Data & Research November 7, 2023

Money Markets Experience Highest 401(k) Investment Inflows in October

Alight Solutions’ 401(k) index also revealed 14 of the month’s 22 trading days favored fixed-income funds.

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Investors moving assets within their 401(k) plans last month sought safety in fixed income amid stock market declines, according to the Alight Solutions 401(k) Index released Monday.

When tracking investment moves within its recordkeeper database, Alight found that traders favored fixed income on 14 of 22 trading days in October, with money market funds seeing the most inflows by far (56%), followed by international equity (13%) and company stock (12%).

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“We can’t say for certain why individuals make trades. However, we know from the 25-year history of the Alight 401(k) Index, that people tend to trade into fixed-income funds when stock prices fall,” Rob Austin, head of research at Alight Solutions, said via email. “With October’s S&P 500 returns in the red, it isn’t surprising to see money market funds receiving net inflows.”

Austin noted that, unlike other parts of the investment market, interest rates are not the most influential factor affecting how investments will start moving if rates are expected to hold, or even fall, in 2024.

“Alight’s 401(k) Index started in 1998 and, since that time, we have found that stock market returns tend to be a bigger predictor of trading activity than interest rate movement,” he said. “Specifically, trading activity spikes when indices like the S&P 500 and DJIA fall significantly in a day.”

In terms of outflows, target-date funds (57%), mid-cap U.S. equity (20%) and small-cap U.S. equity (13%) saw the most departures, Alight found. New contributions to equities decreased slightly to 68.8% in October from 68.9% in September.

“The 401(k) Index shows only trading activity and does not reflect money leaving plans, so this is money traded to other investments,” Austin stated. “Because target-date funds receive the lion’s share of new contributions (51%) and are the largest asset class in the index (31% of balances), it is ripe for money flowing out.”

Moreover, Austin said that due to automatic enrollment, many participants are defaulted into the target-date funds. When these people change their investments, the money will inherently come from TDFs.

Overall, October trading was light, with just one above-normal day, Alight found. A “normal” level of relative transfer activity is when the net daily movement of participants’ balances, as a percent of total 401(k) balances within the Alight Solutions 401(k) Index, equals between 0.3 times and 1.5 times the average daily net activity of the preceding 12 months.

A “high” relative transfer activity day is when the net daily movement exceeds two times the average daily net activity. A “moderate” relative transfer activity day is when the net daily movement is between 1.5 and 2 times the average daily net activity of the preceding 12 months.

Alight tracks 401(k) trading by following trading activity of the 401(k) plans it administers for several large employers, said Austin. This forms the basis for Alight’s 401(k) Index; the firm does not necessarily know when an individual has somebody else trading on their behalf.

Client Service November 7, 2023

RIAs Already Spread Thin, Even as Clients Want More Services, Fidelity Finds

The firm’s RIA benchmarking survey revealed a drop in new client assets and identified an opportunity to be more ‘proactive’ as clients seek holistic services.

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Registered investment advisers saw a slowdown in organic asset growth through the end of last year, dropping to 4% growth at the end of 2022 from 8.2% growth in 2021, according to Fidelity Investment’s annual RIA benchmarking survey released Tuesday.

The decline was primarily driven by a lack of growth in new client assets under management, whether from newly added or existing clients, according to the firm. The drop was not due, as it may have been in the past, to clients departing or assets being withdrawn, says Anand Sekhar, vice president of practice management and consulting at Fidelity Institutional.

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Sekhar, who helps guide the creation of adviser tools and resources, believes advisers failed to gain new assets in part from hustling to bring in new, but ultimately smaller, clients in 2022.

“One of the reasons we believe that this happened is because in 2022, advisers were often acting in a way that was reactive, as opposed to proactive,” he says. “Because they were reactive, they didn’t have time to drive new growth from their existing clients. … Yes, they did grow, so it wasn’t zero, but they were really focused on protecting that base.”

In Fidelity’s report, which surveyed 245 RIAs, those with less than $1 billion in assets under management had an 84:1 adviser-to-client ratio in 2022, higher than the 71:1 ratio reported in 2017. Advisers with more than $1 billion in assets faced the same issue, showing a 84:1 adviser-to-client ratio last year, as compared to a 72:1 ratio in 2017.

Meanwhile, downward pressure on fees also caused strain. The size and frequency of fee discounting increased in 2022, according to Fidelity, with 70% of firms with less than $1 billion in AUM and 89% of firms with more than $1 billion in AUM offering discounts to clients.

Holistic Planning

In today’s RIA market, Sekhar says it is crucial that advisories are staffed to appropriately serve the full spectrum of client needs, from legacy planning to retirement to medical expenses. But that also requires the appropriate staffing considerations and levels.

“You want to have enough bandwidth and capacity to serve your clients and delight them,” Sekhar says. “To some degree, that means being more proactive than reactive, and that requires more capacity.”

Part of that need comes from clients wanting more. Today, investment management, financial planning and tax planning are table stakes that sit on top of areas such as retirement plan servicing, estate planning and risk and insurance strategies. Among RIAs in the survey, more than 50% reported offering all of the above services, with those with at least $1 billion in assets more likely to offer those additional services.

“If you rewind back 30 years ago, you could be a stock picker in our industry and be a very successful adviser,” Sekhar says. “You can no longer be a stock picker.”

He points to Fidelity’s Advice Value Stack, which starts with a client’s overall fulfillment and continues through peace of mind and achieving goals before landing at the bottom with the actual money management part of advisement.  

In order to meet those needs, however, RIAs will often need to outsource areas such as investment management to spend more time with clients, Anend says.

Managing Demand

Fidelity’s survey found that among firms with less than $1 billion in AUM, 26% reported outsourcing investment management and portfolio construction, up 8 percentage points from 2021. Among firms with more than $1 billion in AUM, that rate was 29%, a 7 percentage point jump from 2021.

Among those who reported outsourcing, 45% among those with fewer assets reported using model portfolios, and 37% noted managed accounts. Among group with more assets, 41% reported using model portfolios, with 54% using managed accounts, according to the research.

“It doesn’t make sense for an adviser who wants to really spend the time to get to know their client to spend time trading a small account,” Anend says. “We find that those firms do outsource into managed solutions and others end up gaining back time.”

For the report, Fidelity used an independent third-party research firm to survey 245 RIAs from April 17 through July 4.

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