Closed-End Funds. and the Financial Advisor

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1 Closed-End Funds Closed-End Funds and the Financial Advisor A NATIONAL RESEARCH STUDY How financial advisors use closed-end funds with their clients What sets these advisors and their practices apart Primary barriers to using closed-end funds Opportunities for advisors and clients

2 Executive Summary While closed-end funds (CEFs) have played an important role in investor portfolios for decades, there has been little statistical insight into how and why advisors use CEFs in client portfolios, the impact it has on their practices, and what barriers may exist to using CEFs. To answer these questions, Nuveen Investments sponsored an independent national survey on CEF usage. The findings revealed several key insights, including: Advisors who use CEFs earn more. 30% of advisors who use CEFs earned $500,000 or more in the previous 12-month period compared with just 12% of advisors who do not use CEFs. Advisors who use CEFs have more assets under management. 31% of advisors who use CEFs manage client assets of $100 million or more versus only 13% of advisors who do not use CEFs. Investments in CEFs are driven by advisors. Advisors are nine times more likely to recommend CEFs to a client than to be asked about them by clients. Advisors want more information on CEFs. Over 60% of advisors who use CEFs said they want to learn more about them. Lack of product knowledge is the greatest barrier to usage. Advisors who do not use CEFs cited lack of familiarity as their most common reason for not using them. Study Overview and Methodology Nuveen Investments commissioned Dubick & Associates, a New York based marketing and research firm, to conduct a national quantitative survey of financial advisors use of CEFs. More than 600 financial advisors across the U.S. were surveyed online in two waves, the first in February 2013 and the second in June In order to compare information across distribution channels, representative statistical samples were drawn from the wirehouse, regional, independent and insurance channels. Research explored the path to purchase of CEFs, including advisors knowledge of CEFs, the relevance of their firms support, and the role that firms CEF analysts play in the evaluation and selection of CEFs. Advisors were queried on the frequency of their use of CEFs, why they chose to use CEFs in client portfolios and for what type of accounts, as well as their assets under management and compensation in the 12 months leading up to the survey. Lastly, the survey examined the barriers to using CEFs and how confident advisors felt in their ability to articulate how the funds work to their clients. 2 Advisor Research Study

3 Half of Financial Advisors Use CEFs 51% of advisors surveyed reported using a CEF in a client portfolio in the prior 12 months. Usage varied among advisors, but in total, 72% said they use them with at least 6% of their clients; 33% use CEFs with 21% or more of their clients. While advisors cited a variety of reasons for using CEFs in their clients portfolios, the top three reasons are diversification, income, and addition of a market sector. Most Common Reasons for Adding CEFs to a Portfolio To diversify income-producing investments in the portfolio To increase investment income in a portfolio 56% 55% To add a market sector to the portfolio that is not currently represented To get the benefits of a professionally managed portfolio not subject to inflows and redemptions To boost returns for a client without changing their portfolio's risk composition To get access to an investment type that clients likely cannot get elsewhere To broaden exposure to investment types 20% 20% 19% 26% 37% Asked to describe their objectives for using CEFs, advisors said: We use closed-end funds to diversify accounts and increase income from a professionally managed fund. [They] give us management expertise and market investment sectors that we cannot readily get through other means. In addition, we are not subject to the portfolio inflows and outflows of an open-end fund. They can be a good source of diversification and enhanced income. They offer access to professionally selected holdings. They bring discipline to clients portfolios. 1

4 CEF Use is Widespread Across Distribution Channels and Asset Classes CEF use is highest at wirehouse and regional brokerage firms. CEF Use by Firm Type 79% 73% 52% While CEF use is widespread across distribution channels, advisors at wirehouses and regional offices are more likely to use them. When using CEFs, advisors find them suitable for a wide range of client accounts. Advisors reported that they use CEFs in brokerage accounts (81%), retirement accounts (72%) and managed accounts (51%). What s more, nearly half of all advisors who use CEFs in client accounts also use them for their own accounts. More than one third of advisors use equity, sector and global CEFs. Wirehouses Regional Offices Independent Advisors 27% Insurance Company Reps The vast majority of advisors who use CEFs (86%) select funds from multiple fund families. While fixed-income CEFs dominate usage, 42% of advisors reported using U.S. equity funds and nearly one third use those that invest in alternatives. Types of CEFs Used in Past Two Years Municipal Bond Funds 66% Taxable U.S. Bond Funds 55% Diversified U.S. Equity Funds 42% Global and International Funds 35% Sector Funds 35% Alternative Assets and Strategies 32% Single Country Funds 23% 9% Covered Call Funds Other 3% This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. 2

