Aha! A leading advisor has found a chink in the armour of target date funds – increasingly viewed as the single-biggest threat to retail advisors.
Target date funds may not be the threat so many brokers fear, with a leading player pointing to research identifying a shortcoming.
“There doesn’t seem to be a lot of consistency amongst the asset allocations [of target date funds],” says Jason Abbott, a financial planner with WEALTHdesigns.ca and a dual-licensee.
The Toronto-area advisor became better acquainted with these so-called set-and-leave funds in 2014 in preparation for a video and print article he did for the Globe and Mail. His findings left him totally underwhelmed.
“I pulled up a few target date funds that had the same target date and I was seeing such a massive difference in the asset allocation,” says Abbott. “Thirty points difference in the equity content. One was 70 [per cent] and one was 40. It was substantial.”
In Abbott’s opinion a lack of consistency is the first strike against target date funds, which according to Morningstar, have total net assets of $706 billion and are growing organically at an annual rate of 8 per cent.
But he’s not done.
“It’s an excuse that the advisor and client don’t need to have a relationship,” says Abbott. “The idea of getting an investment set and forgetting it is crazy because life has a way of changing.”
That’s strike two.
The final strike against them according to the financial planner are fees which tend to be higher than most. Morningstar’s report suggests target date funds are between 10 and 20 per cent more expensive than the average mutual fund. While this is a U.S. figure, it likely holds true north of the border.
Abbott does hold out an olive branch when it comes to target date funds suggesting two examples where they are entirely appropriate: The first being new advisors who are ideally suited arranging these kinds of products because they’re still learning the business. The second is in group savings plans where there is no real advice provided to participating employees. In these situations it might make sense.
“By and large I don’t really like them,” states Abbott, speaking for a growing number of advisors – many concerned that their popularity will erode the use of financial planning. “And no one’s asking me for them either.”
“There doesn’t seem to be a lot of consistency amongst the asset allocations [of target date funds],” says Jason Abbott, a financial planner with WEALTHdesigns.ca and a dual-licensee.
The Toronto-area advisor became better acquainted with these so-called set-and-leave funds in 2014 in preparation for a video and print article he did for the Globe and Mail. His findings left him totally underwhelmed.
“I pulled up a few target date funds that had the same target date and I was seeing such a massive difference in the asset allocation,” says Abbott. “Thirty points difference in the equity content. One was 70 [per cent] and one was 40. It was substantial.”
In Abbott’s opinion a lack of consistency is the first strike against target date funds, which according to Morningstar, have total net assets of $706 billion and are growing organically at an annual rate of 8 per cent.
But he’s not done.
“It’s an excuse that the advisor and client don’t need to have a relationship,” says Abbott. “The idea of getting an investment set and forgetting it is crazy because life has a way of changing.”
That’s strike two.
The final strike against them according to the financial planner are fees which tend to be higher than most. Morningstar’s report suggests target date funds are between 10 and 20 per cent more expensive than the average mutual fund. While this is a U.S. figure, it likely holds true north of the border.
Abbott does hold out an olive branch when it comes to target date funds suggesting two examples where they are entirely appropriate: The first being new advisors who are ideally suited arranging these kinds of products because they’re still learning the business. The second is in group savings plans where there is no real advice provided to participating employees. In these situations it might make sense.
“By and large I don’t really like them,” states Abbott, speaking for a growing number of advisors – many concerned that their popularity will erode the use of financial planning. “And no one’s asking me for them either.”
