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Mentoring, a Key to Growth

On-the-job coaching keeps advisers loyal

Investment firms that actively mentor younger advisers are likely to gain a competitive advantage during the next decade, according to the J.D. Power “2014 U.S. Financial Advisor Satisfaction Study.”

Competitive compensation and strong, firm leadership are currently the top factors driving adviser satisfaction, according to J.D. Power researchers, but investment firms need to look ahead and begin to develop better mentorship and succession programs. About one out of every three advisers expects to retire in the next 10 years, the research shows, and more midcareer advisers are considering the flexibility and financial benefits of going independent.

This means investment shops will have to compete more aggressively for adviser talent as time goes on, the study suggests. Firms that start focusing on mentoring younger advisers and providing staff with advanced client service technology are likelier to attract and retain loyal advisers, J.D. Power says. Advisers feel a stronger sense of loyalty to firms that provide these services, the study finds.

Researchers examined seven key drivers of adviser satisfaction as part of the study, including adviser/professional support; client/customer-facing support; compensation; firm leadership; operational support; problem resolution; and technology support. Overall, satisfaction among employee advisers regarding these factors is 721 on a 1,000-point scale. Independent advisers showed slightly higher levels of satisfaction in the workplace, at 778 out of 1,000.

“As financial markets continue to do well and overall adviser satisfaction remains relatively high, investment firms may be operating with a false sense of security for their future success,” says Michael Foy, director of the wealth management practice at J.D. Power in Hightstown, New Jersey. “To prepare for the future, investment firms need to implement effective processes to mentor and train young advisers, and provide them with the technology and tools that will enable their success.”

The J.D. Power study finds formal training and mentoring have a positive impact on satisfaction for advisers at all stages of their careers. Notably, the research suggests that satisfaction is significantly higher among less-experienced advisers (under 10 years) who participate in a mentoring program than among those who do not participate, at 850 vs. 730. However, 33% of advisers are unaware of whether their firm offers a mentoring program, which suggests that part of the challenge is related to effective communications.

Firms also need to address succession planning for advisers who are near the end of their careers. This is necessary to minimize adviser stress during transitions and also to protect client interests. The study shows a vast majority (94%) of experienced advisers who say they “definitely will” remain with their firm for the next several years indicate their firm offers succession planning resources and tools, while only 62% of those who “probably will not” or “definitely will not” remain with the current firm say the same.

Foy says the cost for investment firms to recruit experienced advisers to replace those who leave will likely continue to increase as more advisers move into retirement planning, underscoring the importance of training and retaining talent.

Researchers expect firm leadership to continue to play a key role in cultivating adviser loyalty, specifically through building a values-oriented, client-focused culture and by effectively communicating a strategy that advisers believe in. J.D. Power says about two-thirds (62%) of advisers loyal to their firm believe their leadership clearly communicates strategic goals, compared with just one-third of advisers who are “neutral toward their firm.”

Approximately nine in 10 advisers (87% of employees and 93% of independents) say they “definitely” or “probably” will remain at their current firm for the next year or two. Among those advisers, 44% of employees and 52% of independents are “loyal advisers,” identified in the study as those who indicate that cultural values and client focus are primary reasons for their intention to stay with their firm. Another 38% of employees and 32% of independents say they are “neutral and intend to remain primarily for compensation or contract requirements.” Not surprisingly, the study shows that adviser satisfaction improves with more competitive compensation. Among the 36% of advisers who lack a complete understanding of their compensation plan, compensation satisfaction is significantly lower than among those who have a complete understanding—631 vs. 781.

Among advisers who use mobile devices as part of their client relations strategy, 84% indicate their firm provides smartphone- or tablet-friendly tools. —John Manganaro

Early Savers Fare Well

The key is starting early and saving far more than 3%

Americans with access to 401(k) plans can achieve a more secure retirement if they begin in their 20s and save consistently over the course of their career, according to findings from the Center for Retirement Research (CRR) at Boston College. The latest National Retirement Risk Index (NRRI) from CRR was sponsored by Prudential Financial Inc.

