Investment trends in the $4.5 Trillion Defined Contribution (DC) market are stretching the definition of an ‘open architecture’ investment platform. Historically, open architecture meant you or your partner offered a significant number of mutual funds from a variety of managers. While mutual funds still hold a significant amount of DC assets, alternative investments are taking hold and growing. Recent research from Celent predicts growth in non-mutual fund options, including Collective investment trusts, Exchange Traded Funds (ETFs), separate accounts and retirement income products. If an investment platform wants to remain truly ‘open,’ it will need to consider extending its mutual fund platforms to include these alternatives and the technology and operational challenges that go with them.
Adding ETFs requires retirement plan recordkeeping and trading systems to manage trading and settlement differences between mutual funds and ETF securities. Collective investment trusts (CITs) operate somewhat similarly to mutual funds, but are under a different set of rules and requirements. Separate accounts using third-party money managers open up the potential for thousands of investment model options for investors. Retirement income is garnering a lot of attention as investing continues a shift from accumulation to de-cumulation, and a number of options are being offered into DC plans incorporating annuities, guaranteed minimum withdrawal or income benefits (GMWB/GMIB), investment guarantees and other non-insurance solutions with investment based downside protection.
Offering any of these non-mutual fund options can create system challenges for recordkeepers and third-party plan providers, particularly when considering ever-changing due diligence, fee transparency and fiduciary requirements needed across all investments.
As DC providers expand their offerings, it is critical the underlying systems accommodate the new solutions effectively. Platform questions for their Information Technology (IT) groups and partners include:
- Is there adherence and commitment to data communication standards and protocols like NSCC, SWIFT, FIX and SPARK (retirement income) to speed implementations and grow into new markets quickly?
- Do you have a broad and expanding partner network linking to new products and data sources required for analysis, due diligence and compliance needs?
- Can your ancillary services support the new options to help ensure efficient and compliant end-to-end processes for trading, reconciliation, revenue management, payments, fee transparency reporting and custody?
Is your platform ready for (wide) open investment architecture?
On October 25, 2011, the Department of Labor (DOL) released its final rules related to the provision of Investment Advice under the Pension Protection Act (PPA) of …wait, here it comes… 2006, that pre-financial-crisis, almost-forgotten law. So, why should financial advisors care about a DOL ruling when the DOL regulates advice in retirement plans that fall under the Employee Retirement Income Security Act (ERISA)? Well, the reason is because the DOL also happens to regulate “prohibited transactions” on Individual Retirement Accounts (IRAs).
This is where some of the confusion begins. Based on some comments I have read in the industry press, it seems many people in the advisory business believe that the DOL is muscling in on IRAs for the first time. However, that is not the case. If you go back and read any of the DOL’s past rulings on investment advice, such as the SunAmerica Advisory Opinion, they almost always mention that these rulings apply to IRAs, as well as ERISA accounts, when the advice is provided by a fiduciary.
Some of the confusion stems from the fact that the regulations can be challenging to read and decipher. For example: “The Department did not receive any substantive comments with respect to paragraphs (b)(4)(i)(D), (b)(4)(i)(E)(1)and (2) and therefore is adopting these provisions as proposed, now at paragraphs (b)(4)(i)(E),(b)(4)(i)(F)(1) and (2) of the final rule.“ I have spent a fair bit of time combing through industry regulations, and these are as perplexing as they get.
Confusing or not, the regulations are important, and advisors should carefully review them with their compliance teams. The regulations are targeted at providing two additional means to avoid prohibited transactions on retirement accounts: a computer model method and fee leveling method.
These regulations are additive to current prohibited transaction relief. In other words, if advisors are using prior relief, such the SunAmerica Opinion, to avoid prohibited transactions in their IRA accounts, then they may continue using that approach. However, this is a good opportunity for financial advisors to review their current advisory programs that include IRAs to ensure that they are in compliance with the DOL standards around prohibited transactions. In addition, financial advisors should pay special attention to forthcoming DOL regulations that may expand the definition of fiduciary for purposes of these rules.
The success of any firm’s wealth management business depends in large part on the capabilities of the technology that is employed.
When evaluating your wealth management technology or evaluating a vendor offering, consider these critical needs:
- Is the platform client driven? To remain competitive, consolidating accounts and relationships is imperative to managing and retaining clients.
- Does the platform have a solid financial planning component? To compete in the wealth management business, firms must understand the entire client picture – their needs, goals and retirement plans. Without a sound financial planning tool, it is difficult to keep the pace.
- How solid is the platform’s customer relationship management? While CRM can mean different things to different applications, having the tools to properly manage and stay connected with clients is crucial.
