In Practice March 2, 2010

Schwab Head Optimistic about Poaching from Wirehouses

Bernie Clark, head of Charles Schwab Advisor Services, expects to continue gain more assets from the wirehouse channel, he said at an event today in New York City.
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While traditionally assets move from wirehouse to wirehouse, Clark said more assets are flowing into the independent space (including independent broker/dealers and registered investment advisers). “I do believe it’s not a wave; it’s something that will show consistent movement over time,” he said.

Schwab’s semiannual Independent Advisor Outlook Study, released today, found that 46% of RIAs’ new clients came from full-service wirehouse firms. Surveyed independent advisers reported that clients are leaving wirehouse firms because of lost of trust in their previous firms (65%), followed closely by a desire for more personalized advice (59%).

While custodians such as Schwab have reported an uptick in the number of assets gained from wirehouse firms, industry data show that only a small slice of wirehouse advisers choose to “break away” to the independent channel (see “How Many Brokers Really Went Independent in 2009?”).

Overall, the overwhelming majority of advisers surveyed by Schwab reported gaining new assets in the next six months, with 76% coming from other firms. Schwab remains the largest custodian for independent advisers, with $590 billion under assets as of December 31.

As for retirement plans, Clark said Schwab will continue to leverage any opportunity in the retirement plan arena (about 20% of Schwab advisers work with retirement plans). He told PLANADVISER that Schwab Advisor Services is working more closely with its institutional side; for example, this year Schwab is combining its IMPACT conference for advisers and its ADVANTAGE conference for third-party administrator (TPA) conference.

More Saving

Schwab’s survey found that 32% of advisers think “frugal spending habits” will stick post-recession, followed by “focus on saving money” (26%). However, a majority of advisers (55%) want American consumers to save 9% of their personal income, which is more than the current national savings rate of 4.8%.

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Almost two-thirds (62%) of surveyed advisers reported that their own clients are more focused on paying off debt in the current environment. Another deterrent to saving: the need to take care of children. While only 14% of advisers said their clients are doing more to support their parents in this market environment, a startling 44% said clients are doing more to support their children.

Many advisers (57%) reported that it will be difficult to achieve their clients’ investment goals in the current market environment. However, that is much more optimistic than last year, when 84% felt that way. Advisers have also been able to do less hand-holding; one-third said clients needed reassurance during the last six months, compared to almost half in January 2009.

Clark noted that although advisers might need less assurance, clients are still hungry for more education. “We know from this study that advisers have spent considerable time over the past year communicating with their clients,” Clark said in a release of the survey results. “But while many advisers that we work with say that they are in more of a ‘back to business’ mode, there is clearly a continuing need for advisers to play a role as educators for their clients.”

In January, Koski Research conducted an online survey of more than 1,100 independent investment advisers who custody with Charles Schwab.

The Markets March 1, 2010

Bond Fund Investors Beware

A new report from Morningstar warns those who flocked to bond funds in 2009 that even those investments aren't immune to volatility.
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While mutual funds made up for some of the ground lost in 2008, taking in $377 billion in 2009, most of that recovery was thanks to bond funds, which accounted for $357 billion of the net inflows.  Morningstar said fixed-income funds took in more flows in 2009 than they saw over the previous five calendar years combined.

Low yields in other income-producing investments, such as money-market accounts and bank CDs, likely pushed some investors into bond funds, and there was a bit of performance-chasing going on, as bonds held up better than most other asset classes in 2008. Most importantly, after experiencing harrowing losses in 2008, many investors reassessed their capacity for risk and increased their portfolios’ allocations to lower-volatility asset classes, according to the report. However, Morningstar warns that bond funds aren’t immune from volatility, and there are risks looming on the horizon that many new shareholders may not fully appreciate.

Sonya Morris, editorial director at Morningstar, noted that taxable bond funds accounted for most fixed-income flows in 2009, but on a historical basis, muni funds had a banner year, gathering an unprecedented $72 billion in assets, and blowing away the previous record of $21 billion in 2006. While demand will likely continue to work in favor of munis in 2010, at the same time, supply will be limited as the Build America Bonds program makes it more attractive for traditional muni issuers to gain financing via the taxable bond market. Those technical factors could support muni bonds in the coming months, according to the report.

On the other hand, state and municipal governments have seen tax revenues decline just as the demands on their resources are increasing. Credit-quality worries are rising to the surface after muni-bond insurance has faded to the background, Morris said. Fund managers told Morningstar they aren’t expecting massive defaults, but downgrade risk is a real concern, and many have ramped up their credit-research efforts as a result.

“If credit-quality issues overshadow the positive technical backdrop, muni-fund shareholders could be in for some volatility over the near- to intermediate-term,” according to Morris.Price and Interest Rate Risk

In addition, the report noted that bond index funds, many of which track the Barclays Capital U.S. Aggregate Bond Index, may face headwinds over the near term because they currently own outsized portions of government-backed bonds. At year-end 2009, Treasuries, agency mortgages, and other government-related bonds made up roughly three quarters of the Barclays Capital U.S. Aggregate Bond Index. Treasuries alone accounted for 28% of the index's assets, compared with just 13% for the typical intermediate-term bond fund. Meanwhile, the index's weighting to corporate bonds amounted to just 18%, half the category average.

Price risk is a concern at the moment, Morris said. Neither Treasury bonds nor agency mortgage-backed securities can be considered attractively priced. The report pointed out that the prices of agency bonds and mortgage-backed securities have been artificially lifted by the Federal Reserve, but the Fed is scheduled to end its buying program in March, which could put pressure on the prices of these securities.

Interest-rate risk is also a worry, as higher-quality bonds (like Treasuries and government-backed mortgages) are more vulnerable to rises in interest rates than lower-rated bonds. Interest rates will eventually rise and when they do, Treasury and agency mortgage bond prices will come under pressure.

At the same time, higher interest rates mean higher yields on money-market accounts and CDs, creating competition for bond funds.

Morris concludes that with risks looming, bond-fund returns could come under pressure, and that could shake out investors who don't have realistic expectations about bond-fund volatility. On the other hand, if fixed-income funds manage to limit volatility relative to other asset classes, they stand a good chance of holding on to their shareholders.

The full report is here.

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