIT) “REITWatch,” April 2013.

An investment can not be made directly into an index. Past performance does not guarantee future results.






Mutual Funds and Exchange-Traded Funds for Income

9

Mutual funds and exchange-traded funds (ETFs)

offer many benefits for investors seeking income

> The ability to receive an income stream from dividends

or interest, without redeeming shares

> Depending on the type of mutual fund or ETF, income

may be ordinary taxable income or tax-exempt income

> These investments are highly liquid

> There are thousands of choices with varied objectives,

many with low-cost expenses






Income Guarantees

10

Guarantees apply to certain insurance and annuity products (not securities, variable or investment advisory

products) and are subject to product terms, exclusions and limitations and the insurer's claims paying ability

and financial strength.


Review Your

Client Base

Look for clients

entering the

transition phase

who:

– Are likely to have

an income gap at

retirement

– May be unable

to cover baseline

income needs

from other reliable

sources

Income guarantees

without actually

annuitizing

> Longevity risk

> Penalties/fees for

early or excessive

withdrawals

> Loss of flexibility

> Inflation risk unless

payments are

indexed for inflation

> May not live to

collect benefit

Guaranteed

Minimum

Withdrawal

Benefits

(GMWBs)

Potentially cost

effective way to

manage longevity risk

Income that is

guaranteed for life

Primary Benefit Primary Risks

Deferred

Income

Annuities (DIAs)

Single Premium

Income

Annuities

(SPIAs)





> Pays a guaranteed withdrawal every year for life,

by applying a withdrawal percentage to the contract

cash value or premiums, whichever is greater

Guaranteed lifetime

withdrawal benefit

Guaranteed minimum

payments benefit

Guaranteed minimum

income benefit

Guaranteed

accumulation benefit

> Allows investor to recover total premium through

annual payout even if the contract cash value is

less than the premium

> Pays a minimum yearly income even if the annuity

contract decreases in value due to poor subaccount

performance

> Guarantees the return of the investor’s premium (less

withdrawals) at the end of a stated period, regardless

of the investment performance of the subaccounts

Additional Annuity Benefit Rider Options

Variable annuity issuers policies may include riders that guarantee specific benefits.

Investors usually pay additional fees to purchase benefits. Examples include:


11





Some common pitfalls

to watch for include:

> Contracts jointly owned by spouses

> Naming a trust as beneficiary

> Naming someone other than the

owner as annuitant

Setting Up Annuity Policies

12


Ownership, annuitant

and beneficiary designations

can make a difference in

living and death benefits

This is a complex area of

the tax code, so seek advice

from a qualified professional

or experts at the insurance

company





Alternative Investments

> Publicly traded investments

13

Type Features

Hedge fund-

like mutual

funds

> Employ long-short, arbitrage and other investment strategies that offset or

complement long-only strategies

> Mutual fund format addresses accreditation and liquidity issues for mass-market

investors

Commodities > Futures or mutual funds

> Prices fluctuate with prices of underlying commodities or commodity-related

company stock







> Publicly traded investments

14

Type Features

Master limited partnerships (MLPs)

> Combine the pass-through tax benefits of limited partnerships with the liquidity of

publicly traded securities

> Must earn 90%+ of income from qualifying sources

– Primarily businesses engaged in natural resources, extraction and

transportation

– Less commonly, operating real estate businesses

> Must pay contractually stated quarterly distributions or risk default event

Royalty trusts > Trusts that receive and pass through income from royalty payments on energy

production

> Cash flows fluctuate with production levels and commodities prices

> High, tax-advantaged yields

> Income ends when resources are depleted







> Investments for clients with substantial investable assets

– Require high minimum investments and longer investment periods

– Generally complex and not easily marketable

15

Type Features

Hedge funds > Employ long-short, arbitrage and other investment strategies that offset or

complement long-only strategies

Limited partnerships

> Private securities that represent fractional ownership of commercial properties or

business (e.g., oil and gas production, equipment leasing, cable systems

development)

> No taxation at the business level; net income and any tax credits associated with

the business are passed to the limited partners

Private equity > Investments directly in private companies or to take public companies private

> Business income is taxable to the company

> Investors share operational risks but also rights to all net profits or gains on sale

Private mortgages

> Individuals lend money to others (who may not qualify for institutional financing)

to purchase real property

> The loan is secured by the real asset

> Interest rates can be higher than those charged by institutional mortgage lenders






