Kathleen Kelly, a founding and managing partner of Compass Financial Partners LLC of Greensboro, N.C., started out in the advisory business as a generalist doing financial plans for individuals. She initially got her feet wet in the retirement plan business while doing financial planning for her business-owner clients. Retirement plan consulting now accounts for about 95% of her practice and “we’re very much in the active growth phase,” she says.
This year, Compass, which also does individual wealth management, brought in a CFA/CPA to serve as director of investment consulting. It also added another relationship manager to help with its retirement plan business. “We’re working to help companies drive retirement readiness and improve participant outcomes,” she says.
Kelly has plenty of company. Two-thirds (67%) of the nearly 1,700 advisors responding to a recent Financial Advisor survey plan to increase the number of clients they advise on retirement plans and 69% see retirement plans offering significant profit potential for their advisory firm. More than half of these advisors (54.7%) currently devote less than 25% of their practice to providing advice for businesses that sponsor retirement plans. But for advisors worried about the prospect of an aging client base in the decumulation phase of their lifecycle, building a business with accumulators and savers still in the work force looks like a viable alternative with staying power.
Meanwhile, financial services companies are rolling out new measures to make it easier for financial advisors to expand their retirement plan practices. Especially common among the new offerings are tools designed to help advisors chisel a niche in a precipice that’s been hard to get a grip on: providing individualized 401(k) investment advice to their retail clients and to the employees of their business owner clients.
Traditionally, plan participants have had to devise their own lineup from a fund menu or, more recently, most have had the choice of being plugged into target-date investments based on their age. “An advisor didn’t really have a way to go in and help them other than to maybe scratch it out on a yellow pad and recommend a mix of investments that would fit in the overall investment strategy for the participant or retail customer,” says Bill Chetney, executive vice president of LPL Financial Retirement Partners, a division of independent broker-dealer LPL Financial.
Now LPL and other companies are starting to offer advisors more comprehensive, efficient alternatives. In March, LPL introduced Worksite Financial Solutions, a platform that helps advisors provide custom-tailored participant-level financial advice and education, as well as engagement and transition services. The advice piece, which uses Morningstar technology, allows advisors to take recommendations from LPL’s research department and apply a model portfolio across the investments inside a distinct participant’s 401(k) plan.
Plan participants who elect to receive advice pay platform plus advisor fees ranging from 40 to 150 basis points based on the size of the plan, their assets and how much time the advisor will spend. LPL will release an enhancement next year that allows the plan sponsor to pay the entire fee or a portion of it.
Although 1,000 plans may have 1,000 different fund lineups, the technology makes it economically feasible for advisors to provide participant advice over a large scale, says Chetney. Participants and sponsors access LPL advisors face-to-face, online or through LPL’s call center depending on which component of its platform they are using.
The platform “is a great differentiator and it dovetails with what we believe in,” says Kelly of Compass Financial Partners, an affiliate of LPL Financial. Her firm is looking to roll out its first clients on LPL’s employee advice solution and is very pleased with the robust education solution. “If employees don’t make good financial decisions outside their 401(k) plan, they can’t take full advantage of a plan,” she says.
LPL initially surveys a plan sponsor’s employees to provide each one with a report containing an individualized financial literacy score. This data is then aggregated at the plan level to create a road map that shows the sponsor the education topics its employee base would most benefit from, says Chetney. The sponsor then decides the level of education it wishes to provide.
Broader financial literacy and education “can lead to financial wellness in the way that health plans taught people to eat less cheeseburgers and quit smoking,” he says. “They’re going to be happier, healthier, more productive employees.”
LPL’s new employee advice and education initiative is currently available to LPL advisors who sponsor a plan through mutual fund giant Vanguard’s Retirement Plan Access platform for small to midsize plans. It’s also available for LPL plans serviced by Ascensus, a leading provider of record-keeping and administrative services. LPL has received commitments from at least a dozen record-keepers, including New York Life, says Chetney.
Filling A Market Need
The Vanguard platform, which works with about 1,200 small to midsize plans, has experienced rapid growth since its 2011 launch, says Jing Wang, head of Vanguard Retirement Plan Access. “We’ve seen tremendous interest from advisors and plan sponsors, so in my mind the market needs this,” she says.
