Advisers Say Wholesalers Help in Market Turbulence

FRC’s latest ADVISOR INSIGHT report found that Russell, American Century, and Putnam received the best approval ratings from advisers.

Nearly half of all surveyed advisers said that their service requirements for wholesalers increase during challenging market environments. It should be noted that the turbulent markets advisers refer to did not include the “seismic events taking place at the end of the third quarter,’ according to a release from the Financial Research Corporation (FRC).

Of the surveyed advisers, 88% of respondents stated that wholesalers had been responsive to their changing need, according to FRC. Russell led all firms with 98% approval, followed by American Century and Putnam, each with 97%.

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“Our surveyed advisers spoke highly of the efforts of many of the firms that they work with in terms of their wholesalers staying in front of them during the uncertain times and providing timely and relevant information that could be used during client conversations,’ said Craig Kilgallen, vice president and director of ADVISOR INSIGHT.

The survey of 1,860 financial advisers and 182 branch managers was conducted for FRC and Horsesmouth’s latest ADVISOR INSIGHT report, “Wholesaler Effectiveness.’

Participant Transfers Move with Markets in September

Participants didn’t panic in September – but they did respond to market events.

However, 401(k) participant activity was relatively high and transfers were significant out of equities during September, according to the results of the Hewitt 401(k) Index. A total of $921 million moved out of equities and into fixed income investments during the month.

While activity was relatively high, the vast majority of 401(k) participants stayed put. The overall transfer activity level in September was only slightly higher than the average transfers of the trailing 12 months — 0.06% of balances were transferred on a net daily basis in September versus 0.05% of balances transferred during the past year, according to Hewitt (see August Fund Flows Favor Money Market, Fixed Income).

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However, on five days of the month there were what Hewitt characterizes as “above normal” trading levels, and four of those five days – all “high” volume transfer days – occurred during the latter half of the month. All four days were strongly fixed income oriented and followed significant market drops.

On September 16th, the day following the news of the collapse of Lehman Brothers and the credit-rating downgrade of AIG, the index transfer activity was nearly three times as high as the usual level — with 0.13% of balances transferred, according to Hewitt.

Transfers spiked again on September 18 at nearly 3.5 times the normal level, and on September 29th, the day the financial rescue plan was defeated in the House, participant transfers were 2 to 3 times the normal levels on the following two days. *A “normal” level of relative transfer activity is when the net daily movement of participants’ balances as a percent of total 401(k) balances within the Hewitt 401(k) Index equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

Moves to Fixed Income

Approximately $733 million of participant transfers moved into GIC/stable value funds, representing 68% of the net transfers in September. Bond and money market funds also received $178 million (16% of net transfers) and $133 million (12% of net transfers), respectively, according to Hewitt. Interestingly, a modest 3.48% moved into the company stock category. While we do not know which companies benefited from that shift, this is a category that has regularly seen a net transfer out in recent months.

As the MSCI EAFE Index declined over 14% in September, international funds experienced the largest outflows, with nearly $330 million transferring out of this asset class. Large U.S. equities also experienced $234 million in outflows, followed by lifestyle funds ($141 million) and balanced funds ($137 million).

All in all, during the third quarter a total of $1.9 billion moved from equities to fixed income investments, mainly from international funds ($700 million) and U.S. equities ($478 million) into stable value funds ($1.7 billion). Further, due to those trends in participant transfers and market decline, participants’ overall equity exposure has dropped to its lowest level since April 2003, at 58.8%. It was down by 3.7% for the quarter, according to Hewitt.

Employee equity contributions (participant discretionary contribution) also declined 2.9% during the quarter to 62.4% by the end of September. Among participant-only contributions, more than one-in-five dollars (22.06%) went into lifestyle/pre-mixed funds, while 19% opted for GIC/stable value, 18.41% was directed to large U.S. equity, and 10% to international.

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