Products May 2, 2014

Transamerica TDFs Consider More Than Age

Plan officials need to offer a greater variety of target-date fund glide path options to meet the differing needs of participants, Transamerica says in a new white paper.
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According to “Customized Glide Path and Portfolio Construction,” from Transamerica Retirement Solutions, plan sponsors and advisers need a target-date fund solution that works equally well for participants who want a relatively or entirely passive role in retirement planning and those who want to take a more active role. Transamerica contends its custom glide path approach provides an answer to this need.

Jeremy Hersch, vice president and head of asset allocation services for Transamerica Retirement Solutions, tells PLANADVISER, “Our approach to target-date fund glide paths begins with recognizing that retirement plan sponsors and plan advisers probably don’t have as much as time as they need to in terms of choosing investment options. However, by offering them an open architecture approach, with no preferred funds, sponsors and advisers can either build their glide path from scratch or go with a pre-constructed one, depending on what’s best for their plan.”

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The paper suggests participants left to their own devices generally make less than optimal decisions when choosing investments, or they make no decisions at all, so a solution is needed that refocuses the average participant’s attention to understandable choices. The solution should also automate investment decisions based on those choices, Hersch says.

“At the participant level, the goal is to simplify the investment process—asking participants what year they want to retire in and what their comfort level is with investment risk. The answers to these two questions can help in automating the investment process for participants, letting them know things that they should be doing, such as rebalancing and diversifying their investments, but aren’t ,” says the Harrison, New York-based Hersch.

The problem with most current target-date funds' glide paths, according to Transamerica, is the investment strategy is based exclusively on time horizon and cannot incorporate other participant characteristics.

To address this drawback, Transamerica’s custom glide path approach enables participants to focus on the two easy-to-understand choices—their anticipated retirement year and their personal risk preference. It then provides a series of well-diversified portfolios constructed within a framework guided by generally accepted investment principles and utilizing the investments offered in the defined contributions plan that have already been carefully screened by the plan’s sponsor.

In addition, the participant’s account is automatically rebalanced initially, and on a quarterly basis thereafter, and is gradually reallocated to a more conservative investment mix over time via a glide path to reduce risk exposure. This customized approach efficiently and automatically delivers a customized portfolio that is designed to be both age- and risk-appropriate, the paper says.

“In the past, plan sponsors were used to using whatever target-date funds were being offered by their provider,” Hersch says. “Now, there are a lot more options.” He says Transamerica's approach offers sponsors and advisers flexibility, control and transparency when it comes to glide paths.

“When it comes to choosing target-date funds, the first thing a plan sponsor needs to do is to make sure the plan has an established, documented process for such selections," according to Hersch. "They also have to look at the benefits of investing in proprietary versus non-proprietary funds, depending on what level of control the plan sponsors wants over the investment options. And they have to consider the risk and objectives of the target-date funds, as well as the asset allocation.”

The main thing plan sponsors need to ask themselves is how comfortable they are with the target-date fund glide path strategy and if it is appropriate for their plan and participants, he adds.

“Every plan should have an investment policy statement (IPS) listing the objectives of the plan. And it’s good to form this policy by getting feedback from plan participants. With each participant having their comfort level with investment risk and time frame in which they want to retire, it’s good to not only choose target-date funds, and accompanying glide paths, that not only factor is your IPS’s objectives but that present enough options, in terms of risk and retirement dates, for participants,” Hersch says.

For more information about how to obtain a copy of the white paper, call 888-401-5826.

Data & Research May 2, 2014

Advisers Struggle to Gain Young Clients

New research from financial analytics firm Cerulli Associates finds that 53% of financial advisers’ clients are between 50 and 70 years old.
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Advisers across all channels are finding it increasingly difficult to attract young investors, says Kenton Shirk, an associate director at Cerulli, calling into question the long-term viability of firms that cannot adjust to the preferences of younger clients. The trend appears to be fueled, at least in part, by the growing availability of online advice resources and easy-to-use direct investment platforms, Cerulli says.  

In a recent white paper, “Advisor Metrics 2013: Understanding and Addressing a More Sophisticated Population,” Cerulli researchers suggest the emergence of electronic registered investment advisers (eRIAs) is among the most serious threats to traditional financial advice models. These investment advisers often forego face-to-face relationships for sophisticated online advice portals, Cerulli explains, through which clients can build and direct their own portfolios while receiving remote advice through call centers or directly on the web portal.

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“The eRIAs are able to deliver scalable offerings at extremely low costs,” Shirk explains. “Advisers must understand that it will be nearly impossible to compete on price. To win clients in this market, advisers need to differentiate their offerings and deliver things that eRIAs cannot, such as sophisticated tax planning and long-term care advice.”

Cerulli encourages advisers to branch out beyond offering only asset allocation and retirement advice to attract new clients. If retirement specialist advisers can team with tax planning professionals, for example, they will be able to offer holistic tax and estate planning programs to clients, a significant value-add that will be difficult for eRIAs to match through online portals or call centers. Other subjects, such as long-term care planning and how to navigate the Social Security claims process, can also be addressed as part of more holistic wealth and retirement planning.

Overall, Cerulli anticipates a slow-but-steady migration of investor assets away from employee channels toward the more independent advisory models and direct distribution platforms. The ubiquitous growth of consumer technology has eliminated many of the hurdles that had limited growth of smaller practices in the past, Cerulli explains. The result is not only a wide variety of products becoming available to advisers in each channel, but technology developments have also greatly lowered the barriers to entry to the advisory space.

An adviser no longer needs a Wall Street pedigree to effectively run their business, Shirk says, instead an Internet connection and the trust of clients is sufficient.

Regardless of the advice delivery method, Cerulli says financial relationships are still rooted in trust and value. And while significant segments of the population are willing to use technology to augment their relationships, providers in all channels are finding that the personal relationships many investors have with their advisers are still a vital part of the wealth management and retirement planning industries.

More on how to obtain the latest Cerulli reports is available here.

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