5 The majority of CEF users would allocate up to 50% of clients portfolios to CEFs. The average allocation to CEFs in client portfolios is 17%, but nearly three quarters of advisors using CEFs believe the allocation could be much higher. Almost one quarter of these advisors said there is no limit to how much they would allocate to CEFs. Allocation to CEFs in Client Portfolios Average Allocation to CEFs Highest Allocation to CEFs Advisors in Client Portfolios Would Make in Client Portfolios 20% or more No maximum 33% 24% 10% to19% 45% 50% or more 20% to 49% 15% 24% Less than 10% 22% 10% to 19% Less than 10% 29% 8% Examples of recent CEF purchases and why advisors made them: I have put closed-end funds in managed accounts to generate additional income. They have been the most ideal investment given the current interest rate environment, and availability of other alternatives. I used a healthcare CEF in one of my discretionary models, and I used a variety of CEFs in a high income discretionary model. I used a closed-end fund with a client very recently because the client used closed-end funds in the past and was very comfortable with buying them again. 3

6 Advisors Who Use CEFs Offer Clients More Customization, Are More Prosperous Another goal of the survey was to understand how advisors who use CEFs differ from their colleagues who do not. While both groups are equally focused on helping clients enjoy successful retirements and finding investments with the potential to generate attractive income, the findings revealed three significant differences between advisors who use CEFs and those who do not: 94% of advisors who use CEFs have in place a Rep as Portfolio Manager (PM) arrangement with at least some of their CEF clients Advisors who use CEFs are more likely to deliver customized portfolio services to their clients. Advisors using CEFs more often rely on their own investment models, using these models 50% of the time. Advisors who do not use CEFs use their own models 41% of the time. 34% Rep as PM arrangement with 100% of their CEF clients 16% Rep as PM arrangement with most (51% to 99%) of their CEF clients Advisors who use CEFs are also more likely to have a Rep as Portfolio Manager arrangement; one in three advisors reported they use this arrangement with all of their clients with CEFs. Advisors who use CEFs have greater assets under management. Advisors who use CEFs are more than twice as likely to have a book of business of $100 million or more. Just 4% of advisors using CEFs have less than $10 million under management versus 34% of non-cef users. Advisor AUM: CEF Users vs. Non-Users Total Assets Under Management Advisors who use CEFs are more than twice as likely to have a book of business of $100 million or more Non-CEF Users 13% 13% $100M or more 16% 16% $50M to less than $100M 22% CEF Users 22% 31% 31% 20% $25M 20% to less than $50M 27% 27% 17% 17% $10M to less than $25M 16% 16% 34% 34% Less than $10M 4% 4% 4

7 Advisors who use CEFs earn significantly more. Nearly one third of advisors who use CEFs earned $500,000 or more in the year leading up to the study versus 12% of non-cef users. While greater revenues might seem a natural extension of a larger book of business, that is not always the case since an advisor seeking to compete on price might have a larger book, but ultimately a less profitable one. Advisors who use CEFs also derive comparatively more of their compensation from asset management fees. High-net-worth investors prefer fees to commissions according to a 2011 report by Spectrem Group 1, a financial research and consulting firm that regularly surveys high-net-worth investors. The report found that 55% of those surveyed preferred paying a fixed fee compared with 45% who preferred commissions. Gross Advisor Fees and Commissions: CEF Users vs. Non-Users Gross Fees and Commissions in the Prior Year n $500K or more n $200K to less than $500K n $100K to less than $200K n Less than $100K Non-CEF Users 27% 12% CEF Users 39% 30% 21% 18% 40% 13% Compensation Sources (Mean) n Fees n Commissions n Salary and Other 29% 58% 43% 50% 13% Non-CEF Users CEF Users 7% 1 Spectrem Group, Millionaire Corner, September

