Are investment research firms, such as Morningstar and Ibbotson Associates, now rivals to reps?
FAs, who subscribe to Morningstar and Ibbotson research by the thousands, might be forgiven for thinking so. Ibbotson, traditionally focused on institutional investors, has recently stepped forward to offer assistance to 401(k) plan participants. Under some programs, Ibbotson studies a plan's offerings and provides advice on the best funds to pick. Participants are free to take the advice or not. In other instances, participants rely on the investment firm for complete management; Ibbotson picks the funds and rebalances the portfolio. Ibbotson now provides full management for 150,000 participants with assets of $2 billion. Clients sign up for help through 401(k) providers like Fidelity Investments and Merrill Lynch.
Ibbotson is hardly the only company aiding wary 401(k) plan participants. Financial Engines, founded by Noble Prize winner William Sharpe, now oversees $1 billion in managed accounts. Fund tracker Morningstar manages 6,000 401(k) accounts and provides information and advice to 11 million plan participants. “We expect to see tremendous future growth in this advice area,” says Matt Radgowski, VP of retirement advice services for Ibbotson. “Many people have little interest in the markets, and they just want someone to tell them which funds to pick.”
The current upsurge in advice began following an advisory opinion issued by the Department of Labor in December 2001. The opinion said that it was permissible for fund companies to provide 401(k) plans, including supplying record-keeping services and investment options. But fund companies could not give advice on investment selections because of the potential conflicts of interest. In order to supply advice, the 401(k) provider would have to hire an outside supplier that would, presumably, be objective.
Do they pose a threat to financial advisors? Not really, says Christopher Jones, of Financial Engines. “Most of the people that we help have accounts with less than $100,000,” he says. “That isn't enough to attract the attention of an experienced advisor.” Jones says that Financial Engines is focusing on large companies, like Motorola and J.C. Penney. Financial advisors tend to work with smaller businesses, such as medical practices and law firms. Of course firms like Financial Engines and Ibbotson could introduce new opportunities for advisors. Once 401(k) participants get a taste of professional advice, they may be inclined to try the more comprehensive service that only financial advisors can offer.