The
current focus on retirement plan costs to participants provides a growth
opportunity for the use of institutional investment products in defined
contribution plans.
According to research from Cerulli Associates, adoption
of institutional vehicles among defined contribution (DC) plans is slow. “The
current investment vehicle landscape is dominated by mutual funds, which
account for 53.2% of 401(k) assets,” noted Kevin Chisholm, senior analyst at
Cerulli. “Plan size is the key factor in determining whether a defined
contribution plan uses institutional investment vehicles.”
The research found plans with less than $250 million in
assets will likely continue to use mutual funds as their primary investment
vehicles, and plans with between $250 million and $1 billion assets will
continue to use mutual funds as primary vehicles, but Chisholm says Cerulli
expects the use of institutional vehicles to grow, especially among plans with
close to $1 billion in assets. Plans with more than $1 billion in assets are
using institutional vehicles and Cerulli expects the number of institutional
vehicles used to increase.”
Overall, Cerulli finds that the increase in use of
institutional vehicles is slow for several reasons. Managers typically select
the strategy first, and then choose the investment vehicles that best fit the
plan’s structure. There are also few actively managed collective trust funds
(CTFs) available, which will affect potential growth of institutional vehicle
use.
“Concerns around fiduciary responsibility and the plan
participant communication process lead to a slow decisionmaking process, and
ultimately contribute to a lack of action,” Chisholm says. “We’ve found this to
be consistent with changes to DC plans in general because companies have little
incentive to make changes to their DC plan.”
Many factors contribute to the decision to include institutional
investments within DC plans. Understanding these factors is integral for asset
managers considering the addition of institutional investments.
This research is from “The Cerulli Edge – Retirement
Edition, 4Q 2012 Issue” and is available for purchase by contacting CAmarketing@cerulli.com.
The report provides a review of current product development trends in the
industry, including an in-depth look at investment vehicles used in defined
contribution plans.
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According to a webcast by Schwab Advisor
Services, in the last few years there has been an uptick in the number of
advisers looking to join RIAs.
Other reasons advisers might consider going independent
include more product offerings, marketing and infrastructure. According to Schwab,
some wirehouse advisers have expressed frustration over limited control. At an
RIA, the adviser is able to control all aspects of his business, said Allison
Mistlebauer, director of adviser services strategy at Schwab Advisor Services.
The RIA model can yield greater opportunity for expansion. In one Schwab
study, about half the firms surveyed added new principals since their founding.
Quality client service and
relationships was also cited as a motivating factor. Jeff Leventhal was
previously at UBS before becoming an adviser at HighTower, where his focus is
wealth management and institutional money management “One wirehouse is no
different from another,” he commented.
“I came to realize that the
wirehouses look at our clients as just a number,” Leventhal said. “[There is]
not a lot of interest in putting client interests first—they want to be more
profitable.” During the financial crisis of 2008, he recalled, that tension
between profitability and client servicing became much clearer to him, and
moving forward, he wanted to protect his clients.
Landon M.
Yoshida, an adviser with Iwamoto Kong Wealth Management Group, said the
financial crisis also played a part in his decision to become independent.
“Everyone can recall 2008 and what happened,” he said. “People asked out loud,
‘Is my firm going to exist on Monday?’ From that point on, I spent a lot of time reassuring my clients that their money
was safe. It really got away from the
practice we were building.”
The safety of financial institutions became a louder topic of discussion.
Wirehouses have been the dominant presence for so long, Leventhal said, because
of their perceived safety, as well as access to products and services. “The
safety issue was thrown out the window as the financial crisis began to
unfold,” he said, while “custodians like Schwab were not in the news because
they are not attached to a bank.”
(Cont’d…)
‘I am not cut out
to run a business’
Joining an RIA is often a good fit for those who find running a business
a hassle. “I was fortunate to have experience in both the independent
broker/dealer as well as the big firm,” Yoshida said. “I realized I am not cut
out to run a business. Thinking about trying to run a payroll, and staying in
compliance—that’s the No. 1 thing— and [keeping up with technology]. I had to find a place where the infrastructure
is already set up.”
