Data & Research December 22, 2008

Credit Crisis Reshapes Investment Mindset

The credit crisis will shift the way wealth management firms service investors, according to a report from Celent.
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The Boston-based research firm notes some key effects of the credit crisis on wealth management, including increased scrutiny from investors. Some of the trends Celent predicts:

  • High-net-worth (HNW) and ultra-high-net-worth (UHNW) investors will continue to seek advice.
  • Mass affluent and mass market clients will speed their current trend to self-service.
  • Investors are using the crisis as an opportunity to renegotiate wealth fees.
  • Investors are closely scrutinizing reputations of providers.
  • Investors are seeking investment rather than products.
  • Investors are less-likely to migrate with their managers to new providers.

Retirement Implications

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Celent notes that retirement accounts have taken a huge hit in the market decline. Asset allocation models and mutual fund diversification did not prevent huge declines in assets. Also, lifecycle funds were not immune to the decline. ’Lifecycle funds do not achieve their touted objectives of becoming stable as retirement arrives,’ according to the report. Celent says clients will move much of the remaining assets to stable value funds and that fund fees on retirement accounts will come under increasing pressure due to the poor performance.

“Contraction in the North American economy due to the credit crisis has left an indelible mark on the way wealth management is delivered across financial institutions,” said Robert Ellis, senior vice president of Celent’s Wealth Management practice and co-author of the report, in a press release. “The entire financial services sector has been mauled, causing portfolios and retirement plans to hemorrhage value while requiring investors to question such basic issues as capacity for risk and planning for their retirement.”

Investment Mindset

Celent predicts “tectonic shifts’ in the way investors think and behave with their wealth—including the products they invest in and the providers and channels with whom they do business going forward.

For one, investors are disillusioned with the way larger providers allocated their assets and responded to concerns as they watched accumulated wealth slip away, the firm says. Independent firms might not suffer as significant reputational detriment, but they are still being called into question because of extensive declines some clients have faced while still paying high fees.

Celent says investors will move to traditional low risk asset classes with old economy financial institutions, which have survived the credit crisis with their reputation intact. These institutions include the regional and community banks, medium-size insurance firms, and investment firms that correctly positioned their clients for the downturn.

Investor behavior will also become more conservative, according to the report, and mutual funds will become less popular in retirement accounts and other mass affluent portfolios. Celent also says North American equity markets—which have lost 30% to 40% in the last year—will continue to be volatile in the near future. Within five years, unless the regulations are changed to put mutual funds on a more equal footing, the firm predicts a decline of fund families from more than 7,000 to closer to 2,000.

Celent says advisers will continue to encourage clients to diversify portfolio risk by investing in suitable commodities—which will continue to be volatile, but show opportunity.

Technology Growth

Celent notes a few trends in wealth management technology, focused around better compliance and operational efficiency. The firm predicts a decline in technology spending by wealth management providers in 2009, with the market beginning to pick up again by 2010. The firm expects demand for risk management and compliance technology to grow. It also says there will be improvements to development in aggregation technology and products such as unified managed accounts.

Wealth management firms will also open up more communication channels by enhancing services on the Web and through cell phones, using features such as RSS feeds and texting as future growth channels.

The report is “The Global Credit Crisis: Implications for North American Wealth Management.’

IMHO December 20, 2008

IMHO: Making a List…

There was a time when Christmas shopping for my nieces and nephews was a relatively straightforward process.
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Simply put, we’d spend a day or two at the mall, looking for things that we thought would be genuinely fun (in my case) in a generic sort of way—some flavor of electronic car, legos, dolls, etc.
Of course, as our family has grown ever more extended—and my nieces and nephews older—it became very nearly impossible to keep up with their various and sundry interests—and to a point where the only practical solution was a gift card (even then, pains must be taken to make sure it’s from a store at which they shop).
It’s no less challenging “shopping’ for retirement plan participants. Their needs (and desires) this season are as varied and complicated as the places they work, the tasks they perform, and the places they live.
Nonetheless, and in the spirit of the holiday season, here are some “presents’ that I hope participants find on their retirement plan menus during the next year:
(1) A workplace retirement plan. It’s easy to overlook this one, particularly for those of us who work with these programs on an ongoing basis. The sad fact is that roughly half of working Americans still don’t have access to any kind of workplace retirement plan. That means no convenience of payroll deposit, no assistance from an employer match, no education and/or advice about how to properly invest their retirement savings—and, in all likelihood, no retirement savings.
(2) The ability to roll over distributions from prior programs into their current plan. We all know how difficult it can be for participants to keep up with even a single 401(k) account. How much harder is it for them to keep up with—or remember—all those stray accounts left behind at prior employers, or rolled into retail-priced IRAs? It’s better for them—and it could well be better for the plan as well.
(3) The chance to automatically increase their deferral amounts. Plan sponsors have increasingly been willing to embrace automatic enrollment—but auto-escalation, even though it’s an integral part of the Pension Protection Act’s (PPA) automatic enrollment safe harbor provisions, has proven to be a harder sell. More’s the pity. This is a chance to let participants set in motion a systematic improvement of their retirement plan fortunes—and with a minimum of effort.
(4) The opportunity to select a target-date fund. Some target-date funds have better asset allocations and investments than others, but almost all are likely to provide more favorable investment results over time than most participants will achieve on their own.
(5) Some consideration of a retirement income alternative. It’s ironic to me that we spend decades working with participants trying to help them make prudent, well-reasoned savings and investment decisions—and then, at the most critical moment (distribution), most just get pointed in the general direction of a rollover IRA or annuity. Both can be effective, of course, but can be quite the opposite as well. We shouldn’t just leave participants to their own “advices’ at this critical juncture—and there is a whole new generation of options to choose from.
(6) The continued support of an employer match. I’ll admit this is a tough one, and it can be expensive, particularly when the economy is in such turmoil, and when it seems like so many others are cutting back. Still, we know that the existence of a match has a notable impact on the level of contributions, and certainly influences participation. And even if it did neither, it goes a long way toward shoring up the adequacy of those individual retirement accounts. It is, quite simply, money well spent.

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