The “Young Advisor
Snapshot” report is the first in a LIMRA research series that
covers the experiences of young advisers. LIMRA says the forthcoming series
will focus on all stages of adviser career development, from early recruitment
stages to building a successful practice.
When polled on their satisfaction with current and future
work prospects, 91% of young advisers responded positively, according to LIMRA
researchers.
“Young advisers expressed these high satisfaction levels
because they feel the career has met their expectations in areas such as income
potential, flexibility in work schedule and the opportunity to make a
difference in people’s lives,” notes Mary Art, research director for LIMRA.
She adds that satisfaction actually increases over time from
these high starting levels: While 91% percent of advisers with fewer than eight
years of tenure responded positively to questions about career satisfaction
(45% somewhat satisfied and 44% very satisfied), fully 93% with more than eight
years of tenure had this reaction. Strikingly, 60% of these older advisers with
more than eight years of tenure were “very satisfied” with their career outlook—a 16% increase over younger advisers.
When asked why they chose the career, six in 10 young advisers
said “to make a difference in people’s lives,” LIMRA reports.
“Making a difference was second only to income potential in
our survey,” Art adds. “In fact, among Generation X advisers, making a
difference in people’s lives was the number one response.”
LIMRA says the study also revealed that today’s young advisers
value both independence and collaboration. For many years, financial services
recruiters have emphasized independence and “being your own boss” as key benefits
to the advisory career path. While those qualities are still desired by today’s young advisers,
LIMRA finds young people entering the advice field also put a high value on collaborative efforts, such as having
a mentor and engaging in partnerships.
Three-quarters of the young advisers surveyed by LIMRA said they had
a mentor. In most cases, the mentoring relationship developed naturally,
LIMRA notes, with only 18% of advisers reporting they were part of a formal
mentoring program. More than 8 in 10 advisers said the main advantage of
mentorship was having someone to turn to when they have a question.
“The challenge of recruiting and retaining new advisers to
replace an aging financial services sales force is widely known,” Art concludes.
“We conducted this research because our industry understands the importance of
developing a sales force that can relate to future generations of consumers.”
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A new research paper from J.P. Morgan Asset Management seeks to educate plan sponsors and advisers about the dynamic interplay of risks involved in target-date fund (TDF) investing.
Penned by a team of investing experts at J.P. Morgan, the
paper evaluates the various risk management approaches utilized by different TDFs
available in the defined contribution (DC) marketplace. Given the broad—and
rapidly growing—adoption of these strategies in 401(k)s and other
employer-sponsored retirement plans, the researchers argue now is clearly the
time to get ahead of target-date risk trends.
“Today, these professionally managed multi-asset-class
portfolios capture approximately 38% of 401(k) contributions, a figure projected
to climb to 88% by 2019,” the paper warns, citing previous research from Cerulli Associates.
Daniel Oldroyd, a managing director for J.P. Morgan Asset Management
and lead portfolio manager for the global multi-asset group, who also runs and helped
to create the firm’s SmartRetirement TDF suite, says the complex interplay of
risks in TDFs does not mean they are a poor investment choice for plan sponsors
to offer.
“We continue to believe that target-date funds are the most
prudent investment choice for the vast majority of participants,” he tells
PLANADVISER. “However, we believe it is equally important to understand how
differences in glide-path design may enhance or detract from expected
retirement outcomes. We have received so many questions in recent years from
plan sponsors wondering why their TDF is performing in a certain way, compared
with the wider market.”
Oldroyd says most plan sponsors and participants are showing
an improved understanding of what TDFs are, and how they are intended to function,
especially in the wake of the 2008 financial crises, which brought more
attention to disclosure and reporting. However, he says, one only needs to briefly
peruse industry media for reports that tell a different story.
“To this day we have a small number of participants who
believe TDFs are guaranteed income products, for example,” Oldroyd says. “And that’s
not so unreasonable from the point of view of the participant. There is an
implied social contract here, that if the sponsor chooses a good TDF as the
default investment and they set up a good match and you set up a deferral that is
sufficient, the portfolio manager is supposed to get you to the end of the
glide path successfully.”
