Most advisors start to build their retirement plan business in a market segment where they have good personal contacts and established relationships. Usually, these opportunities include small start-up plans and broker-of-record changes. Once an advisor becomes competent and knowledgeable about the ins and outs of the defined contribution area however, they can begin to think about other market segments. Growing Your Retirement Business Up-Market will take a close look at what advisors may encounter as they seek to compete with traditional consultants and other specialized advisors as they pursue mid and large plan opportunities in the defined contribution space.
Here are five things advisors will need to understand:
1. Partnering – Splitting the business
2. Platform Selection and Presentation Process – Key Considerations
3. Developing A Value Proposition – Your Competitive Advantages
4. Service Capabilities – What you will need
5. Compensation Trends – How to Charge for Your Services
Moving Up-Market – A Case in Point
Suppose that you are the advisor to fourteen defined contribution (DC) plans. The largest of these plans is $12M and the smallest is start-up recently established for a small medical practice. You have serviced these plans well and as a result, built trusted relationships with many of your plan sponsors. Over the years, several of the plan sponsors and other key employees have become individual clients and you leveraged these relationships to expand your offering to include commercial lending, key-man insurance and business succession planning for their businesses. While defined contributions plans represent an important component of your overall business, the majority of your time and effort is spent growing and servicing your larger high-net-worth practice.
Now you have an opportunity to make a presentation to a publicly-traded company headquartered in your market. This opportunity came to you through an introduction made by an existing client to the company’s CFO. During an initial phone conversation with the company, you learned that the company’s 401(k) profit sharing plan, with approximately $72M in assets, is being put out to bid for the first time in several years. While the company is relatively pleased with their existing service provider you learned that areas of concern include fees, fiduciary matters and participant outcomes. You have experience in the DC marketplace, albeit with smaller plans, and now you would love to win this business.
The scenario described above is not uncommon within the advisor community. Successfully moving from the small to the mid- and large-plan market, however, presents a number of practical hurdles. This paper will describe how the sales process, requisite service model and plan sponsor expectations of providers will be different up-market while offering practical suggestions to help interested advisors make the most of their opportunities.
Deciding whether to team up with an expert and split the business
The first decision you face as you go up-market is – Are you interested in doing retail business with participants and wealth management business with executives? Or are you serious about redirecting you efforts to grow your DC plan business up-market? If it is the former, you will certainly want to partner with a plan expert. If it is the latter, you will have to decide how you will acquire the expertise you will need to pursue larger plans.
One very effective way for you to grow your business up-market is to partner with advisors who have already proven successful with larger plans. Alternatively, you may decide to go after these opportunities on your own leveraging various platform providers, Third Party Administrators and wholesaler relationships.
The operative questions are: What will your success ratio be and what will be the impact of your reputation? Partnering with an established Advisor specialist can be an effective way to learn the ropes, build a reputation, and most importantly – land the business.
In fact, this segmented business approach is the model that many of the large broker dealers have embraced with what we will call “Retirement Plan Specialist Programs.” These B/Ds encourage partnering with retirement plan experts; some BDs will not allow inexperienced Advisors to pursue business that is outside their wheelhouse (e.g. above $25M in plan size). The large broker dealers have gone this route for a number of reasons. Risk management is certainly high on the list. Quality control is another. Closing the business is perhaps the real purpose. With a Specialist involved, the large B/Ds seem convinced that they will have dramatically higher close rates on the retirement plan opportunities.
Once you begin to pursue business with plans north of $25M in assets, you may encounter other issues including:
- RFI/RFP Process
- Team Structure
- Consulting with large consulting firms
- Service Model
As you go up-market, plan sponsors employ a more sophisticated due diligence process. They are certainly going to ask you for references with plans of similar size and complexity. There may even be a formal RFI/RFP Process that they use to screen and select service providers including advisors. Another key difference is the number of decision makers as large plans are run by committees, adding an additional dynamic to the sales process. You may find yourself competing with the midsized and large consulting firms that are already operating in the market. Many advisors find they need to operate in teams in order to effectively compete up-market. This is particularly true of servicing the business. Seasoned advisors all know that delivering on promises made is essential to winning and retaining retirement plan clients. The large B/Ds know that even if an advisor can win the business on their own, perhaps due to key relationship with a CEO or CFO, he or she may not be able to service the business effectively. The risk is that service failures will injure both the reputation of the advisor and the firm.
