In Practice February 28, 2014

What Women Want from Advisers

If advisers want to score satisfaction points with their female clients, they need to deliver holistic advice and become active listeners.
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Sometimes it’s getting back to the simple things, like making sure both partners in a relationship are participating in a conversation, says Jaylene Howard, consulting director for Russell Investment’s U.S. private client consulting group.

Recent research from the global asset manager, “What really matters to women investors,” explores the financial needs of women in two age groups—Generation X, ages 32 to 47, and the Silent Generation, ages 67 to 80—and includes insights from financial advisers who serve female investors.

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The same goes for follow-up, Howard tells PLANADVISER. “Don’t follow up just one,” she says. “Include both partners in all communications.” Since women have a tendency to hang back in financial discussions, Howard suggests opportunities to invite them into the conversation.

“Be proactive in the communications you send,” Howard suggests. Russell’s research shows that Gen X women in particular turn to websites, blogs and other sources to seek investment information. “Advisers can send an email that refers to a previous conversation,” she suggests. The adviser can bring up a topic that was raised previously and send a link to an article, along with an email that says, for instance, “In our last conversation you mentioned you were particularly interest in estate planning.”

A substantial majority of women in the survey (86% of Generation X and 87% of Silent Generation women) cited active listening skills as the most important factor to a successful and lasting relationship with their advisers.

Active listening is a skill, according to Howard, which is good news: “You can get better at it,” she says. “It’s a way to communicate that requires that the listener share back what they hear from the speaker. Focus first on understanding the client.”

The adviser should be empathetic, nonjudgmental and listen with undivided attention, noting words as well as body language, Howard says. Repeating and paraphrasing the client’s statements helps establish a base level of communication.

Keeping an Adviser

One surprising finding of the study, contrary to a commonly cited industry belief, a majority of women (93% of Silent Generation and 78% of Generation X) would stay with their current adviser, even after the death of a spouse or partner.

Howard feels that multiple factors could be responsible for this. “Coming out of the global financial crisis, clients demanded a much higher level of interaction from their advisers,” she says. “What we’re seeing now is that really good advisers use that demand as an opportunity to strengthen their relationships with their clients.”

The financial crisis might play a part, according to Howard, since it may have served as a catalyst to galvanize women into greater activity in their financial lives. “They saw their account values drop, and if they weren’t being active, that was a catalyst,” she says. The rebounding of equity markets over the past five years could also be a factor.

Howard says a notable finding of the research was the need for advisers to establish personal connections, particularly for women in the Silent Generation. “Women want holistic wealth management,” Howard says. The advisers who have the highest satisfaction ratings from clients understand more than simple financial facts. They have a complete picture of a client’s life.

“We were surprised, given the level of satisfaction with advisers, that no more than one in three advisers knows everything about a client’s financial goals and concerns,” Howard says. The advisers knew where the money was invested, and what financial products the client had. They knew less about more personal financial goals, such as saving for a child’s education or leaving a legacy.

Women Lack Confidence

Women may participate more but they still lack confidence, according to Russell’s findings. “Advisers have an opportunity to bridge that confidence gap,” Howard says, “by reaching out more, listening, and being proactive.”

“The most influential piece is active listening,” Howard says, “and it is the one that can really change the relationship for the adviser, too.” The more an adviser can get a client to open up and share her financial concerns and goals, the more possible it is for the adviser to help a client attain those goals.

Mathew Greenwald & Associates conducted two surveys in March 2013 on behalf of Russell Investments on women and investing, which focused on financial advisers and women investors in two age groups: Generation X (ages 32 to 47) and the Silent Generation (ages 67 to 80). One survey queried advisers about their relationships with women investors in these groups and the other sought out the woman investor’s point of view for each generation.

The adviser survey includes the results of 343 respondents, while the women investor survey includes 901 individuals (501 Gen X and 400 Silent Generation). In order to qualify for the study, women investors were required to have at least $100,000 in investable assets (Gen X) or $500,000 in investable assets (Silent Generation); work with a professional financial adviser; and meet the age requirements mentioned above.

Advisers who participated had to be employed as an independent financial adviser, planner, or RIA, or work for a wirehouse or national firm, regional broker/dealer, or independent broker/dealer for at least three years. They needed to generate at least 75% of their business from the sale of individual products and services and earn at least $100,000 in personal income from the sale of financial products and services.

Data & Research February 28, 2014

Yale Law Professor Again Targets Industry Fees

A Yale Law School professor known for making waves in the retirement industry released a study arguing plan sponsors tend to establish investment menus that encourage underperformance.
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Ian Ayres, a lawyer and economist serving as the William K. Townsend Professor at Yale Law School, may be familiar to industry members and observers from a curious series of events that unfolded in mid-2013.  Starting in late June, Ayres sent a series of ominous letters to retirement plan sponsors and employers warning their retirement plan’s fees are too high. In all, about 6,000 letters were sent to a long list of employers that sponsor retirement plans, though in somewhat different versions (see “Improve Your Plan—Or Else?”).

