The Markets February 4, 2014

New Year Brings Pension Setback

Funding levels of pension plans sponsored by S&P 1500 companies fell 6% in January, according to data from Mercer.
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This resulted in a funded ratio (assets divided by liabilities) of 89% at the end of the month. The collective deficit of $232 billion as of January 31, 2014, is up $129 billion from the estimated deficit of $103 billion as of December 31, 2013.    

In addition, steep U.S. equity market drops on the first trading day of February are estimated to have shaved nearly 2% more off of the funded status.

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Equity markets fell more than 3% during January, based on the S&P 500 Index. Compounding problems, the yields on high grade corporate bonds also fell, leading to an increase in pension liabilities. The Mercer Yield Curve discount rate for mature pension plans dropped 35 basis points during the month after having risen almost a full percent during 2013.

“This was a rough start to the year for plan sponsors.” says Jonathan Barry, a partner in Mercer’s retirement business. “After a record-breaking 2013 in terms of funded status improvement, it hurts to see such a big step backwards right out of the gate in 2014. 

“This downturn serves as a reminder that there is still a great deal of risk in U.S. pension plans. There are many opportunities available for sponsors to manage this risk, although sponsors need to be prepared to move quickly when opportunities present themselves. Even with this dip in January, funded status and interest rates are still well above where they were last year, and the recent increases in PBGC premiums are making many sponsors consider funding their plans more aggressively as well as looking at risk transfer strategies such as cashouts and buyouts. We still see 2014 as being a big year in terms of pension risk management initiatives.”

Mercer’s Pension Buyout Index shows that as of the start of the year, pension buyouts are a more attractive option than before (see “PBGCPremium Hikes Shake Up Buyout Landscape”).

Data & Research February 4, 2014

RIA Revenues Jump 18% in 2013

Strong market performance helped registered investment advisers (RIAs) increase practice revenues by 18% last year, and growth prospects are good for 2014.
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RIAs generally feel good about their business outlook for 2014 and beyond, new research from TD Ameritrade Institutional shows. The optimism is fuelled in large part by a 20% growth in assets under management and a double-digit gain in new clients coming out of 2013.

Market expectations among RIAs are also positive, with nearly nine out of 10 (88%) RIAs expecting stock prices to either continue their upward momentum or to level out and end 2014 relatively unchanged. Advisers are somewhat less enthusiastic about the historically low-yielding bond markets, though, with 41% believing bond process will start to fall during 2014 in opposition to widely expected interest rate increases.  

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“After another year of double-digit growth on all fronts, advisers have greater enthusiasm about their prospects,” says Tom Nally, president of TD Ameritrade Institutional. “They’re building on last year’s momentum and serving clients better by making strategic investments in people and technology.”

In keeping with that view, RIAs say they are moving client assets into equities and out of fixed-income investments. Equities comprised 54% of client portfolios at the beginning of 2014, compared with 48% at the start of 2013, and fixed income averaged 23% of portfolios, down from 27%.

Another notable trend highlighted by TD Ameritrade Institutional shows a strong minority (42%) of RIAs are searching outside of the traditional bond and equity markets for higher yields. These advisers are investing in asset classes such as international stocks, real estate and energy funds. Seventy percent of RIAs continue to use exchange-traded funds (ETFs) for at least some of their clients, and 37% say they will actively increase their usage of these vehicles over the next 12 months.

Looking Ahead

TD Ameritrade Institutional finds that RIAs are concerned most over pending regulatory issues, while client referrals and technology improvements represent the most promising growth areas.

A full 71% of RIAs claim the potential burdens and costs they would face from changing regulations are the biggest competitive challenge for 2014 (see “DOL Issues 2014 Retirement Plan Pipeline”). Other prominent concerns include the number of investors choosing to handle their own portfolios (33%) and broker/dealers offering competitive fee-based management services (32%). RIAs also see bringing in a new generation of clients to replace older clientele as a priority this year.

“The biggest hurdles to adviser growth won’t go away overnight,” says Nally. “It will require persistent effort over time and a long-term view to successfully work through increased compliance requirements, changing rules and a graying client basis.”

To address this, many RIAs are moving forward with firm-wide strategic initiatives that were put in place during 2013, such as implementing new technology to increase scale, establishing better client service programs and developing new talent. TD Ameritrade Institutional’s analysis shows that about two-thirds of RIAs say they are increasing spending on technology this year, and more than a quarter plan to hire junior advisers to accommodate future growth. Increasing resources for compliance, at 23%, rounds out the top projects on RIAs’ to-do lists.

With clients now averaging 55 years of age or older, RIAs says they are increasingly recognizing that sustainable practice growth must come from the next generation of investors. Despite that realization, advisers are struggling with the right approach. More than half of RIAs say they would be interested in a turnkey program to that could help hire interns and junior advisers. And given the rising popularity of start-up online financial advisers, about 60% of RIAs would like to offer their own online financial advice services to existing clients.

Those desires should result in increased marketing spending among RIAs in 2014, TD Amertirade Institutional says. In fact, 40% of RIAs say they will increase spending on marketing and business development during the first half of the year, and 58% will maintain their current marketing budget. Efforts will be centered on increasing referrals from clients and “centers of influence,” such as attorneys and accountants, which advisers indicate are among the top drivers of external growth.

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