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Passive Shift Pressures DCIOs

A new study finds that the growth of passive management has had a “corrosive” effect on DCIO sales, though target-date funds have enjoyed something of a resurgence in the space.

The State of DCIO Distribution: 2017, Sway Research's annual benchmarking study on the defined contribution arena, finds that 9 out of 10 managers indicated that the growth of passive management has had a corrosive effect on DCIO sales, complicated by a trend among specialist DC plan advisors who increasingly favor passively managed portfolios over active ones in key asset classes, such as U.S. large cap equity and target-date investments.

That said, a growing percentage of managers are now benefiting from TDFs, as more than half of surveyed managers indicated that they had a positive impact on DCIO sales in the past year — up from 40% two years ago.

The rise in institutional pricing is another factor, with products with 12b-1 and sub-T/A fees “fading” from DC plan investment menus, while zero revenue mutual fund shares and, to a lesser extent, collective investment trusts (CITs) are booming, according to the report. The report notes that specialist plan advisors are forsaking commissions in favor of revenue models based on flat- and asset-based fees, while the average manager generated about 30% of its first-half 2016 gross DCIO sales in zero revenue products, while elite plan advisors expect allocations to CITs in the DC plans they serve to grow from an average of just 10% today to 16% by the end of the decade.

Fiduciary Regulation Impact

Many also expect to allocate additional resources to staff training in light of the DOL fiduciary rule. However, when asked what changes they will make in response to the DOL rule, the most common response from DCIO sales leaders was, “I just don't know yet.”

The report finds that specialist advisors are more certain about the impact of the new regulation: More than four out of five advisors within the retirement/benefits consultant segment, who specialize in employer benefits and manage more than $1.1 billion of DC assets on average, believe the fiduciary rule will lead to enhanced business growth. However, those in the retirement advisor segment, who have sizable DC businesses ($70M in plan assets on average) but focus on serving affluent individual investors, mostly expect the regulatory changes will lead to more time spent documenting plan decisions, higher costs, and lower margins on DC business. Either way, the report says that DCIOs have an opportunity to help intermediaries in both segments adapt to, and benefit from, the new rules.

Staffing Commitment

Managers remain committed to the DCIO space, as evidenced by expanding staffs: About one in three managers added to field sales or home office staff in the past year, while two in five say hiring additional sales staff is the top priority for 2017.

Assets at the average manager increased by 5% over the 12 months ended June 30, 2016. That said, although gross sales levels in the first half of 2016 improved relative to 2015, the average manager experienced slight net redemptions from its DCIO business of $21M, following net outflows of $304M in 2015. Sway expects the trend of asset growth outpacing net redemptions to continue, barring a steep or prolonged correction in U.S. equities.

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