In Practice March 24, 2008

Tiburon Predicts Strong Growth Among Fee-only Advisers

The number of fee-only financial advisers has been relatively flat in recent years - there are 10,466 Securities & Exchange Commission registered fee-only financial advisers – but the number will increase to 27,000 by 2012, according to research from Tiburon Strategic Advisors.
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In a press release, Tiburon, a market research and strategy consulting firm, said fee-only financial adviser average assets under management will grow to $310 million by 2012. Fee-only financial adviser clients will increase to 3.2 million by 2012.

Fee-only financial advisers currently generate $30 billion in revenues, but revenues will increase to $55 billion by 2012, Tiburon predicted. Fee-only financial advisers earn $15 billion currently, but their net income will increase to $20 billion by 2012, the release said. However, Tiburon says that fee-only financial advisers’ profit margin will decrease to 36% in 2012. The number of fee-only financial advisers served by custodians will increase to 27,000 by 2012.

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As for the current marketplace, Tiburon said many advisers are really fee-based; fee-only financial advisers account for just 35% of all fee-only and fee-based financial advisers. Fee-only advisers have 25% fewer accounts, on average, than fee-based & commissioned advisers.

Fee-only financial advisers with firm size under $25 million and no assets account for one-half of financial advisers, and over half of all fee-only financial adviser assets are controlled by the 2,000 advisers with greater than $200 million in assets.

Most fee-only financial advisers commented during the research that offering wealth management services is a key to attracting high net worth clients, according to Tiburon. One-third of fee-only financial adviser assets come from retirement plan rollovers and another third is money moved from a different broker. Fee-only financial advisers’ ultra-high-net-worth investors have increased 2% in 2006, while their high-net-worth investors have decreased 8%

When it comes to investments, fee-based financial advisers may buy $75 billion per year in annuities, and will invest over half of their assets under management in mutual funds and individual securities. These advisers prefer to receive contacts quarterly, and financial advisers generally prefer less contact as the portion they accept in commissions increase, and fee-only financial advisers and fee-based independent financial advisers are far less likely to want in-person visits than fee-based wirehouse financial advisers.

Fee-only financial adviser mergers and acquisitions are up over 600% since 1999, with 81 deals taking place in 2007, Tiburon’s research found.

Executives can purchase Tiburon’s “An Initial Overview of the Fee-Only Financial Advisors (RIAs) Market” research report by contacting Sarah Sage at SSage@TiburonAdvisors.com or 415-789-2540.

IMHO March 22, 2008

IMHO: Safety “Net″

Over the past several weeks, I’ve gotten a lot of calls from reporters across the country looking to understand more about what appears to be a recent uptick in the volume of loan and hardship withdrawals from 401(k) plans.
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By most accounts, those volumes are up—in some cases, perhaps, up by a factor of two—from a year ago.
The natural assumption is that some combination of the subprime crisis, the struggling investment markets, and/or just general economic stress is forcing participants to tap into their 401(k)s. Of course, pretty much year-in and year-out, somewhere between 10% and 12% of participants have loans outstanding (though a huge database maintained by the Employee Benefit Research Institute (EBRI) indicates that the percentage with loans outstanding has been in the high teens for a number of years, certainly among larger plans). Still, there is clearly movement afoot.
The question, of course, is what should be done about it? If savings rates and accumulated balances are already inadequate to ensure retirement security, it’s hard to imagine a scenario under which depleting them—even if only for a short time—doesn’t make a bad situation worse, IMHO.
Moreover, when people “borrow money from themselves,’ as the 401(k) loan process is often characterized, they quickly find out that they are really borrowing money from the plan, collateralized by their balance. That not only means that the 401(k) loan must be repaid on a regular basis (the plan fiduciary has an obligation to oversee these just like any other asset of the plan)—it also means that, while the participant may have satisfied one obligation, they have just picked up another.
The Loan Benefit
There are, of course, reasons to take advantage of the loan benefit, for that is surely what it is. There’s the interest rate, of course—generally prime +1%. Interest that, even if it has to be funded by the participant, does at least eventually wind up in their own account, rather than some credit card company’s. Plan loans are usually relatively easy—and the ability to simply tap into money that you have set aside is certainly more appealing to one’s sense of self-reliance than prostrating oneself before some loan official.
This industry has long and consistently embraced the notion that loans were something of a necessary evil in these programs. After all, if we didn’t give participants a way to tap into those funds in an emergency, they’d be much less inclined to save—or so runs the common wisdom. Odds are, if you’ve had the opportunity to explain these loan features to reluctant savers, you’ve perhaps thrown in the notion that “you can get to the money in an emergency.’
All in all, most participants appear to have treated that option responsibly. Over the past 20 years, the number of participants with loans outstanding has remained relatively constant, and while there are certainly cases of individual abuse, the combination of plan limits, processing fees, and sheer inertia has evidently served to keep this genie in the bottle. There are, however, clear signs of a shift here—a shift likely to accelerate along with the uptick in mainstream media coverage of the issue.
This doesn’t have to be a bad thing, of course. And while there is reason for concern if this simply becomes just one more way of fueling (no pun intended) our nation’s apparently insatiable desire for “stuff,’ there’s little point in having a retirement savings account if you and your family get thrown out of your home 20 years before then.
However, unsettling economic periods are not restricted to the here and now, and as important as the safety net afforded by these programs can be in the short-term, it is a net that must be repaired and restored at some point. It’s one thing to borrow from yourself, after all—and something else altogether when you simply rob Peter to pay Paul.

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