2016 Regulatory Outlook for Advisors
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Transcript of 2016 Regulatory Outlook for Advisors
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7/24/2019 2016 Regulatory Outlook for Advisors
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Manning & NapiersRegulatory Outlookfor Advisors
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7/24/2019 2016 Regulatory Outlook for Advisors
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Understand how todays
challenging regulatory
landscape impacts your
practice and clients.
2
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ContentsFIND OPPORTUNITY
IN FIXED INCOME
YOUR FIDUCIARY
RESPONSIBILITY
REGULATORY TRENDS
4
6
8
How to position fixed incomein a rising rate environment
Evolving roles & responsibilitiesfor todays financial advisors
Regulatory developments& trends to monitor
3
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Over the past 30 years, interest rates have
declined. Today, the interest rate outlook
is challenging. Yields are still at very low
absolute levels, and therefore have more
room to go up than down. However, an
increasingly interconnected world means
events from around the globe can influence
U.S. growth and ultimately the direction of
interest rate movements.
Investors of all types are generally unfamiliar
with how interest rate movements affect
traditionally safe bond investments. Using
a bond index fund to gain exposure to the
broad fixed income market has become a
common investor strategy.
Bond portfolios that follow a benchmark may
not deliver the best the market has to offer
in a fluctuating interest rate environment.
Typically, a benchmarks composition is
market-capitalization weighted according
to the total value of debt outstanding in the
market; its not based on the fundamental
characteristics of each bond.
Investors may need assistance from theiradvisors in understanding how a portfolio
can be expected to perform in different
environments. Fiduciaries responsible for
retirement plan assets need to understand
how interest rate movements may affect
plan participants who are nearing retirement
and are more exposed to this traditionally
safe asset class.
4
50 YEAR INTEREST RATE TREND(01/01/1965 - 12/31/2015)
4%
1
/66
1
/71
1
/76
1
/81
1
/86
1
/91
1
/96
1
/01
1
/06
1
/11
12
/15
8%
12%
16%
1.47%
2.27%
3.07%
6.57%
8.99%
2.27%
-4.00%
-26.63%
If the 10-year TreasuryYield in one year is
The total returnwill be approximately
THE IMPACT OF RISING TREASURY YIELDSYield as of 12/31/2015*
(50-year low - 07/2012)
(Yield at 12/31/2015)
(10 year average)
(50 year average)
Find Opportunity in Fixed Income
Source: FactSet.
10 Year Treasury Yield
This information is for illustrative purposes only. Past performance does not guarantee futureresults.
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Advisors can provide
valuable perspective and
insight to their clientsregarding how to position
portfolios to navigate
changes within the sector.
Retirement plan advisors
can provide education
to plan sponsors and
fiduciaries about the effect
rising interest rates and
bond market volatility could
have on current menu
options. A review of in-plan fixed income options,
including the role of fixed
income in target date as
well as fixed income only
offerings, should be part
of the investment review
process in 2016.
LOOKING AHEAD
One of the greatest concerns facing investors is the low
level of bond yields today and the risks associated with
a rising yield environment going forward. While volatilityin stock or bond markets can be a source of opportunity
for savers with many years until retirement, bond market
volatility has become a heightened source of risk for those
investors nearing the date that they will need to start living
off their savings. This results from the higher allocation to
fixed income near retirement, which may mean being more
heavily exposed to the most overvalued sectors of the bond
market like U.S. Treasuries at the same time that stability
of retirement balances becomes most important to meet
ongoing living expenses.
The answer is not to simply own more stocks when nearing
retirement, since volatility is inevitable in the stock market.
Active, flexible management of fixed income portfolios with
the ability to adjust maturities and sector exposures to avoid
taking risk, unless well-compensated for those risks in the
form of more attractive yields, is most important for this
group of investors.
