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Tectonic changes coming to 401(k) industry

Wednesday, January 27th, 2010

Changes will impact plan participants, sponsors, advisors and product manufacturers, resulting in an industry-wide reshuffling.

Register for Webinar on Feb 17 at 2 pm ET.

January 28, 2010 (New York) – According to a new report from research and advisory firm Novarica (www.novarica.com) , a new development in the 401(k) space may put trillions of dollars into play for advisors and plan manufacturers, while also exposing legal and fiduciary liability for plan sponsors. Due to the new BrightScope.com web site and database, the lack of transparency that has always pervaded the 401(k) industry is rapidly becoming a relic of the past.

Americans are relying more and more on their 401(k) plans for funding their future retirements. Bad or expensive plans are costing American workers too much in terms of delayed retirements and lower plan balances. BrightScope has developed a database and rating engine to score and benchmark plans, and provides detailed data that explicitly tells employees, sponsors, advisors and plan manufacturers just where their current plans fall short.

According to the report, the roll out of BrightScope will result in:
Sponsors moving to purchase more cost-effective and attractive plans to meet their fiduciary duty to plan participants.
Participants gaining better investment and retirement outcomes from their 401(k) plans as they pressure sponsors to provide benefits and utilize lower-cost plans similar to others among their peer group firms.
Advisors will be able to sell more-competitively based on the transparency of plan data showing the current costs of both the overall plan and the underlying investment choices.
Manufacturers will be forced to develop lower-cost plans to reflect a more transparent and competitive marketplace. Due to the BrightScope solution, plan and investment option costs are projected to rapidly decline in the 401(k) industry.

Novarica believes that the BrightScope ratings will eventually have a similar impact to the Morningstar ratings on mutual funds, identifying future winners and losers in the 401(k) industry.

“America is looking to defined contribution plans, such as 401(k)s, to replace the defined benefit pension plans, and to take the stress off Social Security,” states Robert J. Ellis, Principal and head of Wealth Management at Novarica, and lead author of the report. “The problem was that, for most of the industry participants, the lack of transparency meant that plans were more expensive than they needed to be. Especially bloated were the fees charged on the underlying investments. BrightScope.com, combined with new Federal regulations, will change all that for the betterment of American workers’ retirement outlooks, but current providers will need to adjust to a radically altered marketplace.”
The 14-page report is available from Novarica at http://www.novarica.com/report_brightscope_401k.shtml . Mr. Ellis will also be hosting a webinar discussing the report on February 17 at 2 PM Eastern. Interested attendees may register online at https://www1.gotomeeting.com/register/760027265 .

Posted in Economy, Innovation, Press releases, Wealth Management, Webinars | No Comments »

Best Practices in Social Networking for Wealth Management

Tuesday, January 12th, 2010

January 12 (New York) – Novarica (www.novarica.com), a research and advisory firm focused on markets, operations, and technology in insurance and wealth management, has issued a new report identifying best practices for wealth management firms to follow in order to maximize the benefits of Social Networking. Top findings from the report include:

Appropriate use of social networking tools is most beneficial when combined with online trading capabilities, resulting in increased client trading through better distribution of trading ideas and concepts, thereby increasing firm revenues. Without trading capabilities, social networking simply adds costs in terms of managing the new channels.
Outside the self-service online brokerage industry, few wealth management firms are successfully deploying social networking tools, thereby missing opportunities to increase client loyalty and capture the elusive Generation Y investor, the future of wealth management.
Firms need to incorporate social networking at their own sites and on their own servers to ensure appropriate compliance; having advisors doing their own thing on Twitter and Facebook is a recipe for a compliance disaster.

“Social networking is a powerful dynamic sweeping communications and peoples’ daily interactions through technology. By combining social networking tools with online self-service capabilities, wealth management firms can build powerful integrated offerings that improve trading volume and client loyalty while creating a methodology for firms to capture the still-elusive Gen Y investor,” comments study author Robert J. Ellis, a principal and head of wealth management at Novarica.

The 15-page report includes tables outlining current social networking of leading institutions and is available from Novarica at http://www.novarica.com/report_social_networking_wm.shtml. Mr. Ellis will also be hosting a webinar discussing the report on January 27 at 2 PM Eastern. Interested attendees may register online at https://www1.gotomeeting.com/register/141451256

Posted in Press releases, Wealth Management, Web 2.0, Webinars | No Comments »

The clock is ticking on cost-basis reporting…

Monday, December 14th, 2009

Thanks to the 2008 Emergency Economic Stabilization Act, at the start of 2011 many financial firms will be required to report the cost basis of publicly-traded securities to both taxpayers and the IRS. To comply, firms such as broker-dealers and fund custodians will need to update their systems.This new law was created by a serendipitous combination; the IRS was concerned that the cost-basis numbers investors put on their Schedule D’s were, perhaps, a little too high, while the Federal government increased an already-insatiable thirst for revenue. The IRS estimated that under-reporting was costing some $7 billion annually. Voila – tax cost basis reporting was born.