8 CEF Education and Firm Support Play a Critical Role CEF use is correlated to firm and analyst support. While support for CEFs is more comprehensive in some distribution channels than others, there is a definite correlation between advisors use of CEFs and their firms support of CEFs: 49% of advisors who use CEFs work at firms that support their use, versus only 12% who work at firms where the advisors report no CEF support. At firms that have designated CEF analysts, the majority of advisors who use CEFs (61%) follow the analysts research. 49% of advisors who use CEFs work at firms that support their use, versus only 12% who work at firms where advisors report no CEF support In fact, the most common way advisors learn about CEFs is from the CEF analyst at their firm (25%), followed closely by those who explore CEFs on their own (24%). In many instances (21%) another advisor recommends using CEFs. Advisor recommendations drive CEF use. Despite the proliferation of investment information available today, investors almost never ask about CEFs as an investment option. Researchers found advisors are nine times more likely than clients to suggest a CEF. This lack of investor awareness offers advisors an excellent opportunity to distinguish themselves, differentiate their practice, and add real value to their client relationships. Advisors are 9x more likely than clients to suggest a CEF Occasions When the Topic of Closed-End Funds Is Raised with Clients n Often or Always n Sometimes n Never or Seldom Client asked generally about CEFs Client asked financial advisor to consider a specific CEF 78% 78% 78% 5% 78% 5% 5% 5% 74% 74% 74% 6% 74% 6% 6% 6% 16% 16% 16% 16% 21% 21% 21% 21% 32% 32% 32% 32% Client asked for a specific solution and financial advisor suggested a CEF 26% 26% 26% 26% Financial advisor suggested a CEF first 30% 30% 30% 30% 45% 45% 45% 45% 41% 41% 41% 41% 25% 25% 25% 25% Data may not total 100% due to rounding. 6

9 Insufficient product knowledge is the primary barrier to CEF use. Many advisors, as well, are not familiar with or knowledgeable about CEFs; this is the most frequently cited reason (30%) advisors gave for not using CEFs with clients. The second most frequent reason cited is that the advisor s firm does not allow CEFs (19%) and the third is that CEFs are not part of their current strategy (18%). The lack of familiarity with CEFs would explain the considerable gap in confidence between users and non-users in their ability to explain CEFs to clients: 65% of non-cef users are less than confident versus just 21% of CEF users. Confidence Explaining CEFs n Confident n Somewhat Confident n Not Confident 80% 34% 37% CEF Users 18% 3% 28% Non-CEF Users Data may not total 100% due to rounding. Users and non-users alike want to learn more about CEFs. When asked what information would be most important to encourage their use of CEFs, non-users most often cited more education/product training. Less than 10% have a specific objection to CEFs as a product option and 80% said they would consider using CEFs if a client requested them. 61% of advisors who use CEFs want to know more about how the funds work. Interestingly, 61% of advisors who use CEFs said they want to learn more about how the funds work. What s more, only a third of advisors who use CEFs are clear on their firms policies about CEFs or whether CEFs are eligible for use in the firms wrap or fee-based programs. These numbers are almost double for advisors who do not use CEFs. Based on these findings, firms would appear to have an excellent opportunity to boost advisors use of CEFs by increasing their advisors knowledge of CEFs, the resources available to them, and firm policies regarding the use of CEFs. (A variety of CEF resources are highlighted on page 9.) 7

