TIAA-CREF gets serious about its financial advisor business.

The reputation a company has earned over the years is usually very difficult to shake, but that isn't stopping TIAA-CREF from tapping its considerable muscle and resources to try and do just that. Most people know the 85-year-old pension giant from its relationship with the teachers, professors, doctors and other individuals who invest through its 403(b) and other retirement plans. More than 12,000 colleges, universities, schools, teaching hospitals and research institutions offer its products, and it has over $250 billion in assets under management.

Despite its long history and impressive size, TIAA-CREF began its efforts to reach financial advisors just five years ago, when the loss of its tax-exempt status spurred its transformation from a pension system for educational institutions to a more traditional group of financial services companies. The challenge, both then and now, is transforming an industry giant with relatively little experience in dealing with advisors into a diversified financial institution that acknowledges their importance to its future and serves them effectively.

Those efforts got off to a slow start. Even as other financial services companies aggressively courted advisors in the late 1990s, TIAA-CREF seemed stuck in first gear. Until 1999, it did not have a dedicated advisor team or a measurable marketing effort to attract advisors.

Michael Lane, director of advisor services since July 2001, admits TIAA-CREF's reputation among advisors at that time was spotty. "For years, financial advisors viewed us as a competitor or adversary," he says. "They had clients in the education or research fields whose assets they wanted to manage, but we just weren't structured to support advisor-run accounts. So a lot of that money left the firm."

Advisors recall a company whose corporate culture needed adjustment. "The message I got from TIAA-CREF was that it wanted to deal directly with the client and would not give advisors the time of day," says Don Kukla, who holds the CPA, CFP and PFS marks and hangs his shingle at the Moneta Group in St. Louis. "Everything from the procedure for submitting forms to getting information on a client account was like pulling teeth."

According to Lane, TIAA-CREF started trying to turn things around in 1999 by putting together a group of five individuals who handled advisor calls, went to professional conferences and tried to get the word out about the new, advisor-friendly environment. "It was a good beginning, but it wasn't enough," he says. "People were using the service desk to pull money out, not put money in."

When Lane took over, he expanded the dedicated advisor staff to 20 professionals, many of whom travel around the country to meet with advisors personally. His group is working on implementing systems that would allow advisors to download information about client TIAA-CREF accounts into their own computer systems. The technology, he believes, will open the door for advisors to manage billions of dollars in TIAA-CREF 403(b) accounts. And the firm now has 17 mutual funds for the public covering a variety of asset classes.

Kukla says these efforts have had a positive effect on his dealings with the company over the last 18 months. "They seem to be embracing advisors," he says. "There is someone I can call who specializes in handling advisor inquiries. And they are very open to working with me." Recently, a TIAA-CREF representative contacted one of his clients about setting up a meeting to discuss his 403(b) plan, which Kukla had been authorized to manage for about five years. "My client said he wanted me at the meeting, and the representative was fine with that. I'm not sure such an open dialogue would have happened a few years ago."

John Stephens, MD, CFA, with TCI in Tucson, Ariz., also has noted a change. "Before, TIAA-CREF wasn't very helpful to financial advisors," he says. "They tended to keep things regarding their client accounts close to the vest. There was an understanding that advisors just weren't a part of their business." More recently, he says, the firm sent a "very helpful" representative to meet with him. "I see TIAA-CREF now as a good, responsive firm with some attractive, low-cost investment options."

TIAA-CREF's efforts on the technology front also are progressing. Currently, systems that will allow advisors to manage 403(b) assets and download the information into their own computers are being tested in practices that use Centerpiece software, and Lane says the program is slated for national rollout in early 2003. Testing for practices that use Advent software will begin later in the year, he says.

Advisors with clients who work at educational institutions believe the new technology will enable them to tap into 403(b) assets. "We have some doctors who work at teaching hospitals that have accounts with us, but who also have 403 (b) plans somewhere else," says Paul Forman, principal in Buckingham Asset Management in St. Louis. "In many cases, the 403(b) is larger than the accounts we currently manage." Forman says the firm is currently testing the new downloading system with a doctor who has a $2.5 million account at his firm, and a $3.5 million TIAA-CREF 403(b) plan. The ability to transmit and download information from the 403(b) into their own systems "is turning a $2.5 million client into a $6 million client," he says.

