In Practice September 15, 2014

Millennials Consult Parents Over Pros on Finances

Financial services providers are failing to connect with the Millennial generation, according to new study by BNY Mellon and the University of Oxford.
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Researchers from Oxford and BNY Mellon found Millennials in developed economies are twice as likely to turn to parents for financial advice as they are to turn to banks or other financial services providers, including retirement specialist advisers. Further, according to “The Generation Game: Savings For The New Millennial,” nearly six in 10 Millennials (59%) say financial services products are not targeted at them, and less than one in 100 want providers to contact them via social media channels.

Researchers use these figures to suggest there is a troubling communication gap between financial services providers and the youngest generation of investors. What’s worse is that financial services providers—from life insurers and banks to asset managers and workplace financial advice providers—are failing to connect with Millennials at a time when young people need the industry more than ever.

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For instance, Millennials face both increased longevity and the erosion of state and employer retirement provisions, researchers observe. This means they will have to save and invest more aggressively than their parents, and must do so over a longer period.  

According to the study, Millennials lack key knowledge about even basic retirement planning concepts. The study reveals that pensions need to be better explained to Millennials, for example, because nearly half (49%) agreed that they did not know how pensions work. In addition, the study found Millennials are twice as likely to turn to their parents for financial advice (52%) than to the next most popular source of information, their bank (24%). Just shy of 16% of Millennials currently work directly with a professional financial adviser. Other key findings show Millennials want products that demonstrate clearly that they are being rewarded for tying up their money in long-term investment vehicles.

Shayantan Rahman, an Oxford student studying economics and management at the Saïd Business School who was involved in the study, points to findings that show Millennials are generally comfortable about receiving product information through social media, but they do not want financial services providers using these channels to contact them for a two-way conversation. “Rather than being the solution for helping providers engage with Millennials, many told us they think it makes them look ‘silly’, ‘pally’ or ‘creepy’,” he explains.

Given this difficulty in making contact with Millennials, how can financial services providers rise to the challenges that the youngest generation of workers face in creating a financially secure future? Some short-, mid- and long-term solutions are shared in the BNY/Oxford report.

In the short-term, given Millennials’ reluctance to seek advice from professional sources, firms need to find avenues to better equip parents and other trusted parties to advise their children. Researchers suggests providers can use traditional media to present tools to educate parents on the retirement savings gap Millennials will likely face. The same indirect pathway should be used to communicate the benefits of wealth compounding and tax efficiencies within qualified workplace retirement plans.

An additional short-term goal should be to carefully consider use of social media campaigns and take care not to damage credibility among Millennials. Firms can build a reputation of trust and solidarity through campaigns that do not appear too flighty or light-hearted, researchers suggest.

In the medium-term, firms should consider ways to create a better perception of the savings and investing industries. This is underscored by Millennials’ reluctance to seek advice from sources such as insurance representatives, consulted by less than 3% of Millennials.

In the long-term, researchers urge financial services providers to work with policymakers to move away from a single purpose tax-incentive retirement pot toward a tax-incentivized savings pot that allows for more flexible and effective lifetime drawdowns. This will allow firms to capitalize on Millennials’ need to feel a sense of reward for their savings efforts, in the form of tax-incentivized and compounding returns, while also granting their desire for wealth accessibility in a more volatile economic environment.

The full study from BNY Mellon and Oxford is available here.

The Markets September 15, 2014

Assessing the Adviser’s Role in Managed Accounts

The role of financial advisers in the portfolio construction and management process is a topic of ongoing debate, says financial research firm Cerulli Associates.
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New research from Cerulli finds that, after the global financial crisis, many advisers have sought to take greater control of client portfolios, which has accelerated the growth of adviser-driven managed accounts. But as researchers explain in the third-quarter issue of “The Cerulli Edge – Managed Accounts Edition,” the trend towards adviser discretion over managed accounts conflicts with what are generally considered to be best practices in designing a financial advisory firm of significant scale.

