Products September 2, 2011

White Paper Discusses Use of Proprietary Funds

Including a retirement plan provider’s affiliated funds as part of a plan’s investment lineup is not a fiduciary conflict of interest or prohibited transaction under ERISA, writes ERISA attorney Fred Reish, in a new white paper. 
Reported by

In the paper, “The Prudence Standard: Affiliated Products and Services,” Reish, an employee benefits attorney with Drinker Biddle & Reath, says that “simply dismissing from consideration the funds offered by an affiliate of a record keeper is potentially a breach of one’s fiduciary responsibility.”  

“Many plan providers offer recordkeeping, administrative services and communication services as well as investment funds managed through an affiliate,” said Charlie Nelson, president of Great-West Retirement Services, which commissioned the paper. “A provider can be compensated from both recordkeeping fees and asset management fees from affiliated funds. The ability of the provider to offset some of its fees can mean significant cost savings for a plan.”

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

Reish, along with co-authors Bruce Ashton and Summer Conley, analyzed fiduciary requirements regarding investment selection in ERISA and similar state standards, as well as applicable court decisions and Department of Labor advisory opinions. They noted that affiliated funds may provide other benefits to participants, such as guaranteed minimum withdrawal benefits or added investment education services.

The authors concluded that when fees received by a record keeper and affiliated fund are reasonable and the fiduciaries do not receive a personal benefit from selecting the fund, there is no prohibited transaction. The paper also notes that any conflict with respect to a service provider and affiliated fund can be managed through disclosures to the plan fiduciaries and participants.

The full paper is available here.

 

Data & Research September 2, 2011

Advisers Using Alternatives to Increase Diversification

Seventy-eight percent of all retail advisers are presently using alternative investments within client portfolios, according to a recent report from Cogent Research.
Reported by

For the first time, Cogent Research dedicated a portion of its annual Advisor Brandscape report to advisers’ usage and attitudes regarding alternatives.

The primary reasons that advisers are using alternatives are to further diversify portfolios (83%), manage risk (80%), or to achieve absolute returns (54%). Far fewer advisers report using alternatives in an effort to deliver returns above a benchmark (20%) or for tax management purposes (19%).

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Cogent found that advisers allocate an average of 11% of their book to alternatives spread across a variety of different products. Independent advisers, the heaviest overall users of alternatives, show the strongest preference for venture capital, private equity, and hedge funds, while Bank advisers have a greater appetite for limited partnerships and RIAs tend to use structured products/notes.

“It was somewhat surprising to us to see such broad and consistent use of alternatives, not only across channels, but also based on assets under management,” said John Meunier, Cogent Principal and author of the 2011 Advisor Brandscape report. “Clearly, advisers of all stripes and tenure have embraced the notion that managing client portfolios in today’s environment requires the tools to provide greater asset-class diversification and better risk management strategies.”

Among the 22% of advisers not currently using alternatives, almost half (47%) admit that their own lack of lack of knowledge is holding them back. Fifty-two percent of current alternative investment product users indicate that a lack of client knowledge and sophistication is preventing them from embracing alternatives further.

Among eight separate types of investment vehicles, advisers say they are least likely to access alternative asset classes and strategies through mutual funds and exchange-traded funds (ETFs). However, over the next year, more advisers expect to increase their use of alternatives and ETFs than any other product or vehicles. In fact, 41% of advisers currently using alternatives indicate they will increase their use of ETFs and 28% will increase their use of mutual funds to access alternatives.

“These figures represent a huge opportunity for mutual fund and ETF providers to satisfy a growing demand among retail advisers for institutional-quality alternative investment strategies that are both scalable within their practices and palatable to skeptical investors,” said Meunier. “However, as they roll out new products or broaden distribution of existing offerings, providers must not overlook the importance of providing the support and education that will be required to promote acceptance.”

The 2011 Advisor Brandscape report was based on a nationally representative survey of 1,643 retail investment advisers.

«