One version told the recipient Ayres intended to “publicize the results of our study in the spring of 2014” and to “make our results available to newspapers including The New York Times and Wall Street Journal, as well as disseminate the results via Twitter with a separate hashtag for your company.” The letters caused a flurry of responses from service providers and industry advocacy groups, most of whom appeared incensed over Ayres’ threat to name individual companies—a move that opponents said could encourage opportunistic and costly litigation (see “Professors’ Study Riddled With ‘Deficiencies’”).

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Now, some nine months later, Ayres seems to have made good on the first part of his warning-threat—releasing a study that suggests retirement plan administration and investment-related fees lead to an average participant loss of 86 basis points compared with low-cost index funds that could be used as retirement savings vehicles.

Ayres published the paper in collaboration with Quinn Curtis, of the University of Virginia School of Law. The 40-page document argues that, notwithstanding fiduciary requirements imposed on plan sponsors by the Employee Retirement Income Security Act (ERISA), a wide range of plan administrators are complacent in the establishment of investment menus with options that predictably lead to substantial underperformance of retirement portfolios. The research utilizes data from more than 3,000 401(k) plans with more than $120 billion in assets.

In 16% of analyzed plans, the research team finds that, for young workers especially, the fees charged in excess of an index-based fund can entirely consume the value of tax benefits related to investing in a 401(k) plan.

“We also document a wide-array of ‘dominated’ menu fund options where the costs of fees in holding the fund so outweigh the benefits of additional diversification that rational investors would not invest in these assets,” Ayres and Curtis write in the paper’s abstract. “We find that approximately 52% of plans have menus offering at least one dominated fund.”

The paper defines a dominated fund as an investment option in a plan that is “clearly inferior to other investments in the same menu,” whether because of higher fees or performance-related factors. In the plans that offer dominated funds, the paper says such funds hold about 11.5% of plan assets. The paper finds these dominated investments tend to be outperformed annually by their low-cost menu alternatives by more than 60 basis points.

“We argue that existing fiduciary duty law (aided by improved rule-making by the Department of Labor) can be used to challenge plans that imprudently expose investors to the risk of excess fees,” the pair writes. “In particular, we argue that (i) evidence of excessive fees can be powerful evidence of an imprudent fiduciary process, and (ii) fiduciaries act imprudently if they included dominated option in their menus, even if plan participants have other offerings with which to construct prudent retirement portfolios.”

Curtis tells PLANSPONSOR the paper does not seek to blame either plan sponsors or industry providers for charging excessive fees and damaging the retirement readiness of participants.

“I wouldn’t characterize this study as a blame game,” he says. “What we found is that there are incentives for a fiduciary to include what we’ve termed ‘dominated funds’ in their lineup. And the law has supported those incentives by creating safe harbors for certain breaches of fiduciary duties. What we’re trying to ask is, how do we structure the regulations and the fiduciary duties so that we can give plan sponsors the right motivation to set their employees up to succeed in the choices they’re making in the menu?  That said, the responsibility for offering a quality menu ultimately rests with the plan sponsor.”

That question gets to another primary argument presented in the paper. The study argues courts have been far more likely to hear and decide fiduciary breach cases in terms of ERISA-related procedural considerations and the availability of diverse funds in an investment lineup. In other words, the courts have shied away from examining the specific issue of whether fees in retirement plans are excessive or not. The study examines the phenomenon at length, suggesting the courts could go a long way towards addressing some of these issues without requiring new legislation or regulation by policing the inclusion of high cost funds more closely, regardless of other options in the menu.

“Some of the Circuits are doing better at this than others,” Curtis points out.

Regarding industry pushback, Curtis says he has seen some argumentation that the study does not do enough to consider what participants are receiving in return for higher fees within some plans—similar to many of the arguments leveled towards Ayres’ earlier mailing campaign. Curtis rejects this interpretation, pointing to page 18 of the study, where he and Ayres examine key plan metrics across higher and lower cost plans and find no evidence to suggest the more expensive plans are doing better for their participants. 

“You would think that these high cost plans would have something to show for it—they would have higher participation rates, or higher contribution rates, or their participants would be allocating their assets better,” Curtis says. “But, what we really saw on each of those pieces is the opposite—that the high costs plans seemed to have worse outcomes on these metrics. The evidence doesn’t really suggest that all of these fees are justified by the level of service, as far as we can measure them.” 

Ayres and Curtis go on to argue that, because heightened fiduciary duty reforms are unlikely by themselves to solve the problem of excess fees and dominated funds, three other major industry reforms should be enacted.

First, the team recommends the requirements for default fund allocations be enhanced to assure that the default investment is reasonably low cost. Second, the pair recommends the Department of Labor (DOL) designate certain plans as “high cost” and mandate that participants in these plans be given the option to execute in-service rollovers to low-cost plans. Finally, Ayres and Curtis recommend participants be required to demonstrate a minimum degree of sophistication by passing a DOL-approved test before being allowed to invest in any funds that would not satisfy the enhanced default requirement.

As of the close of business on February 28th, there did not appear to be any indication that Ayres was preparing to tweet the names of specific companies or plan sponsors. Ayres did not immediately return messages asking for comment.

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