The Markets January 30, 2013

Trends for ETF Usage in 2013

Active manager and adviser exchange-traded fund (ETF) investment portfolios are expected to grow in 2013.
Reported by

Active asset managers will likely continue to use ETFs for asset allocation, in an effort to achieve alpha in balanced funds, asset-allocation funds, defined contribution (DC) funds and annuities, sources at BlackRock predicted during the iShares Institutional Outlook 2013 media briefing.

State Street Global Advisors (SSgA) reported that ETFs had positive cash flows of $182.6 billion in 2012, marking a record high for the industry. (See “ETFs Have Record Year in 2012.”) Daniel Gamba, managing director for BlackRock’s iShares Americas Institutional Business, said this year also looks to be an outstanding year for ETFs.

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“2012 marked a record year for inflows into ETFs for the industry and iShares, as investors continue to use ETFs for the diversification and exposures they seek in their portfolios,” Gamba said. “In the coming year, investors are likely to face continued market volatility while they search for yield in a low-rate environment. Given these dynamics, we see the trend of institutional investors using ETFs, particularly as part of the core of their portfolios, continuing in 2013.”

For 2013, BlackRock sources also predict growth opportunities for advisers who provide expertise about ETF portfolio construction and trading to other advisers seeking outsourced model portfolios.

Gamba foresees that in 2013, institutional investors will seek more liquidity—specifically, liquidity sources that provide market exposure to minimize cash drag. “So they will use ETFs to replace a part of their portfolios,” he explained.

Institutional clients are increasingly implementing overlays that include ETFs in order to mirror the risk/return profile of a portion or the entirety of their policy portfolio, BlackRock sources said. According to Greenwich Associates, the percentage of institutions implementing these strategies with ETFs increased, from 3% in 2010, to 31% in 2012.

(Cont’d…)

Also in 2013, BlackRock predicts that ongoing forces within the capital markets—like increased volatility and decreased liquidity in the underlying bond market—may drive more institutions to use fixed-income ETFs to access and manage fixed-income exposures more efficiently. This year, BlackRock expects institutions will continue to use developed market fixed-income ETFs for passive core allocation, tactical strategies, transitions and risk management.

Despite the increased usage of ETFs, sources acknowledged they are still in the early stages. ETFs still have not penetrated the 401(k) market, for instance, said Sue Thompson, managing director of the Institutional Asset Management/RIA Channel. According to the 2011 PLANSPONSOR DC Survey, only 1% of plan sponsors say they include ETFs in their fund lineups.

Operationally, ETFs as 401(k) investment options can be challenging because ETFs are traded like securities, and 401(k) platforms are oriented toward mutual funds, which are not traded intraday and do not have commissions (see “ETFs: Passive Interest”).

Fortunately, Thompson said, recordkeepers are working to fix the “plumbing issues” with using ETFs in 401(k) plans.

Products January 30, 2013

Lincoln Adapts Fiserv’s Retirement Illustrator

Fiserv announced that Lincoln Financial Group is the first client to make use of its new retirement income technology, Retirement Illustrator.
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Lincoln has branded the tool Retirement Income Illustratorto support an enhanced participant experience in its retirement plan services business. Lincoln and Fiserv partnered on the design and desired user experience, Ken Solon, head of shared services and information technology for Lincoln Financial Group, told PLANADVISER.

“Fiserv developed the application package and worked with Lincoln to make sure the application could be integrated successfully into Lincoln’s technology environment,” Solon said.

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“Most tools on the market today rely on a straight-line market calculation, maybe overlaying it with some other scenario like Monte Carlo,” Hilary Fiorella, vice president of business development and consulting services for investment services at Fiserv, told PLANADVISER.

Retirement Income Illustrator stands out from other retirement visualization tools because it considers risk tolerance, Fiorella said. “The adviser can show how various products can reduce product risk to get an expected outcome.”

Solon called Retirement Income Illustrator “a flexible solution that combines compelling visualizations of a client’s retirement income outlook with a robust analytical engine.”

Since Fiserv works with financial services professionals, the tool was designed with the professional adviser in mind. The tool lends itself well to collaboration with an investor but, Fiorella says, it really needs an adviser to walk the investor through it.

(Cont’d…)

The tool was designed to better support communication and collaboration between financial professionals and clients, Solon explained. “The tool helps clients grasp retirement income concepts and understand how different strategies can help them increase the likelihood of meeting their retirement income goals,” he said.

The Fiserv technology provides Lincoln’s financial professionals with analytical capabilities designed to help improve and better assess an investor’s retirement income outlook. Clients can visualize different savings and investment strategies that can better help them improve cash flow at the time of retirement.

Monte Carlo simulations demonstrate retirement plans in favorable and unfavorable market conditions, allowing financial professionals to plan best- and worst-case scenarios. Investors can visualize how market volatility can affect their retirement picture through interactive, intuitive and graphical illustrations.

The retirement income capabilities deployed by Lincoln as Retirement Income Illustrator are designed to help advisers present retirement spending requirements and distribution alternatives, overlaying risk events such as withdrawal, longevity, survivor needs and health care to ensure investors’ greatest challenges are met throughout their planning and retirement phases. The retirement income capabilities can be easily adapted to different practice models. Retirement Illustrator can be deployed across an enterprise or purchased as individual licenses by financial professionals.

Fiserv is a provider of financial services technology solutions based in Brookfield, Wisconsin.

Lincoln Financial Group is in Philadelphia.

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