The retirement market continues to mature, but market dynamics are clearly changing. The industry is suffering from too much unpolished regulation, the rules seem overly restrictive, the regulations are less than clear and the regulators rarely provide guidance in advance. However, the Pension Protection Act of 2006 could encourage higher adoption rates by small employers, increased participation and higher contribution levels.
The scrutiny on fees, disclosure, indirect compensation and revenue sharing has intensified. Some long standing business practices are also being challenged, while recent lawsuits have fired a shot over the bow of sponsors and the employees responsible for managing retirement plans.
Few outsiders understand it, but the level of fees, the composition of fees, the monitoring of fees, provider fee disclosure and advisor fee disclosure are all separate issues. As with any business, there are always some provider and advisor level fee abuses. Some sponsors also fail to monitor their fees, but few providers are earning an adequate return on their retirement businesses.
The ill-informed are confusing and combining the aforementioned issues for their own purposes, but based on profitability, fees are not excessive for the services provided. Most observers do not believe revenue sharing is illegal, but consistent and universal disclosure will be required to calm the critics. On the other hand, some providers and advisors could certainly improve disclosure at the plan level, including additional managed account fees. Excess revenue on high balance plans is also an issue.
While the nation is badly in need of Tort Reform, it seems to be headed in the wrong direction at the moment. Tort Reform must be addressed, because those that file frivolous lawsuits should be held accountable. A clear definition of “reasonable” by the IRS & DOL would also be beneficial.
Given the recent lawsuits, managing liability has become a priority at both the executive and the advisor level. Unfortunately, fiduciary liability insurance and E & O coverage are not well understood. Policy coverage and prices also vary significantly between the major providers.
While nothing is perfect, the DC system may be the most effective program ever devised to help the average worker save towards retirement. The DC system is in the early stages of major change, and it needs to be protected from those wishing to impose another transaction tax and win settlements rather than lawsuits, but care little about participants.
In addition to the plaintiff’s bar, the DC system needs to be protected from individuals campaigning for office, journalists seeking controversy and individuals trying to radically alter the system.
Sponsor To preclude their retirement plans from putting them at risk, sponsors must stay current with regulatory and investment issues. To avoid lawsuits, fees, expenses and revenue sharing must be evaluated, disclosed and understood.
The selection and monitoring process/criteria for providers, advisors and performance measurement must also be documented very carefully. Again, disclosure, criteria, documentation and process are the order of the day.
The responsibilities are overwhelming for those that manage plans and supervise plan managers. Due to the demanding fiduciary duties and standards associated with ERISA plans, sponsors should
partner with qualified specialists willing to embrace the fiduciary role.
Before outsourcing, sponsors must learn how to evaluate retirement advisors. In addition to best practices and legal requirements, sponsors should seek out: fee-based specialists, neutral platforms, full disclosure, compatible fiduciary status in writing and a well documented operating process.
In addition to complying with the various rules, regulations and safe harbor provisions, sponsors must manage fiduciary liability with a clear understanding of the coverage offered by their insurance carriers.
Provider Although recent trends may make sponsors start to wonder about why they are offering a plan, providers have been wondering why they were in the retirement business for over a decade. The retirement plans market is a challenging business, and it must be a core business for both providers and advisors. Some providers no doubt entered the business for the wrong reasons, but over 100 providers have already exited the money-losing retirement plans business.
Margins are under continued pressure, including fixed and variable costs for technology and human capital. Given that the profit comes from investment management, it is increasingly difficult to justify capital expenditures for support systems.
The competition from former DB money managers has also increased, and providers will have to absorb the costs of adapting to new changes forced upon them, including disclosure and the major shift to the RIA model. A major shift is coming, and old school vendors that fail to adapt to the new model will probably be among the consolidated.
The industry – including providers, investment managers and advisors – would benefit from enhancing their lobbying effectiveness. Indeed, Congress and the regulating bodies need to be reminded that in a capitalistic society, service providers are entitled to earn a reasonable profit.
Advisor As noted, the retirement market is maturing and becoming more challenging to operate in. The advisor market is also stratifying, and while generalists are suffering,
the demand for ethical experts, advisors willing to assume fiduciary status and premium services is increasing sharply.
The increased awareness of changing market dynamics has motivated the sponsor community to document risk management and compliance efforts to prevent/defend against allegations of misconduct. Not surprisingly, legislative, regulatory and litigious activities have elevated the need for fiduciary services, and specialists are benefiting from this trend.
Most advisors are still struggling with advice and fiduciary status, but those subjects seem to be in transition. Indeed, the top advisors already offer contracts with well documented processes that meet ERISA standards.
The b-d community services a large percentage of the retirement market, but they are severely hampered by their umbrella. As a result, the RIA model will probably replace all other retirement plan models, and the top advisor teams could experience major growth in the years ahead. However, these advisors will continue to be challenged in terms of distinguishing themselves, communicating their value via a clear message and getting paid what they are worth.
The most successful advisors are already experiencing growing pains and are further challenged by pricing, organizational development and recruiting. Compensation and benefits, improving efficiency through systems and technology, managing liability and preparing for transition also pose a challenge. Most accomplished advisors are earning a good income, but many are not building equity. As a result, a growing number of advisors seem interested in starting or teaming with Registered Investment Advisory firms.
In summary, a seismic shift is coming in terms of not only product structure and compensation, but also how advisors position themselves. There will always be more than one model, but as automation and formalization of process increase, some advisors will operate less in the trenches and more in the boardroom. As always, the future belongs to those who adapt.
Phillip Chiricotti is a thirty-year veteran of the financial services industry and founder of the Center for Due Diligence. The CFDD is an independent firm dedicated to the support of retirement intermediaries and is widely recognized as the voice of advisors.
The CFDD’s 2007 Advisor Conference, “TRANSITIONING FROM SALESPERSON TO BUSINESSPERSON: Best Practices, Business Development & Marketing Skills,” is scheduled for October 1-3 (Monday - Wednesday), 2007 at the world class Fairmont Scottsdale Princess Resort in Scottsdale, Arizona.
The two and one-half day interactive program was designed by the CFDD’s network and offers fifty-one different breakout sessions, including three keynote sessions. Over one hundred retirement specialists will participate in the agenda, including nearly fifty accomplished retirement advisors, RIAs and other intermediaries. The CFDD’s conferences are designed solely to help retirement advisors grow, manage and prepare their business for transition. The conferences help advisors participate in consolidation, learn successful business practices, adapt to change, develop new opportunities, price their services, increase efficiency, manage liability and network.
For more information about the conference, visit www.401kduediligence.com/
CFDDconference2007.asp or email CFDD@401kduediligence.com.
