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AdvisorNews - February 2015

How Advisors Differentiate

How do leading edge retirement advisors differentiate and how does this help plan sponsors?

Like marketing, differentiation and value propositions are a work in progress. To be successful, they must meet plan sponsor needs in an evolving marketplace. Ironically, the biggest opportunities are also the biggest threats. They are threats because if you don't meet client needs, competitors will and your business will become marginalized or worse. Given that healthcare costs could consume us all in the years ahead, cost control, limiting liability and reducing administrative burden has become Job 1 for employers of all sizes. Outcomes are being redefined and retirement specialists who fail to adapt and provide solutions to these glaring needs may not survive.

\Helping employees accumulate enough savings to retire has always been important, but it has morphed into something much bigger, i.e., corporate viability and competitiveness. More employees plan to work through retirement than ever before because they can't afford to retire. The demographics, lack of savings and ballooning cost of healthcare are a toxic cocktail. There were about 40 million workers at retirement age in 2011. That will increase to more than 70 million by 2020. The percentage of age 55-65 workers planning to delay retirement has also increased to almost 50%. When compared to younger workers, the cost of workman's compensation, disability and healthcare for older workers is staggering. Healthcare cost is also increasing at an alarming rate. Like advisors who fail to solve problems and meet client needs, employers who fail to get older workers off their books at retirement age will not be able to compete and may not survive in an increasingly competitive global economy.

The push to control health care costs has increased interest in High Deductible Health Plans which come with the ability to accumulate tax favored wealth in a Health Savings Account. In addition to huge employer savings on healthcare and employment taxes, advisors can combine HSAs with a few other tactics to facilitate retirement readiness, outcomes (employer & participant) added value, differentiation and capture plan sponsor attention in an unprecedented manner. BAML, US Bank, Fidelity and a few select administrators - like Health Savings Administrators - are all aggressively marketing HSAs, but banks with expense paying debit cards and brokerage subsidiaries are particularly well positioned. Advisors focusing on outcomes will also have to provide more participant education on Social Security benefit choices, QLACs and Medicare.

Like their fight against MEPs, lobbyists and non-providers are fighting outsourced 3(16) services because they are going to have an impact on consolidation. TPAs haven't figured it out yet, but as noted by Pentegra and others, 3(16) services will be widely embraced in the next few years and eventually become a low cost commodity. Full compliance has become impossible and employers of all sizes do not want to be saddled with the cost, burden and liability associated with complicated administration. The majority of plan violations involve administrative functions of the named fiduciaries and 3(16) services can provide a solution to most of these problems.

Rather than attacking charlatans and waiting to be replaced by an advisor who is supporting these services, advisors should align with credible 3(16) providers and help sponsors identify, vet and monitor them. Top advisors and independent recordkeepers in the CFDD's network are already doing this. Committees will continue as fiduciaries and they will need 3(16) oversight. These services vary widely and advisors can help with determining scale, expertise, capability, services, fiduciary roles, cost analysis, insurance, bonding, insurance backed warranties, contract review and verification that the services are being performed in an effective manner. The industry is asleep at the wheel, but combining 3(16) services with HSAs is like hunting small game with a RPG. Given the opportunity, CFDD '14 will include spirited breakout sessions on both topics.



Looking Beyond Past Performance in Manager Selection

John Manganaro
Aug 25, 2014 --- A new analysis from Segal Rogerscasey argues past performance is only one of many factors that should be evaluated when assessing active investment manager performance. ---

Many retirement plan sponsors and other institutional investors feel they are being thorough in looking back as far as five years both in selecting new investment managers and making termination decisions (see “Process for Terminating Investment Managers is Important”). However, even five-year performance can be a poor indicator of future success, according to Segal Rogerscasey, mainly due to a decided lack of long-term performance persistence within nearly all investment classes.

To determine whether past performance is indicative of future results, the firm examined 12 peer groups of investment managers across a variety of active equity and fixed-income styles. Managers were ranked into quartiles for each peer group based on investing performance from January 1, 2004, to December 31, 2008. Next, the performance of top- and bottom-quartile managers from this first period was analyzed for the subsequent five-year period running January 1, 2009, to December 31, 2013.

