Data & Research April 28, 2008

Cerulli Analyzes Evolving Role of Consultants in DC Marketplace

Eighty percent of investment consultants expect to increase their defined contribution (DC) business in the wake of the pension fund crisis, according to Cerulli’s 2007 survey of investment consultants.
Reported by

That does not mean consultants are abandoning defined benefit (DB) plans. In fact, 60% of consultants surveyed feel the demise of the defined benefit pension plan has been overstated, and 60% said they are focused on retaining DB clients. But DC plans are increasingly becoming a focal point for consultants, according to The Cerulli Edge: Retirement Edition for 1Q 2008.

Cerulli estimates that between 20% and 25% of corporate DC plans greater than $10 million use an investment consultant, while between 35% and 40% of corporate DB plans greater than $10 million use a consultant, the report said.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

More Opportunity

One reason for more opportunity for consultants is the increasing structuring of DC plans to be more similar to DB plans, or “DB-ization.’ The report said DB-ization is “more intelligent investment manager due diligence, more sophisticated asset allocation, and more precise fund selection.’ DB-ization also refers to the paternalistic elements the DC plan is adopting, resulting from the Pension Protection Act and Department of Labor sanctioning auto-enrollment provisions and lifecycle funds as qualified default investment alternatives (QDIA).

Consultants also foresee more opportunities outside of the investment offering. For example, 70% of consultants said they expect increased business related to fee analysis, the report said.

Lost in Translation

While DC plans are undergoing DB-ization, not all DB strategies translate to the DC market. Consultants are an important bridge between DB and DC plans, the report noted.

Alpha/beta separation prevalent in DB plans, for instance, is hard to implement in DC plans. While 130/30 funds provide alpha/beta separation, Cerulli analysts believe the complexity of these funds will limit their widespread adoption in the DC market.

But long/short (such as 130/30) funds have potential coupled with exchange-traded funds (ETFs), which are expected to increase in the make-up of DC plans, the report said. According to Cerulli surveys, 80% of DC providers expect an increase in the usage of ETFs. “The coupling of these two funds within an embedded-advice structure could have the potential to deliver investment returns comparable or superior to mutual fund wrap programs at a decreased cost,’ the report said.

Traditional mutual funds are expected to have the least growth in the make-up of DC plans. Thirty percent of providers surveyed expect mutual funds to decrease.

More information can be found at www.cerulli.com

In Practice April 27, 2008

DCIO Most Profitable Platform Market For Asset Managers

The defined contribution investment-only (DCIO) market offers dramatically higher profit margins for asset managers than those found in other platform markets, and firms will be growing their personnel in these markets during 2008.
Reported by

The study by Sway Research LLC, titled Aligning an Organization for Platform Sales Success, found that asset management firms are earning average margins of 25% on DCIO business versus roughly 18% in markets such as mutual fund wrap and sub-advisory and only 12% on the separately managed account business (SMA) business, which also includes multiple-discipline products and UMA platforms.

In addition to the higher margins, asset managers produced greater gross sales relative to assets under management, on average, in the DCIO market than other platform markets in 2007, Sway found.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

According to Chris J. Brown, principal of Sway Research, “despite experiencing a combination of upward pressure on recordkeeping fees and downward pressure on fund expenses, asset managers are still generating sizable profits on DCIO business, largely as a result of low distribution costs, driven by the small sales forces needed to generate DCIO flows.”

The survey, which was based on interviews with executives from asset management firms, predicts that sales staff will grow in 2008. The growth in both margins and gross sales has been recognized by senior management, which has, in turn, raised DCIO sales goals, according to Sway. Therefore, DCIO managers would like to increase their sales staff with experienced personnel to help them reach these goals, while also working to retain the talent currently in-house.

Part of this goal is evidenced in the fact that many asset management firms have been making significant alterations to organizational structures as a means to better integrate sales, marketing, and operational functions for platform businesses.

“All of this is driving up compensation levels for sales people fortunate enough to possess a combination of ERISA and investment product knowledge,” adds Brown.

The study report provides benchmarks for key distribution components, such as sales force headcounts, sales and assets generated per head, and compensation levels and structures. It also contains information about organizational structures within DCIO groups at asset managers. For more information, visit the company’s Web site at www.swayresearch.com.

«