Financial advisors who use Advent, however, await a downloading solution. Janet Briaud, a CFP licensee with Briaud Financial Planning in Bryan, Texas, says about 60% of her clients work at nearby Texas A&M University. Although she has been authorized to manage a number of 403(b) plans since 1986, she has had the cumbersome task of inputting trades and other information from those plans into her own computer systems manually. Because fees cannot be automatically deducted from the account, she must bill clients separately. "I have asked, begged and pleaded for downloading capabilities," she says. "Advisors need to have that to really tap into the 403(b) market."

As he works on technology and service issues, Lane also faces the challenge of getting advisors to try products they may not be familiar with, such as a recently introduced low-cost survivorship life insurance policy with no surrender charges. Lane says that by eliminating the surrender charge, which can apply for as long as 15 years at some companies, the policy makes it easier to adapt to the possible demise of the estate tax in 2010. At that point a policyholder who no longer needs survivorship life to cover estate taxes could simply cash out without incurring any surrender charges or penalties.

Another low-cost twist on a traditionally high-cost product is the firm's tax-deferred variable annuity, Personal Annuity Select. With just 30 basis points of total insurance expenses and no surrender charge, it is among the cheapest variable annuities around. The cost of building a portfolio of sub-accounts ranges from 37 basis points to 59 basis points, including all expenses, compared to an average of 2.18% for the industry.

The fixed-account option allows for full withdrawals at any time and partial withdrawals or transfers every 180 days with no market value adjustments or interest penalties. The contract guarantees 3% during accumulation, and in mid-December, had a current rate of 4.1%-about the same rate as a 10-year Treasury bond, but without the risk of principal fluctuation.

The fixed-account option, in fact, seems to be the major draw for advisors so far. "Right now we're using the guaranteed account as a parking place for cash and as a fixed-income alternative," Stephens says. "In this environment, a guaranteed 4% return is a good deal." Don Kukla believes the guaranteed account is "a nice resting spot for money from securities that are maturing." Neither views the insurance aspect of the annuity as particularly important.

Lane hopes that advisors will eventually migrate to equity and bond mutual funds and corresponding annuity sub-accounts once the markets stabilize. It's a fairly young group. Although the company has been managing money since 1918, its first publicly available mutual funds came out in 1997, and include Bond Plus, Growth Equity, Growth & Income, International Equity and Managed Allocation. Most of the 17 funds currently available are less than three years old, and six of them came out in the fall of 2002.

Some of the funds use a pure indexing approach, while others employ what the company calls a dual strategy by combining active management for a portion of the portfolio-typically less than half-and an enhanced indexing strategy for the rest. Lane says that the dual strategy reduces cash-flow concerns, since managers can sell stock from the indexing side to meet redemptions.

While the actively managed funds that have been around at least five years have a mixed record when it comes to beating their benchmarks, it's hard to dispute that when it comes to low expenses, TIAA-CREF is a fund industry leader. Its mutual funds are among the lowest-cost funds around, with expenses ranging from 26 basis points to 49 basis points. It also gets high marks for financial stability, with triple-A ratings from both Moody's and Standard & Poor's.

Lane also is urging advisors to reconsider the use of annuities for at least part of their clients' portfolios. That may be a tough sell for many fee-only financial advisors, who have a history of resistance both to buying variable annuities as long-term savings vehicles and annuitizing for income at retirement.

Still, Lane says some advisors have reason to take a second look at annuities. "Studies show that if you take out 4% of an account's value every year, there is a very real risk of running out of money in 25 or 30 years," he says. "Annuitizing a portion of a portfolio reduces the chance that a client will outlive his assets."

Advisors seem to be keeping an open mind, thanks in part to the paucity of income vehicles offering satisfactory yields in today's interest-rate environment. "Annuitizing isn't something we've done in the past," says Stephens. "But we don't disagree with the concept, and we aren't ruling it out."