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What's New in
Cybertalk?
by Jean Gora
January 2001
Note: CyberTalk is a column that
appears monthly in LOMA's Resource, the magazine for insurance and financial
services management. To see more contents of the magazine and to see how to
subscribe, click on RESOURCE MAGAZINE.
Automated Investment Advice: Who
Wants It?
Large insurers in the 401(k) market are
increasingly adding automated participant investment advice features to their
Internet offerings. An examination of some of the Web sites of the leading
providers of automated investment advice services turned up numerous
announcements of relationships with insurance companies and other plan
providers. This month’s CyberTalk examines these services and indicates which
insurers and financial institutions use them.
The prevalence of relationships between 401(k)
providers and automated investment advice providers suggests that all serious
401(k) providers will have to offer these services. Providers of automated
investment advice are not confining their distribution efforts to providers of
401(k) plans; some also target individuals directly. This fact suggests that if
401(k) plan providers do not offer advice to plan participants, the participants
will obtain it on their own.
Typically Web providers of 401(k)-related
automated investment advice make recommendations to employees regarding their
plan contribution levels and asset allocations in the light of their current
financial situation, risk tolerance, and investment objectives. Some of these
services incorporate Monte Carlo simulations that enable plan participants to
determine the probability that their investment approaches will enable them to
reach their retirement objectives. These simulations take timing risk and
mortality risk into account in a more realistic manner than traditional
automated financial planning approaches do.
Below are some of the leading providers of
automated investment advice that target the 401(k) market.
Financial Engines®
Financial Engines® is a registered
investment advisor and automated investment advice provider founded by Nobel
prize-winning economist William Sharpe. It markets its services to 401(k)
providers, plan sponsors, and individuals. Financial Engines’® services
targeted at 401(k) providers allow them to provide plan participants with
individualized investment advice (including a customized portfolio), ongoing
monitoring, a personalized forecast, research tools (including scorecards on
mutual funds), and free online support.
Individuals can receive the same services
directly from Financial Engines® for $14.95 per quarter or $54.95 per year for
one retirement account and $39.95 per quarter or $149.95 per year for multiple
retirement accounts. Financial Engines® makes use of a Monte Carlo simulations
engine that generates thousands of potential economic scenarios, taking into
account numerous variables such as fluctuations in inflation, interest rates,
and stock market prices.
The Financial Engines® service is used by
eAdvisor, a joint venture between E*Trade and Ernst & Young LLP that
provides online financial advice. It also draws on the expertise of Ernst &
Young’s network of personal financial consultants. The eAdvisor service makes
use of Financial Engines’® Forecast Engine and Advice Server. Other Financial
Engines® backers include Goldman Sachs, Merrill Lynch, Wells Fargo, and a group
of venture capital firms.
Standard and Poor’s Retirement Services
Standard and Poor’s Retirement
Services, another registered investment advisor, acquired Rational Investors,
Inc., a developer of automated advice software. The S&P service allows
401(k) providers to offer plan participants personalized investment planning and
advice. Participants determine goals, risk tolerance and time horizon and
receive specific investment advice pertaining to investments covered by their
plans. They can act immediately to request deferral rate increases, changes in
investment direction, or transfers of existing balances.
The S&P service also provides traditional
401(k) account management services, allowing participants to access account
balances and history, make loan and withdrawal requests, and change personal
information. Standard & Poor’s Investment Advisory Services can also
advise plan sponsors on the adequacy of the investment options included in the
plan.
ClearFuture
ClearFuture is offered by Morningstar
Associates, the registered investment advisory subsidiary of Morningstar, Inc.
ClearFuture uses a goals-based approach to allow plan participants to examine
the relationship between long- and short-term risk, asset mix, and retirement
income. After participants select goals, ClearFuture provides specific
investment guidance and advice on creating a diversified portfolio using the
investment options available in their 401(k) plans. At the heart of the product
is Morningstar’s research database on mutual funds and stock. Morningstar
Associates also provides investment monitoring.
Morningstar is marketing ClearFuture in an
interesting manner. It is forming alliances with recordkeepers and processors
and working to integrate its advice platform with their transaction platforms.
For example, it is tying in with the record keeping and transaction platform of
Quantech Web, offered by SunGard® Corbel, a unit of SunGard® Data Systems.
