Data & Research June 6, 2017

Americans Lacking Confidence in Retirement Savings

A new report by the Spectrem Group finds that several Americans lack confidence in saving properly for retirement, with the most concerned belonging to the Baby Boomer generation. 
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Even though the U.S. is experiencing a nearly eight-year strong bull market, which has seen financial markets climb in value by more than 300%, a large portion of investors worry about saving enough for retirement. That’s the conclusion drawn from a recent survey by Spectrem Group.

The firm’s study “Financial Behaviors and the Participant’s Mindset” found that 43% of respondents say they expect to have less than $500,000 saved for retirement. Only 20% think they’ll put away $1 million to $2 million, and just 5% think they’ll have more than $5 million saved.

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The majority of Millennials, however, are confident about their potential nest eggs. The survey found that more than half (60%) anticipate saving between $500,000 and $1 million.

Still, some research suggests that Millennials are overly hopeful about retirement. On the other hand, those closest to retirement appear the least confident about generating enough income in that phase. According to the report, more than half (56%) of Baby Boomers expect to have less than $500,000 in retirement. When adding in World War II-era investors, the figure jumps to 91%.

The reasons why participants are generally pessimistic about retirement savings are varied. Such reasons range from concerns over market volatility and current tax pressure to increasing health care costs. The firm found that 71% of respondents believe they pay too much in taxes. And while 75% think wealthier citizens should have the larger tax burden, 46% say they would like to see a flat tax rate levied on all citizens.

Managing health care costs in the future, however, seems to be the biggest obstacle to retirement saving. More than half (74%) believe this is a major issue.

To address that issue, plan sponsors and providers have been turning to integrating retirement planning and health care planning by utilizing different resources such as health savings accounts (HSAs).

Plan participants concerned about health care costs also worry about depleting their retirement savings. Less than half (48%) worry about paying too much in taxes or spending too much once they retire, the report says.

Information about downloading the full report can be found on Spectrem.com.

The Markets June 6, 2017

Managed Account Providers Focus on Consolidation

In this year’s survey by Cerulli Associates, platform consolidation regained its place as the top priority of managed account providers.
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The Department of Labor (DOL) fiduciary rule is affecting how managed account providers think about discretion, and it is shining a light on the risk associated with poor investment outcomes, according to a report from Cerulli Associates.

Platform consolidation has re-emerged as the top initiative for managed account providers, with 59.6% of those surveyed identifying it as their firm’s most important priority for 2017. Most firms anticipate completing their consolidation within two years, but a significant number (35%) acknowledge that the project may require more than two years’ work.

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“Under the rule, it is risky for firms to knowingly allow sub-par advisers to manage underperforming portfolios for clients when a better performing portfolio with a similar risk level is available from the home office,” notes Tom O’Shea, associate director at Cerulli. “Most of the executives interviewed by Cerulli believe that home-office discretion will increase as underperforming advisers are identified and gently coaxed into portfolios created by the headquarters consulting group. 

Still, a sizable minority of managed account firms do not plan to unify their managed account programs. Nearly one-quarter (24%) will continue to allow their products to exist on different platforms. If these firms persist in their plans to maintain separate managed account platforms, asset managers will confront a hybrid distribution environment where some providers have different platforms and others have a single consolidated one.

In 2016, managed account assets grew 13.0%, rebounding from an anemic 3.4% growth rate the year before and improving from $4.1 trillion to nearly $4.7 trillion. Unified managed accounts (UMAs), which exhibited a 21.6% rise in assets, are the second-fastest growing product category, surpassed only by exchange-traded fund advisory (ETFA) programs, which grew assets 33.5%.

Also in 2016, executives who oversaw managed account programs were distracted by two major concerns: how to respond to the rise of “robo” advisers, and the changes required to conform to the DOL fiduciary rule. Changing regulations—primarily the DOL rule—and the creation of a digital advice platform ranked No. 1 and No. 2 on the list of priorities of managed account providers, with platform consolidation in the No. 3 spot. In the 2017 survey, consolidation regained its place as the top priority of managed account providers.

Providers seeking to consolidate their managed account products acknowledge that they require significant time to complete these projects. One-fifth (22%) of providers believe they will complete their consolidation in six to 12 months. Just less than half (43%) anticipate these efforts taking one to two years, and one-third (35%) predict consolidation efforts will require more than two years.

NEXT: Price compression

 

Investors continue to grow more and more price-sensitive, Cerulli notes. A sales manager at a direct-to-consumer firm tells Cerulli, “In our past research, people used to be immune to fees … there was no price sensitivity. Now five out of 20 people we survey comment about expenses and costs.”

Providers are finding it difficult to reduce the total cost of ownership of a managed account by squeezing the price of the products offered through their platform. With a greater use of institutional mutual fund share classes, very little remains in the expense ratio to squeeze. Additionally, the low-cost substitutes for mutual funds that firms promote, such as exchange-traded funds (ETFs) and model-delivered separately managed accounts (SMAs), already sell with rock-bottom fees. As a result, many providers are beginning to explore the possibility that pricing pressure will compress the fee for advice.

A significant majority (79%) of managed account providers surveyed by Cerulli believe that the advisory fee portion of the total fee for a managed account will decrease over the next five years. Half (50%) of those who believe that advisory fees will decline agree this will be by 10%. Executives at wealth management firms understand that competition from digital advisers, greater transparency demanded of fees, and persistently low returns of diversified portfolios will continue to place pressure on the fees that advisers collect for the work they perform in delivering a managed account to a client.

Information about purchasing Cerulli’s latest report, “U.S. Managed Accounts 2017: Convergence and Its Implications,” is here.

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