Many firms have been trying to figure out how they build their own system, or planning on letting their custodian handle it. Wrong and wronger. Others were waiting for detailed IRS regulations. Wrongest. The reality of tax lot accounting, corporate actions and wash sales has overwhelmed most in-house IT departments. In-house solutions are estimated to be running in the $3 million to $5 million range. Plus, the law clearly states that the broker dealers themselves will be ultimately responsible, not the custodians.

For those firms looking for purchased solutions (which include SunGard’s new Cost Basis Reporting Engine, Scivantage’s Maxit and WKFS’ Gainskeeper), they need to get busy selecting a vendor and testing it out. Ditto for those firms that are truly well along in building an in-house solution. But for firms that are late to the party and behind the curve, get out the check book and get ready to write a large check to either a vendor or to the IRS (up to $350,000 for unintentional errors, more for failure to comply).

Because on January 2, 2011, broker dealers better be tracking individual tax lot cost basis details. And in 2012 it will be mutual fund companies, with everyone else on the system by 2013. Happy New Years, y’all.

Posted in Data Management, Distribution, IT Spending, IT Strategy, Outsourcing, Uncategorized, Wealth Management | No Comments »

More Notes from CIO Insurance Summit

Tuesday, December 8th, 2009

More good workshops and conversations yesterday at the CIO Insurance Summit, including some great discussions of agent-facing technology, legacy transformation, and outsourcing. Perhaps surprisingly for a “technology” event, across all three of these areas, the importance of personal engagement and relationships shown through.

One of the highlights of the agent-facing technology discussions was the importance of engaging with the CSRs at independent agencies when designing agent portals. As our small commercial agents study shows, CSRs have their own preferences and needs in agent portal design, and for some small commercial lines especially, the CSR can be influential in determining where business gets placed. One super-regional carrier who presented a case study actually has a CSR council in addition to an agent council, which not only lets them learn what CSRs like, but builds a direct relationship with these important stakeholders.

Among the many discussions related to legacy transformation was a case study from a super-regional P/C insurer, showing how a $30 million, 4-year investment enabled the company to write an additional $200 million in business once the transformation was complete. Like all true transformations, this one was quite disruptive for the organization, and the initiative was only possible because the CIO and CEO had the same vision, goal, and commitment. This strong relationship was the necessary pre-condition for being able to successfully attempt this transformation..

Outsourcing/managed services discussions focused more on capabilities enhancement and the ability to focus internal resources more strategically rather pure cost savings. For many CIOs, maintenance of legacy applications (especially during a transformation project!), testing, and even DBA work are being shifted to external service providers, while internal teams remain focused on developing and supporting strategic applications.

But what struck me about the sourcing discussions, both in presentations and in side conversations, was the efforts being devoting to build personal relationships with these external partner teams, including sending internal staff to visit offshore sites and proving opportunities for teams to mix socially. It really underlined the importance of building cohesive project teams, no matter what color badge the team members wear.

I’m looking forward to today’s discussions on Social Networking and Innovation, and to tonight’s reception.

Posted in Conferences, Distribution, IT Strategy, Insurance, Outsourcing, Wealth Management, Webinars, eBusiness | No Comments »

Webinar on TradeKing Case Study: Wed 2pm

Tuesday, December 1st, 2009

I’ll be presenting a webinar on our case study of TradeKing, focusing on the benefits of social networking in online brokerage and other personal financial services areas.

Posted in Wealth Management, Webinars | No Comments »

Investment ignorance trumps possible deception per US Department of Labor

Friday, November 20th, 2009

The Labor Department’s Employee Benefits Security Administration has killed a Bush-administration rule that would have allowed mutual fund companies to offer direct one-to-one investment advice to defined contribution (401k, 403b) plan participants. The announcement questioned whether the rule adequately protected the interests of plan participants.

This rule reversal has significance for providers of defined contribution plans who had geared up to provide additional plan participant education in the form of targeted individual financial advice, with the hope that such contacts could increase cross-selling of other investment and insurance products.

It appears that DOL prefers participants not know about how their retirement plan assets fit with other investments rather than being told about investments by firms that (gasp) make money off their current plan.

