The Markets March 3, 2011

HNW Allocation Not Completely Back to Normal

TIGER 21, a network for high-net-worth investors, conducted a survey of members that found although allocation to some categories has been restored to pre-downturn levels, certain shifts in asset allocation may be more long term.   
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The survey analyzed whether asset allocation has returned to pre-crisis levels and found exposure to public equity at 21%, which is low compared with historic standards in the 30-35% range. Towards the end of 2008, TIGER-members had public equity exposure at 31%. “While the markets have certainly come a long way from the doldrums of the recession, members remain wary about whether we are in the clear or there will be more bad news,” explained Michael Sonnenfeldt, chairman and founder of TIGER 21.

Holdings in cash and cash equivalents are still at historically high levels, the survey found.  From 2008 to 2009, allocation increased by three percentage points and it remains high at 14%. “While high net worth investors traditionally had 5-10% in cash to weather a downturn through the period it took to recover, TIGER 21 Members have been registering levels of cash in the low teens for a few years and in the mid-teens for the last two years indicating deep concerns about the recovery and not wanting to get caught with too little cash if there is another downturn,” said Sonnenfeldt.   

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Portfolios consists of 23% real estate and 9% private equity investments among TIGER members. “Good advice for any investor, is to stick with what you know, and TIGER 21 members take that to heart.” said Sonnenfeldt.

Allocation to hedge funds, which had seen a four percentage point increase between 2008 and 2009, remained steady over the past year at 9%. “Hedge funds have regained some of their pre-2008 luster, returning to almost 10% of portfolios. Historically they had been in the 10-12% range in the last half-dozen years but fell dramatically in the 2008 downturn from losses sustained. This was amplified by liquidations as Members were seeking to limit risk and build cash. Some Members may now perceive additional opportunities for alternative investments to outperform the public markets,” Sonnenfeldt explained.

TIGER 21, whose approximately 170 members nationally maintain investable assets of approximately $15 billion, collected data throughout 2010 for this survey, ending in the fourth quarter.

Compliance March 3, 2011

Subtracting “Surprise” from the Equation

The American Society of Pension Professionals and Actuaries (ASPPA) presented a statement this week at a Department of Labor-sponsored hearing regarding proposed changes to the definition of “fiduciary.”
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Brian Graff, Executive Director/CEO of ASPPA, spoke in front of the Employee Benefits Security Administration (EBSA) panel. The ASPPA statement highlighted two areas of the proposal that would bring improvements to the retirement industry, as well as two areas of it that may be damaging.

The first improvement ASPPA would like to see enacted relates to clarifying whether advice is “ERISA-covered” or not—a topic that would confuse many plan sponsors.  As Graff stated: “When a broker/adviser is helping a small business owner set up a 401(k) plan and says to the owner, ‘these are the 20 investment options that you should offer in your plan,’ that owner naturally thinks he or she is getting advice… In our members’ experience, these small business owners are surprised when they find out the ‘advice’ they have received for their ERISA-covered 401(k) plan is not actually ERISA-covered investment advice. We urge the DoL to remove this confusion by clarifying the definition so all parties—particularly plan sponsors can be sure they receiving the full protections under ERISA.”

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The second area in which ASPPA and the DoL are in agreement is to discard the requirement that says advice must be given more than one time for it to be counted toward the five-part fiduciary test. “We agree that requiring advice be provided more than once to result in fiduciary status is inconsistent with the reasonable expectations of plan fiduciaries and simply makes no sense,” the statement said.

ASPPA changed its tune when it came to how broker/dealers (B/Ds) should disclose their intent. “…we believe the recommended disclosures required for commission-based brokers/advisers in the proposed regulation is over broad and unduly harsh. We suggest the DoL provide a model disclosure that explains: (1) the broker/adviser is not acting as ERISA fiduciary; (2) the advice may not be impartial if a commission is received, and (3) disclose compensation the broker/adviser will receive based on the investments selected.”

Lastly, ASPPA strongly urged the DoL to not include individual retirement accounts (IRAs) in the regulation due to “the fundamental differences between IRAs and qualified retirement plans.”

ASPPA’s complete statement can be seen here.

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