The report suggests that taking more discretion over client portfolios may be a helpful selling point for financial advisers who use managed accounts—both inside and outside the retirement planning context. However, the skills required to build and manage client relationships are distinct from those needed to successfully run portfolios, Cerulli warns. In other words, advisers may be limiting their growth potential and shouldering excess responsibility in taking discretion over clients’ managed accounts.

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Scott Smith, a director at Cerulli, says this trend towards greater adviser discretion over client portfolios is also exacerbated by investment services providers’ general reluctance to push advisers to adopt centralized portfolio services. Smith says providers generally prefer greater reliance on centralized portfolio services, but fear offending their producing adviser forces.

“Given the limited supply of productive financial advisers, and the ease with which they can change firms, broker/dealers [B/Ds] often find themselves supporting advisers’ preferences that diverge from the firm’s long-term strategy,” Smith explains.

Cerulli’s research finds that increased reliance on centralized portfolio management options is logically correct, given that third parties entirely dedicated to portfolio management and optimization are likelier to better serve client needs than are advisers busy with many other tasks. But in practice this thinking is being trumped by the desires of advisers who prefer to maintain ultimate portfolio authority for clients.

“Beyond risk mitigation, there are also potential incremental benefits of developing robust programs to assist advisers in their portfolio construction and management process,” Smith adds. “Our research indicates that advisers typically spend 20% of their time on investment management duties, including due diligence, research and trading.”

Smith says that reducing the time advisers need to spend managing client portfolios allows more time for client-facing activities, such as prospecting and meeting new clients, which are highly correlated to increased revenues from additional asset gathering. Outsourcing investment management functions can also increase an adviser’s time to focus on things like investor/participant education and holistic lifetime financial planning, which are also commonly viewed as important value-add components in many advisers’ service models.

Cerulli says that currently about 61% of advisers across financial industry verticals favor managed account providers that allow them to maintain at least some discretion and flexibility over allocations in clients’ managed account portfolios. Similarly, 57% of advisers say they prefer to work with investment managers that allow them to go beyond general asset-allocation determinations and choose specific investments in client portfolios.

While asset management service providers are accepting this trend, Cerulli warns that the prolific growth of adviser-discretionary managed account programs is creating considerable consternation among these providers. The initial concern of providers is ensuring that their producing advisers adhere to a strict fiduciary standard and follow a disciplined process when it comes to managing their clients’ portfolios.

Cerulli says providers must be certain that all investment representatives make their best effort to serve their client portfolios to the best of their abilities. While this may be a relatively easy requirement for an independent registered investment advisory firm with a few producing advisers, the scale quickly becomes overwhelming for large asset managers with mandates coming from thousands of advisers, each potentially serving hundreds of clients.

Though there has been little in the way of formal regulatory actions, Cerulli says it has heard from several firms that regulators have recently been inquisitive regarding the performance of adviser-managed portfolios versus those outsourced for home-office management at a purely investment-oriented firm.

In response to their own concerns, several providers formalized or augmented their requirements for an adviser to participate in discretionary programs. Previously, many firms relied on an adviser’s experience or asset gathering success as a proxy for actual training on discretionary portfolio building, but this situation is changing as more firms implement portfolio management fundamentals curricula as a prerequisite for participation in adviser-discretionary programs. Cerulli considers the inclusion of such courses a necessity for positive client outcomes, even if simply as a baseline risk-protection measure.

Considering the litigious nature of society overall and the rapid growth of adviser discretionary programs, Cerulli says it seems likely that the next significant market downturn will be followed by an unprecedented wave of lawsuits from investors who expected their adviser’s skill and forethought to protect their portfolios from substantial losses.

Indeed, despite the variety of disclosures that investors sign, Cerulli suspects that many investors’ expectations will differ substantially from the outcomes they experience—something that is especially important to consider in the workplace retirement plan setting, in which investors are generally novices. To offer some protection for their advisers and the firms themselves, it is essential that each advisory firm’s training regimen and the portfolio oversight process are well-documented, Cerulli says.

Information on how to obtain the most recent edition of “The Cerulli Edge – Managed Account Edition,” is available here.

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