Use Securities Lending to Generate Additional Income

Review Your

Client Base

Do you have

clients that

want to:

– Earn additional

income from their

portfolios and

maintain a

minimum balance

of $250,000 in

their brokerage

accounts

Fully Paid Securities Lending

> Provides an income opportunity for clients with

hard-to-borrow, fully paid-for securities in a

brokerage account

> Clients receive cash collateral in return and

substitute payments in lieu of dividends

> Clients control the securities and can sell loaned

shares at any time

> Clients will not have proxy voting rights, but

profits and losses, tax-lot accounting and

hedging positions are unaffected

16






An Example of Fully-Paid Securities Lending


17

Please note that this is a hypothetical example, and not all securities lending programs are the same. Investors should consult the loan agreement for more

information about a specific program.





Review Asset Allocations

18

> Total equity exposure

> Overall portfolio volatility

Consider Reducing Consider Adding

> Fixed income exposure

> Cash positions

> Low-correlated asset

classes

> Dividend- or income-

generating investments

> Hedging strategies

Review Your

Client Base

Check for

clients that:

– Have significant

equity exposure

– Have significant

shortfalls in

retirement assets

– Do not have

written retirement

income plans

– Cannot withstand

market volatility

Focus on client goals, risk tolerance and diversification.






Some Conclusions

19


Introduce more diverse investments and products

to help address the risks of income phase

Educate clients on traditional investments,

insurance products and alternative investments

designed to generate income

Consider other sources of retirement income,

such as securities lending

Review asset allocations, reducing equity

exposure and overall portfolio risk





Resources

20

Industry Resources

Retirement Income Industry Association Journal of Alternative Investments

CNN Money Guide to Annuities Institutional Financial Advisory Services Group, Inc.

Seekingalpha.com National Association of Real Estate Investment Trusts

Pershing Resources

Pershing Investment Solutions Brochure Subscribe® Participating Insurance Companies

Pershing FundVest® Family List Pershing Fully Paid Securities Lending Brochure

ETF Center in NetX360® Pershing Alternative Investments Network Providers

(visit the Material Catalog in NetX360®)

Additional Resources

FinancialprofessionalFX.com Morningstar®

Standard & Poor’s (S&P) MarketScope®


Third party sites provided for convenience, Pershing does not endorse these sites or their content.

http://riia-usa.org/

http://www.iijournals.com/

http://money.cnn.com/retirement/guide/Annuities/

http://www.iasg.com/articles/education/alternative-investments

http://www.seekingalpha.com/

http://www.reit.com/

http://www.pershing.com/assets/brochures/investment-solutions.html

http://www.pershing.com/assets/brochures/brochures_528698.html




http://www.pershing.com/assets/brochures/FundVest_Participating_Fund_Families.html




http://www.pershing.com/assets/brochures/fully-paid-securities-lending-customer.html

http://www.financialprofessionalfx.com/

http://www.morningstar.com/

http://www.morningstar.com/

http://www.marketscope.com/SP/msa/login.html







Important Disclosure Information

> This presentation and the information or opinions contained herein has been prepared by Pershing

LLC for informational purposes only without reference to any specific person's investment objectives

or financial situation. The presentation and the information are for reference purposes only and are

not intended to be a recommendation with respect to, or solicitation or offer to buy or sell any

particular security, financial instrument, or investment product, or to participate in any particular

trading strategy in any jurisdiction in which such offer or solicitation, or trading strategy would be

illegal. Pershing LLC and its affiliates do not intend to provide investment advice through this

presentation and do not represent that the securities or services discussed are suitable for any

investor. Pershing LLC and its affiliates do not, and this presentation does not intend to, render tax

or legal advice.

> Tax laws are complex and subject to change. The information contained herein is based on current

federal tax laws in effect at the time it was written. Pershing LLC and its affiliates do not provide tax

or legal advice. The presentation and information provided herein were not intended nor written to

be used for the purpose of avoiding tax or penalties that may be imposed on the taxpayer.

Individuals are urged to consult their tax or legal advisors to understand the tax and related

consequences of any actions or investments described herein.

> © 2013 Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of

The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective

owners. For professional use only. Not for distribution to the public.


Module 5 Expanding the Scope of Investments A...

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