“How Much Should People Save?” contends that, on average, individuals with a workplace-based retirement plan should look to that offering, whether a 401(k) or other savings vehicle, for 35% of their retirement income. The average required savings rate to achieve that targeted income is 14%, that is, if saving starts at age 35 and retirement occurs at age 65, according to the study. The research was designed to determine the amount 401(k)s would need to generate, for working-age American households to be able to maintain their standard of living in retirement.

“Planning for Retirement: The Role of 401(k)s in Retirement Income,” a Prudential paper, summarizes the NRRI research and notes the improvements to 401(k)s since they were introduced as supplemental savings vehicles in 1978.

The research helps to highlight the strength of the existing retirement system, notes James McInnes, senior vice president of product management and development at Prudential Retirement in Woodbridge, New Jersey, and co-author of Prudential’s paper. “Modern plan design allows individuals to get tax-advantaged savings and the ease of payroll deduction, as well as investment education, advice and institutionally priced products, to help provide them the opportunity to better prepare for a more secure retirement,” he says.

Prudential’s paper highlights three features of 401(k) plans that help improve retirement security. Matching contributions and auto-enrollment have boosted incentives to save and made it easier to do so. Retirement modeling tools, which project future retirement income, can improve savings behavior by encouraging increased savings rates.

The NRRI model assumes that households start saving at age 35 and retire at age 65. The research also found that the required savings rate for an average wage earner in a single-income household drops from 15% to 10% if the individual starts saving at 25 instead of 35.

When the target retirement age is changed to 67—the retirement age of Social Security for those born after 1959—the average required savings rate (starting at age 35) drops from 15% to 12%. When the retirement age is further delayed to 70, the average rate drops to 6%. If saving starts at 25 and retirement occurs at 70, the required savings rate drops to 4%.

“Even small changes in savings behavior can have a positive impact on individuals’ results,” McInnes says. “This research shows it is never too late to start saving, and even if you didn’t begin at age 25, saving a little more now or extending retirement can still get you to a comfortable place.”

Employers can help their work force achieve their retirement savings goals by ensuring they take advantage of the employer match provided, offering automatic enrollment and providing participants with the proper tools, says George Castineiras, senior vice president, total retirement solutions, at Prudential Retirement. —Jill Cornfield

Many Millennials Prefer Cash

Those under 30 have become risk-averse

American adults under age 30 favor cash and other lower-risk assets, even as the basis of a long-term investment strategy, according to new research.

An analysis of Bankrate.com’s Financial Security Index shows that 39% of young working adults in the U.S. say cash investments are their preferred parking place for money they will not need for at least 10 years. That is three times the number of young workers who picked the stock market, despite the fact that the Standard & Poor’s (S&P) 500 Index has posted strong gains over the past year, Bankrate.com says. Most cash investment yields remain below 1%, the Bankrate.com report shows, implying Millennials who rely on cash investments could fall short on retirement income down the line.

The findings match other recent research suggesting Millennial employees and their Baby Boomer counterparts share considerable common ground when it comes to keeping the risk level of their investments low. But whereas lower risk levels may be essential for Boomers to protect accumulated wealth, younger workers could be playing it too safe.

“The preference for cash and aversion to the stock market among young adults is very troubling, considering this age group has the biggest retirement savings burden,” says Greg McBride, Bankrate.com’s chief financial analyst. “They won’t get [to retirement readiness] without being willing to assume a little short-term price risk in their long-term money.”

Overall, one in four Americans prefers cash investments for money that can be left untouched for at least 10 years. Cash slightly edged out real estate (23%) for the top spot, while stocks came in third with 19% of the vote. Fourteen percent of Americans say they would invest in gold and other precious metals, and just 5% say they would choose bonds as a long-term investment.

The Financial Security Index also shows that four of the five components of financial security assessed by Bankrate.com—job security, comfort level with debt, net worth and overall financial situation—have shown improvement compared with last year.

