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The Value of Managed Account Advice

A new report examines the value of a managed account program, based on its impact on portfolio allocations, savings levels, and the investment management and advice fees paid by the participant.

According to the Vanguard research report, by using managed account advice, 60% of participants increase their projected 10-year retirement wealth by an average of 30%, net of investment and advice fees. The researchers attributed that increase to two factors: higher expected returns because of increased equity exposure and, among a subset of participants, increased savings rates.

The research also noted that 30% of participants earn value from managed accounts through a reduction in portfolio risk, and 40% participants made an active savings decision at the time they adopted managed account advice. One-third of participants chose to increase their savings rate by an average of three percentage points, though 7% of participants reduced their contribution rate when choosing an advice service.

Additionally, for participants with concentrated single-stock positions of 20% or more of their account balance, company stock risk was substantially reduced by using a managed account service. The average allocation to company stock fell from 46% to 4% as a result of managed account advice.

Half of participants saw an increase in equity exposure, while 40% experienced a decrease. Moreover, a 59% of participants saw their expected rate of return rise, and 31% saw expected returns fall as portfolio risk was reduced to an age-appropriate level.

Some participants saw the average cost of their fund holdings rise as the advisor added some active strategies to portfolios. But 60% saw a reduction in average fund fees as the advisor shifts participants to lower-fee, better-performing options, particularly index funds and lower-cost active funds.

While all participants incurred a separate fee for advice, in some cases, the fee for advice was offset by the reduction in expense ratios due to portfolio reallocation. On average, expense ratios were reduced by 0.06% for all participants. This reduction, attributed to portfolio reallocation to lower-priced funds, offset approximately 16% of the fee for advice. As a result of the managed account advice, more participants deferred more than 9% of salary to their DC accounts, international equity diversification improved (at the expense of cash and employer stock), expected returns improved, and fund expenses fell.

Of course, as advisors know, the value of advice needs to be weighed against the potential cost of a managed account service. One cost component is the fee for the advice program itself, another component is the change in the costs of the underlying investments held by the participant as a result of the advisory process. The report acknowledges that those costs can be higher or lower depending on the advisor’s recommendations.

This month’s retirement report taken from “Napa Net”, written by the Napa Net staff