For registered investment advisers (RIAs), fee-based
advisers and investors, protecting assets and saving for
retirement are the top concerns over the next 12 months, according to
Jefferson National’s second annual Advisor Authority study.
Just over three quarters (76%) of advisers and 63% of
investors said they expect volatility to rise over the next 12 months. Advisers
are more likely to review their investing strategy in response; 62% of advisers
plan to do so, compared to 41% of investors. Of those who plan to revise their
strategy, 75% of advisers and 72% of investors plan to “invest more tactically,”
while 69% of both advisers and investors plan to invest more conservatively.
Asked about their plans to attract the next generation of investors, 36% of
advisers plan to work more closely with a client’s family and children, 36%
plan to increase their use of social media, 26% plan to use more mobile
technology, and 24% plan to offer personalized, holistic advice.
Seventy-seven percent of advisers will not make an
investment unless they are confident they can effectively communicate it to their clients. When
choosing an adviser, investors’ top three priorities are experience (44%),
personalized/holistic advice (26%) and a fiduciary standard (24%). Although
investors are expecting more volatility in the year ahead, those who work with an
adviser are far more optimistic than those who do not (47% versus 35%).
“Increasing political and economic uncertainty, both domestically and globally,
creates opportunities for expert advisers to add value and underscores the
importance of working with an unbiased fee-based or fee-only adviser to ensure
that clients will be better off,” says Mitchell Caplan, CEO of Jefferson
National.
Harris Poll conducted the survey of 683 financial advisers
and 733 investors for Jefferson National in March.
DC Retirement Plan Participant Portfolio Construction Has Improved
At year-end 2015, about half of all Vanguard participants were solely
invested in an automatic investment program—compared with just 29% at
the end of 2010.
Vanguard’s 2016 How America Saves
report shows the number of defined contribution (DC) plan participants
with professionally managed allocations—those who have their entire
account balance invested in a single target-date or balanced fund or in a
managed account advisory service—has grown.
At year-end 2015,
about half of all Vanguard participants were solely invested in an
automatic investment program—compared with just 29% at the end of 2010.
Forty-two percent of all participants were invested in a single
target-date fund; another 2% held one other balanced fund; and 4% used a
managed account program. Among new plan entrants (participants entering
the plan for the first time in 2015), eight in 10 were solely invested
in a professionally managed allocation.
Jean Young, senior
research analyst at the Vanguard Center for Retirement Research, and
lead author of How America Saves, based in Malvern, Pennsylvania, tells
PLANSPONSOR, while automatic enrollment and plan sponsors choice of a
qualified default investment alternative (QDIA) had something to do with
this, the study found more participants chose these options than were
defaulted into them. “Just offering the options eases decisions for
participants,” she says.
As for the use of managed accounts,
Young says the study indicates those who choose managed accounts tend to
have higher account balances and be higher-income, longer-tenured
employees. “At some point, their balance gets high enough that they want
advice and professional investment management,” she notes.
Given
the growing focus on plan fees, there is increased interest among plan
sponsors in offering a wider range of low-cost passive or index funds.
An “index core” is a comprehensive set of low-cost index options that
span the global capital markets. In 2015, half (54%) of Vanguard plans
offered a set of options providing an index core.
Over the past
decade, the number of plans offering an index core has grown by nearly
90%. Because large plans have adopted this approach more quickly, about
two-thirds of all Vanguard participants were offered an index core as
part of the overall plan investment menu. Factoring in passive
target-date funds, 69% of participants hold equity index investments.
“I
do think the fee transparency regulations had a lot to do with this,”
Young says. “As plan sponsors look at their investment lineups, they
want to be sure they have low-cost passive option for participants.”
NEXT: What the markets did to account balances
Young points to scatter plots in the How America Saves report
that show the five-year annualized total return for participants in
professionally managed options versus those participants who select
investments on their own. The scatter plots show consistent allocations
to bonds and stocks and consistently rising returns for those in
professionally managed accounts. However, the allocations and returns
for those selecting their own investments included many outliers, with
some experiencing negative returns.
The How America Saves study
found that with essentially flat markets in 2015, the average one-year
participant total return was –0.4%. Five-year participant total returns
averaged 7.3% per year. Among continuous participants—those with a
balance at year-end 2010 and 2015—the median account balance rose by
105% over five years, reflecting both the effect of ongoing
contributions and strong market returns during this period. More than
90% of continuous participants saw their account balance rise during the
five-year period ended December 31, 2015.
Young explains that
the returns participants see depends in part on the size of the account
balance. The Vanguard study found the median account balance was
$26,000; only 25% have account balances higher than average. Young says
there are a few things going on. “The effect of auto enrollment is more
small balances. For better or worse, participants don’t get the idea of
total return and compounding, so they look at what their account balance
is doing. In 2015 when equity was down, ongoing contributions masked
that, so while participants might hear about market volatility, what
they are experiencing in their own account doesn’t reflect that. Smaller
account balances are like rose-colored glasses, and the good thing is
it doesn’t make participants panic.”
Young says those with higher
account balances may see more of a loss in their accounts, which is not
necessarily a bad thing because they are buying low with their
contributions.
“The two big criticism for 401(k)s is that participants don’t save
enough, and don’t know how to invest. We found the overall contribution
rate is 10%, which we’d like to see higher, but it is good. We’ve made
much more headway on the participant portfolio construction issue. These
are the two things we need to get right,” Young concludes.