Data & Research May 19, 2016

What Does 'Self-Service' Mean to Investors?

New polling from J.D. Power explores the similarities and differences among groups of “self-directed” investors. 
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Many investors categorized by advisory firms and investment managers as “self-directed” still frequently look to their providers for guidance, according to the J.D. Power 2016 U.S. Self-Directed Investor Study.

The new survey matches other recent research showing there is an increasing division in the use and meaning of the word “robo adviser,” with the result that many of the clients who receive automated portfolio management still seek out in-person advice at various times.

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According to the research, “only 61% of self-directed investors in 2016 follow the traditional self-serve, or entirely do-it-yourself (DIY), approach to managing their investments, down from 66% in 2015.” At the same time, a subset of self-directed investors J.D. Power calls “validators,” or “those who want to make their own decisions but still have access to an adviser for support and as a sounding board for big decisions,” jumped to 25% in 2016 from 21% in 2015.

The research points to other client personas that complicate the self-service camp. For example, there are the “collaborators,” those who interact regularly with an adviser and depend on that guidance for investment decisions, although they still actually utilize an automated platform to hold accounts. This group grew slightly in the last year, J.D. Power says, to 14% from 13% of the self-service population.

According to J.D. Power researchers, the growth in validators mirrors a similar trend among full service investors, “of which an increasing number are using dedicated advisers as sounding boards but not as final decision-makers. The growing number of investors seeking a middle ground between the traditional full service and self-directed models is forcing investment firms to develop a hybrid service model that seamlessly combines human interaction and technology.”

“The convergence of self-directed and full service models produces both significant opportunities and threats to established firms in this space,” adds Mike Foy, director of the wealth management practice at J.D. Power. “A perfect storm of new technology, such as robo-advisers; new regulations, such as the Department of Labor’s (DOL) fiduciary standard; and demographic changes, such as the rise of the Millennial generation, is dramatically changing the value proposition traditional firms provide.”    

NEXT: Investors dig the hybrid advisory model

The J.D. Power research goes on to argue that individual investors “crave hybrid investment advisory models.” This is evident in the 25% of self-directed investors who indicate they want on-demand access to an adviser as a sounding board, and in the performance of firms that have made strategic changes in their business models to offer more investment advice to clients in this way.

Part of the momentum comes from Millennial investors entering the markets for the first time. While nearly half (47%) of investors overall are interested in robo-advice when their firm offers it, interest varies quite widely by demographic group. Notably, 72% of Millennials and just 25% of “Pre-Boomers” (those born prior to 1946) favor robo-advice. Among investors not interested, top reasons include a preference to manage their own investments; desire for personal interaction; lack of trust; and personal potential for bias.

Considering the likely impacts of the DOL fiduciary regulations, J.D. Power predicts the rulemaking will “create an opportunity for self-directed firms to capture share from full service firms,” based on the fact that 46% of full service Millennials and 33% of Boomers who are dissatisfied with fees express a willingness to switch to self-directed accounts, should these prove to be cheaper.

Related findings show the percentage of investors using mobile devices to regularly manage accounts has increased 4% during the past four years (18% in 2016 vs. 14% in 2013), but both satisfaction and trade activity among these users has increased significantly.  

“Self-directed firms are often focused on highly active traders who are critical because their transactions generate significant revenue, but these firms all have a large segment of less active clients who are looking for guidance and may currently lack the wealth or desire for a full service adviser,” Foy concludes. “Technology makes it possible for self-directed firms to meet the needs of these clients and retain them as their wealth grows.”

More information about the J.D. Power U.S. Self-Directed Investor Study is here. 

Client Service May 19, 2016

Consider Borrowing to Fund for DB Clients

Borrowing to fund pension deficits provides plan sponsors with a way to replace variable and potentially volatile debt obligation with a known, certain amount of debt at a fixed funding cost, says Rohit Mathur from Prudential.
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The enduring low interest rate environment offers a unique opportunity for plan sponsors to fund their pension plans, according to an article from Prudential.

Sponsors of underfunded defined benefit (DB) plans can borrow at attractive rates and contribute the proceeds to their pension plan, thereby reducing—or even eliminating—their pension deficit.

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Rohit Mathur, head of Global Product & Market Solutions, Pension & Structured Solutions at Prudential Retirement in Newark, New Jersey, explains to PLANADVISER that borrowing to fund means the DB plan sponsor issues a contractual debt in the marketplace. The interest rate is based on creditworthiness.

“Borrowing to fund pension deficits provides plan sponsors with a way to replace variable and potentially volatile debt obligation—the underfunded pension—with a known, certain amount of debt at a fixed funding cost,” says Mathur. “A range of plan sponsors—with small, large, frozen or ongoing plans—could benefit from a ‘borrow-to-fund’ strategy.”

The strategy benefits plan sponsors by reducing variable premiums to the Pension Benefit Guaranty Corporation (PBGC)—premiums that are expected to rise to 4.1% of unfunded liability in 2019. In addition, the economic benefit of this approach is also driven by lower after-tax debt service compared to annual plan contributions, and acceleration of tax deduction on pension contributions.

NEXT: Borrowing to fund is right for nearly all DB plans

Comparing two scenarios—making regular annual required contributions and borrowing to fund—shows a hypothetical plan could be fully funded in 10 years under the first scenario or fully funded in one year in the second scenario. A Prudential article notes that borrowing to fund yields a net present value (NPV) economic benefit of $150 million, compared to the pay-over-time strategy.

According to Mathur, part of the analysis in deciding whether to borrow to fund is determining if the interest on the debt is cheaper than PBGC premiums. DB plan sponsors should also look at the overall funding deficit and contribution requirement and compare that to the benefit of contributing to the plan more quickly.

Mathur also says DB plan sponsors should look at their creditworthiness. A Prudential analysis found borrowing to fund may be optimal for companies across the credit ratings spectrum based on current debt market conditions. “We believe such a strategy is optimal for most plan sponsors, except in situations where a restrictive leverage covenant in credit facilities could become adversely impacted by the issuance of contractual debt,” the Prudential article says.

"We believe borrowing to fund is an important first step to consider in the context of an overall risk-reduction strategy, and should be utilized based on a plan sponsor’s end goal for pension de-risking,” Mathur says. He tells PLANADVISER borrowing to fund can be an important part of any strategy, including liability-driven investing (LDI), offering a lump-sum payment window or completing a pension risk transfer.

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