As explained by Segal Rogerscasey, performance persistence in this analysis was “generously defined” as when more than 50% of a peer group’s top-quartile managers from the five-year period starting in 2004 also finished in the top half of active managers for the five-year period starting in 2008. Drawing this hard line gives “somewhat more significance than is merited” to the peer groups that finished close to the 50% threshold,” researchers explain, but the overall results still hold.

The results of this analysis were particularly striking among the three fixed-income peer groups, Segal Rogerscasey says. The vast majority of fixed-income managers that led their peer groups during the 2004 to 2008 period fell into the third or fourth performance quartile during the following five years. Managers of high-yield fixed income had the greatest level of performance persistence among the three fixed-income peer groups, at 32%. This means just 32% of the high-yield managers who finished in the top quartile for 2004 to 2008 finished in either of the top two performance quartiles from 2009 to 2013.

The performance inconsistency was the most extreme for U.S. core plus fixed-income managers, who invest in a core bond portfolio with additional allocations to non-core assets, such as high-yield or emerging market debt. Nearly eight in 10 (77%) members of this peer group who finished in the first quartile between 2004 and 2008 fell into the bottom two quartiles for the period 2009 to 2013, according to Segal Rogerscasey. Conversely, 91% of the fourth-quartile managers in this peer group in period one (2004 to 2008) rose to the first or second quartiles in the following five-year period.

Another interesting upshot of the research is that this year’s findings about fixed-income peer group performance persistence are significantly different from figures covering five-year periods from 2003 to 2007 and 2008 to 2012—largely because of the lasting impact of the 2008 financial crisis on five-year investment manager return measures. Massive market corrections often have a confounding impact on medium-term performance review efforts, researchers explain, further challenging retirement plan fiduciaries to make sound backward-based predictions of future performance.

Results among the nine equity manager peer groups analyzed by Segal Rogerscasey also support the thesis that outperformance is rarely persistent. In fact, emerging market equity was the only equity peer group analyzed to show performance persistence during the most recent 10-year period, something researchers explain as an essentially random result. Strikingly, among U.S. small cap equity managers of every style, an investor had a much better chance of ending up with a first- or second-quartile manager in the 2009 to 2013 period by selecting from the fourth-quartile managers versus those who finished in the top three quartiles from 2004 to 2008.

In an attempt to identify any patterns in the performance data, researchers looked at the behaviors of the 12% of U.S. large cap core equity managers who finished in the first quartile for both 2004 to 2008 and 2009 to 2013. The only pattern identified was that managers that protected assets better in the down market of 2008 (i.e., whose portfolios fell less than the Russell 1000 in that year) had a higher likelihood of showing performance persistence in the 2009 to 2013 period of the study. Other than that, there was no discernible trend or investing behavior, such as style tilts, that might help one predict which top-quartile managers would manage to outperform in both five-year periods.
One of the more counterintuitive results of the analysis, according to Segal Rogerscasey, is the lack of performance persistence in capacity-constrained sub-asset classes, such as U.S. small-cap core, growth and value, or emerging markets equity. Some may assume that stocks in these areas are less closely followed by sell-side analysts and thus perhaps offer more scope for an informational or tactical advantage among skilled active asset managers.

This may be true to some extent, researchers say, as about 77% of emerging market equity managers have outperformed the MSCI Emerging Markets Index during the 10-year period ending December 31, 2013. However, this insight does little to help one to identify which active manager among a group of peers will perform best, or indeed which ones will even be able to beat their benchmarks.

One explanation for the inability of first-quartile active managers to maintain outperformance relevant to peers may be that a manager with a strong five-year track record is likely to attract large amounts of new investments. A major inflow in strategy assets may limit the manager’s ability to nimbly trade less-liquid assets, which may dampen performance. As stressed by Segal Rogerscasey, this type of research is highly end-point dependent. So in last year’s version of the study, which reviewed different five-year periods, results for each peer group differed substantially.

Given all this, Segal Rogerscasey recommends that investors (and retirement plan fiduciaries) should rely on a forward-looking approach based on fundamental research when selecting active managers. Such fundamental research involves plan fiduciaries closely examining the investment manager’s stated strategies and processes, Segal Rogerscasey says. It’s also important to review credentials and regulatory background for any issues.

In this scenario, past performance is only used as a validation of a manager’s capabilities, researchers explain. When the plan fiduciaries do look at past performance, they should be sure to look across various market cycles to see how the manager performs in different macroeconomic conditions.