Savings continues to be a sore spot for most Americans, though. The Bankrate.com index shows those who feel “less comfortable” with their savings outnumber those who are “more comfortable” by a two-to-one margin. While men believe they have seen improvement in their financial security over the past year, women feel their financial security has deteriorated. —Matthew Miselis

Advisers Want Better Tech

Few are satisfied with asset managers’ offerings

Just a modest number of financial advisers are pleased with the technology offerings and communications resources at asset management firms, according to a kasina report.

The report suggests that financial advisers often visit asset manager websites for information and services they fail to find elsewhere. To become a preferred provider, though, asset managers will have to reshape their messages and focus on anticipating and responding to advisers’ business needs, to ensure lasting success.

Nearly 500 U.S. financial advisers representing 97 firms were polled for “What Advisors Do Online.” The results show that advisers would like to take advantage of mobile, online and social media technologies to learn about investment strategies and products. Advisers also appear interested in new technologies to assist in interactions with investment product wholesalers, as well as their own clients, the report suggests.

“Advisers can be fickle, and what will set leading managers apart is the sophistication of their digital capabilities in building awareness and trust, and making it easy to do business in ways that are relevant to individual advisers,” explains Julia Binder, director at kasina, in Oberlin, Ohio, and author of the report.

This study also reveals that 50% of advisers want firms to personalize online content to their needs—actually a decline from past editions of the research. The report attributes this to stagnant innovation, among most asset managers, in customizable online content.

In addition, 71% of advisers want asset managers to let them choose the topics, managers and products included in subscription emails. However, only 43% of firms offer any subscription email services, according to kasina.

“The need to personalize and customize the user experience is the focus of many of our recent discussions with our asset management clients,” notes Michael Cogburn, a senior consultant in kasina’s Boston office.

Other results from the report show email is by far the preferred notification option for advisers, with 86% of them favoring this method.

 —Matthew Miselis and John Manganaro

Online tools flourish

Most popular way to determine retirement needs

More than half (52%) of retirement plan participants have used online tools to calculate their retirement income needs.

This is according to a survey of 7,545 retirement plan participants conducted by American United Life Insurance Co., a OneAmerica company. Respondents also used worksheets (25%), made calculations on their own (24%) or worked with a financial professional (9%) to estimate their retirement income needs. Further, the survey found that 56% of respondents prefer to receive financial education information online.

More than half (55%) of those participants who took the time to calculate their retirement income needs said they were either very confident or confident they would be able to maintain their current lifestyle in retirement. Among those who did not take this step, only 23% expressed the same confidence level.

As to why they made no calculations, 55% said they were unsure of how to accurately assess future income requirements. The remainder said they were too nervous to find out how much they will need (23%), did not know where to go for help (20%) or had no time to run a simulation (16%). —Lee Barney

Debt Spurs Parents Toward 529s

Balancing college and retirement savings is possible

Spiraling college costs and student debt are powerful motives for parents to invest in tax-advantaged 529 college savings plans, according to a report by Strategic Insight, an Asset International company.

Almost three-quarters of this year’s college graduates are leaving school with student loans, and the average loan debt is about $33,000, according to Paul Curley, director of college savings research at Strategic Insight in Boston. “In our most recent survey, nearly 60% of the consumers currently saving to help pay for their children’s education said concern about the family going into debt was an important factor in their decision to do so,” he says.

The fear of debt motivates people to save, according to Strategic Insight’s report “529 Industry Analysis, 2014,” but 29% of consumers not currently putting money aside for education said they are counting on scholarships and financial aid to cover those costs. That may be unreasonable, though, because growth in college enrollments has outstripped increases in financial aid. As a result, per-student aid levels to help finance post-secondary education have not filled the affordability gap, compounding student loan debt growth.

Curley often recommends that parents step up their contributions to a 529 college savings plan to fill the funding gap, but this can be challenging for families torn between competing financial goals.