- How flexible is the platform’s integration? Does your firm’s investment advisor framework provide a simple experience, and is it open enough to integrate additional products into a single interface? Is it web-based, or are there portions that must reside on the advisor desktop?
- Do you have a reliable on-boarding tool for new clients? How easy is it to maintain your client and account data?
- How robust is the trade interface, and how expansive is the range of asset classes you are able to offer your clients?
- Does the platform have the ability to reevaluate and rebalance portfolios based on the client’s changing financial needs?
- Is the platform ready for the new regulations around cost basis processing?
- How integrated is its data management capabilities? Can it bring together all of your wealth management information, and provide informative dashboard reporting to your financial advisors and wealth management executives?
These nine wealth management technology requirements are critical to wealth managers’ ability to attract and retain clients and grow their businesses. The right platform can help them increase their efficiency, productivity and value to clients as a trusted advisor.
How well is your technology platform addressing your wealth management needs?
An advisor was recently asked what the difference is between an online trading brokerage account and a self-directed account. Is there a difference between the two, or is the term “self-directed” just a new name for the same old, online trading account?
Online trading accounts rose to popularity in the mid- to late-1990s, when it was the wave of the future and certainly had its benefits. Online trading accounts increased the number of individuals owning securities at a faster rate than any other time since the stock market crash of 1929. That party lasted until 2000, when the technology industry’s bubble burst.
The amount of trades entered online plummeted then, and online trading did not recover until the mid-2000s. Around that time, particularly in retirement and 401k accounts, investors were allowed to pick the securities in which they wanted to invest. Most of the time, their investment selections were limited to the options an employer chose for them, but more and more qualified plans started to offer investors the ability to choose to invest in securities not offered by their companies.
With the great recession, investors welcomed the ability to choose their own investments for a variety of reasons, including:
- They thought they could do better than their advisor
- They were from generation Y, and had an increased familiarity with the Internet
- They simply liked having control over their own destinies
Does being self-directed take online trading one step further by providing the user with new tools to do their own research before investing? Major online brokerages have been offering online tools for financial planning, and some have been providing access to a live broker for over 10 years now. In other words, online tools being available in self-directed accounts really are nothing new. Full service and wealth management firms now are offering online trading, and are looking to distinguish themselves may be where “self-directed” was born. Or perhaps the terminology was adopted from the 401k and IRA community because it describes essentially what an investor is doing anyway.
To answer the original question of whether there is a difference between an online trading account and a self-directed account — perhaps it merely is a new catch phrase used to set one type of firm apart from another. What’s your opinion?
Last week, I had the opportunity to attend and present at the Financial Planning Association’s (FPA) Major Firms Symposium in San Diego, CA. So much has changed in the financial planning space since last year’s symposium that I thought I would share a few key observations and conference highlights that stood out to me.
First and foremost, the technology landscape has changed and is moving faster by the day. The evolution of the iPad has taken us all by storm. I have to remind myself regularly that the iPad was launched just in April 2010. It would be a dream-come-true if we could capture a percentage of that adoption for other advisor tools that are currently on the market. But nonetheless, it is fair to say not only that did the symposium’s presentations evangelize the power of the iPad, but also that it was obvious how tablets are changing the way advisors adopt technology. Advisors are now, more than ever, pushing technology providers, SunGard included, down the innovation path and at a quicker pace than ever anticipated.
Second, the method in which advisors perform financial planning is should evolve to be a “higher touch” experience. During George Kinder’s presentation titled, “Financial Planning as the Value Proposition” he spoke about how important it is to have deep emotional relationships with clients. This involves a great deal of listening and asking the non-financial questions to truly obtain the ultimate “goals” or “dreams” a client has. He quoted a statistic that 75% of clients would not refer their advisor to others. That is astonishing. In times when advisors have to work harder than ever to earn their clients trust, it seemed apparent that advisors could help re-establish trust through “life planning.” Based on this information, I am very interested to explore how technology can help advisors make the shift to this type of planning approach.
Lastly, I found the presentation by Cambridge Investment Research discussing their approach to social media very enlightening. Instead of fighting (or denying) the power of social media, they chose to embrace it for their advisors. They established a dedicated support team internally and then implemented social media monitoring software that allows their advisors to use LinkedIn, Twitter, and Facebook. Content has to be pre-approved and then software is used ongoing to monitor. They do not yet track revenue and referrals by virtue of social media, but they do have specific advisor testimonials that document how they have won new clients and revenue as a result of their efforts. In less than one year, they achieved over 15% adoption from their advisors.
There were several other quality presentations I did not get to touch on, but I am sure you can see from the little bit I have shared that technology and advisor interactions can have a strong positive impact on a client’s planning experience. Considering how much has changed, I greatly look forward to seeing what the symposium agenda will bring next year.