Creating a Sound Way to Choose TDFs

Jill Cornfield
Aug 25, 2014 --- Plan sponsors thinking about putting target-date funds (TDFs) in their investment lineup must determine an implementation process that will support the plan’s goals, Towers Watson says in a white paper. ---

“Are You in the Wrong Target-Date Fund? Now Is a Good Time to Reevaluate,” by Towers Watson, gives an overview of the growth of TDFs, and touches on guidance from the Department of Labor (DOL) issued in 2013. (See “EBSA Offers Tips for Selecting TDFs.”)

The funds have grown in popularity, notes David O'Meara, a senior investment consultant who specializes in target-date funds at Towers Watson Investment Services Inc., and now require plan sponsors to take more care with choosing the best one for their plans.

In the wake of the Pension Protection Act of 2006 (PPA), O’Meara says, many plan sponsors adopted TDFs in fairly short order. “When they started, there were not a lot of product offerings,” he tells PLANADVISER. In fact, he points out that most plan sponsors selected a TDF that was associated with the plan’s recordkeeper, without any particularly rigorous due diligence, because the offerings appeared reasonable and could be implemented fairly quickly. “They saw that [speed] as a benefit to participants,” O’Meara explains.

The offerings now include more sophisticated products and expanded implementation options. Towers Watson points out that the DOL’s guidance provides plan sponsors an opportunity to revisit their exposure relative to plan objectives and participant needs. Active or passive management; custom or off-the-shelf and a process of due diligence are among the issues plan sponsors should think about when choosing a TDF.

O’Meara says a key factor for plan sponsors to consider is the choice between actively and passively managed TDFs. At the time the PPA was passed, there were very few passively managed TDFs, he says, but that has changed: “The marketplace has changed, and there is greater variety within passive off-the-shelf solutions.”

It may still be a small portion of the market, O'Meara says, but the firm has seen more interest in passively managed TDFs in recent years. “We think, at Towers Watson, that active management is a difficult task to accomplish in a single class,” he adds. “You need to be in the top 40% of investment mangers consistently over time to outperform the market. When you look across multiple mandates and multiple asset classes, very few have the skill set across all the classes and mandates to do this.”

Easy Unbundling
The issue of this kind of ability is specific to TDFs, O’Meara feels, since many skilled managers can outperform in fixed income, for example, or in large-cap U.S. equities. But it is difficult for someone to outperform in each and every class.

These days, plan sponsors can much more easily move to separate or unbundled recordkeeping and investment duties, O’Meara says. “The ability is far greater than it was five, six or seven years ago,” he says. “Large-plan sponsors have a greater ability to use third-party investment mangers or even build custom solutions through further unbundling the components of the recordkeeper, the custody and asset management and portfolio construction.”

A custom approach provides the greatest opportunity for plan sponsors to provide the TDF best suited to their participants’ needs while managing the risks and outcomes specific to the needs of the plan, Towers Watson says. Organizations that cannot pursue custom TDFs (either because of a lack of time or expertise, or a lack of interest in unbundling responsibilities), should consider passive, off-the-shelf products, the paper contends.

A custom approach requires more governance, however, Towers Watson notes. “The DOL has become aware that not every plan sponsor is utilizing their flexibility and strength to negotiate with their vendors to ensure they are getting the best product or at least one they’ve done their due diligence on,” O’Meara says. “In general, we continue to see plan sponsors out there using the funds of their recordkeeper. If you look at the largest recordkeepers, they also happen to be the largest TDF managers.” But custom TDFs maximize fiduciary oversight by putting the oversight of the recordkeeper, custodian and asset manager in one place instead of having separate firms to do it all.
Some sponsors may want to give careful thought to passive implementation in an off-the-shelf product. “One drawback for off-the-shelf providers is that if they don’t have investment skill in a particular class, it probably won’t find its way into the product,” O’Meara says.
Off-the-shelf products simplify fiduciary oversight, O’Meara says. A single manager determines the glide path and typically invests the assets, instead of having separate firms do it all. Plan sponsors will need to choose between active and passively managed funds. Today, O’Meara says, passive funds offer a greater variety of goals and metrics.

