Data & Research October 26, 2011

Wirehouse Brokers Use Alternatives the Most; RIAs the Least

Research from asset management firm American Century Investments indicates the use of alternative investment strategies by financial intermediaries is widespread and growing.  
Reported by

According to the firm’s “2011 Financial Professionals Alternative Investments Study,” which surveyed 300 financial advisers and planners, 80% report they are currently using alternative investments with their clients, while 95% have some level of experience with these strategies. And, among those currently using alternative strategies, 55% plan to increase use in the next year.

“Financial intermediaries clearly recognize the valuable role alternative investments can play in their clients’ portfolios,” said Peter Cieszko, American Century Investments senior vice president of North America. “It’s incumbent on asset management firms to offer an array of options so that financial professionals can devise customized solutions in line with their clients’ long-term goals, time horizon and risk tolerance.”

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

Among financial professionals participating in the study, almost one third of their clients have alternatives in their portfolios; the average allocation to alternatives in a typical client portfolio was 17%. Intermediaries who indicated “extensive” experience with alternatives reported higher use across their client base (an average of 49% of their clients) with the average allocation of a typical client at 23%.

Current use of alternatives varies by type of financial professional, with wirehouse brokers (90%) reporting the greatest level of use, while registered investment advisers (68 %) report the lowest level of use. Also, 83% of regional brokers and 81% of independent brokers indicate current client use.

Types of Alternatives 

When financial professionals were asked to name the type of alternative investments that are most top of mind, “precious metal commodities” were cited by 75% of respondents, “natural resource commodities” by 67% and “hedge funds” by 65%. Among intermediaries using alternative strategies with clients, “precious metal commodities” ranked first for use at 40%, “natural resource commodities” ranked a close second with 39% and “U.S. REITs” ranked third with 33%. The least-used alternative investments were “bear market” vehicles (3%).

“These ‘top-of-mind’ and ‘use’ statistics might suggest that financial intermediaries are currently gravitating toward more tangible, less esoteric strategies such as commodities,” said Cieszko. “That said, over time we anticipate increased use of all types of alternative strategies as intermediaries gain a better understanding of the different options and their potential benefits when used in a diversified portfolio.”

Risk Management

The study also indicates that financial professionals appear to use alternative strategies to manage risk in their clients’ portfolios rather than achieving out-sized returns. “Low correlation with traditional asset classes” was the trait that topped the list of features chosen as “most attractive” by 41% of respondents. And, “potential for broader diversification” garnered 29%, the second-most attractive feature. “Potential for higher returns” was only cited by 12% of respondents.

“These results really debunk the common misconception that financial intermediaries use alternative strategies to juice the performance of clients‟ portfolios,” Cieszko said. “To the contrary, they are acting as true fiduciaries looking out for the long-term welfare of their clients through effective risk-management techniques.”

The study also indicates that mutual funds are the most popular way for financial intermediaries to provide alternative strategies to clients. Among professionals currently using alternatives in client portfolios, 42% cited mutual funds as the preferred mode of access followed by exchange-traded funds at 28%. Among those selecting mutual funds as a primary mode of access, respondents used words and phrases like “simple/easy, offering diversification and/or having active and/or professional management” when describing the attractive qualities of the vehicle.

The American Century Investments 2011 Financial Professionals Alternative Investments Study included data from surveys of 300 financial professionals employed as financial planners, financial advisers, personal financial consultants, brokers or registered investment advisers (RIAs). Respondents averaged 15.8 years of business experience and participation was contingent on having a book of business equal to, or exceeding, $10 million.

American Century Investments currently has approximately $2.5 billion in assets under management in five alternative investment strategies – Strategic Inflation Opportunities, Global Real Estate, Real Estate, Global Gold and Equity Market Neutral – with others incubating and expected to launch in the near future.

Compliance October 26, 2011

Court Approves Settlement of Wachovia Stock Drop Suit

The U. S. District Court for the Western District of North Carolina has approved a $12.35 million settlement in an ERISA fiduciary breach case against Wachovia.
Reported by

The class action suit claims fiduciaries of the Wachovia Savings Plan and the A.G. Edwards, Inc. Retirement and Profit Sharing Plan breached their fiduciary duties to act solely in the interest of the participants and beneficiaries of the plans, and to exercise the required skill, care, prudence, and diligence in administering the plans and the plans’ assets by continuing to offer company stock as an investment option when it was no longer prudent.  

The court had previously dismissed the suit, finding that the plan document required that company stock be included as an investment option for the plan. The plaintiffs appealed, and a settlement agreement was reached while the appeal was pending.  

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

The court noted that the plaintiffs’ attorneys, Keller Rohrback, have “extensive experience” in such cases and would likely continue its “vigorous defense” of the case. “The Settlement obviates that delay and restores some value to the Plans,” U.S. District Judge Martin Reidinger wrote in his order.  

In addition, the court concluded that an attorneys’ fee equal to 15% of the settlement fund constitutes a reasonable award in the case. “The Court finds that such an award is ‘high enough that these particular attorneys, skilled as they are, are not put in a financial situation where they will be unable or unwilling to pursue similar types of class action litigation in the future’ but is not ‘so high . . . as to overcompensate plaintiffs’ counsel at the expense of the class, or to create a perception of such overcompensation,’” the opinion said. The court also found that an award of 15% is well within the range of awards made in similar complex class action cases.  

The case is In re Wachovia Corp. ERISA Litigation, W.D.N.C., No. 3:09-cv-00262-MR.

«