Story
Advisers look beyond performance in making fund selection but not much further
Today’s open-architecture environment “norm" affords plan sponsors and retirement plan advisers alike near untrammeled access to a vast array of investment choices. Buoyed by the recent market resurgence, fund complexes once more are flush with cash and apparently willing to spend it in the service of gaining the attention of advisers who, in turn, can help those offerings gain access to retirement plan platforms.
That being said, a recent PLANADVISER survey of nearly 500 advisers found that what matters most—what seems almost to matter only—is performance.
In fairness, while performance—more specifically, performance versus benchmarks and performance over time (five years)—clearly dominated the attention of adviser respondents, that was not the sole criteria. Manager tenure—which admittedly contributes mightily not only to performance, but also to the consistency of that performance—was cited by two-thirds of our survey respondents. A focus on performance consistency also was evidenced in the degree of attention to style drift.
However, adviser respondents also were clearly attentive to the specific influences of the Employee Retirement Income Security Act (ERISA), and the attendant fiduciary obligations. Fee structure for the plan was cited more frequently than style drift by survey respondents, and plan demographics were also prominent in the ranking.
Still, with the thousands of funds available to retirement plans, how can an adviser best determine the appropriate mix of funds and fund characteristics? How can that mix be adequately monitored and maintained?
The challenge lies not in the paucity of data, but in its proliferation. There are, of course, a multitude of resources for an adviser to use, including stand-alone investment analytic offerings (see “Finding a Good Fit,’ page 62); resources offered through broker/dealers; and an expanding variety of tools available through retirement plan recordkeepers, fund families, and their wholesalers. The potential of the combination—properly managed and balanced—provides the committed adviser with a unique perspective to appreciate and evaluate fund providers and their offerings.
Advisers surveyed keep themselves busy monitoring fund families; they actively monitor an average of 25 and a median of 15 fund families, choosing to work with an average of about 18 fund families and a median, and thus more common, universe of 12.
Asked what type of support material, beyond investment performance, they relied on regarding those investment funds, the most common answer was some other sort of quantitative data surrounding an investment, including the use of investment analytic tools (primarily Morningstar, Lipper, and Zephyr), analyst reports, expenses, fact sheets, manager commentary, and prospectus information—all of which support the prominent focus on tenure, style drift, and fees cited above. However, more than one in 10 told us that they do not rely on any other support material regarding funds. Further, when we asked plan advisers what types of support material they would like but do not currently have access to, almost half (42%) said, “Nothing.’
Visibility Issues
Investment management firms that also offer recordkeeping services clearly have an inside track when it comes to menu access. In fact, more than three-quarters of the firms cited by survey respondents offer retirement plan recordkeeping services. It is also clear that stellar performance track records matter. One need look no further than the dominance of American Funds (not only in our respondent citations, but in industry fund flow tracking) to see the proof that “if you build it, they will come.’ What is less clear, perhaps, is how less dominant brands, particularly among “investment only’ shops, can successfully gain the attention of advisers—to find a way to crack into that dozen or so fund families that our adviser respondents work with on a regular basis. The answer—for the moment, at any rate—seems to be performance, performance, performance.
Of the advisers we surveyed, when they were asked to list the top five fund families they do business with, the firms that garnered the most number-one votes were American Funds, The Principal, Merrill Lynch, Putnam, and AllianceBernstein. The top five most frequently mentioned companies were American Funds, Oppenheimer, Fidelity, Vanguard, and Franklin Templeton.
Despite the articulated emphasis on performance, if advisers were truly that myopic, one might expect that the top five funds with which advisers work and the top five most frequently mentioned would overlap more significantly. This apparent discrepancy may well suggest that, while retirement plan advisers are clearly attentive to that measure, the final determination is a more sophisticated integration of factors.
Targeted Solutions
In the world of investment options, lifecycle and lifestyle funds have been a hot commodity in the last few years, and that will likely continue, with the passage of the Pension Protection Act of 2006 and the proposed guidance from the Department of Labor suggesting that lifecycle funds might be part of a safe-harbor default investment for retirement plans. However, their prevalence is already significant in the adviser community: Almost nine out of 10 advisers surveyed recommend lifecycle and lifestyle funds to their plan sponsor clients. Of the advisers who currently recommend such funds, slightly more than half (52.8%) recommend target-risk funds over target-date funds, a finding that runs somewhat counter to a current industry trend toward target-date funds. In its current form, the DoL’s qualified default investment alternative (QDIA) proposal exhibits a clear preference for date-oriented choices—and target-date funds have been generating a lot of interest for their simplicity of a selection based on a withdrawal date (some argue that there is a fine line between simplicity and oversimplification—and that the involvement of a skilled adviser makes risk-based funds a more appropriate choice). Sixty percent of advisers do not bind themselves to recommending lifecycle or lifestyle funds from the plan’s recordkeeper, opting instead for nonproprietary funds.
Methodology
In September 2006, approximately 8,000 advisers that service defined contribution (DC) plan clients were sent a link to an online questionnaire developed by PLANADVISER editorial and research staff; 452 usable responses were received from qualified plan advisers. The list of advisers was derived entirely from PLANADVISER's own proprietary database. The questionnaire consisted of approximately 40 questions, including a section on investment evaluation and selection process vis à vis qualified plans, as well as questions regarding the size and scope of the adviser's qualified plan business and assessments of defined contribution providers, which was published in the Fall issue of PLANADVISER.