Visions

Custom asset allocation solutions offer advisors an unprecedented opportunity to grow, differentiate and add value while increasing margins as well as practice value. Custom solutions also transfer the alpha as well as the margins from traditional providers to the custom solutions provider. This shifting dynamic facilitates growth, an enhanced value proposition and increases the value of the practice/firm. Additionally, custom solutions facilitate rollover business. Going forward, advisors without asset allocation solutions will become marginalized or worse.

The shift to low cost passive investments and the ability to transfer investment management margins to asset allocation solutions will have a major impact on the industry. Custom asset allocation solutions offer advisors an unprecedented opportunity to grow, differentiate, add value and increase margins. Future growth will be fueled by following the flow of funds, margins and increasing participant savings through asset allocation solutions, including custom solutions. Custom large plan solutions are plan specific while custom asset allocation solutions offered by advisors are generally specific to the advisor’s skills and employment status. The CFDD’s 2013 preconference workshop will show advisors how to harness this growth.

Excluding IRAs, annuities, other retail investments and non-reported DB plans offered by nonprofit organizations, approximately $2.7 trillion of the nation’s retirement plan assets are held in passive investments. The real message here is not that retirement plans hold $2.7 trillion in passive investments, but rather that the shift to passive investments is still embryonic. The continued growth of passive investments will have a meaningful impact on the industry in many ways, including the increased use of model portfolios managed by advisors.

To complete our value add thrust in the TDF space, the CFDD is re-launching their competitive analysis service, but the new service will focus exclusively on TDFs. Other components include the mutual fund & CIT Quarterly Monitoring Reports, Annual Reports, TDF Category Ranking Reports, the DC Plan & TDF Statistical Supplement and more. The value added services mentioned above, including the new TDF competitive analysis, will be tightly controlled and limited to CFDD conference attendees on an EXCLUSIVE basis. Pioneering new ground and prospecting techniques, the CFDD is also launching a unique form 5500 alliance that will help advisors identify new opportunities.

Some of the big mutual fund providers are getting bigger, but market share is changing hands, i.e., Fidelity and the American Funds are losing market share. Additionally, ETFs are gaining ground on mutual funds. The investment category holdings of retail investors and DC plan participants have also shifted. The investment category shift is benefiting fixed income, passive strategies and Target Date Funds. With the increased use of custom solutions, CITs may also gain market share, but the increasing use of the R6 share class could impede CIT growth.

It remains paramount for sponsors and participants to know what they own and why they own it. With few exceptions, today’s top performing TDFs are teamed with the highest standard deviation. In other words, today’s top performing TDFs are among the highest risk funds if the market corrects.

The CFDD’s last newsletter, Fidelity Target Date Funds: Good, Bad Or Average, generated a barrage of media articles. Not surprisingly, it is difficult for most observers, including plan sponsors, to think beyond fees and absolute performance. Moving beyond TDF strategy, fees and the glide path, real due diligence requires one to look at the asset classes, the allocation to each asset class, the performance of the underlying investment and the tactical component. In addition to volatility, one needs to consider the credit and maturity risk of the fixed holdings as well. In short, is active management adding or subtracting value?

Noting the average at best performance, the high turnover (portfolio & executive) and the mediocre nature of the underlying funds, many advisors view the Freedom Funds as low hanging fruit. Fidelity has, however, streamlined the cluttered portfolio to avoid overlap and added diversifiers. Some have noted that access to their better funds is expected, but there is no guarantee that these managers will be added or continue to perform well. Net of revenue sharing, the Fidelity Freedom Funds are a low cost option and selection returns look normal. While some view the success of the Freedom Funds as a marketing victory over substance, astute observers view them as average. While they certainly could, Fidelity’s active management isn’t currently adding or subtracting much in the way of value. Given the stakes, the value added by Fidelity’s active fund managers will be under scrutiny.

Fund managers live and die by the sword on a quarterly basis, but consistency carries a lot of weight.  In addition to other nuances, the Fidelity, T. Rowe Price and Vanguard TDFs have different glide paths, invest in different asset classes and the quality of their underlying investments vary.  Nevertheless, the big three have delivered consistent performance. T. Rowe Price has consistently shot the lights out, Vanguard has consistently delivered above average returns and Fidelity has consistently delivered average to BELOW average TDF performance.  While rising markets certainly benefit T. Rowe Price’s aggressive glide path, the firm delivered near top decile performance for all vintages and all time periods for the year ending 12/31/12.

Moving beyond the industry hype, the most important question a sponsor can ask an advisor is NOT: “Do you have a legal obligation to act in the best interests of the plan and its participants?” The most important question is: “Are you QUALIFIED to service my retirement plan needs?” This is paramount to understanding the evaluation process because registration status is not a qualifier, i.e., the industry is full of unguided fiduciary missiles.