Despite the obvious service and value that financial advisers provide in helping a plan sponsor evaluate the choice of a QDIA, we sometimes hear from those who are concerned about the perceived value they add when recommending a packaged asset allocation solution. We’ve discussed this concern with financial advisers across the country who recommend target-date funds. From our conversations, we believe these ideas and approaches are effective:
- During conversations about target-date funds, look for an opportunity to ask a question like “How would you go about choosing a fund?’ Regardless of how sophisticated the sponsor’s response might be, the ensuing conversation should provide ample opportunity to talk about the considerations you take into account – and the value you add – when evaluating funds. Nearly 200 adviser-distributed target-date funds were available as of Q3 2007, and few are alike. Compounding the challenge of evaluating so many funds is the fact that differences go far beyond the obvious stock, bond and cash weightings in pie charts. Key distinctions like investment philosophy, allocation strategy, use of alternative asset classes and fee structures can be fairly complex.
- Point out the not-so-obvious ongoing costs of “doing it yourself.’ A solid asset-allocation strategy involves far more than buying a handful of ETFs or mutual funds in a plan’s self-directed brokerage option. Essential activities like proper diversification, rebalancing, and reallocation are time consuming and can be surprisingly expensive for participants who opt to go it alone. And of course, you can provide invaluable advice to sophisticated participants who wish to use a target-date fund as one of the components of their overall investment portfolio – which blunts the common objection that employees misuse target-date funds if they don’t invest 100% of their contributions.
- Build analogies with other professionals who get paid to add value. A plan sponsor’s interest in target-date funds presents a great opportunity to talk about the overall, often seemingly intangible value of the service and solutions you provide – especially for advisers who differentiate themselves with the level of service and education they provide to plans. You might ask a plan sponsor, for example, to describe why many of their employees are willing to pay a personal trainer to teach them how to do an exercise – and then pay the trainer every week to stand and seemingly do little but watch. Such a conversation should be an ideal platform for showcasing the value you add in terms of guidance, discipline, and motivation. Like that personal trainer, you are providing a solution that the sponsor and participants are unlikely to get without your help and counsel – and are almost certain not to stick with over time.
Above all, maintain the mindset of Red Adair, the legendary oil-well firefighter. I recently saw this Adair quotation prominently displayed on the side of an adviser’s computer: “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.’
Gary Terpening is Research Analyst, Seligman TargetHorizon ETF Portfolios of Seligman Advisors, Inc. The Funds are distributed by Seligman Advisors, Inc.
Diversification does not ensure a profit or protect against loss in a declining market.
The views and opinions expressed are those of the commentator as of the date stated, are provided for general information only, and do not constitute specific tax, legal, or investment advice to any person. Opinions, estimates, and forecasts may be changed without notice.
Investments by the Funds of Seligman TargetHorizon ETF Portfolios in ETFs involve risk, including the risk of loss of principal. An investor in a Fund will indirectly bear the operating expenses of the ETFs in which the Fund invests. The total expenses borne by the investor will be higher than if he or she invested directly in the ETFs, and the returns may therefore be lower. To the extent that a Fund has a substantial percentage of its assets exposed to an industry or sector though its investment in ETFs, the Fund’s performance may be negatively affected if that industry or sector falls out of favor.
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