Institutional assets are flowing into exchange-traded funds
(ETFs) as U.S. institutions integrate ETFs into essential investment functions
ranging from risk management and liquidity enhancement to the generation of
income and yield in a challenging interest-rate environment.
In a new report, “ETFs:
‘Active’ Tools for Institutional Portfolios,” Greenwich Associates
says it interviewed 187 institutional investors and found respondents invest an
average 21.2% of total assets in ETFs—up from the 18.9% of total assets
reported in 2015. Those allocations are likely to grow in 2017. Forty-seven
percent of equity ETF investors and 38% of bond ETF investors expect to
increase their allocations to the funds in the year ahead.
“Although institutions are using ETFs as a means of
obtaining strategic investment exposures, for many institutions, ETFs also have
taken on a central role in critical functions like risk and liquidity
management,” says Greenwich Associates consultant Andrew McCollum.
Approximately half the institutions in the study use ETFs for liquidity
management and nearly the same number employs ETFs in risk management/overlay
strategies.
The survey found institutional demand for ETFs is fueled by
several powerful trends:
Institutions
are using ETFs alongside other investment vehicles. Thirty-eight percent
of institutional ETF users are replacing other vehicles in their
portfolios, including active mutual funds and derivatives positions.
Institutions
are using innovative ETF structures to address challenges in their
portfolios. Growing numbers of institutions are turning to non-market-cap
weighted/Smart Beta funds like Minimum-Volatility ETFs and Dividend/Equity
Income ETFs to help navigate the challenges posed by low interest rates
and increasing market volatility. The share of institutional ETF users
investing in non-market-cap weighted/Smart Beta ETFs increased to 37% in
2016 from 31% in 2015, and 44% of these investors plan to increase their
allocations to the funds in the next year.
Demand
for ETFs is being fueled by the roll-out of new multi-asset funds.
Fifty-two percent of asset managers use ETFs as part of multi-asset funds
operated for clients. That share is up sharply from the 35% of asset
managers employing ETFs in these funds in 2015. Within these funds, asset
managers allocate a full 55% of total assets to ETFs.
Past
impediments to institutional use are giving way. Fewer institutions are
expressing concerns about ETF liquidity and expenses. In fact, many
institutions are introducing the funds into their portfolios specifically
to enhance liquidity and reduce costs. Meanwhile, explicit prohibitions or
limitations against ETF investments are becoming less common in both
equities and fixed income. In 2015, nearly one-quarter of non-users said
they were prevented from investing in fixed-income ETFs by internal
investment guideline restrictions. That share fell to 19% in 2016.
When conducting due diligence on a potential ETF investment,
institutions consider four primary factors: the degree to which the ETF matches
their exposure needs, liquidity/trading volume, the expense ratio of the fund
and performance/tracking error. Insurance companies, of course, pay close
attention to an ETF’s National Association of Insurance Commissioners (NAIC)
rating, and institutions across the board also take into account the fund
company and management behind the ETF.
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Short Term Financial Wellness is Key to Retirement Planning
Even though retirement plan sponsors are seeing higher participation
rates, several employees struggle with handling debt, budgets and savings, which
is undermining retirement readiness.
Failure to manage short-term financial obligations
such as budgets, debt and savings can have a lasting impact on financial
health and retirement readiness, according to an independent study by retirement
consulting firm AFS 401(k).
The survey found 38% of employees said they
don’t feel comfortable with their current debt. Of that percentage, 42% don’t check their credit reports
annually, 62% don’t pay their credit card bills in full every month, and 71%
said they don’t have at least three months’ worth of emergency savings.
However, the firm also found that a majority of
employees are seeking help facing these challenges, and many are turning to
their employers.
Speaking with PLANADVISER, Alexander
Assaley, managing principals with AFS 401(k), says effective financial wellness programs can help. He explains that successful wellness programs
typically combine financial literacy content in a range of media,
incentive-based challenges to drive financial behavior, and one-one-one coaching
and advice to personalize the experience.
He stresses that while retirement savings
is critical to financial wellness, employees typically won’t make the most of
it if they’re struggling to meet short-term financial obligations.
“What we’ve found is that regardless of their age or
income, if employees aren’t getting access to financial literacy tools, resources
and educational advice that helps them make wise financial decisions for today
and tomorrow, they can create negative impacts on their long-term financial
future and retirement,” says Assaley.