Pinning down some of the processes in TDF selection is important. “How much governance are they willing to put into the process?” O’Meara says. If the plan sponsor is squeezed by time or resources, it may be better to separate the responsibility for these decisions, from underlying asset allocation to portfolio construction.

Determining governance capacity is an important task for the plan sponsor, Towers Watson says. That capability allows the plan sponsor to be available for overseeing the selection, implementation and monitoring of the TDF. Limited capacity can steer a plan sponsor toward an off-the-shelf product or to outsource the governance.

Retirement Specialist Advisers Do More for Plan Sponsors

August 26, 2014 ( – Professional retirement plan advisers are central to the strategic direction, administration, and overall performance of the retirement plans they serve, says new research from Transamerica.

More than six in 10 (61%) retirement plan sponsors with plan assets between $5 million and $500 million work with a financial adviser or consultant who is exclusively or primarily focused on retirement plans, according to a study produced by EACH Enterprise and co-sponsored by Transamerica Retirement Solutions. These sponsors consistently cite their professional retirement plan advisers as being central to the success of the plans they manage, Transamerica says.

The study, “The Value of a Professional Retirement Plan Advisor,” defines professional retirement plan advisers as those whose book of business is filled primarily or exclusively with retirement plans. Stig Nybo, president of U.S. retirement strategy at Transamerica Retirement Solutions, says these specialist advisers often earn high marks because they deliver stronger levels of expertise and knowledge about challenging retirement-related issues than generalist investment advisers.

The study makes the case that retirement specialist advisers do a better job retaining retirement plan clients for the long term than generalist advisers or benefits brokers. More than 80% of plans that partner with an adviser entirely dedicated to retirement plans have worked with their current adviser for at least five years. Strong accomplishments related to boosting plan outcomes and simplifying administration undoubtedly play a role in the length of these relationships, Nybo says.

Another factor is the standard use of a formal request for proposal (RFP) process by sponsors in selecting new retirement plan advisers. The Transamerica study found that more than 65% of plan sponsors have conducted an RFP search for an adviser for their plan within the last 10 years. Researchers explain that retirement specialists can often demonstrate greater expertise and client service capabilities during the RFP process, allowing them to win and retain business more effectively.

While generalist financial advisers often bring powerful investing knowledge to the table, Nybo says it’s the specialist advisers’ additional ability to simplify plan administration and boost participant outcomes that sets them apart. For example, sponsors appear to be especially interested in hiring advisers who can help implement creative and compliant plan design adjustments, according to the Transamerica study.

Nybo says specialist advisers are being called on to support everything from changes in the employer match formula to the implementation of automatic enrollment. They are also usually skilled at helping sponsors increase deferral rates through financial wellness education and innovative plan design changes, he adds.

“Importantly, their efforts often translate into measurable improvements in plan performance and retirement outcomes, and the survey results make it clear that plan sponsors recognize the value of partnering with a retirement plan adviser,” Nybo says.

In addition to planning and executing effective plan design changes, specialist advisers also provide better visibility into important plan analytics, according to Transamerica. The study suggests new reporting tools supplied by advisers at the participant and plan level have made it easier for plan sponsors to understand how plan design characteristics impact overall plan performance. A majority of plan sponsors that work with a specialist adviser reported positive results coming out of more advanced technology tools and other adviser support efforts (see “Plan Design Meets Big Data”).

Among those sponsors working with specialist advisers, 76% say more than half their participants are on course to achieve a successful retirement. More than 80% have experienced an improvement in participant deferral rates, and 33% reported a deferral increase of at least 6% in the last two years.

Further, 90% of plan sponsors agree that their specialist adviser simplifies plan administration, and when challenges arise, nearly 60% say they turn to their adviser first in the event of a problem with plan administration.

Transamerica also conducted a series of focus group discussions with 14 plan sponsors as part of the research effort. Fully half of these sponsors indicated they had chosen their current adviser based on the role of the adviser in participant education, communication and financial wellness counseling. The other 50% of plan sponsors based their decision on a range of other factors, including the scope the adviser’s fiduciary services, approach to qualified default investment alternatives in the investment policy, compensation structure, and business affiliation.

The research urges sponsors to consider plan needs and demographics in choosing which criteria will be important during the adviser search. For specialist advisers, it's key to stay on top of plan design innovation and best practices for boosting and measuring participant outcomes.

