The Markets August 23, 2016

R6 Shares Popularity Reveals Revenue-Sharing Concerns

Cerulli research highlights the ongoing push among institutional asset owners away from investments that include revenue sharing. 
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A recent Cerulli Associates survey finds investment firms expect to see the biggest increase in use of I-shares, R6-shares, and “platform/wrap share classes.”

According to the latest issues of The Cerulli Edge U.S. Monthly Product Trends Edition, mutual funds endured outflows of $9.8 billion during July, marking the second straight month of outflows. Despite that, Cerulli data shows capital market performance was strong enough to propel asset growth to 2.5%, ending the month at $12.5 trillion.

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“After tepid growth in May and June, ETF assets jumped 5.5% in July, to finish the month at $2.36 trillion,” Cerulli explains. “While global market performance was a key driver, massive July flows of $45.9 billion were also a contributor.”

One clear overall theme continuing this year has been the shift in assets to lower-cost share class offerings. Firms expect to see the biggest increase in use of I-shares, R6-shares, and/or a platform/wrap share class—64%, 55%, and 50%, respectively. Additionally, financial advisers report that while 23% of their 2015 practice sales came in A-shares, they expect to substantially increase their use of platform and institutional share classes this year and beyond.

“Amid a persisting trend toward lower cost and more transparent share classes, as well as the recent Department of Labor (DOL) Conflict of Interest Rule, the R6 share, which typically has no revenue sharing (e.g., 12b-1 fee, sub-TA fee), has witnessed significant asset growth,” Cerulli says. “Moreover, the low-cost and transparent attributes of the share class resonates with DC plan sponsors to the point that 64% of asset managers view large DC plans as the most popular channel for the R6-share class.”

NEXT: A positive trend for individual investors, too 

According to Cerulli, the industry’s focus on low-cost pricing, “demand from intermediaries for the lowest priced share class, retirement plan sponsors’ efforts to offer lower costs, the Department of Labor Conflict of Interest Rule, and now the SEC’s 2016 share class initiative should all be enough reason for firms to scrutinize their share class offerings.”

“Firms continue to offer an alphabet soup of share classes, but assets have shifted to lower-cost offerings,” Cerulli finds. “According to Morningstar, institutional share classes represented 31% of assets at the end of 2Q 2016, up from 16% in 2006. Conversely, A-shares made up 16% of assets at the end of 2Q 2016, down from 28% in 2006.”

Cerulli suggests this phenomenon is confirmed through net flow trends and the firm’s 2016 proprietary Economics of Product Development and Pricing Survey, in which asset managers report that I-shares made up an average of 49% of gross sales over the last 12 months.

Looking deeper at net flows the picture grows even clearer: “Institutional and retirement share classes brought in positive net flows in 2015 and June 2016, $143.5 billion and $125.1 billion, respectively, while A-shares had outflows of $91.3 billion and $68.9 billion for the same time frames. Cerulli continues to believe that core share classes will prevail—a lean institutional share class, a non-12b-1 share class for platforms and wraps, a classic 25-basis-point share class, and a bare-bones retirement share class exclusive of a servicing fee (sub-accounting transfer agency fee).”

More information on obtaining Cerulli research is available here. 

Data & Research August 23, 2016

Holistic Advice Key to Winning Gen X, Millennial Trust

They are also looking for fiduciary advisers and leading-edge technology.
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To win the business of Generation X and Millennials, registered investment advisers (RIAs) and fee-based advisers need to provide holistic advice and fiduciary support, according to the Jefferson National second annual “Advisor Authority Study.” They are also looking for advice delivered via leading-edge technology.

For advisers who managed $250 million or more, Gen Xers (ages 36 to 52) are their primary target. Advisers who earn $500,000 or more a year say that Millennials (ages 18 to 35) are their primary target.

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With 10,000 Baby Boomers retiring each day over the next 19 years, advisers need to turn their attention to younger investors, Jefferson National says. Only 42% of Gen Xers and 52% of Millennials are working with advisers.

Asked why they work with advisers, 43% of Gen Xers say it is advisers’ years of experience, 37% say it is holistic advice, and 22% say it’s the use of a fee-based fiduciary standard as opposed to a commission-based sales model. Among Millennials, 32% say it is reducing fees, 31% say it is years of experience, 23% say it is socially responsible investing, 20% say it is holistic advice, and 17% say it is a fee-based fiduciary standard.

When advisers were asked how they plan to attract the next generation of investors, 36% say by working with current clients’ family and children, 36% say via social media and 26% say through mobile technology. Jefferson National says this shows a disconnect between what advisers perceive that younger investors want and what they are actually looking for: holistic planning, a fiduciary standard, lowering fees and socially responsible investing.

NEXT: Younger investors’ top financial concerns

While saving for retirement is a priority for investors across all generations, younger investors are focused on other things, as well. For Millennials, the top three financial concerns are financing a large expense, such as a wedding or a vehicle (31%), their children’s education (30%) and retirement (26%). For Gen X investors, it’s retirement (47%), taxes (30%) and their children’s education (22%). Baby Boomers, on the other hand, are completely focused on retirement, with their first priority being managing the cost of health care (40%), followed by protecting assets (35%) and generating reliable income during retirement (30%).

When asked what influences them to work with an adviser, both Millennials and Gen Xers point to enhancements to their websites, robust cyber security and mobile technology. Forty-five percent of Millennials—compared to only 19% of Gen X and 14% of Boomers—think that robo advisers can help manage the volatile market.

Asked how they would like to communicate with their adviser, Millennials first choose face-to-face interaction (22%), followed by email (21%) and phone calls (18%). For Gen X, it’s phone calls (36%), face-to-face (28%) and email (13%). Boomers prefer phone calls and face-to-face (both at 40%), and then email (11%).

“There is a tremendous opportunity shaping the future of financial advice, as an emerging market of younger investors continues to grow in numbers and to build their own wealth,” says Mitchell Caplan, chief executive officer of Jefferson National. “Our research shows how the most successful advisers are more proactive at working to bridge the divide and meet the distinct needs of the next generation.

The report comes on the heels of a Transamerica Center for Retirement Studies survey that found all generations are worried about having enough money in retirement.

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