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The Effects of Conflicted Investment Advice on Retirement Savings

February 24, 2015 Comments off

The Effects of Conflicted Investment Advice on Retirement Savings (PDF)
Source: Council of Economic Advisors
From blog post (Whitehouse.gov):

Americans’ retirement income is derived from many sources, including Social Security, traditional pensions, employer-based retirement savings plans such as 401(k)s, and Individual Retirement Accounts (IRAs). While this landscape is familiar today, it reflects a dramatic change from the landscape 40 years ago. The share of working Americans covered by traditional pension plans—which offer a guaranteed income stream in retirement—has fallen sharply. Today, most workers participating in a retirement plan at work are covered by a defined contribution plan, such as a 401(k). Importantly, the income available in retirement from a defined contribution plan depends on both the amount initially saved and the return on those savings. The shift from traditional pensions to defined contribution plans raises important policy issues about investment responsibilities and the roles of individual households, employers, and investment advisers in ensuring the retirement security of Americans.

Defined contribution plans and IRAs are intricately linked, as the overwhelming majority of money flowing into IRAs comes from rollovers from an employer-based retirement plan, not direct IRA contributions. Collectively, more than 40 million American families have savings of more than $7 trillion in IRAs. More than 75 million families have an employer-based retirement plan, own an IRA, or both. Rollovers to IRAs exceeded $300 billion in 2012 and are expected to increase steadily in the coming years. The decision whether to roll over one’s assets into an IRA can be confusing and the set of financial products that can be held in an IRA is vast, including savings accounts, money market accounts, mutual funds, exchange-traded funds, individual stocks and bonds, and annuities. Selecting and managing IRA investments can be a challenging and time-consuming task, frequently one of the most complex financial decisions in a person’s life, and many Americans turn to professional advisers for assistance. However, financial advisers are often compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest: the best recommendation for the saver may not be the best recommendation for the adviser’s bottom line.

CEA’s new report The Effects of Conflicted Investment Advice on Retirement Savings examines the evidence on the cost of conflicted investment advice and its effects on Americans’ retirement savings, focusing on IRAs. Investment losses due to conflicted advice result from the incentives conflicted payments generate for financial advisers to steer savers into products or investment strategies that provide larger payments to the adviser but are not necessarily the best choice for the saver.

Nine Charts about Wealth Inequality in America

February 23, 2015 Comments off

Nine Charts about Wealth Inequality in America
Source: Urban Institute

Why hasn’t wealth inequality improved over the past 50 years? And why, in particular, has the racial wealth gap not closed? These nine charts illustrate how income inequality, earnings gaps, homeownership rates, retirement savings, student loan debt, and lopsided asset-building subsidies have contributed to these growing wealth disparities.

Accenture Survey Shows Digital Investing Tools Are Disrupting the European Investor-Advisor Relationship

February 19, 2015 Comments off

Accenture Survey Shows Digital Investing Tools Are Disrupting the European Investor-Advisor Relationship
Source: Accenture

Digital investing tools are changing the ways financial advisors connect with investors and will impact how investors use their advisors in the future, according to an Accenture report based on a survey of 1,200 middle- and high-income, digitally savvy European investors, which Accenture refers to as “Generation D.” The study found that investors value digital financial planning tools that offer investment education, advanced planning and scenario analysis, suggesting that wealth management firms that provide these tools and alter their business models to better serve both traditional and autonomous investors will come out on top.

According to the survey, 27 percent of investors have switched firms to receive a new digital tool or service. The survey also showed that digital tools that offer education on long-term goals, retirement planning, estate planning, auto asset allocation and a 360-degree account view are considered “difference makers” that may drive an investor’s decision on which firm to select. Among the high-net-worth investors who were surveyed, 25 percent said they would consider switching their institution if they did not receive a desired online tool or service.

Who Is Internationally Diversified? Evidence from 296 401(k) Plans

February 16, 2015 Comments off

Who Is Internationally Diversified? Evidence from 296 401(k) Plans
Source: Center for Retirement Research at Boston College

We examine the international equity allocations of over 3 million individuals in 296 401(k) plans over the 2006-2011 period. These allocations show enormous cross-individual variation, ranging between zero and over 75 percent, as well as an upward trend that is only partially accounted for by the slight decrease in importance of the U.S. market relative to the world market. International equity allocations also display strong cohort effects, with younger cohorts investing more internationally than older ones, but also each cohort investing more internationally over time. This finding suggests that the home bias phenomenon may slowly disappear over time. Worker’s salary has a positive effect on international allocations, while account balance has a negative one, but these effects are not economically large. Education, financial literacy, and the fraction of the foreign-born population measured at the zip code level have strong positive effects on international diversification, consistent with familiarity and information stories. In addition, states with more exports have higher international allocations.

Foreign Direct Investment stocks at the end of 2013 – EU was a net investor in the rest of the world – The United States, by far the main partner of the EU

February 16, 2015 Comments off

Foreign Direct Investment stocks at the end of 2013 – EU was a net investor in the rest of the world – The United States, by far the main partner of the EU
Source: Eurostat

Data on FDI stocks help to quantify the impact of globalisation and provide a measurement of longstanding economic links between countries. They measure the accumulated value of all FDI carried out in the past.

+ Full Release (PDF)

CRS — Who Regulates Whom and How? An Overview of U.S. Financial Regulatory Policy for Banking and Securities Markets (January 30, 2015)

February 10, 2015 Comments off

Who Regulates Whom and How? An Overview of U.S. Financial Regulatory Policy for Banking and Securities Markets (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Financial regulatory policies are of interest to Congress because firms, consumers, and governments fund many of their activities through banks and securities markets. Furthermore, financial instability can damage the broader economy. Financial regulation is intended to protect borrowers and investors that participate in financial markets and mitigate financial instability. This report provides an overview of the regulatory policies of the agencies that oversee banking and securities markets and explains which agencies are responsible for which institutions, activities, and markets. Some agencies regulate particular types of institutions for risky behavior or conflicts of interest, some agencies promulgate rules for certain financial transactions no matter what kind of institution engages in them, and other agencies enforce existing rules for some institutions, but not for others. These regulatory activities are not necessarily mutually exclusive.

SEC Alerts Investors, Industry on Cybersecurity

February 3, 2015 Comments off

SEC Alerts Investors, Industry on Cybersecurity
Source: U.S. Securities and Exchange Commission

The Securities and Exchange Commission today released publications that address cybersecurity at brokerage and advisory firms and provide suggestions to investors on ways to protect their online investment accounts.

One publication, a Risk Alert from the SEC’s Office of Compliance Inspections and Examinations (OCIE), contains observations based on examinations of more than 100 broker-dealers and investment advisers. The examinations focused on how these firms:

  • Identify cybersecurity risks
  • Establish cybersecurity policies, procedures, and oversight processes
  • Protect their networks and information
  • Identify and address risks associated with remote access to client information, funds transfer requests, and third-party vendors
  • Detect unauthorized activity

The second publication, an Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy (OIEA), provides core tips to help investors safeguard their online investment accounts, including:

  • Pick a “strong” password
  • Use two-step verification
  • Exercise caution when using public networks and wireless connections
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