Data & Research May 30, 2014

Advice Firms See Virtual Model as a Positive

A strong majority of broker/dealer and registered investment adviser (RIA) firms surveyed by Fidelity Institutional see the emergence of digital advice models as a positive industry trend.
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A recent poll of advisory firm executives, conducted by Fidelity Institutional, shows 74% of broker/dealer and RIA firms see the emergence of virtual financial advice platforms and low-cost online investment management services as a positive industry trend—and one that is here to stay. However, 54% of executives polled also felt digital advisers cannot replace the human element of advice.  

When asked for one word to describe digital advisers, advisory firm executives described the new models as “needed” and “complementary,” but with the potential to be “disruptive.”

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The poll complements previous research showing two-thirds of mass affluent investors prefer a face-to-face relationship with an adviser. Together, the two pieces of research suggest firms have an opportunity to blend the best practices of the digital advice model with human touch to prepare for the next generation of investors, Fidelity says.

“Firm leaders should evaluate the wide range of new models emerging and identify which elements may be useful to embed into their advisers’ practices,” explains Sanjiv Mirchandani, president of National Financial, a Fidelity Investments company. “Overall awareness of digital advice solutions is low right now, with our poll showing that only 13% of executives are feeling very informed about the models. So, education is the first step.”

While the firm leaders polled agreed that the impact of these new models will equate to positive changes for clients in the advice industry, they shared reservations regarding greater confusion about advice options and increased regulatory scrutiny, Fidelity says. Executive respondents frequently cited concerns over whether regulators will be able to effectively oversee these new models.

The executives polled saw digital advisers as having the greatest impact on the availability and cost of advice for mass affluent investors and raising investor demand for technology, Fidelity says.

According to the poll, many executives are already incorporating some of the digital adviser best practices and solutions into their businesses in order to engage the next generation of investors. A majority of executives report that they are using technology to drive collaboration and ease of doing business (52%). Others are using lower cost investments in portfolios (46%); offering do-it-yourself tools for goal planning, asset allocation, etc. (22%); and lowering minimum asset levels (20%).

Fidelity Institutional took the poll during the firm’s annual Executive Forum client event, held in early May. The event was attended by more than 300 industry executives, most of whom are clients of Fidelity’s custody and clearing units.

Data & Research May 29, 2014

Younger, Newer Employees the Plan Participation Challenge

Millennials continue to be the big challenge for retirement plan participation, Wells Fargo Institutional Retirement and Trust finds.
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Wells Fargo’s quarterly analysis of key trends among the 4 million eligible employees for whom it provides an employer-sponsored 401(k) plan shows about one-third (34%) of Millennial workers participate in their 401(k) plans on average. However, this number jumps up to 70% for Millennials who are automatically enrolled in their 401(k) plans.

“As evidenced by the difference in participation for Millennials in plans with auto enrollment versus those in plans without auto enrollment, where they had to opt in to the plan, automatic enrollment can be very effective in getting people into the plan,” Joe Ready, director of Wells Fargo Institutional Retirement and Trust, tells PLANADVISER. “Education and communication campaigns are also essential—and for the younger groups, this involves more than just the traditional print mailer.”

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In addition, although participation is improving a bit among employees with one to four years of service, new hires are actually losing ground. Only 22% of people hired in the past year are participating in their workplace retirement plan.

Participation is improving for those who earn at least $40,000 per year. Less than half (48%) of workers earning $20,000 to $39,000 are participating, compared with just more than half a year ago.  Only 17% of those earning less than $20,000 are participating, compared with 22% a year ago.

There is good news, however, as younger and newer employees who are participating in their 401(k) plans are saving at better levels and are more diversified in their investments. Wells Fargo’s recommended contribution index, which measures how many people are saving a minimum target of 10% in their 401(k) plan, including employer match, is up 1.4 percentage points, which is noticeably better than the modest gains in prior years (0.6 percentage points in 2013 Q1, 0.5 percentage points in 2012 Q1).

All generations except the Silent Generation have seen at least a four-percentage-point increase in Contribution Index over the past three years. Additionally, the Contribution Index has improved three percentage points among new hires over the past three years, and now stands at 24%. Those hired one to two years ago have seen an improvement of four percentage points—with 30% saving at a minimum target of 10%.

“I am encouraged by the uptick in participants [with contributions of at least] 10%, including employer match,” Ready says. “It’s not enough to just get in the plan; people need to save adequately, also.”

The number of participants meeting a minimum level of diversification—either a minimum of two equities and a fixed fund or an asset allocation fund such as a target-date fund, and less than 20% in employer stock—in their 401(k) account is up two percentage points this year. Wells Fargo says the big driver is the growing use of managed products; 74% of participants now have at least part of their balance in a managed investment product, up from 65% three years ago.

According to the study, among generations, Millennials are still the most diversified. By tenure, new hires continue to be the most diversified, but there has been no change in that group over the past three years. The biggest gains are among those with three to nine years of tenure, who have seen a jump of 10 percentage points over the past three years. This correlates with the wave of plans that adopted managed investment products as their default investment in the wake of the 2006 Pension Protection Act, Wells Fargo says.

By salary, diversification is highest among the lowest earners: 82% for those earning less than $20,000. The other salary groups are clustered tightly, ranging from 75% to 77%.

The analysis also finds loan usage has leveled off, but still more than 19% of participants have an outstanding loan.

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