In Practice October 31, 2007

Cerulli Report Highlights Areas for RIA Growth

The registered investment adviser (RIA) industry has grown significantly in two years, driven by growth of existing firms, new entrants to the market, and the growth of the capital markets.
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The industry has grown from approximately $950 billion and 11,745 firms in 2005 to $1.4 trillion and 14,451 firms in 2007, according data from Cerulli Associates.

Dually registered advisers saw the greatest growth over the last three years in terms of number of firms, indicating this is an entry point for many new RIA firms, according to “Registered Investment Advisors (RIAs): Evaluating Opportunities in a Maturing Marketplace,” the most recent release in The Cerulli Report series. Additionally, Cerulli said advisory firms without a broker/dealer affiliation are generally larger, indicating many firms drop their broker/dealer affiliation after reaching a certain level of scale.

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Challenges for RIA firms reported by Cerulli included investing in technology and people – two infrastructure investments an RIA must make in order to help their firm run more efficiently. Almost half (47%) of RIAs said they believe compliance is the greatest challenge facing them currently, the press release said.

Areas and Aid for Growth

 

More client wealth and referral sources for clients are two marks of an advisory firm that is growing quickly. Cerulli said growing adviser firms address wealthier clients and shape their marketing plans in order to attract more target clients.

In addition, Cerulli identified multigenerational wealth planning as an emerging advice trend for RIAs.

Service agents can be a source of the necessary tools to help an RIA practice grow. Cerulli said in the release RIAs who use service agent technology experience more efficiency as many of the connections between programs are already built in.

On the other side of the coin, best practice-service agents understand they can grow their business by helping their RIA clients grow business. However, Cerulli warned service agents must respect the independence of RIAs when demonstrating tools for their business.

Cerulli found an RIA’s decision to use a specific service agent is often driven by several elements of his or her practice, including AUM (assets under management) and the type of practice. RIAs will choose to use the service agent whose services best align with their business.

The Future of the RIA Industry

 

Going forward, many RIAs are open to new ideas on how to build better client portfolios, Cerulli said. Providers selling into RIAs would do well to remember it is not a classic, performance-oriented sale – 66% of RIAs always use an investment policy statement, compared to 23% of broker/dealer reps. Instead, the sales focus should be more institutional, with a focus on investment process and risk controls.

Cerulli reported new advisers are entering the industry with better education and more experience than ever before, and are more frequently coming from independent firms and insurance broker/dealers than wirehouses. Additionally, the RIA channel has also become an entrance point for second-career professionals who wish to become financial advisers, the press release said.

Finally, Cerulli said as the early entrants to the RIA space move toward retirement, they are beginning to think about their succession plans – 26% of RIAs that plan to sell their practice plan to sell it to existing employees.

More information can be found at www.cerulli.com.

Data & Research October 31, 2007

Participation Rate Not The Only Plan Success Metric

A new survey has found many plan sponsors concentrating not just on snagging 401(k) participants, but helping them to save enough for retirement.
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A Hewitt Associates news release said its poll of more than 300 of mid-to-large companies with 401(k) plans found that sponsors were not only increasingly embracing auto enrollment, but defaulting participants into diversified portfolios – often at a 3% level. Only 25% of companies viewed a high participation rate as the primary measure of success for their 401(k) plans, down from 43% in 2005.

Hewitt said its latest survey found that 34% of companies automatically enrolled employees in their 401(k) plans in 2007, up from 19% in 2005. Of those, more than 77% defaulted employees into a diversified portfolio, such as target- risk, target-maturity or balanced funds – a drastic hike from the 39% in 2005.

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Default Choices

More than 50% of plans involved in the survey utilize target-maturity portfolios as a default while 83% set their default contribution rates as 3% or higher, compared to just 66% who did so two years ago. Not only that, Hewitt reported, 28% of companies used contribution escalation in conjunction with automatic enrollment, with more than 40% of companies escalating employees to target rates between 8% and 15%.

Plan Fees

Hewitt’s study also shows that an increasing number of companies are taking a closer look at 401(k) plan fees, a trend due, in part, to an upsurge in government and media scrutiny. In fact, 61% of employers noted they are very or somewhat concerned about plan expenses.

A similar number of employers (60%) have attempted to calculate the total cost of maintaining their 401(k) plan – an increase from 34% in 2003 – and more than half (57%) have made efforts to reduce fund or plan expenses in the past two years. Forty percent of employers noted they were planning to evaluate the cost of their funds.

“It’s obvious that today’s employers understand that the majority of their employees take a back seat in managing their retirement. This is why we continue to see a steady number of companies putting their 401(k) plans on autopilot and adopting features like automatic enrollment,” said Pamela Hess, director of retirement research at Hewitt Associates, in the news release. “What’s encouraging is that companies realize that simply automatically enrolling employees into the 401(k) plan will not get workers where they need to be in terms of retirement savings. Employers are helping their employees obtain sufficient retirement income by picking more appropriate default contribution rates and investment funds, and coupling automatic enrollment with other automated tools that force employees to save and invest more wisely.”

Investment Options and Services

The average number of core investment options increased from 14 to 17 in the past two years. Excluding target-risk and target-maturity funds the average went from 10 to 12 options. The most popular asset classes remain stable value (84%), bond (88%), large-cap U.S. equity (98%) and international equity (97%).

More than three-quarters (77%) of employers now offer target-risk and/or target-maturity portfolios, up from 63% in 2005. Among those plans, 58% offer target maturity funds portfolios, 31% offer target-risk, and 10% offer both.

The number of firms that offer outside investment advisory services has grown to 40%, up from 28% in 2003. The types of services vary with 20% offering online advice and 11% offering managed accounts.

Nearly 60% of employers offer non-mutual fund alternatives as part of their 401(k) plan. Among plans with over $1 billion in assets, 46% offer only institutional vehicles, while only 12% offer none or only one institutional option.

About one-quarter (23%) of companies offer employer stock match exclusively in company stock, down from 36% in 2005. Among those that match exclusively in company stock, 67% allow employees to diversify/transfer out any time, up from 24%in 2005.

Copies of the complete report, “Trends and Experience in 401(k) Plans,” are available at (847) 771-2500 or infodesk@hewitt.com.

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