10 Opportunities for Advisors and Clients: 5 Reasons to Build Your CEF Business CEFs may help address a number of trends affecting investors and advisors today. 1 Need for Income In the Spectrem Group study Affluent Market Insights 2012, investors concerns about having the ability to maintain their current financial position ranked as high as concerns about the health of their spouses and having enough money for retirement. Since the market collapse of 2008, investors are acutely aware of how quickly their circumstances can change. 2 Concerns about Retirement The oldest Baby Boomers have already turned 65, expanding the ranks of the older population in the U.S. In 2009 there were approximately 40 million Americans over the age of 65; the federal government projects that will grow to more than 70 million by The vast majority of this population will likely be seeking reliable sources of attractive regular income for their portfolios. 3 Uncertainty about Interest Rates Apprehension about Federal Reserve tapering has sparked record withdrawals from U.S. listed bond funds; Trim Tabs Investment Research in December 2013 reported outflows of more than $70 billion over the year. Assets in CEFs, however, have increased. As of the end of 2013, the Investment Company Institute reported assets in closed-end bond funds slightly ahead of year-end 2012 assets. 30% of advisors using CEFs plan to increase their use in client portfolios. Why? I have seen great investment opportunities in CEFs. Clients like the strategy. Need for income and the use of non-leveraged covered call strategies. Clients [are] looking for more sophisticated solutions/ products. 1 U.S. Department of Health and Human Services, Administration on Aging. 8

11 Advisors who can demonstrate the ability to create and manage an income stream particularly for their clients who are approaching or in retirement will likely be able to attract and retain these clients. Resources for Advisors The Income Institute SM Develop CEF expertise and earn CFP and IMCA continuing education credit through this online interactive education program. nuveen.com/incomeinstitute 4 Trend Toward Advisor Diversification In a 2011 survey 2 of affluent and high-net-worth investors, Cisco found that 80% had assets at more than one advisory firm, with 25% spreading their investments to four or more firms. While this trend has made it more challenging for advisors, it has also opened the door to new opportunities. Offering a full range of products and services, including CEFs, can help advisors stand out in the marketplace. 5 Advisors Need for an Ongoing Value Proposition While the shift to fee-based pricing has created a level of financial stability for advisors, it also requires them to regularly prove their stewardship. Advisors who can demonstrate the ability to create and manage an income stream particularly for clients who are approaching or in retirement will likely be able to attract and retain these clients. CEFs can be an excellent income vehicle and, as the research indicates, few investors may be aware of this opportunity. Nuveen Investments View CEF educational videos and brochures, learn more about Nuveen s unparalleled secondary market support, and explore our wide array of CEFs. nuveen.com/cef CEFConnect A comprehensive online industry resource for identifying and evaluating CEFs spanning the entire universe of product offerings. cefconnect.com Closed-End Fund Association (CEFA) The national trade association representing the CEF industry, CEFA provides a wealth of information on its members and their fund offerings. cefa.com 2 Cisco Internet Business Solutions Group, Winning the Battle for the Wealthy Investor, January

12 Nuveen Investments Nuveen Investments is guided by a deep commitment to securing lasting value for investors and the financial advisors who serve them. Since 1898, the firm founded by John Nuveen has offered a steadfast presence in rapidly changing markets. Over the decades, Nuveen Investments has evolved from providing public financing to managing public investment. In 1987, it offered its first closed-end fund, advancing its position as a trusted leader in the financial industry and a pioneer of long-term income and cash flow solutions. Through the use of multiple investment strategies and a variety of asset classes, we actively manage our closed-end funds to seek optimal investment performance and generate attractive distributions. Nuveen Investments manages more than $224 billion in assets as of March 31, 2014, including over $54 billion in closed-end funds. Important Risk Considerations Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Shares of closed-end funds are subject to investment risks, including the possible loss of principal invested, and frequently trade at a discount to their net asset value. Past performance is no guarantee of future results. Leverage creates the risk of higher volatility for a fund s net asset value, market price, and distributions. There is no assurance that a fund s leveraging strategy will be successful. When evaluating investment choices, investors should be aware that some closed end funds include only net investment income in regular payments, while others may include income only net investment income and/or a portion of realized gains, and/or capital (representing unrealized gains or paid-in/retained capital) in each regular payment. Nuveen Securities, LLC, is a FINRA member and subsidiary of Nuveen Investments, Inc. For more information about Nuveen closed-end funds, contact your Nuveen Advisor Consultant at and visit Nuveen Investments, LLC 333 West Wacker Drive Chicago, IL Cover mosaic: Helga Dangel, The Chicago Mosaic School EBR-CEFARS-0714D 2220-ADV-AN07/15

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