Client Service January 8, 2018

Generation X a Key Target for Advisers

More than half of this generation currently does not have an adviser.

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Generation X offers key opportunities for advisers, according to “Moving the Needle: Targeting Generation X,” commissioned by Jefferson National, the advisory solutions business of Nationwide. The report is aimed at helping advisers and registered investment advisers (RIAs) better understand Gen X’s priorities, preference and concerns, so they can grow their business.

“Being in their prime earning years and next in line for inheritance, Gen X is a vital segment for advisers to target in order to enhance profitability and set their firms up for future success,” says Craig Hawley, head of Nationwide’s advisory solutions business. “Each year, successful advisers are most likely to say that Gen X will be their primary target over the next 12 months.” In fact, Jefferson National says these investors are poised to inherit $30 trillion.

Jefferson National also says that the number of affluent Gen X investors now exceeds the number of affluent Baby Boomers. Citing a study by Deloitte, the firm says that by 2030, Gen X investor’s assets will reach $22 trillion, while Millennials’ share will be $11 trillion.

The study found that 52% of Gen X do not have an adviser. As the Jefferson National report says, “as this generation continues to earn more and inherit more wealth, there is huge opportunity for advisers to tap into this market.”

Among those Gen X’ers who are working with an adviser, 30% say it is because they are concerned about saving enough for retirement. For Millenials working with an adviser, the primary motivation is to feel confident about their financial future, cited by 27%.

When selecting an adviser, Gen X investors  say experience matters most (41%). Twenty-six percent want personalized advice for a holistic financial picture, and 20% say a fee-based fiduciary standard is important.

Among all members of Gen X, including those not working with an adviser, when asked about their top financial concerns, 46% say it is saving enough for retirement, 28% say it is the cost of health care, 21% say it is financing their children’s education, and 20% say it is protecting assets.

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Thirty-three percent of Gen X prefers face-to-face meetings over all other forms of communication. Likewise, Jefferson National says this is the best way for advisers to learn about Gen X investors’ needs.

The firm also found that 26% of Gen X investors say the quality of communication makes for a successful customer experience, followed by low-cost products and services (22%) and establishing a personal relationship with their adviser (14%).

Jefferson National’s report on Gen X can be downloaded here.

Client Service January 8, 2018

Provisions of Tax Reform Could Affect DB Plan Sponsor Strategies

DB plan sponsors may want to make a voluntary contribution to their plans in 2018 to claim a deduction at their former, higher tax rate, according to Michael A. Moran, with GSAM.

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Since, under tax reform, the corporate tax rate will be lower in the future than what had previously been in effect, more voluntary defined benefit (DB) plan contribution activity is expected, according to Michael A. Moran, CFA, managing director and chief pension strategist with Goldman Sachs Asset Management (GSAM).

 

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In a Q&A on GSAM’s website, Moran explains that contributions to corporate DB plans are generally tax deductible up to certain limits. For plan sponsors that were contemplating making a contribution in future years, some decided to accelerate that contribution into 2017 in order to reap the benefits of getting the tax deduction at a higher rate. GSAM observed that Kroger and Valvoline are two examples of companies that explicitly cited potential corporate tax reform as one of the reasons for making a voluntary contribution earlier in 2017.

 

According to Moran, since plan sponsors can under certain circumstances make a contribution up to eight and one-half months after the end of the year and still have it count as a deduction for the previous tax year, the firm expects voluntary contribution activity to continue into 2018 where sponsors claim a deduction at their former, higher tax rate.

 

In addition, changes to repatriation rules under tax reform may make foreign cash more accessible for U.S. multi-nationals, which may enable them to continue to make voluntary contributions in the future.  Moran says estimates of overseas cash for U.S. companies have been in the range of $1 to $2.5 trillion.

 

He points out there have been several other factors which have also provided plan sponsors with an incentive to put more money into their plans sooner rather than later, including Pension Benefit Guaranty Corporation (PBGC) premiums.

 

Increased contribution activity leads to higher funded ratios which may be a catalyst for more de-risking activities, according to Moran. This may take the form of increased allocations to long duration fixed income, to better match plan liabilities, as well as more risk transfer activities since better funded plans make it easier for the plan sponsor to transfer liabilities to a third-party insurance company.

 

However, he notes that some DB plan sponsors may not find a borrow-to-fund strategy as compelling as before the enactment of tax reform. “In particular, for certain companies, interest deductions are generally limited to 30% of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for tax years beginning before 1/1/2022, and to 30% of Earnings Before Interest and Taxes (EBIT) for subsequent tax years. Given this, the ability to use existing corporate cash for pension funding may become more critical,” he says.

 

Moran also warns that increased flexibility around cash may mean that some U.S. multi-nationals may not need to issue as many bonds going forward to fund buybacks, dividend increases, capital expenditures, etc. “Just as more corporate DB plans are looking to add long-duration fixed income to their portfolios as funded ratios move higher from contribution activity, the new supply of long duration fixed income securities may decline,” he says.

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