The Markets April 10, 2014

DC Participants Less Active Traders in March

March was a light trading month for defined contribution (DC) plan participants, according to Aon Hewitt’s 401(k) Index.
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The index found the overall daily transfer volume in March averaged 0.021% of the total daily balances, slightly lower than February’s value of 0.023%. In addition, there were zero days in March with above normal transfer activity levels, marking the first month of zero above normal trading days since August 2013. Total transfer activity across the index was low, at $244 million (0.15%).

In this context, the normal levels are defined by the index as when the net daily movement of participants’ balances, as a percent of total 401(k) balances within the index, equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

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When DC participants did trade in March, they favored fixed income funds. Fifty-seven percent of trading days were fixed income oriented. Overall, net transfer activity moved away from diversified equities (equity assets excluding company stock) by $160 million (0.10%).

The asset classes that experienced net inflows during March include premixed portfolio funds, with gains of $70 million (29%), and bond funds with a gain of $36 million (15%). Next in line were international funds, with $29 million (12%) of the monthly inflows, and small cap U.S. equity funds received $23 million (10%). Company stock funds again lead the net outflow activity, with $208 million (86%) transferring out, followed by GIC/stable value funds, with $13 million (6%), and money market funds, with $12 million (5%) transferring out.

On average, participants’ overall equity allocation remained at 65.5% at the end of March, unchanged from the value in February. Employee discretionary contributions to equities, another measure of participant sentiment, were also virtually unchanged at 66.6%, compared to 66.5% in February.

Aon Hewitt noted that emerging equity markets outperformed the developed equity markets during March. The MSCI Emerging Markets Index posted strong performance for the second consecutive month, returning 3.1% during March on top of its 3.3% gain in February. Equities, both U.S. and non-U.S., also had positive performance as the S&P 500 Index returned 0.8% and the MSCI All Country World ex-U.S. Index gained 0.3%. The fixed income markets, as measured by the Barclays U.S. Aggregate Index, decreased by 0.2% during March.

For the first quarter of 2014, $393 million total net transfer activity moved into diversified equities. As a percentage of total participant balances, the quarter totaled 0.25%.

During the first quarter, the S&P 500 Index hit a series of record closing highs and posted a return of 1.8%. Non-U.S. equities, as measured by the MSCI All Country World ex-U.S. Index, also delivered positive performance over the first three months of the year, gaining 0.5%. Two consecutive months of positive performance for the MSCI Emerging Markets Index were not enough offset the rough start it had in January, with the MSCI Index having an overall return of -0.4% during the quarter. The Barclays Capital Aggregate Bond Index returned 1.8% during the quarter, as the yield on the 10-year Treasury fell by more than 25 basis points.

More information about the March results for the Aon Hewitt 401(k) Index can be found here.

Data & Research April 10, 2014

Mega Teams Control Much of the Advisory Market

New research from financial analytics firm Cerulli Associates finds “mega adviser teams” with at least $500 million in assets under management control 42% of the total advice market.
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Mega teams are well situated to attract high-net-worth clients and large corporate retirement plans, explains Kenton Shirk, an associate director at Cerulli, leading to their relative dominance in the investment advice marketplace. One of many reasons for this is their size, Shirk says, which allows mega teams to offer a greater breadth and depth of expertise to serve the complex needs of the largest and most affluent clients.

But size isn’t the only factor leading to mega team success—as such teams comprise only about 14% of the total financial advice industry headcount, Cerulli says. Findings in the second quarter 2014 issue of The Cerulli Edge – Advisor Edition suggest mega teams are also advantaged by better technology, skilled support personnel and other back office resources that allow such teams to more easily acquire and absorb competitor firms. This, in turn, allows for more rapid growth in assets under advisement.

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“Mega teams are ideally positioned to make acquisitions,” Shirk says. “Their financial success reduces the burden of financing, and the scale of their operational infrastructure makes it easier to service additional clients. As a growing number of advisers near retirement age, acquisitions will help mega teams grow at even faster rates.”

Cerulli finds advisory practices that increase adviser capacity can free their top-performing producers to spend more time on business development activities that drive revenue growth. These practices also operate at substantially greater levels of productivity than smaller firms, Cerulli says, as measured by AUM per headcount. Given that staffing expenses such as salaries, benefits and payroll taxes comprise the largest overhead costs, a higher level of productivity can greatly increase a practice’s operating profit.

Additionally, from a succession standpoint, large practices with high-net-worth clients are considered more appealing and typically garner high revenue multiples when assessing practice value and negotiating a merger or acquisition, Cerulli says.

The benefits of size can also generate a higher return on investment from human capital. Cerulli says successful, high-performing practices are more successful at recruiting talented advisers and staff who seek opportunities for long-term career growth. Large practices are a fertile training ground for junior advisers because they can offer a structured career path, allowing juniors to learn various aspects of the business over a period of time.

A summary and more information on how to purchase the full report are available here.

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