While many sponsors and participants can correctly identify
the general strokes of a TDF program—that equity exposure will ramp down over
time and the portfolio will automatically be rebalanced—there is a serious void
when it comes to more sophisticated understanding of how to compare two
different TDF suites.
“This is particularly true in terms of how each strategy
handles risk management in its portfolio allocation and construction choices,”
the paper notes. “Given the broad number of factors that go into securing
retirement funding success, assessing a glide path’s risks entails more than
evaluating standard deviations and downside volatility alone.”
Oldroyd says the new paper makes a clear case that DC risk
is dynamic and multifaceted, so the risk-mitigation approach of a TDF also must
be dynamic and multifaceted.
“Participants face an array of DC risks, some of which they
can control with a high level of certainty, such as accumulation risk,
participant-user risk and withdrawal risk,” he continues. “Other risks are
driven more by what participants may experience, where the only degree of
control they might have is through their saving and asset-allocation choices.”
These include market and event risk, longevity risk, inflation
risk and interest rate risk, Oldroyd notes, adding that the magnitude of each
risk changes over time and in response to different market climates. “This once
again underscores the importance of taking a broad risk perspective in target-date
fund design,” Oldroyd says.
But how does this thinking actually
apply to portfolio construction
and maintenance? Oldroyd again turns to the whack-a-mole analogy: You
won’t win
the game by focusing on one hole for the entire game. A TDF that
focuses on one or two risks, say longevity risk and inflation risk, will
leave participants exposed to other, equally important risks that are
almost guaranteed to impact a TDF portfolio at some point along its
glide path.
“The way I tend to think about all this during portfolio
construction conversations, is just to point out that we know two things about
the glide path of all participants,” Oldroyd explains. “First, we know participants
are going to face all these types of risks over their working career. Over 40
or even 50 years, you can be pretty confident you’ll see bouts of inflation or
low interest rates, or high interest rates. And you’ll see markets doing really
well at some times and you’ll see markets doing really poorly. The other thing
we know is that we don’t know when each risk will be most prevalent, or the
magnitude of the risks and market reactions.”
Put these points together, Oldroyd says, and one can see
there are some times when, as a DC plan participant, certain risks become the
most prevalent and others take a back seat in terms of their ability to derail retirement readiness.
“For
example, the biggest risk at the beginning of the glide
path would be accumulation risk—given that the younger investors will
just be
starting out and will be nowhere close to retirement readiness for a
long time,”
he says. “Given that they have little saved, this person probably
doesn't have to worry as much about a strong downturn, or inflation.
They're going to be focused on accumulation risk and getting the ball
rolling.
“But as you move along the path, say to the end of the working career
and near the retirement date, other risks become more prevalent,” Oldroyd says. “The biggest
one during the late career or early retirement might be inflation risk or longevity risk, probably, for this group. Or it
could be the risk of a major market loss.”
The paper suggests more dynamic risk approaches, which do
not focus on one risk for the lifetime of the TDF and instead shift to address
multiple risks that become more prevalent at different points along the glide
path, will be more successful over time.
“This is easy to see from recent history, when you consider a
TDF for example that has a construct that seeks to mainly combat long-term
inflation risk—which therefore will have more risky assets at the retirement
date and will likely be called a through-retirement TDF,” Oldroyd says.
As
a through-fund, Oldroyd says, sponsors might expect the TDF to be
riskier today and seek a higher return than many of its peers, “but
being an inflation-fighting TDF, it would actually have lots of
commodities and real estate and shorter duration fixed-income, even for
someone who is 25 years old.”
“There are TDFs in the marketplace
that take just this approach,” he concludes. “But we know that since
2008 there has been relatively little inflation, so
these strategies have lagged their peers and have led to some very
disappointed
plan sponsors, who wonder why their TDF didn’t follow the market up so
sharply
in 2013 or 2014.”
The full J.P. Morgan Asset Management paper is available for
download here.