Data & Research June 20, 2016

Schwab Advisor Services Outlook Measures RIA Optimism

Interviews with nearly 1,000 independent advisers who custody assets at Schwab show significant optimism about growth opportunities for registered investment advisers. 
Reported by

Nearly three quarters of independent registered investment advisers (RIAs) feel “very optimistic” about opportunities for RIAs to grow in the next five years, according to Schwab Advisor Services’ 19th semi-annual Independent Advisor Outlook Study.

The optimism comes despite significant uncertainly still brewing around the Department of Labor’s (DOL) new fiduciary regulations, which have been cited by some advisers as a likely drag on future profitability. 

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

According to Schwab’s polling, most advisers seem to feel the rule, set to phase into effect in 2017 and 2018, will at least change the way they package and market their services—with two in three RIAs (66%) expecting “more competition for securing assets in the five-year timeframe and, likewise, believing the need to differentiate their firms from competition is greater than ever (65%).”

Schwab finds more than half (57%) believe the rule will drive more questions from clients about an adviser’s fiduciary responsibilities, though there is less certainty about what these questions will be or how they will have to be answered. In this context, one in three RIAs (36%) think the DOL rulemaking will increase competition directly by favoring particular service and compensation arrangements. This is about the same number that feels the strengthened fiduciary standard will “create greater challenges for RIA firms to differentiate themselves from wirehouse firms (35%).”

Looking to the markets, advisers are feeling cautious and urging clients to adopt the same attitude, the Schwab research shows. For example, adviser confidence that the S&P 500 will continue its upward trajectory is at a four year low. “Just over half (56%) of advisers expecting the markets to increase in the next six months,” researchers observe. “In addition, the majority of advisers (90%) have needed to reassure at least some portion of their client base in the past six months that they will achieve their investment goals.”

NEXT: More findings from the Schwab Advisor Services

Given the worries about the markets, Schwab Advisor Services finds over half of RIAs expect difficulty in achieving their clients’ investment goals in the near-term future. As such, “one in three (38%) advisers reports spending the majority of their time considering how to prepare for future growth,” and “the majority of organic growth the next five years is expected to be driven by founders and principal-level equity owners.”

This matches other research showing increasingly difficult barriers to entry for the advisory and financial services industries.

“Currently, advisers have most assets under management (37%) in a ‘mature’ lifecycle stage, in which the investor is focused on protecting and maintaining wealth, followed by 25% in ‘aging’ lifecycle stage, in which the investor is focused on spending and planning for distribution to heirs,” researchers explain. Additionally, 23% of clients are in “mid-lifecycle,” seeing their wealth “steadily building but with needs that are getting more complex.”

Just 10% of assets are held by younger clients wholly focused on building wealth over the long term, the polling finds. And while, looking ahead five years, advisers do predict a decreasing percentage of assets in the “aging” and “mature” categories (23% and 33% respectively), it’s still very much the minority of advisers who anticipate serving more “mid-lifecycle” (25%) and “young” (12%) clients over the next five years.

Thinking about wider demographic trends and the potential impacts on client service strategies, 37% of RIAs say they are “factoring changing demographics into their succession planning.” Another 35% of independent advisers are “aiming to attract and serve younger clients, and 29% are aiming to attract and serve more female clients.” Another 10% “plan to attract and serve more ethnically diverse clients.” At the same time, “two-thirds of advisers still aim to attract and serve clients similar to those they have today—and are hiring accordingly.”

More information on the semi-annual Independent Advisor Outlook Study (IAOS) is here. 

The Markets June 17, 2016

PSNC 2016: Understanding Stable Value

The use of stable value funds within defined contribution plans has evolved substantially in recent years and decades, with more changes right around the corner. 
Reported by

The use of stable value funds in today’s defined contribution (DC) plans tends to break down along three main lines, according to panelists at the 2016 PLANSPONSOR National Conference in Washington, D.C.

“The first big use is by older investors who need to protect the wealth they have while gaining some modest capital appreciation,” explained Andy Apostol, head of stable value client service at Invesco. “Next, we are also seeing more use of stable value within custom target-date funds (TDFs), and finally, related to this, we are seeing stable value serve as a capital preservation tool sitting as the anchor of a diversified portfolio.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

James King, managing director and client portfolio manager for Prudential, agreed with that assessment, explaining that from purely a return perspective, stable value has quite similar characteristics to intermediate duration, high-quality bonds.

“That gives you an idea of how they will perform in a portfolio, but it’s obviously not the entire picture,” King said. “Stable value is lower risk, and it’s designed to reduce the probability of loss as much as possible. In the simplest terms, stable value funds are basically bond portfolios, paired with insurance wrap contracts that seek to deliver a guaranteed return even when bond markets turn negative.”

There are obviously extra fees that come along with building the insurance wrappers, the panelists explained, but that’s pretty much the point: Stable value is a good option for those who are willing to pay a little more compared with bond funds in order to smooth out the return cycle.

“The best example we can give of this comes from 2008 and 2009,” Apostol suggested. “While so many funds lost a whole lot during the period, stable value delivered a steady, daily positive return. The asset class outperformed money market funds as well, and they can be expected to do so over the long term.” 

NEXT: Significant variability within stable value 

The panelists went on to outline the main types of stable value being offered on the market today, although there is even significant variability within the general archetypes, described as follows:

  • Insurance company general account products – These tend to have longer durations in the underlying bond investments, and therefore they can offer higher crediting rates in general. The wrap contracts in this case are usually single-provider contracts, however, so there is credit risk to consider regarding the insurance company. Be mindful of the crediting rate reset rules, panelists urged. There will also likely be less transparency and less portability compared with other approaches.
  • Insurance company separate account products – These have some similarities with general account products, but the insurance company agrees to hold the underlying fund assets in a separate account disassociated with the insurance guarantee, potentially reducing credit risk. Panelists suggested this approach can provide an additional level of security, a wider variety of investment strategies, and an enhanced level of portability—usually for a higher cost, of course.
  • True separately managed accounts – This approach utilizes multiple investment wrap contracts and multiple insurance guarantors, panelists explained. Securities are also held by a third-party custodian, further segmenting the insurance guarantees from the asset management portion of the product.  
  • Pooled funds designed for small investors – This approach is increasingly being utilized by plans with, say, $50 million or less, to access stable value investments. There is significant variability in how these pooled funds are invested and guaranteed, but the idea is to bring institutional pricing to smaller plans by having them all bargain together. A plan sponsor can actually use the three previously described stable value styles under this pooled approach, panelists suggested.  One key things to consider, they warned, is that the book value crediting rate of the pooled fund can be impacted by each co-investors’ decisionmkaing, especially when there is only a small number of investors in the pooled fund. 

«