Data & Research February 17, 2007

Retirement Coaches “Suiting Up″

As the nation’s workforce ages, a new study suggests that one in five advisers are already positioning themselves as “retirement coaches.″
Reported by
The national survey of Registered investment advisors (RIAs), released by Rydex AdvisorBenchmarking, Inc, also indicates that just over half (51%) of advisors are developing tools and resources to assess clients’ retirement readiness and identifying areas where they need additional support.
Looking ahead to the future, 26% are seeking to build strong relationships with the children of their clients and 24% are seeking to become retirement experts by taking educational seminars and courses. Seventeen percent are partnering with other professionals who offer services to pre-retirees.
Work Ahead
They have some work to do, however. While the advisers surveyed feel well-equipped to handle the investment side of the retirement equation, they’re not so prepared in the non-investment areas. For example, most ranked themselves as well-equipped in the areas of wealth retention (64%) and income-related investments (64%), while 48% claimed to have adequate knowledge of retiree health care issues (48%) and retiree living arrangements (50%). About one third of advisors are planning to increase their expertise in these areas (28% health care and 34% living arrangements). Still, 17% who admit they do not have familiarity with retiree health care issues do not plan to enhance their understanding of this topic, while 10% of advisors felt the same way about retiree living arrangements.
Maya Ivanova, research analyst for Rydex AdvisorBenchmarking, Inc., noted that, “Retirement is no longer just an investment equation for advisors. To truly be a ‘retirement coach,’ as nearly one fourth of advisors are striving to do, advisors will need to provide their retiree and soon-to-retire clients with comprehensive solutions and advice — beyond just investments. Those advisors who can provide a total package to their clients will differentiate themselves in the market and be more successful than their counterparts who don’t.”
Alternatives Eyed
RIAs surveyed also plan to ramp up their use of alternative investments (such as hedge funds, real estate, commodities, currencies and managed futures) in the next five years, according to a the survey. While many advisor respondents (42%) have moderately increased their use of alternative investments (0 to 25% in the past five years), another quarter (24%) have increased their use of alternatives by more than 100%. Advisors largely attribute the increased interest in alternative investments to their desire to access alternative investment strategies and pursue alternative returns, according to a press release regarding the survey.
The survey also noted that: 55% of advisers estimate that they will increase their use of alternative investments up to 25%, while 13% believe they will increase their use of alternatives by more than 75%.
According to the survey, advisers have turned to alternative investments for a variety of reasons:
  • 40% – different investment techniques
  • 38% – seeking absolute returns
  • 29% – filling portfolio allocations
  • 28% – addressing portfolio correlations, and
  • 25% – seeking unique vehicle structures
In the next five years, 24% of advisers believe that the alternative investments with the greatest business growth potential are capital protected and structured products, including commodities, while real estate (16%), private equity/venture capital (15%) and hedge funds (13%). About one fourth (24%) of advisers believe that alternatives will become more important than traditional investments, but nearly half (49%) believe that alternative investments will not become as important.
Client objections to investing in alternative investments cited include:
  • 51% – a lack of understanding
  • 27% – lack of liquidity
  • 27% – lack of clarity in how an alternative strategy works in the overall portfolio
The supplemental annual Rydex AdvisorBenchmarking Study was conducted online with 333 RIAs in November 2006. More information is available at http://www.advisorbenchmarking.com/
Data & Research February 17, 2007

Trading Analysis Leads to Auto 401(k) Rebalancing Call

A new study suggests that automatic portfolio rebalancing programs can make a significant contribution to retirement savings.
Reported by
The report by the Vanguard Center for Retirement Research, “Do Traders Win? Trading Behavior and 401(k) Portfolio Performance,” researchers Gary Mottola and Stephen Utkus claims that plan features such as lifecycle or balanced funds, managed accounts or automatic rebalancing services generally lead to higher risk-adjusted returns.
Risk Assumption
Generally, traders realized higher returns than nontraders but also assumed higher levels of risk, the study said. Before adjusting for risk, traders outperformed nontraders by 0.55% on an annualized basis. After adjusting for risk, however, the difference in returns between the two groups disappeared.
Computing the risk-adjusted returns for 401(k) trading produced “several striking conclusions,” according to Mottola and Utkus:
The returns of active traders are not statistically different than the returns of other nontraders.
Passive rebalancers earned the highest risk-adjusted returns – a full 84 basis points per year more than other nontraders. “The gains with passive rebalancing are substantial,” wrote the researchers.
Rebalancer Results
According to the study, “passive rebalancers,” who hold only balanced or lifecycle funds, realized excess annual returns of 84 basis points compared with nontraders on a risk-adjusted basis. Meanwhile, “active rebalancers,” who move their 401(k) portfolio’s equity allocation back to a given target on their own, pulled in 26 basis points worth of higher risk-adjusted returns.
Active rebalancers outperformed other nontraders by more than 2% per year, while passive rebalancers underperformed other nontraders by more than 1.5% per year, the study said.
Mottola and Utkus emphasized that while some level of trading can enhance returns, going too far and suffering high portfolio turnover is not. Traders with the highest turnover rates lost 72 basis points per year compared with traders with the lowest turnover ratios, the study found.
Rebalancing Benefits
The researchers said plan sponsors can help participants achieve the benefits of portfolio rebalancing in several ways:
  • Encouraging the use of investments that offer automatic rebalancing, either by default or through participant education. These include balanced funds, lifecycle funds, or a managed account service.
  • Offering a service that provides automatic rebalancing, regardless of the fund holdings selected by the participant.
  • Revising the default for rebalancing in defined contribution plans. Wrote the researchers: “…the case could be made that all participant accounts should be rebalanced to their original contribution allocations, unless participants otherwise opt out.”
The researchers said Web registered participants with online access to their accounts were less likely to be active rebalancers, and more likely to be active traders. Finally, traders who invested in index funds were more likely to be active rebalancers, “perhaps because they are attracted to the buy-and-hold approach,” the report said.
The study was based on a database of administrative records on more than one million active 401(k) plan participants in nearly 1,500 retirement plans.
It is available online HERE

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