Quantech Web allows participants in 401(k) plans to transfer money between
funds, initiate loan requests, and realign existing investment account balances.
Participants in Quantech’s 401(k) plans can now access ClearFuture with
preloaded information such as their plan investment options, name, date of
birth, salary, and balances for their retirement accounts and loans.
ClearFuture generates recommended portfolios out
of the investment options in the participants’ 401(k) plans. Participants can
then implement the recommendations immediately through the ClearFuture-Quantech
link. Morningstar also provides investment plan design for plan sponsors,
manager selection, investment performance monitoring, custom analysis, and
trustee reporting. It does not make use of Monte Carlo simulations or indicate
the probability that a particular investment approach will yield the desired
result. Morningstar plans to expand its offerings beyond the 401(k) market and
expects to have a multi-goal investment advisory product that allows planning to
buy a house or finance a college education. The Japanese firm Softbank is a
major investor in ClearFuture.
mPower
mPower, which was previously 401(k) Forum
and now offers 401kafe, provides individualized fund-specific investment advice
to 401(k) plan participants. Customization is based on the plans, investment
options, vesting/matching schedules, loan information, contribution limits and
eligibility requirements.
The service guides individuals through a risk
assessment process and helps them to take inventory of their current assets. It
then uses this information to provide specific investment advice and create
savings plans based on each individual’s unique retirement situation. It also
offers online investment guidance that relies on an asset-level allocation
approach.
The 401kafe provides education to plan
participants. mPower has alliances with a number of high-traffic Internet sites.
GE Asset Management Service, a division of GE Retirement Services (which is a
division of GE Financial Assurance) is offering the ePower service through its
GE One-on-One™ 401(k) plan service. This service also makes available
telephone access to professional retirement counselors provided by Arthur
Andersen.
Targeting Individual and Broker Markets
Some providers of automated investment
advice target the individual and/or broker markets. These include Financeware,
Quicken’s 401(k) Advisor, Direct Advice, and AdviceAmerica™. Descriptions of
each of these providers are below.
Financeware
Financeware, funded by venture capital,
offers financial planning software targeted at brokers and to a lesser degree at
individuals and 401(k) plans. Its leading product is Financial Plan Auditor,
which allows users to examine how their current financial plan would have
performed under an assortment of different historical situations.
Financeware also offers AASim (AssetAllocation
Simulation Software), a Monte Carlo simulation financial planning software
package developed by Macey-Holland. It is to be incorporated into a forthcoming
Financeware product called wealthsimulator.com. AASim simulates what might
happen to an investor’s portfolio value over a large number (e.g., 1,000) of
lifetimes.
Using this sample, it calculates the percentage
of times the investor might have achieved his or her goals. In each of the
lifetimes, the model generates an age at death using mortality factors. In each
year of each lifetime, it generates a random rate of return based on an average
and a standard deviation specified by the user. The model also addresses timing
risk and indicates the probability that the plan will be successful.
Quicken’s 401(k) Advisor
Quicken’s 401(k) Advisor is a
consumer-oriented investment advisory service offered by TeamVest, a registered
investment advisor. This service, which includes preloaded data on mutual fund
choices and matching policies for more than 1,100 companies, provides
fund-specific advice and offers ongoing monitoring. It also allows consumers to
communicate with a real personal advisor over the phone, enabling the advisor to
see information on the customer’s browser while the customer is looking at it.
The customer has unlimited access to the Quicken
401(k) Advisor by phone, e-mail and the Web. The advisor can rebalance the
customer’s portfolio and provide quarterly updates to track progress to
financial goals. The service costs $19.95 per month after a 30-day free trial.
DirectAdvice and AdviceAmerica™
DirectAdvice, another registered
investment adviser, offers financial planning software to financial institutions
for use by their brokers and/or their customers. It has an agreement to provide
services to the Pershing Division of Donaldson, Lufkin, & Jenrette. It also
has a relationship with E*Trade and is involved in a joint venture with Softbank
in Japan.
AdviceAmerica™, also a registered investment adviser, provides personalized
financial guidance on the Web. It allows constant consumer monitoring and
updates depending on changes in the consumer’s life cycle. In an introductory
offer, subscribers can pay $49 per year or $14 per quarter for the service.
Later, the first year’s subscription will be $99 per year or $29 per quarter.
The service is headed by Robert Goss, the former president and CEO of the CFP
Board of Standards.
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