The temptation to address financial concerns that loom in the short-term is understandable, says James Holland, director of business development for MillenniuM Investment and Retirement Advisors in Charlotte, North Carolina.

However, he adds, the cost of waiting to save for college is so significant, there has to be a happy medium. Investors and plan participants should be made aware of the effect of compounding, which can be dramatic. There are other ways to get money for college, Holland says, “but what other ways are there to get money for retirement?”

Another solution is for employers to support plan participants with payroll deductions, education on savings vehicles and matching contributions, Curley says. Overall, 8% of employers surveyed offer a 529 college savings plan, according to data from PLANSPONSOR’s “2014 Plan Benchmarking Report.”

“Providers and distributors of 529 college savings plans should encourage families to plan to pay for at least some of college from their own funds,” Curley says. “Even small investments, building tax-deferred in a 529 over time, can help reduce the debt that students and their families will have to incur.”

Holland recommends trying to strike a balance: Instead of stopping contributions to a retirement savings plan, even temporarily, perhaps the payments can be split equally between the two plans. —Jill Cornfield

Fund Expenses Tick Downward

The average equity mutual fund ratio was 0.58% in 2013

Participants of 401(k) plans saw lower expense ratios when investing in long-term mutual funds during 2013, according to a report from the Investment Company Institute (ICI).

“The Economics of Providing 401(k) Plans: Services, Fees and Expenses, 2013” shows that, at year-end last year, nearly 38% of 401(k) plan assets were invested in equity mutual funds. In 2013, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.58%, down from 0.63% in 2012.

Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid mutual funds fell from 0.60% in 2012 to 0.58% in 2013. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.50% in 2012 to 0.48% in 2013.

One reason for this decrease is that participants in 401(k) plans tend to pay lower fees than fund investors overall, according to the report. The 0.58% paid by 401(k) investors in equity funds is lower than the expenses paid by all equity fund investors (0.74%) and less than half the simple average expense ratio on equity funds offered for sale in the U.S. (1.37%). The experience of hybrid and bond fund investors is similar.

“It is clear from our study that 401(k) participants investing in mutual funds tend to invest in lower-cost funds,” says Sean Collins, ICI’s senior director of industry and financial analysis, in Washington, D.C. “This sets up a competitive dynamic within the fund industry, as funds strive to provide ever better services at even more competitive prices. This dynamic is amplified to the benefit of retirement savers through the design of the 401(k) system, in which plan sponsors as fiduciaries select mutual funds as investment options for their plan.”

The report finds that this decrease in expense ratios is part of a decade-old pattern. The 0.58% that 401(k) plan participants incurred in 2013 represents a 25% decline from expenses of 0.77% of the assets they held in equity funds in 2000. Hybrid and bond funds’ expenses also fell from 2000 to 2013, by 19% and 21%, respectively.

—Kevin McGuinness

Video Takes Hold

Advisers look to Skype, FaceTime

 A new study from Spectrem Group and Millionaire Corner highlights growing investor demand for access to video conferencing services, such as Skype and FaceTime, from their financial adviser. The research also shows an increased interest in online client ratings and reviews, such as those on Millionaire Corner’s Best Financial Advisors service, particularly among mass affluent, millionaire and ultra-high-net-worth individuals.

Additional findings suggest that client interest in professional rating profiles of advisers is also substantial—more than one in four respondents (26%) say they are interested in this type of service. Though direct social media interaction with advisers is sought after only lightly, approximately 36% of respondents say they would like the option to text their adviser.

Debate continues among retirement plan service providers about the best ways to communicate with and educate participants. Some favor aggressive education through whatever communication pathways are available, while others say it is more effective for improving retirement outcomes to focus on implementing plan design features such as auto-enrollment and auto-escalation. If sponsors and advisers use technological advancements to improve relationships and two-way communication with participants, retirement readiness improvements potentially may occur down the line, the study suggests. Spectrem notes that the research shows greater overall demand for tech-savvy advising. —Matthew Miselis