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Why Asset Allocation Funds are Selected |
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Many studies in the area of finance support the idea that approximately 90% of a portfolio’s return can be explained by its target asset allocation. Given the importance of asset allocation, retirement plan participants are faced with a choice: allocate their accounts themselves or allow a professional to do it for them.
The top reason given by participants (48%) for opting to invest exclusively in asset allocation funds was that they preferred to allow a professional money manager to make the decisions on their behalf. Forty percent (40%) felt that ease of use was a key selling point while 19% decided to invest in asset allocation funds exclusively based on advice from their financial advisor. In order to gauge the level of importance of various fund selection criteria, plan participants were asked to provide a numerical rating for each of the fund attributes shown in the chart below. Most of the criteria ranked fairly high. Topping the list was fund expenses, at 64%, while fund rating bottomed the list at 45%.
Participants that choose to not invest any of their contributions in asset allocation funds have various reasons for doing so. Close to half (49%) believe that they can earn a better return selecting funds themselves. Ironically, 36% of the participants surveyed don’t invest in them because they don’t understand how they work. Ten percent (10%) avoid asset allocation funds based on the recommendations of their advisor.
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High Net Worth Advisor Insights Newsletter April 2008
