Data & Research November 23, 2015

Many Investors Focus on Wrong Performance Factors

No way around it—new research from TIAA-CREF into the way U.S. retirement savers think about their investments is downright troubling. 
Reported by

A new TIAA-CREF survey finds more than half of investors look to short-term performance factors when making investment decisions, while nearly one-third mistakenly believe all investments carry the same overall level of risk.

Accordingly, TIAA-CREF warns the focus on short-term financial performance and misunderstandings about the nature of investment risk may have an impact on American investors’ financial well-being, especially in the long-term effort to plan for retirement.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Overall, 36% of investors look to one-year performance as the “most important indicator of an investment’s return,” with an additional 16% looking to quarterly performance as most important. TIAA-CREF finds nearly half of investors have purchased a fund “based on its performance during the previous year rather than looking at its performance over a longer-term investment horizon such as five or 10 years.”

Roger Ferguson, president and chief executive officer of TIAA-CREF, says it’s critically important for people to look at the big picture when evaluating investment performance. “One year or one quarter is a short period of time when you consider that many individuals are investing for 30 years or more,” he adds. “Fortunately, investors can avail themselves of a range of resources, including professional financial advice, which can help them make well-informed investment decisions and build portfolios designed to meet their specific financial goals—whatever they may be.”

NEXT: Grappling with diverse concerns 

According to TIAA-CREF, investors should be less focused on recent bouts of market volatility and more focused on the key concepts of diversification and asset allocation—building a more holistic understanding of the important role that taking risk and accepting some periodic short-term losses plays in generating a stable retirement outlook.

This state of affairs is still someway off, TIAA-CREF notes, as among those surveyed, a strong majority (71%) believe they can completely eliminate investment risk by having a diversified portfolio. “In fact, while a diversified portfolio can help to manage investment risk, there is no way to eliminate it altogether,” TIAA-CREF says. Nor would one want to, given the yin-yang relationship of risk and return. 

“Similarly, although investors should maintain an appropriate level of risk in their portfolios, many are unclear about how that works,” the report explains. Currently 53% of U.S. investors think that higher risk guarantees higher returns.

TIAA-CREF finds all investors would benefit from better access to financial education about these topics, but Millennials could use the most help. Among this age cohort, 40% of all respondents misunderstand the nature of various asset classes, TIAA-CREF says, indicating that they believe that all investments offer the same level of risk. At the same time, 64% of Millennials think that higher risk guarantees higher returns, compared with 53% for the general investing population.

NEXT: Focus remains on outcomes

“Despite some misconceptions about investment performance, American investors have a clear picture of what they want from their portfolio,” TIAA-CREF explains. “Two-thirds of investors believe it’s more important that their portfolio allows them to achieve their life goals, such as funding a comfortable retirement or paying for a college education, versus one-third who place more importance on a portfolio that consistently meets specific investment criteria, such as a certain percentage return.”

One specific piece of advice plan sponsors and advisers might offer to the workplace retirement investors: the middle of a period of market volatility is likely not the most effective time to rebalance the portfolio. Instead, most advisers’ recommend investors “ride out market fluctuations as part of a long-term investing strategy,” TIAA-CREF says. Another appropriate approach might be to tie the rebalancing date to a regular time of year, perhaps a birthday, cited by 21% of advisers. Other key times to reconsider the level of risk taking may be after a life change, such as marriage, the birth of a child or grandchild, or the death of a spouse (20% of advisers). 

Ferguson concludes that having a well-defined vision of one’s financial goals is a good first step for investors. “Once you have set your priorities, a financial adviser can help you find the approach that is right for you,” he concludes.

More information about the 2015 TIAA-CREF Built to perform study is here. 

In Practice November 23, 2015

Bounce in Adviser Headcount First in Nine Years

U.S. financial adviser headcount increased a little more than 1% in 2014, Cerulli finds.
Reported by

Cerulli Associates finds the U.S. advisory industry’s total headcount across all channels increased for the first time in nine years during 2014—by 1.1%.

Kenton Shirk, associate director at Cerulli, says many positive developments led to the headcount growth last year. “From the adviser perspective, there is a heavier focus on teaming and onboarding rookie advisers into multi-adviser practices,” Shirk explains. Across the industry firms are eagerly hiring junior advisers, “so they can refocus their own efforts on their largest and most ideal clients. There is also greater awareness and concern about succession preparedness.”

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The report finds advisers are feeling a positive sense of momentum for key business metrics for 2016, but the industry is “still not in the clear,” Shirk explains. Although there was an uptick in the number of advisers in 2014, Cerulli projects that the industry’s headcount will begin declining again in 2019.

Unless current trends quickly reverse, today’s modest headcount gains will be trumped by a sizable uptick in adviser retirements, Shirk continues. By 2019 the industry’s headcount will begin to decline once again, Cerulli predicts, and at an even more pronounced rate than in the recent years.

NEXT: Learning from past trends 

Cerulli’s reporting shows the financial advisory industry lost 12.7% of its total adviser headcount between 2005 and 2013, but in 2014, adviser headcount stabilized and even showed a small bounce by year end.

Not all segments of the advisory industry have seen the same growth or shrinkage. For example in the past five years the direct advisory channel experienced a 12% compound annual growth rate. Firms across the service spectrum are concerned about an aging client base—with 57% of advisers’ clients already older than age 60.

Comparing business models, Cerulli finds approximately 14% of “wirehouse mega team advisers” say they are “undecided about whether they will remain affiliated in the next 12 months, compared to 5% for all advisers across the industry.” For independent broker/dealers (IBDs), the appeal of the registered investment adviser (RIA) channel for large advisers is putting a drag on both revenue and profitability.

“In response,” Cerulli says, “numerous IBDs have introduced RIA platforms, allowing advisers to leverage their platforms while holding a separate and independent RIA.” Cerulli suggests this is an important move given that nearly two-thirds of wirehouse and regional advisers who changed firms in the past three years indicate that “concerns about the quality of their B/D’s culture” was a major factor influencing their decisions to move.

NEXT: Service model evolution 

Advisers report that 38% of their clients receive comprehensive written financial plans, and by 2018, they plan to increase this figure to 48%. The percentage of clients receiving no financial planning services is expected to decline 10%, Cerulli finds, highlighting the evolving adviser-client relationship.

Advisers are increasingly using (68%) “niche marketing techniques,” Cerulli says, and more than one-third (37%) of those advisers consider it to be a very effective marketing activity. Better than half (52%) of independent advisers who are planning to retire in the next five years have streamlined workflows in preparation, while another 45% have upgraded their technology. “Just less than half (43%) of independent advisers preparing for retirement have engaged a consultant to prepare,” Cerulli notes.

Encouragingly, approximately 28% of rookie advisers are female; this is higher than the average for the advisory industry as a whole of only 14%.

Information about obtaining Cerulli Associates research, including “Advisor Metrics 2015: Anticipating the Advisor Landscape in 2020,” is here. 

«