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FINRA issues guidance about social networking
Broker/dealers and their reps confused about regulations regarding social networking might have some answers now.
The Financial Industry Regulatory Authority (FINRA) issued guidance to securities firms and brokers about the use of social networking Web sites—such as Facebook, Twitter, LinkedIn, and blogs—to communicate with the public. FINRA said the notice is in response to “the expressed need for guidance explaining how FINRA rules governing communications with the public, recordkeeping, and supervision apply to social networking sites.”
Regulatory Notice 10-06, which is presented in Q&A format, clarifies the responsibilities of firms to supervise the use of social networking sites to ensure that investment recommendations are “suitable” and customers are not misled, FINRA said. The notice also addresses necessary recordkeeping, supervision, and other responsibilities of a firm.
In the notice, FINRA emphasizes that each firm must develop its own policies and procedures to supervise personnel who use social networking sites for business. It also addresses in what circumstances it is permissible to recommend specific investment products. “As a best practice, firms should consider prohibiting all interactive electronic communications that recommend a specific investment product and any link to such a recommendation unless a registered principal has previously approved the content,” according to the notice.
FINRA reiterated that firms must retain records of social media communications related to their business. Some technology providers are developing systems that are intended to enable firms to retain records of communications made through social networking sites. For instance, advisers can find applications that will capture and save tweets from Twitter. However, FINRA said that it does not endorse any particular technology to keep such records, “nor are we certain that adequate technology currently exists.”
Last year, FINRA produced a podcast about social networking rules, which had been broadly encompassed in its Internet communication rules. In the fall, FINRA announced it had formed a task force to further examine social networking regulations.
“Social networking sites and blogs raise new regulatory challenges,” said FINRA Chairman and CEO Rick Ketchum. “Our goal in issuing this notice is to ensure that firms and brokers use social networking sites in an appropriate manner.” —Ellie Behling
Building Confidence
More workers, retirees turn to financial advisers for help
As Americans regain confidence in their ability to retire, more workers and retirees turn to advisers for help, according to the 2010 Retirement Confidence Survey, released by the Employee Benefit Research Institute (EBRI).
After taking a nosedive in the last two years, Americans’ confidence in their ability to afford retirement is back on the rise. Now that economic volatility has smoothed out, worker confidence in paying for basic expenses in retirement has rebounded slightly, with 29% now saying they are very confident about having enough money to pay for basic expenses (up from 25% in 2009). Amid the mauled confidence of last year, about a quarter of those who lost confidence said they would seek out a financial adviser for help.
The latest survey results showed that slightly more workers did, in fact, seek out an adviser. The number of workers (age 25 and older) who sought out investment advice from a professional adviser over the past year rose to 33% in 2010 from 30% in 2009. Likewise, the number of retirees getting advice rose to 32% in 2010, up from 26% in 2009, according to EBRI.
Now that investors have put out the fires and want to focus on retirement savings again, advisers might have an opportunity to help.
After financial advisers, workers and retirees said they turn to family, friends, or co-workers (27% of workers, 17% of retirees); newspapers or magazines (10% of workers, 8% of retirees); and information on the Internet (10% of workers, 4% of retirees). At the bottom of the list are their employer or former employer (9% of workers, 1% of retirees) and the company managing their employer-sponsored retirement plan (7% of workers, 5% of retirees).
While retirement confidence has stabilized, fewer workers reported that they and/or their spouses have saved for retirement, and an increased percentage of workers reported they have virtually no savings and investments at all. In fact, EBRI found that three in 10 Americans age 25 and older reported saving no money for retirement. Furthermore, many workers continue to be unaware of how much they need to save for retirement. About one-quarter of workers reported they have postponed their planned retirement age in the past year, citing reasons such as the poor economy (29%) and a change in employment situation (22%).
Fewer workers have access to an employer-sponsored plan (73%, down from 82% in 2009). However, of workers offered a plan, more are taking advantage of it. Of workers offered an employer-sponsored retirement plan, 81% contribute (40% of all workers), which is up from 78% in 2009.
Similar to recent years, less than half of workers (46%) reported they and/or their spouse have tried to calculate how much money they will need to save for retirement. The largest percentage (44%) of workers determine how much they need to save in retirement by guessing. Approximately two in 10 report doing their own estimate (26%) and asking a financial adviser (18%).
EBRI and Mathew Greenwald and Associates, Inc., conducted the 20th annual Retirement Confidence Survey in January among 1,153 individuals (902 workers and 251 retirees) age 25 and older in the U.S. —Ellie Behling
Guidance Counsels
Study says investment “help” makes a difference
It is a long-accepted tenet that most retirement plan participants want—and need—help to make good investment decisions, and a new study suggests that it makes a difference.