Moreover, the firm found that mishandling one financial
obligation can have a ripple effect across their entire financial well-being. For
example, AFS found that those who don’t have at least three months of emergency
savings tend to fare poorly on the other two aspects of financial wellness,
compared to those who do have at least three months of emergency savings.
Out of the non-emergency savers, 44% say they don’t
feel they have cash flow under control, 66% say they don’t pay off their credit
cards in full every month, and only 14% are retirement ready. Out of those with
adequate emergency savings, 86% feel they are in control of cash flow, 60% say
they pay their credit card bills on time each month, and 31% are on track to
meet their retirement goals.
Clearly, financial wellness programs can benefit from
emphasizing the importance of saving for unexpected financial obligations,
while also getting workers to take action toward meeting this goal. The
educational component can come from print and online educational materials,
webinars, group sessions, and individual meetings. But a crucial component to
any financial wellness program is its ability to drive action and change behavior. Assaley points to incentive-based
challenges that motivate employees to engage with these programs, while being
rewarded with various incentives such as cash bonuses or reduced premiums for
health benefits. One example AFS presents to clients is a 90-Day Budgeting
challenge in which employees play a mobile game to meet different financial
milestones and are rewarded.
“I would be very excited for a future in
which there is more flexibility inside the retirement plan, where you can use
different kinds of incentive-based programs to reward employees with something
like an additional employer match or discretionary contribution,” explains
Assaley, noting that such a move would require some regulatory change.
However, one financial wellness program
may benefit one company and flop with another. Assaley recommends taking a
customized approach that considers the specific needs and preferences of a particular work force. He says this can be done
with various surveys, assessments, and one-one-one counseling that can provide “a
good amount of data about the demographics around the organization, as well as
the financial challenges and obligations that are most important to them.”
And despite advances in technology, the
firm finds that financial professionals can learn a lot from employees and help
them through one-one-one sessions. The survey found 63% of respondents prefer
one-on-one meetings with financial professionals.
But over the last few years, financial
wellness has become a buzzword in the industry and a lot of money has been
pumped into creating programs around this concept. So, is it a bang for the
buck? Research suggests some financial wellness providers are not doing it
right.
Assaley tells PLANADVISER, “One of the most important
questions we ask is, ‘Does financial wellness live up to the hype?’ In a lot of
cases, I think it’s being pitched as financial wellness, but it’s really just recycled
presentations on different broad-based topics. Generally, what we’re seeing now
in the market place is not integrated and engaging programs.”
Still, AFS drew some positive outcomes from several
financial wellness programs and offered some case studies in its research.
One banking client that started working
with AFS in December 2015 managed to boost participation rates from 73% to 93%
and average savings rate from 5.4% to 7.5% after “implementing a structured
financial wellness education program that includes group and
one-on-one financial counseling, as well as online resources employees may
access at any time they wish.” These results were recorded as of September
2016. Notably, auto enrollment features had not yet been implemented by then.
He recommends looking at the standard metrics such as participation
rates, savings rates, and retirement readiness levels; as well as other facets
such as the reduction of liabilities an employer may have in retaining their
employees past retirement age, and seeing how financial wellness can help
employees retire on time. “If their employees aren’t retirement ready, what
does that cost them in terms of health care and workers’ compensation, and
human capital? Ask, ‘how can you improve your bottom line by getting employees
retirement ready?’”
The research notes that the process of implementing a
financial wellness program and measuring its real ROI can take years, but have lasting
impact.
“When structured, managed, and delivered in the right
way with buy-in from the employer, these programs can drive significant results
and provide benefits for the employee and the organization.”
Of course, there is plenty of room for improvement in
the industry.
“What we’re seeing in the market place generally is
not integrating and engaging programs that create a model, challenge or
incentive for employees, and then support that with one-on-one coaching. Those
are the pieces that are a launch pad to getting working Americans on track for
today, tomorrow and for retirement.”
The study "Beyond Retirement: An Examination of Financial Wellness for Employers" by AFS 401(k) was conducted by interviewing more than 1,000 working professionals and surveying more than 500 employees to learn about their financial priorities and struggles. A white paper based on the study can be accessed at afs401k.com.