Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
I always find it odd when a financial advisor writes an article questioning the value of financial advice. This usually happens when the advice under question deviates slightly from what that advisor offers. I’m picking up on some of this in a recent article by Brian Allen titled, “The Threat of Managed Accounts for Plan Advisors.”
It misses the mark, starting with the title.
Let’s define some terms. “Managed accounts” means different things in different domains. Within a 401(k) context, managed accounts could be better described as a robo-advisor, providing guidance on optimal portfolio risk levels, fund allocations, savings, retirement age, as well as other ancillary services such as when to claim Social Security retirement benefits.
The primary method of engagement with managed accounts is typically online, although most solutions offer call centers and some even offer access to on-site and/or local advisors. There are differences in the scope of services offered by managed-accounts providers and across recordkeepers, but they tend to be relatively similar among the largest managed-accounts companies, such as Financial Engines, Morningstar (my employer), Fidelity and Guided Choice.
Allen suggests that managed accounts “compete” with robo-advisors in 401(k) plans. This is incorrect. Managed accounts is the predominant robo-advisor in the 401(k) space. In fact, managed accounts should probably be considered the original robo-advisor, since it has been available for more than two decades, well before the recent growth and availability of robos in the retail space.
Attacking the potential value of robo-advisors is a fundamentally an attack on the value of financial advice and financial planning (i.e., helping households achieve financial goals). I am a strong believer in the value of advice (and advisors) and there’s lots of ways to deliver it. Robo-advisors aren’t the only solution, but they definitely fit within a larger ecosystem of tools that can help people accomplish their goals.
At its core, Allen’s perspective appears to boil down to the following question (his words): “are managed accounts a valuable service that addresses a substantial need among plan participants, or are they an easy sell that plan advisors can use to drive up their income?” This is a bit of a loaded question because it assumes the two options are mutually exclusive.
Do recordkeepers make money off managed accounts? No doubt. To suggest that managed accounts are bad because the recordkeeper profits is naïve. Companies exist to make a profit and someone, somewhere, is probably going to make money off anything you buy. The larger question boils down to two things: Do participants need access to tools such as managed accounts to help them make better choices and do managed accounts add value?
With respect to the need for managed accounts, lots of 401(k) participants need help. There are decades of research documenting poor investment behaviors for households as well as a general lack of financial literacy. Allen explicitly acknowledges “the general lack of knowledge among plan participants to invest their retirement money appropriately.”
If people need help, where are they supposed to get it? They can always get help outside the plan, but a benefit of in-plan tools such as managed accounts is the fact there’s going to be a professional fiduciary helping the participant figure out things like how to invest savings, how much to save, etc. Participants get to choose whether they want to use the service (given its cost). If someone doesn’t think managed accounts are worth the fee (or they can find a cheaper way to get it), they don’t have to use them.
With respect to the potential value of managed accounts, there’s quite a bit of research suggesting that managed accounts help participants achieve better retirement outcomes. I’ve actually done quite a bit of research exploring this, as have others. Here are some of the more notable pieces in the space:
- “The Impact of Managed Accounts on Participant Savings and Investment Decisions,” by David M. Blanchett, Morningstar Investment Management, January 2019.
- The Value of Managed Account Advice,” by Cynthia A. Pagliaro, Vanguard, September 2018.
- “Made to Measure: Evaluating the Impact of a Retirement Managed Account,” by Brian Cosmano, Great-West Investments, Empower Institute, June 2018.
- “The Impact of Managed Accounts and Target Date Funds in Defined Contribution Plans,” by Alight Solutions, 2018.
- “Help in Defined Contribution Plans: 2006 through 2012” by Financial Engines and Aon Hewitt, May 2014.
Allen’s point that “fees charged to 401(k) plans are negative investment returns” is definitely true. Fees represent negative alpha in any domain, for any service. “Help” isn’t typically free, though, and if it is, then caveat emptor.
I pay people to do things that I can’t do myself, and the list is probably longer than it should be. When hiring someone, though, the question we each have to ask ourselves is whether the expected value of the service or solution (i.e., help) exceeds the expected cost (i.e., creates positive expected value). While the costs are typically explicit, the benefits can be both implicit and explicit. Not only can “help” save you time, but it can also keep you from doing bad things (like trading during the recent market volatility).
The empirical research shows that managed accounts improve participant outcomes, especially among those who want help from a professional fiduciary. Does everyone need to use managed accounts? Nope, but each participant gets to choose whether they want to use the service.
Managed accounts are a solution to financial security, not a “threat.” People need help and managed accounts represent one very good way to get it.
David M. Blanchett, Ph.D., CFA, CFP®, is head of retirement research for Morningstar Investment Management LLC. Views expressed are his own and do not necessary reflect the views of Morningstar Investment Management LLC. This article is provided for informational purposes only and should not be construed by any person as a solicitation to effect, or attempt to effect transactions in securities or the rendering of investment advice.
Read more articles by David Blanchett
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