WHAT TO EXPECT
5
USEFUL TOOL
We understand that explaining the risksof this asset class to clients in the context
of rising rates may be challenging. Oureducational resources can help you talk to
your clients about the hidden risks of fixed income.
https://www.manning-napier.com/Corporate/Insights/ResearchLibrary/tabid/307/Tag/111/fixed-income.aspx?tn=fixed+incomehttps://www.manning-napier.com/Corporate/Insights/ResearchLibrary/tabid/307/Tag/111/fixed-income.aspx?tn=fixed+incomehttps://www.manning-napier.com/Corporate/Insights/ResearchLibrary/tabid/307/Tag/111/fixed-income.aspx?tn=fixed+income -
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Being an ERISA fiduciary is not easy.
Courts have repeatedly observed that
fiduciaries under ERISA are subject to the
highest standard known to the law. Vital
components of fiduciary status under ERISA
are the duty to act prudently in selecting
and monitoring investments, and removing
investments that become imprudent based
on changing economic environments.
The Department of Labor, through its
proposed definition of fiduciary, will
extend the fiduciary standard embedded
in ERISA to advisors who handle any kind
of retirement account, including IRAs,
in addition to accounts held inside aretirement plan.
An ERISA fiduciary must act with the
care, skill, prudence, and diligence . . .
that a prudent man acting in like capacity
and familiar with such matters would use.
While plan fiduciaries are not required
to be clairvoyant, a fiduciary who can
establish that they followed a prudent
decision-making process, including hiring
experts and consultants and reviewing
relevant information and documentation,
can clear this bar easily. This process
is commonly described as procedural
prudence.
A crucial aspect of procedural prudence
is documenting the reasons why certainchoices were made. Documenting
the investors objectives and how the
selected investment options help meet
those objectives is an essential step
in a procedurally prudent process.
Documentation can be an anchor point
when reviewing performance months or
years later, providing fiduciaries with a
reminder of why they made the choice
they did and giving them a baseline for
evaluating whether the investment optionhas met investor objectives.
6
Fiduciaries are
not allowed to
set it and forget it.
Your Fiduciary Responsibility
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LOOKING AHEAD
In 2015, the Supreme Court
reminded plan fiduciaries that
they have an ongoing duty to
monitor investments for prudence.
For ERISA fiduciaries, this is not
a new duty, but is worth revisiting
in light of the changing economic
environment, particularly as
it relates to fixed income. A
fiduciary who is responsiblefor maximizing an investors
likelihood of a secure retirement
could easily be as concerned with
managing risk as with low fees,
and must understand what trade-
offs are involved with the various
options in the marketplace.
In the retirement area, the
growing popularity of target date
funds has led to a proliferationof product options which can be
difficult to evaluate. Especially in
a rising interest rate environment,
fiduciaries need to understand the
managers investment process,
the holdings in the portfolio, how
those holdings will change over
time, and how those changes can
affect the interests of investors
in varying market environments.
A target date manager whooffers a transparent view into the
funds holdings and strategies
will allow fiduciaries to thoroughly
understand the investment and
document their reasons for
making specific choices.
WHAT TO EXPECT
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Understanding an investors objectives and using
expertise to manage risk in changing market
environments are core competencies for financial
advisors. In light of the coming ERISA standard for all
retirement accounts, advisors can review their service
offerings, documentation regimes, and educational
capacities and develop methods for demonstrating the
value they deliver to their clients:
Demonstrating understanding of investor
objectives and the appropriateness of investmentrecommendations for achieving those objectives will
be key to establishing a record of prudence.
Monitoring the economic and regulatory environment
and adjusting recommendations as environments
change, and documenting the reasons for those
recommendations, can help advisors stay on the
right side of ERISA.
USEFUL TOOLSOurQDIA SyncSMtoolcan assist in the selection
of a QDIA and provide documentation for
retirement plan fiduciary file.
