Data & Research December 22, 2008

Most Quarterly Statements Avoided Crisis

When third quarter statements started rolling in, the majority of mutual fund management firms did not acknowledge the effect of current market woes on investor assets.
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An analysis by research firm Corporate Insight of 18 mutual fund management firms found that few firms changed much about their quarterly statements. However, three firms—Fidelity, T. Rowe Price, and MFS—changed their statement designs. Fidelity and T. Rowe changed the aesthetic presentation, and MFS introduced features such as rate of return figures, average costs per share calculations, and fund details for investments held by the client.

Overall, Corporate Insight says it was disappointed to find that only 22% of mutual fund management firms acknowledged the effect of current market woes on investor assets. Of the firms that did, most simply printed messages on their statement to reassure clients or promote certain products and services. Oppenheimer was the only firm to include a letter to shareholders encouraging clients to stay invested.

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Corporate Insight also was disappointed to find only 28% of firms offer a rate of returns percentage; however, firms that do offer it usually include the figure for multiple time-spans. While RS Investments includes both quarterly and year-to-date returns, ING displays quarterly and year-to-date returns for each individual fund as well as an overall portfolio performance figure for each time frame. American Century and Janus each include year-to-date, 12-month, and since inception rates of return, according to the Corporate Insight report.

About three-fourths (72%) of firms did offer investment slips with their quarterly statement mailings. However, only 23% of these firms include a pre-paid envelope to make adding to their investments even easier for clients, as 54% include a standard unpaid envelope and 23% do not include an envelope at all. RS Investments and ING stand out as the only two firms that list their entire family of funds before the tear-away deposit slip, providing clients with a valuable reminder of the selection of funds available to them, according to Corporate Insight.

Data & Research December 22, 2008

Credit Crisis Reshapes Investment Mindset

The credit crisis will shift the way wealth management firms service investors, according to a report from Celent.
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The Boston-based research firm notes some key effects of the credit crisis on wealth management, including increased scrutiny from investors. Some of the trends Celent predicts:

  • High-net-worth (HNW) and ultra-high-net-worth (UHNW) investors will continue to seek advice.
  • Mass affluent and mass market clients will speed their current trend to self-service.
  • Investors are using the crisis as an opportunity to renegotiate wealth fees.
  • Investors are closely scrutinizing reputations of providers.
  • Investors are seeking investment rather than products.
  • Investors are less-likely to migrate with their managers to new providers.

Retirement Implications

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Celent notes that retirement accounts have taken a huge hit in the market decline. Asset allocation models and mutual fund diversification did not prevent huge declines in assets. Also, lifecycle funds were not immune to the decline. ’Lifecycle funds do not achieve their touted objectives of becoming stable as retirement arrives,’ according to the report. Celent says clients will move much of the remaining assets to stable value funds and that fund fees on retirement accounts will come under increasing pressure due to the poor performance.

“Contraction in the North American economy due to the credit crisis has left an indelible mark on the way wealth management is delivered across financial institutions,” said Robert Ellis, senior vice president of Celent’s Wealth Management practice and co-author of the report, in a press release. “The entire financial services sector has been mauled, causing portfolios and retirement plans to hemorrhage value while requiring investors to question such basic issues as capacity for risk and planning for their retirement.”

Investment Mindset

Celent predicts “tectonic shifts’ in the way investors think and behave with their wealth—including the products they invest in and the providers and channels with whom they do business going forward.

For one, investors are disillusioned with the way larger providers allocated their assets and responded to concerns as they watched accumulated wealth slip away, the firm says. Independent firms might not suffer as significant reputational detriment, but they are still being called into question because of extensive declines some clients have faced while still paying high fees.

Celent says investors will move to traditional low risk asset classes with old economy financial institutions, which have survived the credit crisis with their reputation intact. These institutions include the regional and community banks, medium-size insurance firms, and investment firms that correctly positioned their clients for the downturn.

Investor behavior will also become more conservative, according to the report, and mutual funds will become less popular in retirement accounts and other mass affluent portfolios. Celent also says North American equity markets—which have lost 30% to 40% in the last year—will continue to be volatile in the near future. Within five years, unless the regulations are changed to put mutual funds on a more equal footing, the firm predicts a decline of fund families from more than 7,000 to closer to 2,000.

Celent says advisers will continue to encourage clients to diversify portfolio risk by investing in suitable commodities—which will continue to be volatile, but show opportunity.

Technology Growth

Celent notes a few trends in wealth management technology, focused around better compliance and operational efficiency. The firm predicts a decline in technology spending by wealth management providers in 2009, with the market beginning to pick up again by 2010. The firm expects demand for risk management and compliance technology to grow. It also says there will be improvements to development in aggregation technology and products such as unified managed accounts.

Wealth management firms will also open up more communication channels by enhancing services on the Web and through cell phones, using features such as RSS feeds and texting as future growth channels.

The report is “The Global Credit Crisis: Implications for North American Wealth Management.’

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