Data & Research August 15, 2011

Market Volatility Causing Clients to Seek Additional Support

A recent report from Cerulli says that current market volatility is likely to spur more clients to seek additional support, as was the case in 2008.  
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Cerulli’s latest research shows that advisers tend to gain more clients during times of market volatility. Some of the largest increases in advisory relationships can be seen with high-net-worth households, it says. In 2011, 58% of investors with greater than $5 million in investable assets employed multiple advisers, versus just 27% when aggregating all wealth levels for a combined view.

Cerulli has been studying this trend for several years, and notes that the average number of advisers used by households has increased across all wealth tiers and investor types. It says this is due to non-advice users seeking advice for the first time, as well as advice seekers adding secondary and tertiary advice relationships.

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Amidst the market downturn, loss of trust has driven clients to take control of their finances, according to Cerulli, as well as seek additional input.  Therefore, advisers need to carefully assess the strength of their client relationships and their influence.

“Interestingly, advisers are well aware of their clients’ outside relationships and accurately estimate the percent that have multiple relationships. Our research shows that advisers estimate 30% of their clients have multiple advisers, which is slightly higher than the 27% of investors that report as such. So, advisers have an accurate view of what their clients are doing,” comments Katharine Wolf, senior analyst and head of Cerulli’s investor practice.

“We believe investors will eventually reconsolidate their assets as they tire of overseeing multiple relationships. However, given the most recent volatility, more clients are likely to see additional advice as there is just so much uncertainty right now. However, advisers should be thinking about the long term and position themselves to benefit from the eventual reconsolidation, since secondary relationships will lose assets to favored advisers,” she added.

The Markets August 15, 2011

S&P Issues Report on Mid-Cap Funds in DC Plans

An S&P report contends that if the goal of employers is to offer retirement plans that are capable of generating adequate retirement funding for participants, then index funds should play a central role in defined contribution lineups.
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In its report, “Mid-Caps in DC Lineups: Considerations for Plan Sponsors,” S&P looks at why the vast majority of defined contribution (DC) plans offer at least one index fund, which are mostly concentrated in the large-cap segment of the U.S. stock market.  Passive funds representing other asset classes are offered in far fewer plans, which may be due to popular misconceptions about the efficacy of indexing in markets that are perceived to be less efficient than large-cap equities.  S&P considers the basis for this perception, and explains why it believes the notion is unfounded for mid-cap equities.   

While companies in the mid-cap segment of the stock market are more mature than small-caps, many may have strong growth potential relative to large-caps. Their unique fundamentals produce a distinct performance profile, says S&P. Over the past decade, many investors – and the fund industry – seem to have embraced the notion of including a dedicated allocation to mid-cap equities in their portfolios. The number of actively managed mid-cap mutual fund products increased from 216 at the beginning of 2000 to 461 at the beginning of 2010. 

The report also asks if DC plan participants are well served by actively managed mid-cap choices, or is this a relatively efficient asset class where indexing works? Analysis shows that more than three quarters of the most widely used mid-cap funds in DC line-ups have underperformed the S&P MidCap 400 over the three years ending March 31, 2011.  

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Picking active mid-cap managers is risky for plan sponsors, the report said. Over three-, five- and ten-year periods, active funds that failed to beat the benchmark did so by a significantly larger margin than the amount by which outperformers beat the benchmark.  

Despite this evidence suggesting indexing mid-cap exposure is highly effective, less than 20% of DC line-ups in the survey have a passive mid-cap option available for participants.  Contrary to conventional wisdom, indexing is a highly effective means of gaining exposure to market segments beyond large-caps, S&P notes. Mid-caps are not immune to the “arithmetic of active management.”

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