Understand holistic investor goals and objectives
with our Retirement Planning Guidebook
which provides participant-level guidance on IRA
rollovers, Social Security, and Medicare.
https://sync.manning-napier.com/https://sync.manning-napier.com/https://sync.manning-napier.com/https://sync.manning-napier.com/http://go.manning-napier.com/l/38932/2015-08-18/2hndtyhttp://go.manning-napier.com/l/38932/2015-08-18/2hndtyhttp://go.manning-napier.com/l/38932/2015-08-18/2hndtyhttp://go.manning-napier.com/l/38932/2015-08-18/2hndtyhttps://sync.manning-napier.com/ -
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States get into the Act
State governments are concerned about
private-sector retirement readiness and
savings rates because they realize that
states would ultimately bear the burden
of providing for indigent seniors. Concern
about whether a state-sponsored plan
would trigger ERISA liability has held states
back from implementing their own savings
incentives. Recent regulatory developments
show that the federal government and the
states are finding common ground on this
issue.
States that choose to harness the power of
inertia by encouraging or mandating payroll-deduction retirement savings will present
new challenges and new opportunities for
employers, employees, and advisors.
Retirement plan leakage
Another area of perennial concern,
leakage refers to early withdrawals
by participants from their retirement
accounts, leading to tax penalties and
loss of retirement savings. Based on an
EBRI study commissioned by the ERISA
Industry Committee (ERIC) in 2014,
two-thirds of the leakage from qualified
accounts occurs when a participant
changes jobs. Participants will commonly
cash out a retirement account with a
relatively small balance rather than roll
it over to their new employers plan or to
an IRA. Other sources of leakage include
hardship distributions and participantloans.
Regulatory Trends
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Source: Employee Benefit Research Institute (EBRI).
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Financial advisors can
monitor developments in the
states where they practiceand evaluate how they are
positioned to service clients
in the evolving environment.
Potential areas to explore
include financial literacy
education and related
services to smaller
employers who adopt a
payroll-deduction IRA and
later want to graduate to a
plan that includes employercontributions.
LOOKING AHEAD
Current proposals to combat leakage include simplifying or
automating the rollover process to encourage individuals
to keep their retirement savings in a tax-qualified account.Proposals to limit hardship distributions and loans are also
being discussed, but eliminating these features, it is feared,
may have the un-intended consequence of discouraging
participation in the first instance.
Other commentary observes that the lack of basic financial
literacy, including an understanding of the importance of
emergency savings, contributes significantly to the leakage
problem. Americans struggle to keep cash available for
emergency situations such as major car or home repairs,
and tap their 401(k) account instead. Education regardingthe importance of a strong personal balance sheet to
retirement security can be expected to gain traction as
state-based programs grow. State regulation in an area
traditionally governed by the federal government will add
to the complexity of the regulatory environment and may
present new opportunities to provide advice to the next
generation of savers and investors.
WHAT TO EXPECT
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Manning & Napier is
committed to providing
ongoing resources &expertise to advisors.
Our priority is helping
you manage real-worldrisks and meet the
needs of your clients.
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To learn more about these topics and to stay up-to-
date, we invite you to check out these resources that
are available to you.
Regulatory FAQsSubscribe to our Regulatory FAQs series to getanswers to your regulatory questions and to stay up-to-date on regulatory issues.
ConvergeSubscribe to Converge for a unique perspective on the
current retirement landscape and to stay up-to-date onregulatory changes.
Investment InsightsLeverage our research and economic analysis through
timely articles & whitepapers, and subscribe to ourMarkets & Economy blog and in-depth Vantageeconomic commentary.
Resources
Access our useful tools & resources and more at
www.manning-napier.com/financialprofessionals
http://go.manning-napier.com/l/38932/2015-10-26/39tplghttp://go.manning-napier.com/l/38932/2015-10-26/39tplghttp://go.manning-napier.com/l/38932/2015-10-26/39tplghttp://go.manning-napier.com/l/38932/2015-10-26/39tplghttp://go.manning-napier.com/l/38932/2015-10-26/39tplghttp://go.manning-napier.com/l/38932/2015-10-26/39tplg -
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