The benefits of managed accounts are many and varied, according to a new report from Vanguard. The study, appropriately titled “The Value of Managed Account Advice,” finds that most participants adopting managed account advice realize value in some form.
“For a large group of participants, advice leads to higher projected retirement wealth due to increased expected returns and savings,” the authors write. “For a smaller group, advice leads to reduced risk exposure, resulting in lower expected returns and projected retirement wealth but better portfolio diversification.”
The report notes that, to date, few studies have addressed the impact of managed account services on both saving and investment behavior. This is due in part to managed account advice being viewed predominantly as an investment advisory service. In contrast, Vanguard considers the impact of advice on all the components that impact retirement wealth, including savings, portfolio expected returns and risk, and investment and advisory fees.
Additional findings include the following:
- Increased wealth. By using managed account advice, 6 in 10 participants increase their projected ten-year retirement wealth by an average of 30%, net of investment and advice fees. This increase can be attributed to two factors: higher expected returns because of increased equity exposure and, among a subset of participants, increased savings rates.
- Reduced risk. Three in 10 participants earn value from managed accounts through a reduction in portfolio risk. While participants’ portfolios are better diversified, that risk reduction leads to lower expected returns and retirement wealth because of reduced equity exposure.
- Impact on savings rates. Four in 10 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. Meanwhile, 7% of participants reduced their contribution rate when choosing an advice service.
- Reallocation of company stock. 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.
“A managed account advisory service can be an effective tool to improve outcomes for defined contribution plan participants,” the report concludes. “The benefit depends on the fee charged for the service relative to improvements in investment allocations and savings behavior. Plan sponsors should consider offering professional advice programs as a complement to other professionally managed vehicles, such as target-date funds. Because of the powerful effect of savings increases on wealth outcomes, managed account providers should also consider expanding efforts to promote improved savings rates.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
