Jim O'Shaughnessy, managing partner of Sheridan Road Financial in Northbrook, Ill., is a third-generation retirement plan advisor. His grandfather did it. His father did it. And now O'Shaughnessy has over 100 retirement plan clients with nearly $2 billion in assets. In 2005, O'Shaughnessy and his partner, Daniel Bryant, made a decision to leave AXA Advisors, their broker/dealer at the time, because AXA would not allow them to act as the co-fiduciary on their retirement plans. After an exhaustive search for a new broker/dealer that focused on retirement plans, they made the leap in December 2006 to National Retirement Partners, which was acquired by LPL Financial in July of last year.
Because NRP and LPL provided O'Shaughnessy with the resources and support to act as a fiduciary on plans, he has been able to increase his assets five-fold and double the number of retirement plan clients since 2007. O'Shaughnessy says plan sponsors look to him to provide investment selection and monitoring inside their plans; acting as a fiduciary, not simply a broker, allowed him to give clients that service. NRP and LPL allow him to act as the fiduciary, whereas not all b/ds do.
“If you're not a fiduciary on the plan, you're not going to be able to provide ongoing advice as to the selection of the investment options,” says Bill Chetney, executive vice president of LPL Financial Retirement Partners.
There's no question that the retirement plan space is growing, and with $3 trillion in retirement plan assets floating around, this provides a tremendous opportunity for advisors to capture these clients. And now some broker/dealers — from LPL Financial to John Hancock — are launching concerted efforts to help advisors win and serve that business. But as the retirement plan business becomes more complex and demanding, especially with upcoming changes to the Employee Retirement Income Security Act (ERISA), reps can no longer dabble in this space, retirement experts say. If you want to make it in the 401(k) business, you need to specialize. Many advisors understand this and are completing designation and training programs, offering special “fiduciary” services, becoming more knowledgeable about ERISA laws, and seeking out 401(k)-friendly b/ds.
“People that are non-concentrated in the retirement space where they're really doing one or two or three plans incidental to their primary business, those advisors are going to come under increasing pressure to almost abandon serving those types of plans,” says Chetney. “And that will create more opportunity for the people that have invested and have accumulated expertise.”
Dabbling Out, Specializing In
It's clear that the retirement plan landscape is changing, providing a lucrative opportunity for advisors. According to the Investment Company Institute, 401(k) assets have grown from $2.7 trillion at the end of 2009 to $3.1 trillion at year-end 2010. Fred Barstein, founder and executive director of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson Executive Education, says there's more of an emphasis in corporate America on 401(k) plans these days, with about 625,000 defined contribution plans nationwide. But 115,000 of those plans don't have an advisor to the plan itself, Barstein says. In addition, IRA rollovers are expected to represent 40 to 50 percent of wealth manager net new money between 2010 and 2015, according to McKinsey & Company.
Meanwhile, the regulatory environment is shifting. The U.S. Department of Labor has proposed a rule that would change the definition of a fiduciary to a retirement plan under ERISA. Another change, which takes effect April 2012, requires all providers to disclose fees and services, and acknowledge fiduciary capacity to clients in writing.
“There's a perfect storm of disclosure coming, between 408(b)(2), which is the plan level disclosure, 404(a)(5), which is the participant-level disclosure, and then this impending change to a fiduciary standard,” says Bruce Harrington, head of retirement sales and strategy for John Hancock Financial Network. “So I think in the next 18 months, there's going to be a lot that's going to happen that's going to shake up business. And I think those advisors that are focused and specialized in the 401(k) space will have a great opportunity, and those advisors who choose to stay as generalists are going to find it more competitive.”
According to Barstein, of the 300,000 FAs actively selling to the public, 15,000 have at least five plan clients, while 5,000 FAs are considered “focused” on the retirement space, with 10 or more plans. “We think that's going to grow to 10,000 in the next five years,” Barstein says.
LPL's Chetney says about half of all advisors have at least one plan client, but the increasing complexities will drive the dabblers out of the business.
“I am definitely seeing FAs now saying, ‘Not only do I think retirement is a good business, but I want to put almost the entirety of business around plans,’” says Kevin Crain, head of institutional client relationships for Bank of America Merrill Lynch.
Tim Eyerman, a retirement plan consultant with E&M Consulting, an affiliate of Raymond James & Associates, managed to pick up a $10 million plan from a retail clothing chain, which already had an advisor on the plan. Eyerman scored a conversation with the plan sponsor after the company's human resources director attended one of the firm's seminars, aimed at educating the retirement community on issues related to plans. The plan sponsor was attracted to Eyerman's specialized and user-friendly tools.
“401(k) plans are absolutely predictable,” says Steve Johnson, a branch manager for Raymond James Financial Services in Draper, Utah, who does a lot of retirement plan business. The revenues from these plans are consistent, he says, and participant contributions provide natural growth. Johnson started seven years ago with about $12 million in retirement plan assets; today that's grown to $170 million.
“The ones that are specializing in it are growing their business at a rapid rate,” Barstein says.
Building Out the Resources
Barstein says there are only 25 broker/dealers that have at least one person on staff dedicated to the 401(k) space, but more advisors are turning to their b/d to help them become specialists. Recently, some b/ds have been stepping it up, building out their retirement plan businesses and offering more services and resources for these advisors. B/ds are doing it not only as a way to capture new clients, but also as a way to lure retirement plan advisors who are looking for a firm to support their business model.