2. Platform Selection Process
Key Considerations in Choosing Providers
Depending on the specific opportunity, you may be asked to lead a platform selection process. There are two ways you can approach the search process. You can play the role of an independent consultant who will help the company identify various providers and make a decision or you can team up with particular providers to build a joint solution that is unique to the needs of the company. Either path can prove successful. It really depends on the role you wish to play with the company now and in the future. If you choose the independent consulting approach where you conduct a search and help the client choose a new service provider platform, you will confront traditional consultants and Registered Investment Advisors (RIAs) who regularly compete for business in the mid and large plan markets.
It will be important that you align yourself with a provider who can do an outstanding job converting and servicing this plan and its participants. Today very few advisors partner with a single administrative service provider unless their B/D has a proprietary provider. Instead, most advisors will approach this search process in the role of an independent consultant who will help the company identify several potential providers that fit the plan’s service needs and demographics. You then must help the company narrow the field to a handful of key providers who make final presentations. Once the company makes a decision on a particular provider, you and the selected service provider will need to construct the role you wish to play with the company now and in the future (e.g. fund selection, fund monitoring, investment policy development, plan participant investment education, etc.)
When looking for a mid-market provider, it’s important to ask questions on the following topics:
- Investment oversight – will the provider support you as you deliver investment management services to the plan?
- Participant communications and education – will the provider support you to deliver participant education through technology and webinars?
- Participant outcome-oriented tools and solutions – does the provider have outcome oriented tools and other solutions that will allow you to change participant behavior?
- Insight and forward-thinking solutions – does the provider push the envelope and provide retirement income estimates for participant account balances?
- Managing your practice – will the provider support you to effectively manage your time and maximize your results?
The platform selection process is important whether you are operating on your own, partnering with a Specialist or part of a Specialist Team. The considerations outlined above are central to a successful service delivery model.
3. Developing a Value Proposition
What are your Competitive Advantages?
• Dedicated team?
• Institutional approach?
• Investment management consulting skills?
• Customized tools?
Investment Management Consulting Services – Is your service model scalable and “sellable” up-market?
Most Registered Investment Advisors and now many of the large broker dealers will allow certain designated advisors to act as pure consultants or alternatively as advising fiduciaries under Section 3(21) of ERISA. In either capacity advisors will operate under a fee for service arrangement pursuant to a contract with the Plan Sponsor. These contracts will stipulate a litany of services that can be made available to a particular client. The advisor and the plan sponsor will agree on the specific scope of services to be offered. The advisor will acknowledge in writing to act in either a non-fiduciary consulting or a 3(21) advising fiduciary capacity.
The advisor should review the following list and assess where they can assist and add value:
- Annual review of fiduciary appointments – All fiduciaries must be monitored to ensure that they are meeting their responsibilities and they must be replaced if they are not.
- Periodic training – Fiduciaries/benefits committee – this is a clear value and yet not many advisors provide this service.
- Annual review of written investment policy statement – This is a central document to any fiduciary oversight process and must be reviewed to ensure that the parameters expressed are still appropriate. The IPS must be amended from time to time to reflect the new realities of the global financial markets.
- Annual review of plan costs and revenues – New fee disclosure regulations require advisors to disclose fees and to state whether they are acting as plan fiduciaries. Plan fees must be reasonable and services must be necessary – what is the plan paying and what is the plan paying for?
- Quarterly review of investment performance – In these volatile financial markets, it is important that all plans are provided with a quarterly update on investments performance.
- Periodic Investment Committee meetings – Many plan sponsors do not structure quarterly meetings of the committee members. It is difficult to imagine committee members fulfilling their fiduciary duties if they do not meet periodically to perform their investment oversight responsibilities under ERISA. It can be the advisor’s role to establish and maintain a tight fiduciary process for the plan sponsors.