Posted in Distribution, Economy, Outsourcing, Wealth Management | No Comments »

Target payout funds – a substitute for variable annuities?

Friday, November 20th, 2009

Mutual fund product manufacturers like Vanguard, Schwab, and Fidelity launched target date payout funds to great fanfare in 2008. These funds, designed for retirement income and as a lower-cost replacement for variable annuities, have had significant problems. Just like the target retirement date or life-cycle funds that failed so abysmally in the downturn, they represent a poor substitute for variable annuities with guaranteed withdrawals.

Problems with the target date payout funds include:

No guarantees – only insurance companies can guarantee return of investment and withdrawal amounts. The dropping NAV of a target payout fund impacts the ability to return all the investment. Furthermore, much of the return is actually return of investment, reducing the ability to earn sufficient amounts to make future payouts.

Funds can reduce future payout percentages, unlike annuities where the withdrawal benefits are locked in as a percentage of the original investment or higher amount.

Even the mutual fund companies are now backing off their claims of a low-cost variable annuity replacement. Stated one Vanguard spokesman, “No one should have any illusions that we are guaranteeing income. People need to understand the role of these products — they’re a disciplined mechanism to draw down from mutual fund-based investments.” Mutual fund investments that, at the time of withdrawal, may be significantly below the original amount invested.

For mass market and mass affluent investors, there are better options. For scheduled payouts, investors gain equivalent benefits through bond or CD ladders. For guarantees that enable such things as paying the mortgage or eating, the variable annuity, especially those with lower fees, remains the better choice. Insurance and brokerage firms need to invest marketing dollars to counteract the slick marketing of the payout fund manufacturers and contrast the lack of history and potential retirement risk with the time-tested strategies in ladders and annuities. These firms should also prepare new wholesale marketing pieces to assist advisors in guiding their clients in the better direction.

Posted in Distribution, Innovation, Insurance, Wealth Management | No Comments »

Novarica in WealthBriefing

Monday, November 9th, 2009

Bob Ellis, Novarica’s Wealth Management practice Principal, has an editorial in WealthBriefing, the international wealth management newsletter, today. The article discusses the potential for conflicts of interest when law firms appoint themselves as trustee as opposed to selecting an independent corporate trustee. While this trend is problematic enough, it has been going on for years, but is now accelerating at a frightening pace. Even more troubling has been the development of asset management firms by law firms to manage the assets of the trusts where they have appointed themselves trustee. Law firms are engaging in these practices to increase recurring revenue far in excess of what they receive for writing the trust documents, but the conflicts of interest are dangerous for clients. Equally scary is that once the client finds themselves in this situation, they are almost impossible to correct without court intervention. To subscribe to WealthBriefing, go to www.wealthbriefing.com.

Posted in Wealth Management | No Comments »

Lightyear Capital buys 3 ING Broker-Dealers

Wednesday, November 4th, 2009

Lightyear Capital has acquired three of ING’s five broker-dealers, acquiring over $70 billion in client assets and 5,700 associated advisors. These firms represent three of the fifty largest broker-dealers in terms of associated representatives in the US. ING was a motivated seller as they are still endeavoring to raise cash to emerge from the financial meltdown of the last year. Lightyear, which initially intends to keep the firms separate (with separate clearing relationships), will be able to rationalize the systems over time and remove the tarnished ING brand. Lightyear should also be in a better position to invest in updated technologies, especially advisor platforms.

Even without the urgency of having to raise the cash, this deal makes sense as product manufacturers continue to separate themselves from their captive distribution channels to avoid any perceived bias toward proprietary products. This issue may gain even more relevance if the SEC moves ahead with advisor harmonization and makes broker delaers and their registered reps the fiduciary equivalents of RIAs.

As a private equity firm, Lightyear can be expected to sell off the enhanced broker dealer operation within five years to a larger independent broker dealer looking for additional scale or to a new retail player looking for a distribution channel.

Posted in Distribution, Wealth Management | No Comments »

New Wealth Mgt Case Study: TradeKing

Thursday, October 22nd, 2009

With the majority of the mass market and mass affluent investing public poised to move to a self-service environment to manage their investments, Novarica’s wealth management group has published a case study on one of the online investment industry’s biggest success stories, TradeKing.

The case study highlights their competitive strategy in terms of client segments and products, and the roles of customer service, education and social networking capabilities to create a compelling value proposition for their target client segments. Other online brokerage firms, as well as other financial services firms outside wealth management, can learn from TradeKing’s use of social networking to boost profitability.

Posted in Innovation, Wealth Management, eBusiness | No Comments »

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