In July of last year, LPL announced its acquisition of NRP as part of an overall effort to segment its advisors according to specialty. Since then, Chetney and his team have been building out the LPL Retirement Partners platform, and now the firm has more than 43 back-office staff dedicated to retirement plans across LPL's departments. The firm has attracted 50 new retirement plan advisors since the acquisition.
In June, John Hancock Financial Network launched a new defined contribution consulting program to help advisors expand their retirement plan business. The new program includes in-person and online training, practice management consulting, access to dedicated retirement consultants to help advisors grow their business, and a new 3(21) fiduciary program, so advisors can act as a co-fiduciary. A 3(21) fiduciary, as outlined by ERISA, allows the advisor to provide advice for a fee, but the plan sponsor retains discretion over the investment decisions in the plan. Year-to-date, John Hancock's 401(k) assets are up 15 percent.
“We're also doing this to help attract advisors that want a place that's friendly to 401(k)-focused advisors,” Harrington says.
A year ago, Merrill Lynch launched a designation program for advisors serving middle- to large-market retirement plans, says Crain. Advisors can be designated by the firm if they meet certain criteria, such as years of experience in 401(k)s, number of plans they serve and growth in their business. As of July, more than 65 advisor teams, representing 160 advisors, were among the first to receive the designation.
Advisors who are designated under the program will get referrals from the Bank of America Global Commercial Banking and Global Corporate & Investment Bank on plan assets of $10 million or more. Year-to-date through July, the referral program has resulted in 220 new clients totaling more than $3.8 billion in new assets.
After getting designated, Bruce Gsell, wealth advisor and managing director of investments for Merrill, won a $25 million 401(k) plan earlier this year through a bank referral. He's also in the finals for a $24 million plan, another bank referral.
Morgan Stanley Smith Barney has also been investing in this side of the business, adding staff dedicated to retirement plans as well as paid provider search and fee benchmarking services. Jim McCarthy, managing director and head of wealth advisory solutions, Morgan Stanley Smith Barney, says the firm also holds regional retirement forums for people interested in the retirement business. The events are designed to help advisors build the scale needed to support plans and move up the ladder. Also, in late September, MSSB expanded the number of funds for which reps can provide a fiduciary recommendation to retirement plans. The list will expand from 300-400 choices to more than 1,000.
Ginger Brennan, head of national distribution management at ING, works with b/ds that are building out their retirement plan business, and over the last couple years, she has seen more b/ds segmenting these advisors. A year ago, ING rolled out its “GROW” kit, a written guide for advisors that includes sales ideas and techniques for growing this business.
Getting Over the Fiduciary Hurdle
Clients are also looking more closely at fiduciary responsibility, Brennan says, and many advisors are either taking on that fiduciary responsibility themselves or offering fiduciary services as part of their specialization.
Many broker/dealers don't allow their advisors to act as the fiduciary on the plan, but retirement plan advisors want to offer this service as a competitive advantage, says Merrill's Crain. According to Boston Research Group's 2010 DCP study of retirement plan advisors' attitudes and behavior, 44 percent of advisors said their b/d or licensing organization considers them to be a fiduciary to their plan clients, although this is up from 31 percent in 2005.
“Most broker/dealers are not allowing their advisors to be fiduciaries because they don't have the structure to train and oversee it,” says LPL's Chetney.
In addition to John Hancock and LPL, other b/ds are listening to advisor demand for fiduciary capabilities. Merrill expects to offer a certain level of plan fiduciary services through a restrictive group of FAs by the end of the year. Crain says advisors see the service as an entrée into a client relationship because it's something plan sponsors are asking for. Rather than seeking the fiduciary service elsewhere, Merrill FAs can have a competitive advantage and hold onto the client.
UBS Wealth Management already allows its advisors to perform investment selection and monitoring for plans under Section 3(21) of ERISA, which means reps can make a recommendation to the plan. The firm is expanding its capabilities to provide fiduciary services under Section 3(38), which means the firm will assume full discretion for selecting, monitoring and replacing investment options.
For those advisors who cannot act as fiduciaries, many plan service providers are contracting with third party firms who will act as the fiduciary instead. Some advisors don't want to take on the additional risk of being the fiduciary, and these third-party arrangements allow them to hold onto that business, says Dominic Falaschetti, senior vice president of investment strategies at Mesirow Financial, which offers these services.
“We've built a really flexible business model that enables these brokers and advisors to better service their plans and retain those relationships,” says Falaschetti.
This type of service takes the investment advice and recommendations off the table, so FAs can achieve scale and spend more time on other things, such as plan design issues, plan distribution options, and enrollment eligibility, says Chris Giorgi, vice president of advanced markets for AXA Equitable's employer-sponsored division. AXA partners with Wilshire Associates to offer fiduciary services to its plans.
Nationwide Financial started offering 3(38) services through IRON Financial in June. Because of the increasing complexities and specialization in the retirement space, there's a greater need for outsourcing fiduciary services, as it becomes harder for FAs to stay on top of everything, says Anne Arvia, senior vice president of retirement plans for Nationwide.
New York Life Retirement Plan Services, part of New York Life Investments, contracts with Morningstar Investment Services to provide this fiduciary service.
For advisors who want to become specialists but don't have the bandwidth to commit to investment consulting and monitoring, outsourcing could be the way to go, says Estee Jimerson, director of relationship management and business development for Morningstar Investment Services.