A recent report, a collaboration between Hewitt Associates and Financial Engines titled “Help in Defined Contribution Plans: Is It Working and for Whom?,” comes to the unsurprising conclusion that participants who get (investment) “help”—defined in the report as target-date funds, managed accounts, or online advice—are better off than those who do not, in all but the most extreme circumstances (in 2008, the most conservative allocations, no matter how undiversified or age-inappropriate, did better than more diversified portfolios, according to the report). On average, the median annual return for “help participants” was almost 2% (186 basis points) higher than for “non-help participants,” net of fees, according to the report.
Additionally, those participants using “help” have portfolios with risk levels that the survey’s authors suggest are both “more appropriate for their retirement horizons and more efficiently allocated among the options in their plan.” Factors contributing to that risk “gap” were the tendency of “non-helped” participants to make no adjustments in their portfolio (or risk level), and a gravitation toward larger holdings in company stock over time. In fact, the survey noted a particular concern—in view of a more limited time to recover from mistakes—that the greatest variability in observed portfolio risk levels was found among retirees and near-retirees not using “help.”
The report looked at participant behavior, portfolio risks, and returns during a particularly volatile period in the markets—January 1, 2006 and December 31, 2008—across a data set of seven large plans representing more than 400,000 individual participants and more than $20 billion in plan assets.
Who’s Getting “Help”?
On average, across the more than 400,000 plan participants represented in the report, about a quarter use at least one of the types of help offered within their 401(k) plans. However, average usage of help varied across the seven plans in the sampling, from a low of 15% to a high of more than 35%. Of the quarter of participants using help, 9.8% are invested appropriately in target-date funds, while 9.7% were enrolled in managed accounts, and 5.8% use online advice.
Across all three market conditions included in the study range (a bull market, a mixed market, and a bear market), help participants outperformed non-help participants 88% of the time, and that, across the three years in the study, the extra efficiency provided by help portfolios provides an average annual return benefit of 67 basis points, even when adjusted for similar risk levels.
What Kind of Help?
The survey’s authors note that plan design (specifically, automatic enrollment coupled with a qualified default investment alternative, or QDIA), the length of time investment “help” has been in place in a plan and participant demographics all affect usage. However, one of the stronger influences appears to be age. For example, the study found that target-date fund users tend to be younger, with lower tenures and with significantly lower account balances, salary, and contribution rates (the study’s authors estimate that approximately half of the participants using target-date funds have been defaulted into the funds).
The study also noted that online advice users tended to be younger, but with higher account balances (as compared with target-date fund users), salaries, and contribution rates, while managed account users tend to be older and with longer tenures—both compared with participants using target-date funds or online advice, and with those receiving no “help” at all.
The study also noted that plan design and possibly what it described as the “one-size-fits-all nature” of target-date funds make them the most popular choice or default for younger workers (those younger than age 35). In contrast, the study noted that Baby Boomers (participants age 45 to 64) and retirees (age 65+) are far more likely to prefer managed accounts, while Generation X participants (age 30 to 44) tend to be more likely to enroll in managed accounts than Generation Y, but less likely than members of Generation Y to use target-date funds or online advice.
The study noted that there are two ages in particular where the probabilities shift significantly; starting at age 50, participants begin to be far more likely to enroll in managed accounts versus the other two types of help, and participants tend to be more likely to use target-date funds over the other two types of help up to age 35.
Size Matters
Account size also appeared to have an influence (though age, and an increased opportunity to accumulate savings, can be correlated with larger balances). In the study sampling, the higher the balance, the more likely participants were to use online advice. In fact, nearly 12% of participants with account balances of more than $250,000 use online advice, according to the report. Managed accounts appeal to participants across several balance categories.
The study’s authors noted that “$5,000 is a key threshold for target-date funds in our sample,” with those having balances less than $5,000 being 80% more likely to use target-date funds than those with account balances between $5,000 and $10,000.
Which Matters More?
So, all other things being equal, which matters more—age or account balance? According to the researchers, age is the dominant driver of the type of help used. However, they went on to note: “Certain types of help correlate with various life stages. At 25 years of age, for example, most participant risk preferences and life situations are relatively similar, making it easier to combine them into a cohort based only on age, as is the case with a product solution like target-date funds. As participants age, however, their life situations grow more heterogeneous, requiring greater flexibility and personalization.” —Nevin E. Adams
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