CEO of Austin Capital Trust
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At the bottom of the Great Recession, defined contribution (DC) retirement accounts lost a staggering $2.7 trillion from its peak in 2007 according to the Urban Institute. According to the Federal Reserve’s 2012 Flow of Funds Accounts, DC account balances have increased since the first quarter 2009 reaching $9.5 trillion at the end of the 2012. This is almost 10% above the peak in 2007 and about in par when adjusted for inflation. Unfortunately the defined benefit (DB) plan assets declined 37% from their peak but yet not fully recovered from the recession. As of the end of 2012 the DB values were still only $2.3 trillion.
Although individual retirement accounts (IRAs) accounted for majority of the DC asset increase, small plans (under $25 million) and micro plans (under $5 million) attributed significantly to this bounce back. Small business employs 60% of the U.S. workforce and so it would not be surprising that majority of the plans are micro plans (above 90%), which stand about 670,000 plans with about 17 million participants. More importantly for advisors these micro plans are where the growth of the DC assets will come from so understanding this marketplace and how the advisor can assist them will be crucial to any advisor trying to grow their practice.
For instance on 15.5% of micro plans automatically increase participants’ contributions, compared to almost 30% for all plans. For plans with less than $1 million of assets the average participation rate is about 60%, 71% for plans between $1 million to $5 million and 73% for all plans. Likewise, barely 15% of micro plans have an Investment Policy Statement (IPS) and only 40% review their investment options once annually although over 70% of the plans have an investment advisor. This lack of governance and attention from current advisors leave a great deal of room for an advisor who understand the fiduciary process that is required.
Overwhelming majority of advisers is hired based upon recommendations and referrals but for DC plans still over 30% of the business is acquired through cold solicitation. This level of closure from cold calling is almost 3 times higher for DC plans than individual accounts. And even more surprising is the number 2 reason why a Plan Sponsor will choose one adviser over another - his or her sales process. Did the client believe the answers that were given by the adviser or did it just sound like a sales pitch, did the adviser sound knowledgeable, and the most frequently cited reason for hiring the adviser is “did his answers educate me. “
There is still a great deal of room for growth in the micro plan market even for a newbie advisor. But the adviser need educate himself on the tools required to make his practice scalable and create a process for implementing necessary elements to successfully manage the fiduciary risk for the client and himself.
And for god sakes work on your sales process!