Compliance July 18, 2008

ICI Pushes DoL for More Employee Advice

The Investment Company Institute (ICI) urged the Department of Labor (DoL) to provide workers and retirees with more access to advice and education about managing assets and income in retirement.
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ICI testified before a working group of the DoL’s ERISA Advisory Council, highlighting its research that retirees often consult financial advisers, written and online information, and financial software tools when deciding how to manage their defined-contribution plans at retirement, according to statement from the ICI.

“Individuals have vastly different needs for retirement asset and income management, and different products are designed to meet these needs,” said Sarah Holden, ICI’s senior director of retirement and investor research, reported to the Advisory Council. “How they choose to use their retirement assets depends on a number of factors including age, health, and personal and family needs.”

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ICI said the DoL should foster the development of education and advice programs to help people weigh these factors and make sound decisions at retirement. To do this, ICI recommends the DoL adopt regulatory policies to facilitate better use of advice programs and further develop educational materials. The institute also recommends the DoL provide more educational resources itself.

“These recommendations are based on the fundamental tenet that the decision of how to take a distribution at retirement is highly individualized,” Holden said in her testimony. “Investors must consider their own personal circumstances and the objectives, limitations, and cost of the options available. The Department of Labor should continue to build upon its efforts to educate individuals about saving and investing, to include materials on making retirement distribution decisions.”

In Practice July 18, 2008

Advice is Value Added

A Cerulli study says the role of financial planning is becoming more important in client relationships.
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In the current marketplace, creating alpha is increasingly about creating more value in the advice relationship. As investment management becomes more commoditized, broker/dealer (B/D) firms are turning to more comprehensive advice delivery to add meaningful value and differentiation to their client relationships, said Cerulli Associates, in a release.

To capture this, advisers should not try to tout esoteric investment philosophies—as Cerulli put it: “Explanations of firms’ investment philosophies sound like the mumbles of Charlie Brown’s teacher to most of the investing public.” Rather, advisers need to construct a plan using these tools to meet a client’s goals. “Providing investment advice independent of financial planning is like a doctor writing prescriptions without examining the patient,” said Scott Smith, senior analyst at Cerulli Associates, in the release.

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More B/D firms are making financial planning advice less of an afterthought and more of a core component by encouraging their advisers to embrace the growing demand for advice delivery, according to Cerulli. But how can advisers balance the cost and time of this? Cerulli said firms must assist advisers with upfront costs. Also, well-integrated planning systems can help—but are quite pricey.

“Firms truly committed to increasing advice delivery will need to integrate planning into their core desktop systems to minimize adviser resistance,” Smith added.

In these volatile markets, increased emphasis on financial planning can help advisers strengthen client relationships. Positive investment performance is not exactly there to boost client confidence. Cerulli said an adviser more focused on financial planning will be able to focus clients on the question of, “Will I still be able to retire on time?” instead of, “How much have I lost this quarter?”

At the end of the day, Cerulli noted that clients remain the judge of whether an advice delivery model is valuable. By focusing on long-term, advice-centric relationships, the financial advice industry will create a win-win situation beneficial for client outcomes and adviser business.

These findings were in the Cerulli report Financial Planning: Trends in Advice Delivery.

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