Products July 13, 2021

Vestwell Managed Account Platform Helps Advisers Meet Needs in Small Plan Market

The platform uses Franklin Templeton’s Goals Optimization Engine and helps advisers provide an offering to small DC plan sponsors and participants in a cost-efficient way.

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Joshua Forstater, senior vice president of partnerships at Vestwell, says the firm has seen that advisers are looking to Vestwell’s recordkeeping platform as a way to scale up in the small defined contribution (DC) plan market.

“Advisers want to talk about investments, education and financial wellness, but they get bogged down with administrative issues,” he adds. “This presents a problem when working with smaller plans because it becomes cost prohibitive.”

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To address the advice issue, Vestwell and Franklin Templeton have partnered to build an adviser managed account experience. The new offering, which was announced in January but recently went live, combines Franklin Templeton’s proprietary Goals Optimization Engine (GOE) methodology with Vestwell’s recordkeeping infrastructure to create an entirely digital, open-architecture and cost-effective managed account solution. The offering will live natively in Vestwell’s platform, with the ability to automatically enroll participants into a personalized investment strategy.

During a demo of the managed account solution, Forstater showed how advisers can offer the platform with their own branding. A dashboard allows advisers to see client plans’ stats, including participation rates, as well as investments offered by the plans. Advisers can also drill down to the participant level to see how participants are invested, as well as their account balance, age and deferral rate.

Participants using the platform can see their account balances and contribution rates, as well as change their beneficiary information. They have the option to use a goals-based strategy, which will enroll them into the managed account program. Payroll and demographic information for participants is pulled into the managed account program from the recordkeeping system, and certain assumptions are defaulted, such as the expected retirement date. Participants can edit the information; for example, they can determine how much they will save, how much they will spend in retirement, their retirement date and their risk tolerance.

Forstater explained that once goals are set, Franklin Templeton’s GOE uses an application programming interface (API) to generate in real time the optimal portfolio for the participant to reach those goals. The system automatically invests and updates every quarter.

The platform has a fully open architecture, so advisers can determine which funds are offered to participants. “We let advisers pick the funds and open up additional levels of customization, such as choosing asset classes,” Forstater says.

He also notes that the platform shows participants how much retirement income their accounts are generating, how much they will need in retirement income and ways to close the gap. Participants can just click a button to apply changes.

“We’re seeing plan sponsors want to default participants into managed accounts so they can get a more personalized experience than age-based TDFs [target-date funds],” Forstater says.

He adds that the Vestwell/Franklin Templeton program is priced basically at one-third of other managed account products. “For most clients, the all-in cost is less than or equal to an actively managed TDF,” he notes.

Forstater says that over time, Vestwell will integrate other data points, such as expected Social Security income and income to be generated by other savings accounts, and will include considerations such as a participant’s emergency savings or expected health spending in retirement.

Vestwell also plans to include more nudges for better savings behaviors in addition to the options to close retirement income gaps that are already included on the platform.
Data & Research July 12, 2021

Advisers Can Help With Financial Biases

A Morningstar survey details what biases are affecting investors and explains what advisers can do to diminish these influences.

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A recent report by Morningstar studied how financial behavior and biases affect investors and participants. 

A national sample of more than 1,200 Americans completed a bias assessment survey, and the results revealed that the majority showed some kind of financial bias. Furthermore, Morningstar says some biases directly contribute to worse financial outcomes, such as poor financial health and lower account balances.

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Of the six biases assessed—present bias, base rate neglect, overconfidence, loss aversion, exponential growth bias and gambler’s fallacy—total savings account balances fell by 0.55% for participants who showed base rate neglect bias, or the tendency to ignore the probability of something happening and instead judge its likelihood by new, readily available information. Account balances also fell by 0.22% for those who showed overconfidence bias, or the tendency to overweigh one’s own abilities or information when making an investment decision, and 0.26% for those who showed present bias, defined as the “tendency to overvalue smaller rewards in the present at the expense of long-term goals.”

Morningstar suggests these lower balances might have been motivated by bias-influenced behaviors. The study’s results show, for example, that as present bias scores increase, the odds of having higher debt increase by 1.19 times, while the odds of holding lower checking and savings account balances grow by 1.23 and 1.16 times, respectively.

The report goes on to explain how present bias has been observed in previous Morningstar studies, through behaviors such as higher credit card borrowing and procrastination on the decision to enroll in a tax-deferred savings plan, for example.

Additionally, the study found that higher bias scores could lead to increased biased behavior in participants. In the case of present bias, higher bias scores were related to having increased credit card debt, spending more than incomes and failing to pay bills on time. Generally, the Morningstar report correlated higher bias scores with worsening financial health scores, bad credit scores and lower net worth.

The report also touched on investor wealth and its ties to bias scores. Overconfidence, base rate neglect and loss aversion, or the tendency to be excessively fearful of experiencing losses relative to gains, were found to be harmfully correlated with income.

Similarly to how increased biases lead to worsening financial health, the Morningstar study says participants with low biases tend to have better financial outcomes. According to the report, people who scored low on present biases were 7.5 times more likely to plan ahead for their future than people with high present bias. These participants were also more likely to spend less of their income, be able to survive six months on their current savings, pay bills on time, save to invest and save for emergencies.

Morningstar also underscored several generational and gender differences, finding that women were more likely to show loss aversion biases compared with men. Additionally, younger investors, on average, demonstrated higher overconfidence scores. In its findings, Morningstar said Generation Z had the highest proportion of overconfident people, while the Silent Generation had the lowest number of overconfident people. Millennials were reported to have the largest proportion of people with high present bias (13%) compared with Baby Boomers (4%) on the low end.

Despite the generational and gender data, the study argues that financial health cannot be explained by demographics or individual characteristics alone, but, instead, is tied to the biases that each participant holds. Therefore, Morningstar recommends advisory groups should incorporate behavioral coaching into their practices. By testing clients for biases, financial advisers can recognize how these preferences are impacting an investor’s financial health. 

Furthermore, advisers can reach out to investors who may be more vulnerable to biases, to help them monitor their own decisions, Morningstar says.

More information on the study can be found here. 

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