The Markets June 5, 2018

Advisers Continue to Select ETFs as Preferred Investment Vehicle

The vehicle has maintained the popularity vote since 2010.

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Exchange-traded funds (ETFs) are continuing their momentum of popularity as the tool wins its fourth consecutive year as the top investment vehicle among advisers, a new survey by the Financial Planning Association (FPA), the Journal or Financial Planning, and FPA Research and Practice Institute reveals.

According to the FPA, 87% of advisers are currently using or recommending ETFs to their clients, out of 20 investment vehicle options listed in the survey. Additionally, 46% of advisers plan to expand their recommendation of ETFs in the upcoming 12 months.

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Usage of ETFs has risen over the past eight years, says the FPA, with % of survey respondents utilizing and recommending the vehicle back in 2008, compared to 72% in 2018.

Following the popularity behind ETFs, the survey found blends of active and passive management styles are also preferred by advisers, with 65% of survey respondents voting in favor of them. While a consistent trend over the past five years, the survey says advisers are showing a higher preference towards purely passive approaches, as 22% voted for the style in 2018—an increase from 15% in 2017.

“With only 200 active ETFs out a universe of nearly 5,000, the continued rise in advisers’ use of this investment vehicle is clearly congruent with the uptick in their adoption of a purely passive approach to investing,” says Dave Yeske, managing director of Yeske Buie and practitioner editor of the Journal of Financial Planning. “And while 65% of advisers continue to favor a blend of active and passive approaches, these results suggest that the ratio may be shifting in favor of passive.”

Other preferred investment options include cash and equivalents, as 83% of advisers voted usage and recommendation of the product in 2018. Twenty-four percent also say they plan to increase their use/recommendation of these vehicles over the next 12 months.

Yet, aside from ETFs, no other investment vehicles ranked as highly in favor, reports the FPA. Only 19% of respondents plan to raise their use of mutual funds, and 19% plan to grow their individual stock-use.

Among the least-utilized investment vehicles are cryptocurrencies, as only 1% of advisers currently operate or recommend the investment type. According to the survey, only 2% believe they are a “viable investment option that has a place in a portfolio,”; 24% see cryptocurrencies as a “gamble” and “only worth investing money you can stand to lose,”; 29% think the investment is an “interesting concept to keep an eye on, but not invest in yet,”; 18% voted it is a “fad that is best avoided,”; and 26% consider them as “not a viable investment option.” Unsurprisingly, the FPA says usage is not likely to increase, as only 2% report they will raise usage/recommendation of cryptocurrencies over the coming 12 months.

The report surveyed 78% of Certified Financial Planner (CFPs) professionals, with 55% indicating they work as independent IARs/RIAs. More information on the study can be found here.

Data & Research June 5, 2018

TDF Investor Behavior Improves, But Allocation Mistakes Remain Common

Looking ahead, Vanguard researchers estimate that 77% of participants on the firm’s recordkeeping platform will be invested in a single TDF by 2022.

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Vanguard reports that more than half of 401(k) participants are now invested in a single target-date fund (TDF), compared to only 13% just a decade years ago.

A new report published by Vanguard, “How America Saves 2018,” suggests target-date funds (TDFs) continue to reshape the investment patterns of retirement savers, driving increased diversification and deterring errant, emotional trading.

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Looking ahead, Vanguard researchers estimate that 77% of the participants on the firm’s recordkeeping platform will be invested in a single TDF by 2022.

As the data shared by Vanguard shows, when constructing their own retirement portfolios, about 10% of participants still tend to hold extreme allocations—defined here as holding either 0% or 100% equities in a retirement-focused portfolio.

“With the advent of TDFs, three-quarters of all participants now have broadly diversified portfolios—up from only half 10 years ago,” Vanguard’s report states. “The rate of participants holding concentrated stock positions fell by half during the same timeframe. TDFs also help investors ‘stay the course’ with their investment plans, with only 2% of TDF investors executing a trade in 2017.”

The publication of the report comes alongside something of a reinvigoration of the target-date fund research topic in the financial services trade media. As the Great Recession of 2008 and 2009 proceeds further into the rear-view mirror, providers seem increasingly concerned about investor complacency—and on the optimal way to shape their risk glide paths for TDF product users who are approaching and entering retirement. Providers in 2018 are also more prone to discuss the way workplace demographic shifts are morphing their approach to risk management and product presentation.

“Target-date funds have revolutionized investing for millions of Americans, providing a ready-made, diversified portfolio for retirement savers,” observes Martha King, managing director and head of the Vanguard Institutional Investor Group. “Many participants lack the time, willingness, and expertise to build and manage their retirement portfolios, and TDFs offer a professionally-managed investment option at a very low cost.”

According to the How America Saves report, over the past decade, plan sponsors have implemented “thoughtful plan designs to influence and improve employee retirement savings.” The dramatic rise of TDFs—and subsequent portfolio construction benefit—has been driven by the adoption of automatic enrollment, which has tripled in the last decade to nearly half of plans.

“Plans with automatic enrollment have a 92% participation rate, compared with a participation rate of just 57% for plans with voluntary enrollment—meaning more employees are saving for retirement,” the report explains. “Not only are sponsors using higher default rates, but of those plans with automatic enrollment, two-thirds have also implemented automatic annual deferral rate increases. Importantly, automatic increases have helped to narrow the spread between deferral rates for participants in voluntary plans vs. automatic enrollment plans to just 0.3 basis points.”

Vanguard’s data further shows, when both employee and employer contributions are taken into account, the average savings rate of 10.5% has held fairly steady over a 15-year period.

“More people are participating in their employer-sponsored 401(k) plan than ever before, and saving at a healthy rate of about 10%,” adds Jean Young, senior research analyst in the Vanguard Center for Investor Research and lead author of How America Saves. “After over a decade of leading this research, it’s gratifying to see meaningful advances in plan design have such a tangible, positive impact on retirement savings for participants.”

The full Vanguard analysis can be downloaded here.

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