“We recognize that small business owners have so much on their plate,” she says. “They don’t have time to do due diligence or research.” The platform also offers low-cost investment options, is very transparent and provides high-quality record-keeping, she notes.
Vanguard provides participant-level data on a nightly feed to LPL for its calculators and investment models. It says LPL’s size will enable it to help more participants access individualized advice and education. Participants can access platform-related information through Vanguard’s Web site. When asked if Vanguard has plans or interest in engaging in similar partnerships with other companies, Wang responded, “There is nothing concrete in the pipeline, but we’re always looking for opportunities to help investors.”
Vanguard Retirement Plan Access offers participant education and communication programs for all its plan sponsors and participants. It also offers tools for selecting and managing plan investments. A Morningstar-powered feature that creates personalized portfolio allocation recommendations and provides ongoing account management with a level of fiduciary protection is available to participants for a nominal fee.
Wang says plan sponsors have been asking her many questions regarding fees and the role of fiduciaries, which she expects to continue next year. Additionally, she notes that more advisors are talking about becoming Erisa Section 3(21) or 3(38) fiduciaries, or are seeking assistance.
Even longtime retirement plan providers are seeing a surge in the demand for advice. TIAA-CREF will continue the expansion of its Individual Advisory Services group by adding more than 200 financial advisors to the group by the end of 2014, the financial services organization announced in mid-October.
The group provides financial planning services to clients across the nation and was created in 2005. The expansion will bring the number of advisors in the group to about 650, up from 250 at the start of 2012. The firm has $523 billion in assets under management.
Driving this demand is the growing number of Americans approaching or reaching retirement age. Until recently, more retiring Americans relied on a defined benefit plan than on a defined contribution plan. That is now changing in a big way.
Mike Narkoff, senior vice president of retail sales for Ascensus, also acknowledges that his firm has big shoes to fill. “The average employee needs help with all aspects of retirement planning, both in and out of the plan,” he says.
He thinks LPL’s employee advice and education platform will help facilitate participant readiness and higher participant outcomes. “It’s a highly personalized, ongoing experience,” he says. “The idea of sort of ‘set it and forget it’ couldn’t be further from the way the LPL tool works.” He expects it will help give participants a better understanding of how the assets they accumulate will translate into annual income as they draw down their savings in retirement.
Narkoff says a couple of recent trends jump off the paper for him. One, the big move away from a commission-based model to a fee-based model, should enable advisors to individually assess the needs of each employer and determine the right compensation to service that employer and its employees, he says. The other trend, a byproduct of the first, is the migration toward the lowest-priced share class. For new clients whose advisors can operate in a fee-for-service model, more than 70% of the investments used are institutional-type mutual fund share classes, he says.
“We don’t see either of those two trends reversing—we think they will accelerate,” he says. Meanwhile, auto enrollment “is still somewhat of a mystery,” he says, noting that there is a disconnect between what employers say about it and their adoption rate. He says this rate is running only about 15% across all 401(k) plans, from start-ups to large-market employers. Auto enrollment is an option on Ascensus’s platform.
More Tools Of The Trade
Custodian TD Ameritrade bought a retirement plan platform about five years ago from Fiserv Trust Co. A few hundred of the 4,500 advisory firms who serve individual clients on its brokerage platform now also do business on it. TD Ameritrade helps advisors manage plans, provide individual advice to plan participants, and open and manage brokerage accounts within a plan for participants who seek broader investment exposure. It has found this last option to be more popular with professional services firms in the legal, medical and engineering fields.
TD Ameritrade conducts seminars and webinars to provide advisors with educational content regarding the retirement plan market, recent regulations and best practices for advisors. Its educational efforts are helping bring more of its existing advisors into the huge, growing retirement plan market, and the company is encouraging more to get involved, says Skip Schweiss, president of TD Ameritrade Trust Co. He is also head of both retirement services and advocacy for TD Ameritrade.
“One of the great things is that new money comes in every two weeks, every payroll, which you wouldn’t typically see in an individual client account,” he says. “When you have a downdraft in the market like we had in 2008 and 2009, being in the retirement space can provide something of a floor under your assets under management because you have these accounts where money keeps coming in every time payroll hits.”