- Existing fiduciary liability insurance policies – Plan sponsors should review their policies to determine that they are up to date and the coverage limits are appropriate for the size of the plan.
- 404 (c) compliance – Many plan sponsors assume that their plan meets the requirement of Section 404(c) of ERISA. This is an exception to the normal fiduciary liability rules. In order to shift responsibility from the plan fiduciaries to the participants themselves, plan sponsors must ensure compliance with the rules. Failure to satisfy the conditions of this exception can mean that the statutory defense would not be available in the event of a participant lawsuit.
- Education/advice – Education and advice programs must be monitored to ensure that they meet the requirements of new regulations and existing advisory opinions. Many advisors will help plan sponsors create an integrated communications strategy for providing education and advice. (For additional information, request a copy of Janus’ whitepaper, “Can Advisor Provided Plan Fiduciary and Participant Distribution Services Co-Exist?”)
- Documentation of all processes – Prudence is really a matter of process. The only way for a plan sponsor to effectively demonstrate prudence is to document the plan’s fiduciary process.
- Fiduciary Audit File – One effective way to document the fiduciary process is to create a fiduciary audit file. It should contain the plan and trust document, the most recent valuation for the plan, the IRS determination letter, the last three years of 5500 reports, the Investment Policy Statement, the plans correspondence file, the minutes for the committee meetings and the service provider contracts.
- Plan Design Consulting – A clear way for advisors to show expertise and differentiate against their competition is to provide plan design consulting. As for most other plan needs, Advisors will find that sophisticated new tools are available to help provide effective plan design consulting. These services might include safe harbor designs featuring:
- Auto enrollment
- Auto contribution escalation
- Qualified default investment alternatives selection
Plan Fee Process Review Services
- Addressing expense factors and revenue sharing – new DOL regulations make it clear that plan sponsors must receive fee disclosure from all service providers including advisors. It is the plan sponsor’s fiduciary responsibility to ensure that fees are reasonable and necessary.
- Plan sponsors must ensure that fees are reasonable in light of services provided. An effective way to establish that fees are reasonable is by comparing costs against a peer group (benchmarking)
- Recovering plan revenue for specific plan needs – plan sponsors can renegotiate service provider contracts with existing providers and use an ERISA budget account for any fees recouped to pay other expenses for the plan or redistribute these recaptured fees across all participant accounts.
Fiduciary Risk Management Services – Do you sign on as an ERISA 3(21) advisory fiduciary or 3(38) investment manager/managing fiduciary for the plan or are you teamed up with a
Specialist who signs on in these fiduciary capacities for the plan?
If so, adequate fiduciary insurance becomes a critical consideration. Most advisors lack what is referred to as affirmative fiduciary coverage in their existing error and omission (E&O) policies. In other words, fiduciary coverage needs to be specifically stated in the E&O policy or in a special rider to that policy. Advisors need to make sure their firm allows them to act in an RIA capacity offering fee based services. Some broker dealer E&O policies may provide ERISA fiduciary coverage at all or alternatively these policies specifically place limits on such coverage.
However, several large broker dealers are providing fiduciary E&O coverage for qualified advisors who are part of their Retirement Plan Specialist Programs that are the foundation for strategic partnering relationships with other advisors at the firms. Retirement Specialists at the large BDs have a clear advantage beyond the insurance coverage itself; these advisors are backed by the deep pockets of their B/D. This is a powerful fact and can be and effective marketing and sales message for differentiating and winning new business.
Although insurance is not required by ERISA, advisors can successfully use proof of affirmative fiduciary coverage to differentiate for sales and marketing purposes. Advisors with coverage have a clear advantage over those who lack coverage. There will come a point – perhaps in short order – when having this coverage will become table stakes when bidding for new business or renewing existing plan sponsor relationship contracts.
4. Services and Capabilities
What you will need; how you will execute
There are many sophisticated tools and support service packages now available for advisors who seek to provide services to larger plans. The cautionary question you must ask yourself is: are you who you say you are? A sophisticated tool can make you look the part but in the end, you must remember that these are legal obligations you are assuming. If you perform well, you have a long term relationship with a happy client. If you are in over your head and your service levels demonstrate incompetence, in addition to losing the client and damaging your reputation, you may become the subject of a lawsuit or a DOL enforcement action.
