Investment Analytics - Making Sense of It All
When it comes to helping plan sponsors evaluate investments for their plans, advisers have many directions in which they can head. Oftentimes they have access to a host of investment analytic tools, whether through broker/dealers, recordkeepers, or other affiliations.
When it comes to deciding how to select funds, some routes are well–traveled, but may not represent the best choice for all plans. Other paths may be less well-blazed but offer advisers some new ideas and options. Here are five ideas, some old and some new, for advisers to contemplate when it comes to using investment analytics for the betterment of plans and their participants:
Consider using outside investment tools. This includes tools such as FIRM, Fi360, Morningstar, or services offered by groups such as the Retirement Plan Advisory Group (RPAG), which include investment scorecards and fiduciary guidance. Having access to such tools, says Bruce Harrington, Director of Retirement and Product Strategy for John Hancock Financial Network, gains advantages for advisers akin to taxpayers using TurboTax rather than filling out a return by hand. These investment tools can help advisers write investment policy statements, map funds, compare existing fund lineups with other options, and monitor performance. They also help advisers avoid mistakes in fund monitoring by using up-to-date data, and the tools keep analytics current, because they are automatically populated. If an adviser goes it alone and downloads material from Web sites, the data often can be old and lead to mistaken analysis.
On the other hand, do not become too reliant on such tools.
Advisers may go astray if they depend on these tools alone, says David Boucher, a Principal with Longfellow Advisers. Many of these programs cannot track investments that stray beyond the primary mutual fund portfolio, such as target-based and lifestyle funds, separate accounts, collective trusts, asset-allocation models, and group annuities, because public information is not always readily available for such funds. For due diligence, advisers will have to track some of these investment products through old-fashioned, solid research, according to Boucher.
Model portfolios may be a good solution, but can require extra due diligence. The push toward asset allocation models may be a boon to participants who have scant idea what to do with their 401(k) assets, but these products also can add an extra burden of responsibility onto the laps of advisers and plan sponsors. Typical analytic tools may not work for asset models, because they generally do not cover all share classes. And, while advisers can influence the composition of a plan’s core investment lineup, they may have little say in the way asset allocation models are constructed if those models are constructed by an outside provider. But that situation is changing now, according to Darrin Farrow, a Principal and Financial Adviser with the Cleveland firm of Rehmann Financial, which advises plan sponsors. He says recordkeepers are beginning to allow plans to help create their own asset allocation models to mesh with the specific demographics of their workforce. A model for a group of doctors, for instance, might differ from a plan for a retail sponsor with lots of employee turnover or a manufacturing firm with less sophisticated investors. The adviser should be the point person in this process—linking the recordkeeper and plan sponsor or plan investment committee. Advisers then can use the same analytic tools on asset allocation models, whether target-date or target-risk, that they have relied on to assess core investment funds.
Investment analytics can be complex and arcane. So, advisers must demystify the language of reports and convey the data to sponsors in simple terms that clients can understand. A lot of investment analytic tools are written for the adviser, to give in-depth analysis, but not in a format that many sponsors can understand, says Scott Revare, the CEO of the Center for Fiduciary Management, which provides the tool FRM. Reports to sponsors based on analytics should be composed in the language of the sponsor, not in the jargon of the investment community. FRM, for instance, issues reports that a corporate executive might understand, relying on concise language and using techniques like color coding and executive summaries.
Make sure to customize investment strategies for each plan. It is important for advisers to help develop an investment strategy or philosophy that fits a plan and its participants. All plans are not alike. They can have vastly different participant demographics. A fund menu for employees with little sophistication should differ from that of a plan with investment-savvy participants, say Revare, Farrow, and Boucher. Similarly, some participant populations are comparatively old, others young. Manufacturers in rural areas often have employees who remain for decades. Urban retailers, conversely, see constant turnover. An investment lineup should reflect those varying demographics by making it more conservative or aggressive, and by choosing funds with the potential for quick gains if employees are generally short-term, as opposed to longer-term payoffs if the workforce is more stable. So should the number and style of funds offered. Do not simply accept funds offered by a proprietary investment manager, advise Farrow and Boucher. Developing a suitable investment philosophy also helps if the Department of Labor questions how a plan’s portfolio was constructed. “Create an investment philosophy you can define and defend,” says Boucher.
—Louis Berney
Advisers Move into Equities, Away from Treasurys
Advisers will be advising clients to move into domestic equities, emerging market equities, and global developed market equities and away from Treasury bills, U.S. fixed income, and cash, according to a recent survey from Aberdeen Asset Management.
The survey of financial advisers across wirehouses, regional brokerage firms, independent wealth management shops, and other investment advice providers found 46% of advisers plan to increase the allocation of clients’ assets to U.S. equities (S&P 500 Index); 38% plan to increase the allocation to emerging markets equities; and 34% to global developed equities.
Contrarily, 58% plan to decrease their allocations to Treasury bills; 42% plan to decrease their allocations to U.S. fixed income; and 42% plan to decrease the allocation to cash.
Regarding emerging market equities, 44% of advisers will recommend that clients allocate between 6% and 10% to those funds, while 25% of advisers polled will recommend clients allocate between 11% and 20% to emerging market equity funds. As for percentages dedicated to emerging market fixed-income funds, 43% of advisers will recommend clients allocate 0% to 5% to those funds; 35% of advisers stated they will recommend clients allocate six to 10% to emerging market fixed-income funds.
Most (60%) of the advisers prefer to invest in open-ended mutual funds when increasing allocations to international or emerging markets, while 24% stated a preference for exchange-traded funds (ETFs) when investing in international or emerging markets.
This survey was conducted online within the United States by Harris Interactive on behalf of Aberdeen Asset Management Inc. between March 15, 2011, and March 22, 2011, among 805 investment professionals. —PA