Data & Research September 30, 2014

Many Favor Predictability Over Beating the Markets

Retirement investors are, for the most part, willing to sacrifice some overall returns to secure more predictable portfolio outcomes, according to Natixis Global Asset Management.
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Natixis today released results from a new survey of financial advisers, finding advisers currently see strong demand for their services and expect this demand to continue briskly. More than three-quarters (76%) of financial advisers say their business grew in the last few years, including 20% who reported strong growth. On average, advisers expect their businesses to expand by another 18% over the next 12 months, according to Natixis.

Most advisers attribute the growth in their business to net new assets from existing clients (49%) or new clients (22%), while just 14% of advisers attribute the growth to strong market performance. Nearly all (96%) say they are confident their clients’ portfolios are well positioned to take advantage of the current bull market cycle.

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Yet advisers consistently cite investor behavior as a top challenge to their business success, and most have concerns about the potential impact of rising interest rates and inflation on client portfolios. According to Natixis, advisers say the top three challenges to their success are clients’ emotional reactions to market movements, managing investor behavior and confidence, and persuading clients to stick with their financial plans. Each was cited as a top challenge by nearly nine in 10 advisers.

Ed Farrington, an executive vice president of Natixis Global Asset Management, tells PLANADVISER that these results are, unfortunately, not a big surprise. Advisers have long worried about their clients’ tendencies to react emotionally to short-term events in portfolios designed to win in the long term, he says. For advisers, Farrington says the important takeaway is that there is a real premium placed today on the ability to dampen portfolio volatility while still maintaining opportunity for growth, whether through the addition of liquid alternatives or through other strategies.

Indeed, Natixis finds more than half (54%) of financial advisers say their clients have started to question traditional buy-and-hold investing strategies—though clients have actually done so less in the past two years as the stock market has soared and investors focus less on making up for past losses.

“One of the things that we’ve been working on for the past few years is building a more durable portfolio construction process the adviser can provide to clients that may be more worried about volatility,” Farrington explains. “To us, it goes back to having a personal goal as opposed to a goal set according to a relative benchmark.”

Farrington says that other Natixis research shows that most clients (more than 80%) would be comfortable using a personalized benchmark to assess portfolio outcomes—one not based on a relative benchmark, such as the S&P 500 capitalization-weighted index, but instead on an individualized assessment of future income needs. What’s most striking, Farrington adds, is that investors similarly appear to be willing to sacrifice relatively hefty amounts of returns for less-volatile portfolio performance.

One of the most interesting figures from Natixis’ recent research, Farrington says, shows 84% of individual investors say they would be happy to achieve their long-term investment goals, even if they underperformed the market in a given year. Even more striking, two-thirds (69%) would be happy to achieve a guaranteed 10% return, even if the overall market gained 25%. 

Farrington is also quick to point to findings from the adviser survey showing relatively weak engagement with the investing process, even for those already deferring part of their annual salary into a retirement plan. For example, while 64% of retirement plans offer some sort of online retirement income calculator, just 38% of participants report having ever used this type of tool.

Farrington says this picture is hard to reconcile with some of the more positive findings from the adviser survey–such as the fact that the average retirement plan participation rate for eligible employees in the U.S. has climbed to about 90%, in large part due to the wider adoption of automatic enrollment. But as the 401(k) plan is now the primary retirement vehicle for about 84% of workers, it’s not encouraging that so few workers actively calculate their future income needs.

“These particular statistics really speak to what needs to happen next with the 401(k) plan,” Farrington says. “If people are saying the DC plan will be their sole retirement income vehicle, then it becomes the shared responsibility of the plan fiduciaries and the individual to make sure that all of the tools are made available and used to improve that experience. The first key is for people to understand why they are saving and to save towards a target.”

Another key takeaway for advisers, Farrington says, is the clear relationship between access to professional advice and the likelihood that a participant will be on track to achieve a secure retirement through defined contribution (DC) plan assets alone.

“It’s really clear. You see better engagement among employees with the development of a professional financial advice relationship,” Farrington explains. “The one stat that really jumps off the page is, people with an adviser relationship are contributing at a rate of 9.5%, and those without are contributing on average at 7.8%. And we know that over decades of saving and compounding, that difference can really add up.”

Farrington says that the adviser relationship also helps people take better advantage of tools like retirement income calculators. Almost three-quarters of retirement savers (71%) who report having regular access to advice say they have consistent conversations about whether they are contributing enough to the retirement plan.

“Without the advice relationship, it’s hard for a participant to use the calculator alone and to know how to set a good goal,” he says. “We see that, among those who have somewhere to go regularly and ask questions about savings rates, the strong majority are taking positive action. This links to the higher contribution rate, and they are also more likely to have an understanding of how much they’re going to need in retirement.

“It is very helpful when you’re saving and investing money to know what the end goal is,” Farrington continues. “This allows you to work backwards, and you can come up with answers to questions like, ‘Am I saving enough? Am I taking too much or not enough risk?’ In turn, you can start to build a truly personalized investing program for yourself. Those who have the ability to pick up a phone and call an adviser on this stuff are doing better. It’s that simple.”

In Practice September 29, 2014

PANC 2014: Team and Practice Building

Finders, minders and grinders are all critical members of successful retirement plan service teams, and growing an advisory practice will require all three skill sets working in concert.
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“Finders are those that love the hunt and love to go out and look for business. Minders are those folks who identify themselves as relationship people, and grinders do the day-to-day service work,” explained Gordon Tewell, principal at Innovest Portfolio Solutions and a member of the practice building panel at the 2014 PLANADVISER National Conference, held earlier this month in Orlando.

These three groups are the heart and soul of a 401(k) adviser team, panelists said, explaining that the individual titles of “finder, minder and grinder” are attributed based on the distinct strengths of employees on a team. While the individual titles are a clever and catchy way to for advice professionals to identify their specialty, panelists said the titles also have a serious function—helping to further define an individual employees’ job tasks and ensuring efficient client service.

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Tewell and the other panelists—including Janet Ganong, a financial consultant at The Kieckhefer Group, and Robert Massa, chief investment officer at Ascende Inc.—explained that any great advisory team needs a combination of all three skill sets. Bringing a finder, minder and grinder to client meetings, for example, can demonstrate a firm’s diverse expertise and help ensure all client questions will be answered skillfully on the spot. Each team member should feel comfortable taking the lead on different types of client inquiries, and the conservation should flow easily to the adviser who is most informed on a given topic.

Of course, any given team will develop an original working dynamic depending on the structure of the firm and the unique skills of the individual team members, panelists said. Ganong addressed the fact that she has to be highly aware of structure because she works in a small firm, where adding two people could be about a 50% staff increase. This affects the dynamics of the team-building effort and the balance of finders, minders and grinders.

With team dynamics playing such an important role in the success of a firm, choosing new hires is a also a critical process, panelists said. The experts described the ideal candidate as one who is teachable and coachable, not necessarily one with the most skill up front. Employers should strive to teach their employees everything they know and then trust them to get the job done. In addition, panelists said advisory firms should strive to hire men and women who will not just get the job done for the sake of the employer, but also for the sake of the client and the team as well.

The panelists further discussed different ways in which they build comradery at their own firms. Massa, for instance, said he sits down with his team for a meeting at least once each week. Tewell pointed to industry events and community service programs his team participates in outside of the office, leading to closer relationships and shared experiences among team members.

The experts also acknowledged the significance of building a sense of team and individual accountability. They said the best team members will recognize the need to take responsibility for their actions, as well as the need to identify and respond to mistakes.

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