Consider this in the context of service provider searches, fee benchmarking assignments and investment management mandates:
Client Reports – Will you create reports from your own interview process with various providers or will you seek to leverage existing technological platforms. Technology can help you look the part up-market but it also adds to your need to further differentiate against other advisors using the same tools and reporting capabilities.
Investment Management Services - If you are an A or a B player providing excellent investment management services to your current clients, you can provide the same services up-market. You can use tools like MPI, Zephyr, Morningstar and FI360 create customized quarterly reports. Alternatively, you can acquire tools by partnering and teaming up with an expert advisor team and/or the selected plan service provider.
Education/Communication – Participant communication is an excellent way to demonstrate an ongoing value proposition for the plan. As you go up-market, however, it may become more costly and time consuming to execute. New service providers like vWise allows Advisors to provide scalable targeted communications and market updates effectively using technology to deliver seminars/teleconferences; ongoing enrollment services for new hires, ongoing enrollment services for non-participants, and other online participant communication services. As advisors move up-market, their role may change from a deliverer of the education services to a coordinator or facilitator of the communication services the platform delivers.
Participant Investment Advice Solutions – New DOL rules specify that providers can provide participant investment advice in one of two ways:
- A level fee arrangement
- the advisor is compensated on a “level-fee” basis
- Advisors must disclose fees and acknowledge in writing that they are fiduciaries;
- A certified computer model
- the investment advice they provide is based on a computer model certified as unbiased and generally accepted investment theories,
- Advisors will not be able to stray from that computer generated advice
Alternatively, Advisors may take advantage of online advice tools and managed account solutions offered by various 3rd party service providers in the marketplace.
5. Compensation Trends
How to Charge for Your Services
Where do you begin to understand how to charge for your services up-market? Is the market completely elastic or are you constrained by competition and other developments in the marketplace?
The compensation trends today include:
- Eliminating conflicts of interest – Separating fees from investments
- Level fees – Hard dollar fees versus asset based fees perhaps with a hard dollar cap
- Fee for service contract – How does your value proposition translate into a legitimate fee for service contract? What are the practical and legal realities? Are you a 3(21) Fiduciary or 3(38) fiduciary?
- Transparency – How do you fully and effectively disclose your fees in the content of services to be rendered?
- ERISA Budget Accounts – How can service providers help you eliminate conflicts of interest by collecting 12b-1 fees and fees from other revenue sharing arrangements and repatriate fees for the benefit of the plan and its participants?
In writing this paper we had many worthwhile discussions with retirement plan advisors and other industry experts who gave us sophisticated insights into the retirement plan business. All conversations confirmed our premise that fee disclosure will accelerate the trend from commission to fee-based business models. Up-market, advisors are charging hard dollar fees or asset-based fees with a hard dollar cap. All experienced fee-based advisors are disclosing fees to plan sponsors. Asset-based fees for larger plans can be justified because there is more liability for the advisor as the plan grows. Being a 3(21) fiduciary or a 3(38) fiduciary also allows the advisor to justify higher fees. At the same time, there comes a point where the asset-based fee may become “unreasonable compensation”. Experienced advisors may tier fees or put a hard dollar cap on asset-based fee formula. Some sophisticated plan sponsors are even demanding a three-year guarantee on the fees for larger plans much like the guarantees provided by platform providers. Advisors need to carefully consider what compensation they need based on their time and services provided.
What It Takes to Succeed Up-Market
The issues look the same up-market but the scale of the undertaking is significantly different. If you are providing high-quality investment management services to your current clients now, these services may be scalable so you can provide the same services up-market. As we have seen, you can go it alone or partner with a specialist to gain experience and reputation up-market. Alternatively using a sophisticated, advisor friendly, comprehensive service platform can help you to compete up-market. We have also seen that you need to become an expert yourself so you can specialize in retirement plan business, educate and lead plan sponsors on important issues and win more business.
In the end, it is all about having the requisite knowledge, capabilities, tools and support, which leads to competence and ultimately the strong sense of confidence that will allow you to grow your business up-market.