TD Ameritrade is hearing more and more that plan sponsors want education about fiduciary responsibilities. It has brought in prominent Erisa attorneys for seminars, including Fred Reish and Marcia Wagner, to provide insights that its advisor clients can share with plan sponsors.
Schweiss isn’t surprised that many advisors are shying away from the retirement plan market. “There are a lot of moving parts and every plan needs multiple services in order to run,” he says. “We’ve done a lot of listening to advisors in recent months and are trying to build ways to simplify the retirement market for them so they can generate more success in that arena.”
TD Ameritrade’s interfaces enable advisors and record-keepers to access retirement plan data. Advisors can also share some information with plan sponsors. The company is a big believer in open architecture, which enables a plan to pick the best record-keeper, third-party administrator, advisor and custodian to meet its needs. TD Ameritrade will introduce new services for the retirement plan market at its national conference in early 2014, says Schweiss.
Meanwhile, Schwab Retirement Business Services, a leading service provider for retirement plan advisors and independent record-keepers, is also seeing more advisors get into the retirement business and currently works with more than 1,200 of them. “They all want to do things differently,” says Debbie Pritchard, vice president of Schwab Retirement Business Services. To help accommodate their increased demand, it has partnered with a number of service providers.
Schwab’s partnership with investment technology provider Klein Decisions enables it to produce individualized retirement readiness reports, which are used by advisors interested in providing one-on-one retirement advice to plan sponsors and participants. Schwab has integrated a tool kit from fiduciary specialist fi360 into its online retirement center to create investment management resources for advisors. Schwab’s use of planAnalytics, a comprehensive reporting tool from dailyVest, compiles data from participant record-keeping software that advisors and plan sponsors can use to analyze the effectiveness of plan provisions and participant utilization.
Schwab has also established a relationship with vWise, a provider of interactive videos for plan participants, to help its clients provide participant content. It has also teamed up with the Retirement Advisor University (TRAU) to provide education to advisors.
“It’s really been for us about trying to make it easy as possible,” says Pritchard. “If these folks are using all of our platforms, we can make it much easier for them to get the data and interact with the vendors, and we can make it a lower cost for them.”
Even advisors who aren’t intent on consulting to retirement plans have gotten more involved in the space. An example is Charles Weidman, a certified financial planner with LPL Financial in Whippany, N.J. He focuses on providing comprehensive and holistic advice to individuals and families and helps business owners prepare to transition out of their businesses. His clients frequently ask him for help with the 401(k) plans they belong to and he assists them. “I consider it to be one of the key elements of my value proposition to clients,” he says.
Weidman looks at his clients’ available investment options and uses eMoney Advisor planning software and Morningstar tools to review their allocations and compare them to the overall investment strategy he has helped them establish. Every plan is different, and “with target-date funds you need to take a closer look under the hood,” he says.
Weidman’s clients are often concerned whether they are contributing enough to their 401(k) accounts. “But unless you’re a highly paid executive or business owner who can contribute more, they won’t be sufficient to fund a second act or retirement years,” he says. To help clients understand their whole financial picture, he focuses a lot on client education. He provides information through conversations and often sends them current events articles on relevant topics including tax policy changes. He also shares written and video market commentary from LPL.
If a business-owner client wishes to review or establish a 401(k) plan for employees, Weidman partners with an LPL retirement plan specialist. To pair its advisors and specialists, LPL created its Sync Advisor Match program, which Chetney describes as “kind of a Match.com.” It’s up to the advisors and specialists to determine how to divide the revenues from their shared labor.
Chetney notes that nearly two-thirds of the industry’s 330,000-odd advisors have at least one 401(k) plan. While regulatory and tax complexities have forced some away from servicing these plans, “the pendulum is swinging back to them,” he says. Why? Retirement plan specialists provide much-needed expertise at the plan level but generally don’t focus on plan participants, he says.
There’s a great need for 401(k) advice “across the kitchen table and now across the lunchroom table,” he says. “It’s pretty exciting for retail investors to get back into the qualified plan space and do what they do best, which is consult to individuals.”