In Practice September 11, 2019

Successful Advisers Are Able to Spot Emerging Trends

Craig Hawley, head of Nationwide Advisory Solutions, also explains how successful advisers are using AI.

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The fifth annual Advisor Authority study, commissioned by Nationwide Advisory Solutions and conducted by The Harris Poll, found that the most successful advisers are able to spot new trends and set new ones. Nationwide defines successful advisers as those who earn $500,000 or more a year or have total assets under management (AUM) of $250 million or more.

As to how successful advisers are able to spot emerging trends, they “act like business owners and have what we like to call a ‘CEO mindset,’” Craig Hawley, head of Nationwide Advisory Solutions, tells PLANADVISER. “Every aspect of their practice—from consolidating technology and adapting their marketing, to building their client base and cultivating their in-house team—is built around a long-term vision for the future of their firm. With this outlook, they’re always looking one step ahead, balancing short-term objectives with long-term investments, to create operational efficiencies, drive growth, achieve scale and build an ensuring franchise.”

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And Hawley estimates that there are few successful advisers as defined by Nationwide: “While compensation and AUM [assets under management] figures at the industry fee-based adviser level is a bit difficult to come by, based on the data available for the independent RIA [registered investment adviser] space, we would estimate that less than 2% of RIAs individually manage more than $250 million in AUM.”

The study found successful advisers are also more likely to put more importance on adding new hires than those who are not as successful (22% versus 11%), and to consolidate technology (21% versus 15%). Successful advisers rely less on adding new clients than other advisers (37% versus 46%). Rather, they are slightly more focused on adding new technology (27% versus 25%).

They are more likely to have adopted Artificial Intelligence (AI) (41% versus 27%) and robo-advisers (26% versus 17%). They are also more likely to offer interactive websites and/or client portals (47% versus 38%), tax optimization tools (38% versus 35%) and account aggregation systems (34% versus 31%).

“They use technology to transform every aspect of the customer experience, from the front end to the back office, opening the door to a new category of client, offering a new universe of products and solutions—and ultimately gaining an edge over the competition,” Nationwide says. “By aligning with clients’ best interest, successful advisers earn their trust, deepen the adviser/investor relationship, create greater loyalty—and, ultimately, bring more assets under management.”

Hawley explains how successful advisers are using AI: “We know that the most successful advisers are squarely focused on using AI to better understand and better serve their clients—including analyzing clients’ feedback and predicting clients’ future needs and behavior. With the right CRM [customer relationship management] and a strategy to capture more high-quality data, advisers can develop predictive profiles using AI tools that are widely available, such as Saleforce’s Einstein and EIM’s Watson. They also use AI to build more durable portfolios, select products and protect clients’ assets against market risk.”

As for what types of interactive websites and mobile tools successful advisers are using, Hawley says that mobile apps are essential and that the tools they are using include those focused on budgeting, and planning and comparing products; calculators to help guide goals for saving and generating income; robo solutions to help with portfolio allocations; and secure, encrypted file-sharing services.

Successful advisers are more likely than other advisers to agree that there should be one federal financial standard across the financial services industry (82% versus 74%).

Successful advisers are more likely than others to say that technology frees up their time to focus on one-on-one relationships with their clients (35% versus 28%). They are also more likely to use technology to protect clients against market risk (33% versus 26%) and to provide them with more holistic financial planning (29% versus 25%).

Mike Lynch, vice president, strategic markets at Hartford Funds, adds that successful advisers need to be “good educators who can educate participants not just on the financial side of life in retirement but the non-financial side—where they should live, how they should spend their time.”

Nationwide’s full report can be downloaded from here.

The Markets September 10, 2019

Determining Whether DC Plan Clients Should Offer Real Estate Investments

Investors cite several common considerations for including a dedicated allocation to real estate, and a recent survey of American investors found real estate ranked as the top investment option they consider to be the safest for long-term retirement investing.

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“While investments in real estate have long been common for defined benefit plans, more plan sponsors are turning to property markets to diversify their defined contribution (DC) portfolios,” Thomas M. Anichini, CFA, chief investment strategist at GuidedChoice, a digital investment advisory firm, wrote in a blog post.

Aside from capital market assumptions, he noted, investors cite several common considerations for including a dedicated allocation to real estate, including: inflation hedging, portfolio diversification, high tangible asset value, competitive risk-adjusted returns and attractive and stable income returns. “A substantial portion of the world’s wealth consists of property. It would seem obvious that real estate would be a part of a long-term investment portfolio,” Anichini said.

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A new survey from SophisticatedInvestor.com of 2,000 Americans between the ages of 35 and 65 examines which investment option they consider to be the safest for long-term retirement investing. According to the findings of the survey, when asked which option they would choose from, 22.4% of all respondents selected real estate as the safest long-term investment for retirement—the top choice. When demographic filters were applied to the survey results, 25.1% of respondents between the ages 45 and 54 selected this investment option.

Very few defined contribution (DC) plans invest directly in real estate, according to Anichini. He added that, as a result, the only type of real estate investment typically available within a DC investment menu is a REIT. REITs, or real estate investment trusts, are companies that own or finance income-producing real estate in a range of property sectors. These companies have to meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges.

According to Anichini, REITs perform a lot like small/mid-cap value stocks than like private real estate. He said this is not surprising, considering that most public REITs are in the major broad stock indexes.

A 2014 Callan study found that about 70% of target-date funds (TDFs) have some exposure to REITS. And, DC plan sponsors and participants may be surprised to learn that most publicly available REITs are already available in their plan’s index funds. For example, Anichini said, if a DC plan already has a large cap index fund and a small-cap index fund, it already has exposure to all the REIT exposure it could obtain by adding a dedicated REIT fund.

However, he noted that does not mean there is no basis for having a dedicated REIT fund in a DC plan. The Callan study found 22% of DC plans offer REITs in their fund lineup. The tendencies of REITs both to perform like stocks and to belong to broad indexes tend to weaken the case for including a dedicated REIT fund in the lineup, but two additional rationales may support including a dedicated REIT fund in a DC plan lineup:

  • If capital market assumptions extend to the level of equity market sectors, at times DC plan sponsors and participants may find the REIT sector specifically appealing. Anichini said this rationale would make a dedicated REIT fund desirable to enable overweighting the sector.
  • The lineup’s active mid-cap or small-cap funds might underweight REITs or not hold them at all. He said this rationale is the case for a completion strategy that seeks to avoid an inadvertent underweight in the sector.

James Veneruso, vice president and defined contribution consultant in Callan’s Fund Sponsor Consulting, previously told PLANADVISER, “The problem with REITS is that they tend to behave a lot like equities so they may have volatilities similar to that of equities. But what we’ve been seeing slowly over time is that through TDFs, participants are now able to access direct or private real estate. Private real estate gives you the advantage of a lot less volatility. So you’d have an asset class that over the long term could have a return similar to REITS but with a dampened volatility profile.”

As a general matter, DC direct real estate product structures should accommodate the unique considerations that are important to DC plan fiduciaries, such as investor eligibility, regulatory oversight and tax reporting, the Defined Contribution Real Estate Council (DCREC) says.

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