Data & Research April 10, 2014

Adviser Compensation at 7-Year High

The seventh release of the “Adviser Insights” study from Fidelity Investments suggests financial advisers are enjoying the highest levels of compensation and assets under management since 2007.
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According to the study, 95% of advisers grew their books of business in the last 12 months, and with average assets under management (AUM) at $62 million and average compensation at $240,000, advisers seem to be enjoying strong near-term success. However, the study argues many advisers appear to be overlooking several important steps to help ensure growth will continue in the long term, as follows:

  • Two-thirds of advisers surveyed for the report do not have a multi-year growth plan in place, and nearly half have not set formal career goals for themselves. Fidelity warns that achieving meaningful, lasting gains in AUM and compensation requires a formal vision of where an adviser wants to be long-term, and what steps can be taken to lock in any gains.
  • Forty-three percent of advisers do not feel it is important to evolve their practice to meet the needs of younger investors, implying future challenges as wealth transfers from retiring Baby Boomers to younger generations. Changing market dynamics and emerging technologies call for advisers to consider taking a closer look at how they will build and manage client portfolios in the future, Fidelity says.
  • Two-thirds of advisers believe they stand out from the competition by giving clients personal attention, but Fidelity warns advisers may want to consider new strategies that set them apart and help position them for long-term success, such as building a well-rounded advisory team or adopting newer technologies.

“Business has been good for advisers, but it’s important they don’t put off what’s needed to ensure the future looks just as attractive,” explains Brian Nelson, vice president of practice management for National Financial, a division of Fidelity Investments. “There are steps advisers can take today to help position themselves for tomorrow and ultimately contribute to a high-performing firm, one that is profitable, productive and growing.”

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The study finds high-performing advisers—which Fidelity identifies as advisers who appear to be positioned for both short- and long-term growth—tend to use three strategies to shape near-term momentum into lasting success.

First, Fidelity finds the most successful advisers are also the most serious about setting down a growth plan on paper. According to the study, 63% of high-performing advisers have formal career goals, and they are much more likely to have planned out different areas of their business, particularly such areas as business continuity and succession planning. Given the link between planning and growth, Fidelity says advisers should consider placing an emphasis on developing formal plans that articulate a vision for the long-term future and clearly outline initiatives that can bring about lasting success.  

Next, Fidelity finds the most successful advisers are taking steps to realign their client base to address changing demographics. It’s an important step for protecting growth prospects in the long-term future, Fidelity says, as about 70% of the typical financial adviser’s clients are Baby Boomers or older. Forty-two percent of high-performing advisers actively target Generation X and Y investors, compared with 17% of other advisers. High-performing advisers are also nearly twice as likely to ask less profitable clients to leave the firm, and more than twice as likely to target high-net-worth investors.

Finally, high-performing advisers appear to be more proactive about finding ways to differentiate their services from the competition. Only 21% of advisers see team building as a differentiator, and while 64% feel technology can increase value to clients, only 35% are willing to spend money on it. Fidelity argues that these factors are more significant to client satisfaction than other factors advisers typically point to, such as a lengthy track record or the ability to provide clients with one-on-one attention.

The study finds high-performing advisers are embracing strategies such as teaming with others, harnessing technology and customizing their offerings to create a strong value proposition designed to help them stay relevant to tomorrow’s investors. Sixty-seven percent of high-performing advisers work to tailor their approach to each client’s long-term goals (vs. 58% of other advisers). They were also heavier users of technology, with 52% of high-performing advisers actively investing in new technology.

A fuller discussion of the seventh “Adviser Insights” study report is available here.

The Markets April 10, 2014

Consider the Market Before De-Risking DBs

Market conditions like those seen in 2013 benefited those plan sponsors that had not yet moved to de-risk their defined benefit (DB) plans.
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Milliman’s “2014 Pension Funding Study” found that during 2013, a 7.5% decrease in plan liabilities from higher discount rates and 9.9% average return on plan assets combined to produce a $198.3 billion improvement in the funded status deficit from year-end 2012. Plans with high allocations in equity investments came out as the big winners in 2013.

The study reveals not all DB plan sponsors adopted a liability-driven investing (LDI) strategy to de-risk their plans. Some continued to maintain an equity-heavy asset mix, awaiting a more opportune time to carry out de-risking. In 2013, say the authors of the study, that strategy paid off as equity investments surged and interest rates rose, giving those plans with a higher equity allocation a boost in funded status. The study also found DB plan sponsors that adopted an LDI strategy after 2009 have not seen much improvement in funded status as those plans that made use of more traditional asset allocation.

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“2013 was actually a very good year for taking risks, since the equities market offered such positive returns, Zorast Wadia, a principal and consulting actuary with Milliman in New York, and one of the authors of the study, tells PLANADVISER. “During 2013, there was obviously some rebalancing going on, with plan sponsors trying to make their liabilities less volatile. We saw the effect of that rebalancing in that fixed income did poorly in 2013.”

The rise in interest rates during 2013 definitely impacted DB plans’ decisionmaking process on whether or not to de-risk, says Wadia. “Plans were hesitant to de-risk because risks, in terms of equity investments, were actually being rewarded, while the value of fixed income investments was dropping.”

When to De-Risk 

However, Wadia says now may be a good time to de-risk, with the funded status of plans having improved to a level that is better than those seen since the onset of the 2008 financial crisis. He points to 18 companies studied by Milliman that are already at surplus funding levels. 

In addition, he says, DB plan sponsors need to keep in mind that Pension Benefit Guaranty Corporation (PBGC) premium rates will be increasing in the near future. “Plans can lower their rates by increasing their funded status,” he says. 

In addition, new life expectancy tables released by the Society of Actuaries, still being reviewed by the Internal Revenue Service, will probably be approved and adopted in the near future, says Wadia. Once they are, this will probably mean liability increases for plans, since people living longer lives means their pension payments will have to be paid over a longer period of time. 

As for what DB plan sponsors should be doing to improve their plan’s funded status, Wadia says, “A company’s strategy depends on their plan’s current funded status and their ultimate funded status goal.” DB plan sponsors need to ask over what time period they want to achieve this goal, as well as how much risk they want to undertake. Wadia explains, “For some plans, a glide path strategy could be useful, with investments gradually transitioning from equities to fixed income. Sponsors also need to factor in their comfort level within the equity space. And if the plan is underfunded, sponsors may want to pursue downside risk protection.” 

For DB plans that have surplus funding, what plan sponsors need to do is to remove the possibilities of funding deficits in the future, says Wadia. For those plans that currently have 110% or higher in terms of funded status, sponsors may want to investigate a lock-in strategy, he says. This allows companies to maintain an ongoing plan, which can have its advantages, especially with regard to employer contributions, giving companies a longer time period over which to pay these employer contributions, compared with a more condensed time frame called for in defined contribution plans. 

The results of the study are based on the pension plan accounting information disclosed in the footnotes to the companies’ Form 10-K annual reports for the 2013 fiscal year and for previous fiscal years. These figures represent the generally accepted accounting principles (GAAP) accounting information that public companies are required to report as per standards from the Financial Accounting Standards Board.

The study report is at http://us.milliman.com/PFS/.

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