The research was conducted by EACH Enterprise, LLC, an independent firm specialized in retirement plan research whose clients include retirement plan service providers and investment managers. EACH Enterprise administered the survey among employers in the private sector (privately-held, exchange-traded, and not-for-profit) with 100 employees or more. Respondents also had 401(k) or 403(b) plan sponsors with plan assets in the $5 million to $500 million range.

Does Your Value Proposition Resonate?

John Manganaro
Aug 27, 2014 --- A gap exists between what financial advisers say during early-stage client meetings and what truly resonates with prospects, according to a new survey form Pershing. ---

The research suggests an effective value proposition can strengthen new client connections and foster practice growth, yet few advisers seek out or receive objective guidance in formulating such statements. Above all, Pershing says advisers should view the value proposition stage as the time to differentiate their services from the competition.

Survey results suggest an effective value proposition answers the critical client question, “Why should I choose your firm over the competition?” Yet according to the survey, 60% of clients polled said they hear prospecting advisers from competing firms make similar or identical service-related promises. Pershing says this makes it difficult for many clients to distinguish between advisory firms and make a truly informed decision about which firm may best serve their needs.

The strongest value propositions, according to Pershing, incorporate the unique attributes of the advisory practice being discussed; a rational explanation of how the firm's attributes will benefit the client; and language that evokes emotion, especially optimism.

“Developing an effective value proposition can have larger implications on an adviser's overall business than they may realize,” says Kim Dellarocca, managing director at Pershing. “In many instances, the value proposition is the first impression potential clients experience and can be the catalyst for a future relationship.”

Dellarocca says the value proposition is also an opportunity for advisers to promote sustainable business growth by identifying and targeting their ideal client base. The adviser should understand how the attributes and features of his practice could appeal to specific demographic groups or client segments. Such insights should be constantly updated and worked into the value proposition, Pershing says.
“Of course, the real test is delivering on what you promise,” Dellarocca adds.

Based on a systematic look at the value propositions used by the fastest-growing advisory practices, as well as investor reactions to these and other value propositions, Pershing has identified key takeaways for advisers to consider when creating a value proposition of their own.
First, advisers must include core promises in their value proposition that will serve as the foundation for the client relationship. Pershing’s poll found that investors respond well to promises to build tailored investment solutions that can meet specific goals. While clarity is king, don't oversell simplicity, Pershing warns. Many advisory firm websites promise to simplify investing and relieve clients of the burden of managing wealth, but according to Pershing's study, most investors accept the need to take an active role in managing their own finances.
Additionally, two topics that investors care about most—finding defensive investment approaches that retain growth potential and finding trusted sources of advice and guidance—are under-represented in most value propositions.

Prospective clients also seek assurances that the adviser will work in their best interest, and that the adviser will work with skilled and experienced investment managers. Pershing warns that such points may seem obvious, but advisers who do not specifically mention these points in their value propositions risk being excluded from consideration by potential clients.

Successful advisers also need to include “something extra to differentiate themselves,” Pershing says, such as the delivery of unusual client benefits, like building a family legacy or understanding clients' personal aspirations. If the client is a retirement plan sponsor, language around participant financial wellness and boosting retirement outcomes is important, as is discussion of fiduciary accountability.
Advisers must also watch their language, especially early in the prospecting phase. Pershing’s poll shows potential clients dislike jargon and favor words with emotional connotations—meaning how the value proposition is formulated is just as important as the message it is trying to portray. For example, when judging between near-synonyms, investors prefer words with an emotional punch, such as “unwavering” and “passionate” rather than “committed” and “dedicated.” In addition, Pershing's survey found that investors prefer value statements that incorporate terms like “comprehensive” over “holistic” by a ratio of seven to one.

Trust remains a much bigger concern for investors than the financial industry realizes, Pershing says. Advisers, therefore, must ensure their value propositions include a message about why investors should trust them. This can be accomplished through language around track-record and credentials, as well as more general themes of accountability, integrity and fiduciary responsibility.

Finally, Pershing reminds advisers that different market segments place higher emphasis on different adviser attributes. Advisers should identify their ideal client base and what is most important to them in an adviser—and make sure their value propositions exhibit those points. For instance, investors younger than 40 place higher importance on advisers who will provide guidance through life's major events and relieve the burden of managing finances.