Investment Automation Benefits Participants and Advisers

Providing a cost-efficient and customizable approach to client service, automated investment solutions can act as a powerful mechanism for advisers to improve practice performance and client satisfaction.

When built over a well-constructed core investment menu, automated solutions can enhance flexibility, transparency and control for advisers, explains Jeremy Hersch, vice president, head of asset-allocation services at Transamerica Retirement Solutions.

“In addition, many advisers use automated investment solutions as a vehicle to grow and differentiate their practice,” Hersch explains, noting that automated tools offer critical efficiency when selecting and maintaining investments for large groups of plan participants. Such efficiency allows smaller advisory firms to punch above their weight, he notes, while larger advisories can free up staff to focus more on sales or client relationships.

Advisers are also better off using technology to streamline investment functions because they are presented with the opportunity to focus more on things like plan design and participant communications. Participants benefit from these automations as well, Hersch notes, and not just because automation reduces the amount of time and effort required for successful outcomes. The market’s leading tools drive helpful diversification and timely rebalancing, and can cut down on the likelihood that participants will engage in problematic trading or other damaging behaviors.  

“Automated investment solutions simplify the process for participants, giving them confidence in what is otherwise an intimidating situation,” says Hersch. “With regular and transparent reporting, automated solutions also create awareness of each individual’s investment stance at any point in time, and reassurance that they’re following a sound investment approach.”

The main challenge posed by automated solutions is to understand the quality and capabilities of the services offered by different providers, Hersch continues. A big part of this is evaluating the extent to which each provider can meet the specific needs and goals of the plan adviser and his unique plan sponsor and participant clients (see “Adviser Tech Seems at Once Peaceful and Threatening”). 

Hersch explains that Transamerica recently conducted a study analyzing approximately 2 million plan participants in more than 1,400 defined contribution (DC) plans offering an automated service built on its custom target-date technology platform. He says the statistics reveal for a three-year period ending December 31, 2013, the distribution of the personalized rate of return for do-it-yourself (DIY) investors showed a concentration between approximately 35% and 50%, with a peak around 42%. In contrast, the distribution for participants using the automated technology showed returns between approximately 40% and 55%, with a peak around 50%.

This means the median return for automated investment service participants outperformed DIY participants by approximately 11.7%, Hersch notes. Further, only 0.8% of participants using automated services earned a rate of return at or below 15%. That number jumps to 28.2% for DIY participants, meaning participants were more than 37-times more likely to have returns at or below this level when using a DIY strategy.

While the numbers are compelling, advisers will find technology that meets the needs of one plan client may not be sufficient for another. Another investment services provider very active in the retirement space, Russell Investments, urges advisers to recognize the debate surrounding automation is not about to go away, nor are the challenges of overcoming participant inertia.

Jeff Eng, director of retirement income solutions at Russell Investments, explains that while his company believes in target-date funds, they understand that certain plan sponsors believe in different investment strategies for their plan participants. These clients will be better served by automation technology that can leverage recordkeeping data to implement more customized glide paths or risk-based investment programs, Eng suggests. 

“The automated support means each participant gets a customized allocation and glide path based on their individual retirement readiness outlook, as contained in their recordkeeping data,” adds Dirk Quayle, president of NextCapital, a firm that provides this type of service in partnership with Russell, branded as the Adaptive Retirement Accounts.

Hersch and Eng caution these solutions are not a silver bullet, as improving participant outcomes is driven not only by a well-conceived and executed investment strategy but also by a sufficient savings rate and the discipline to stick with a long-term approach.

“Beyond achieving potentially higher and more consistent account performance, there are intangible benefits from the comfort they bring and the time they free up to focus on other important decisions,” says Hersch. “Automated investment services can provide an extra boost for participants, in both their confidence and their accounts, and responsibility lies with the adviser to access the powerful mechanism.”