Inves
tment Survey – Playing Favorites

When it comes time to help plan sponsor clients select and monitor investment lineups, advisers have clear favorites

Advisers frequently are wooed by fund wholesalers from across multiple fund families who try to convince the adviser that their particular fund group and offerings are the best, but what is it that really makes an adviser recommend a fund or fund family?

As was the case in PLANADVISER’s 2006 survey, (“Putting the Pedal to the Mettle," Winter 2006), once again we found that advisers most frequently rely on fund performance—specifically, consistent fund performance—in making their recommendations. In fact, most adviser respondents relied on performance versus benchmarks as their number one criterion when deciding which funds are appropriate for their plan sponsor clients, followed closely by five-year performance. It’s not surprising then that the five funds most likely to be recommended to plan sponsor clients by the nearly 200 adviser respondents to this year’s survey all have strong track records in the performance category. Advisers did seem to favor more equity-laden target-date strategies—beneficiaries of the market’s run (through July, anyway)—as half the advisers surveyed selected AllianceBernstein’s Retirement Strategy funds or T. Rowe Price’s Retirement Date Funds as their favorite lifecycle fund suite.

However, one should not think advisers are chasing returns—one-year performance ranks low on the totem pole of consideration criteria. Indeed, even when advisers included that shorter-term focus—after all, many of the current lifecycle fund offerings have only just come on the market—most ranked it fifth of five options.

Next most-relied-on in this year’s survey were manager tenure and style drift, elements that also speak to the importance of consistency. The fifth-most- cited criterion is the fee structure for the plan, something that was also in last year’s top five responses.

 Asset AllocationWhen selecting a fund lineup for the plan, almost nine out of 10 (86.4%) advisers recommend lifecycle or lifestyle funds for their plan clients, and 70.7% of those recommend target-date funds, compared with a mere 29.3% who said that they tended to recommend target-risk, or lifestyle, funds. This is a change over last year when target-risk funds seemed more popular, a shift that may be attributable to the Department of Labor’s focus on date-based solutions in the proposed regulations as qualified default investment alternatives, or QDIAs. Seventy percent of advisers look to nonproprietary funds, instead of those from the plan’s recordkeeper, when recommending a suite of either lifecycle or lifestyle funds to clients.

Demographics
Advisers report being paid in various ways for their qualified plan business. About half are still receiving commissions, at least for some clients, while the most common are asset-based fees. In the “other’ category, most report using a flat fee or fee-for-service model. In terms of other support, access to research was most commonly cited (75.6%), followed by marketing collateral, conferences, and practice management support.

Adviser respondents were nearly evenly split on the notion of recommending a minimum or maximum number of funds on the investment lineup. Those who did recommended a minimum of about 11 funds, on average, with a maximum of 18.7.

Methodology
In August 2007, subscribers to PLANADVISER magazine who had provided a valid e-mail address were sent a link to an online questionnaire developed by PLANADVISER. The list of advisers was derived entirely from PLANADVISER’s own proprietary database. We received 240 responses to the survey, of which 175 passed our eligibility criteria that the adviser be “personally involved in evaluating and recommending fund choices on behalf of qualified plan clients.’ The questionnaire consisted of approximately 20 questions about advisers’ favorite fund providers and fund options as well as questions about investment evaluation and selection for qualified plans. The survey also asked demographic questions about the size and scope of the adviser’s qualified plan business.

Respondent Demographics

Total Qualified Plan Assets

• Average: $1,191,585,037
• Median: $100,000,000

# of Qualified Plan Clients

• Average: 139.8
• Median: 35.0

Adviser firm affiliation

• Independent advisory firm/RIA/financial planner 59.90%
• Wirehouse or regional broker (full-time employee of such a firm) 32.00%
• CPA/accounting firm 1.20%
• Other 6.90%

Compensation for qualified plan business

• Commissions: 51.50%
• Asset-based fees: 77.30%
• Participant: 4.20%
• Other (most frequently, flat fee for service): 21.00%

Adviser Recommendations

What funds do you think belong in an ideal DC plan fund lineup?

• Large-cap value - 93.90%
• Large-cap growth - 93.20%
• Fixed-income/money market - 92.50%
• Target date - 76.90%
• Large-cap core - 74.20%
• Small-cap growth - 72.80%
• Small-cap value - 72.10%
• Mid-cap growth - 68.70%
• Mid-cap value - 66.70%
• Small-cap core - 65.30%
• Mid-cap core - 63.30%
• Target risk - 37.40%

Do you recommend a minimum or maximum number of funds?

• Yes - 48.70%
• No - 51.40%

If so, how many?

• Average: minimum - 10.8; maximum - 18.7
• Median: minimum -11.5; maximum - 20.0

If you do recommend lifecycle/lifestyle funds, are they usually:

• Target date - 70.70%
• Target risk - 29.30%

If you do recommend lifecycle/lifestyle funds, are they usually:

• Proprietary funds from the plan’s recordkeeper - 29.50%
• Nonproprietary - 70.50%

Favorite Funds and Fund Families

What is your favorite lifecycle fund suite?

• AllianceBernstein: Retirement Strategy - 26.30%
• T. Rowe Price: Retirement Date Funds - 25.40%
• John Hancock: JH Lifecycle - 20.30%
• Fidelity: Fidelity Freedom - 17.80%
• American Funds: American Funds Target Date Retirement - 16.10%

What is your favorite lifestyle fund suite?

• John Hancock: JH Lifestyle - 28.90%
• Russell Investment Group: Life Points Target Risk - 17.50%
• AllianceBernstein: Wealth Strategies - 12.40%
• Vanguard: Vanguard LifeStrategy - 11.30%
• Putnam Investments: Asset Allocation - 7.20%

Preferred fund families that are also recordkeepers (# of mentions in top 5)

• American Funds (63)
• Fidelity (50)
• MFS (24)
• Principal Financial Group (21)
• John Hancock Financial (19)
• T. Rowe Price (17)
• Vanguard (16)
• The Hartford (15)
• Oppenheimer Funds (15)
• Putnam (11)

Preferred fund families that are investment-only shops (# of mentions in top 5)

• AllianceBernstein (27)
• Davis (24)
• Columbia (21)
• Dodge & Cox (18)
• Thornburg (16)
• AIM (11)
• PIMCO (11)
• VanKampen (11)
• BlackRock (8)
• Janus (8)

Funds most likely to be recommended to a plan sponsor (# of mentions in top 5)

• American Funds Growth Fund of America (49)
• Davis New York Venture Fund (34)
• American Funds EuroPacific Growth (21)
• PIMCO Total Return (12)
• Thornburg International Value (11)

Interaction With Investment Providers

What kind of support services/tools do you currently rely on from fund families/investment managers?

• Conferences - 53.50%
• Sponsorship of certifications/designations - 26.80%
• Research - 75.60%
• Marketing collateral - 55.10%
• Practice management support - 35.40%
• Other - 15.00%