Other benefits of joining an existing RIA are leveraging cost structures
and economies of scale, according to Leventhal.
Mistlebauer pointed out that when advisers don’t have to expend
time and energy on the day-to-day business, it leaves them freer to focus on
their client base and running client experience, rather than the tasks of
payroll and accounting.
One thing that
sealed the deal with HighTower,” Leventhal said, “was that the relationships
would always be mine, from day one. And from an investment standpoint, they
asked me how I ran money and how we handle clients. They wanted to make sure
the process would fit what they do in the marketplace. I could expand on
products and services, back-office support, what kind of ongoing service they would
offer my clients.”
Yoshida said his
points of clarification were similar. “Of course I started with the topic of
payout,” he said. “We’re all looking for that growth. I would suggest that
those looking at these options ask the firms you’re meeting with, ‘What are you
going to provide for me?’ Get those expectations really clear.”
Leventhal pointed to having an existing team as a reason he was
comfortable he could operate on his own. Although there were aspects of the
business he didn’t want to be involved with on a daily basis, he wanted to make
sure he was an owner. “Many of us as advisers want to have some ownership stake
in the business,” he said. He said that HighTower, which is adviser-owned, has
national scale and is multi-custodial, provided reasonable solutions.
(Cont’d…)
What Transition Looks Like
Advisers soon
find out that transition is not instantaneous. “I learned right away the
transition would not be over the weekend,” Yoshida said. He found that he had
to explain to his clients and help them understand. “It wasn’t as smooth in
that sense as I was hoping,” he said, although he was able to bring over all
his clients with one exception.
“You have to
know the language and be able to talk through the differences and help that
client understand why they’ll be better off going that route with you,” he
said.
Leventhal said
that an important difference to retain in working through transition is that
between a dual-party and a tri-party relationship. “I wish I’d understood that
better,” he said. In the independent model, it’s firm, adviser and client,
while at a wirehouse, it’s company and client. “When you come from the
wirehouse world you are not a true fiduciary,” Leventhal pointed out, “but when
you go RIA that is a huge benefit to the client. That can help make the
transition much smoother.”
Yoshida agreed
that an adviser does not need a wirehouse in order to deliver a great client
experience, and mentioned the many resources available to help clients. “We can
offer a dashboard where they can look at all their accounts in one place, whether
it’s with us or a bank. There’s no way Merrill would have offered that.”
Yoshida’s firm—10 staff members and four wealth managers—is “entirely an
RIA, SEC-registered. We have no broker/dealer affiliation. All the wealth
managers have let their Series 7 lapse,” he said. Schwab is their sole
custodian for client assets. “I like the simplicity,” Yoshida said.
According to
Leventhal, HighTower has 250 employees with 65 adviser partners. They are
multi-custodial, and advisers can work with more than one custodian, but he
chose Schwab.
“There’s an
option out there for whatever will fit a person, Mistlebauer said. “Larger
national presence? Small, local-driven firm? It’s a matter of understanding
what you want and how you’ll fit in from a cultural standpoint.”
When two
advisers are touting the advantages of going independent, it is natural to
wonder why anyone would stay at a wirehouse. Inertia is one factor, according
to Leventhal. “It’s a lot of work to make a move, and some people don’t want to
put the effort in.”
Yoshida echoed
this, adding, “Obviously we’re a little biased.” Benefits, including health
insurance, can be an important reason to stay with a wirehouse, he said.
Merrill Lynch was very generous in its coverage, he said. “Ask the question, ‘What
is that going to look like, if I transition?’ ” he
advised. Part of his compensation structure was keeping his coverage at Bank of
America Merrill Lynch through COBRA, which the firm paid a substantial portion
of.
Other issues
that might make the change harder to consider, Yoshida said, are advisers who
believe there is a low likelihood of bringing clients on board, as well as
retention packages and signed agreements. “The risk and the reward makes a lot
of sense, and you do have to make that leap of faith and take a shot,” he said.