The Markets October 17, 2017

Advisers More Apt to Use CITs in Client Portfolios

Cerulli maintains that as financial advisers become more educated about CITs, the more likely they are to use them in client portfolios.
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Defined contribution plans are increasingly using collective investment trusts (CITs) in their investment portfolios, according to a recent study by global research firm Cerulli Associates. The firm credits this trend to fee sensitivity, the threat of litigation and awareness of CITs.

“As of 2016, CIT assets were almost $2.8 trillion, which is a major increase from 2011, when assets had yet to cross the $2 trillion mark,” says Christopher Mason, a senior analyst at Cerulli. “This increase in assets reflects an 11.6% increase from 2015 to 2016, which is the first year of double-digit year-over-year growth.”

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“The primary source of growth can be explained by the fact that CITs often are priced lower as compared to mutual funds of similar strategies,” continues Mason. “However, when examining the driving forces behind the demand more closely, we see that the threat of litigation is putting pressure on plan sponsors to ensure that related fees paid reflect the best interest of the plan participants.”

In addition, the firm says increasing awareness and education of CITs are also driving up adoption. “This year’s survey by Cerulli found that 81% of CIT managers perceive consultants to be very knowledgeable about CITs, with the remaining 19% indicating that they are somewhat knowledgeable,” explains Mason. “These findings stand to reason that as consultants become more educated about CITs, they are more apt to use them in their clients’ portfolios.”

“On the other hand, the majority of surveyed managers believe financial advisers are somewhat knowledgeable regarding CITs, while only 14% believe them to be very knowledgeable,” says Mason. “Financial advisers’ familiarity with mutual funds, along with marginal differences in cost compared to CITs, cause them to be more apt to turn to mutual funds.” Cerulli maintains that as financial advisers become more educated about CITs, the more likely they are to use them in client portfolios.

In fact, the study finds that a need for education around investments is also contributing to CIT growth as “asset managers are searching for third-party help as the world of investing becomes too complicated to go it alone.”

Cerulli’s fourth quarter 2017 issue of The Cerulli Edge – U.S. Institutional Edition examines the forces creating demand for CITs and outsourced chief investment officers (OCIOs). Information about purchasing Cerulli reports can be found here.

Compliance October 17, 2017

PANC 2017: Fiduciary Differentiation Is Difficult

The definition of the “fiduciary duty” has dominated headlines and discussions for years in the retirement plan industry—and for good reason—but among plan sponsors, the topic remains poorly understood. 
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The third and final day of the 2017 PLANADVISER National Conference in Orlando opened with a frank discussion about how difficult it is to educate plan sponsors on the varying responsibilities they carry as Employee Retirement Income Security Act (ERISA) fiduciaries.

As laid out by Heidi LeMieur, director of client relations for the Retirement Learning Center, changes made to the fiduciary rule by the now-long-gone Obama administration were very significant and are still poorly understood by many plan sponsors. Further complicating the situation is that the Trump administration and the Republican-controlled Congress have pledged to make their own changes to the ongoing reforms.

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Along with fellow panelist Steve Niehoff, chief operating officer (COO) at the Pension Resource Institute, LeMieur suggested that most plan sponsors have an understanding that there has been a shift in the fiduciary landscape, but the finer points of the reforms elude them.

“For example, we know that even before the recent changes, sponsors did not fully understand the different levels of fiduciary service, from 3(38) to 3(21) to 3(16),” Niehoff said. “They especially don’t really understand that there is diversity even within these three categories in terms of exactly what the provider is pledging to do by taking on a given fiduciary status. For that reason, it is important to step back and make sure the sponsor understands its full set of responsibilities.”

LeMieur reminded advisers that the lack of fiduciary awareness is both a challenge and an opportunity facing the industry: “As an adviser, this can be a big opportunity, working across all the different areas of the plan and ensuring the sponsor understands its various duties. If you are a good fiduciary educator, you can become even more indispensable to the plan sponsor than you already are.”

Niehoff further observed how “more so than ever, we have clients asking what it means to be a fiduciary.”

“They want to hire you because they are not expert in this subject and they need guidance,” he explained. “At the end of the day, they want to know, ‘What is it you can do for me in this part of my business?’ That’s an important point, because for many plan sponsors, the retirement plan is just that—a small part of what they have to worry about on a daily basis.”

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