Tool "Set"?
Measure twice, cut once, says the carpenter’s admonition, and the principle of thoroughly considering all relevant information applies to retirement plan management as well, where a hasty investment choice can be costly to participants’ portfolios, not to mention an adviser’s reputation.
When reviewing investments to be put into defined contribution plans, a majority of advisers surveyed by PLANADVISER consider the following (in this order): performance versus benchmarks, manager tenure, five-year performance, the fee structure for the plan, and style drift (see “The Right Pieces“PLANADVISER, September-October 2008). Other advisers also bring in considerations such as the funds’ alpha, Sharpe ratio, standard deviation, shorter duration performance results, and how the manager has added value through stock selection and asset allocation, among others.
An adviser could, if he had the time or inclination, assemble investment evaluations on his own by drawing market information from public sources and returns from fund providers. However, fortunately for advisers, the market for tools to measure investment performance is competitive, varied as to cost and capabilities, and constantly evolving. Despite the broad industry reliance on Morningstar’s “star” ratings, advisers frequently use multiple providers when performing their analytics on investment options. A program that may work for a plan adviser specializing in the small market and retail mutual funds might not be the right one for an adviser using collective trust funds or separately managed accounts that need a program with more customization, or one that covers alternatives.
The shortlist of investment monitoring and selection tools (although not exhaustive) includes Informa (from Informa Investment Solutions, White Plains, New York); fi360 (fi360, Sewickley, Pennsylvania); Morningstar Principia and Morningstar Advisor Workstation (Morningstar, Chicago, Illinois); and Zephyr Style Adviser (Zephyr Associates Inc., Zephyr Cove, Nevada).
Some of the analytics packages have been incorporated into in-house data systems of large adviser groups: For example, Zephyr Style Advisor is the investment analysis engine for The 401(k) Company and National Retirement Partners (NRP).
Value Added
What advisers value most in their analytic tools is, of course, their ability to search, select, and monitor client plan investments. Dorann Cafaro, General Partner of Cafaro Greenleaf, based in Little Silver, New Jersey, says her favorite analytics system is Informa. “For years it was, and it still seems to be, the only software that monitors all managers’ separate accounts. In some cases, our clients are in those separate accounts but, for all clients, I track the separate account results, and compare them to their mutual funds. When there’s a divergence, it’s a signal to us to be looking elsewhere.” Informa also maintains databases of managed account returns. Second in importance to advisers is the capability of systems to produce unique reports. “We don’t want to give the same reports as everyone else,” Cafaro adds. “We need to show the clients what value we’re adding to their plans.” Her firm hired a software firm to build its own system, to pull information from fi360, Informa, and Fiduciary Benchmarks (which analyzes fees), and integrate it into one proprietary report.
An important constraint, however, is the legal dimension. “A lot depends on how our compliance area feels about the data that goes into a system, and then what comes out. Because we distribute these documents to prospects makes it crucial that everything is properly disclosed under FINRA guidelines,” says Bill Loesch, Director of Investment-Only Marketing with MFS Investment Management, Boston. (While not an adviser to 401(k) plans, MFS works closely with the organizations that distribute to various platforms.)
According to advisers interviewed, both the Informa and fi360 solutions get high marks for being easy to use; Zephyr, while very capable, is more complicated. Zephyr and Informa are said to be pricey, running from $3,000 to $10,000 or more annually for single-user installations, less when purchased in quantity. fi360 costs as little as $675 for an entry-level subscription. The Morningstar systems are said to be more suited to simpler plans that stick to mutual funds, but less so for investment choices in institutional accounts. At Winter Park, Florida-based Chepenik Financial, Chief Investment Officer Phil Senderowitz relies on the NRP system, but likes Morningstar for its impartial commentaries on mutual funds.
Morningstar Vice President John Faustino reports that its packages are expanding, adding data modules for insurance company separate accounts and collective investment trusts. The company has, in the past few years, added modules that can be helpful to advisers in the retirement plan space, including asset allocation modules and a defined contribution plan module. Enhancements are also in the works for rapid alerts to changes in fund ratings. At fi360, recent updates include a powerful new optimizer and the company is adding more history to its database archives.
The analytic tools industry is behind the curve, however, in one crucial area: target-date funds, because they entail the additional analytical dimension of glide paths and, in some cases, alternative asset classes. Benchmarks currently are offered by Target Date Analytics and PLANSPONSOR, Morningstar, and Dow Jones, among others.
From outside the software sphere, a target-date fund provider has introduced a tool useful to advisers: “We’ve started using the Target Date Navigator from JPMorgan,” reports Senderowitz. “It asks a committee what they are looking for in a target-date fund—whether to end at retirement or continue beyond, and whether they want a narrow or broad range of asset classes. It then divides the universe into four quadrants, and groups the funds that fit the characteristics you have defined. The choice might be JPMorgan or not—it’s completely impartial.”
“Once the sponsor has decided what style of target-date fund is right for its plan, the traditional tools are great for getting under the covers and making the right final selection,” says David Musto, Managing Director at JPMorgan’s retail investment-only retirement unit. About 40 target-date offerings are covered now, and JPMorgan Asset Management announced in February that it has fortified the Target Date Navigator by incorporating broader data feeds from Lipper.
Illustration by John Hersey