In Practice October 29, 2006

Buddy System

Retirement plan relationships are evolving from a casual give-and-take toward something more formal
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Advisers frequently cite client referrals as a significant generator of new business. However, the ongoing relationship between retirement plan advisers and the other parties that provide services to retirement plans can go well beyond a simple referral source. Ultimately, the ability to build and nurture these working partnerships can foster a cooperative camaraderie that can make it easier for you to focus on true value-added servicing, rather than being drawn into finger-pointing squabbles–and your clients will benefit as well.

As these relationships grow in popularity, what used to be a casual practice of give-and-take is making a gradual shift for some advisers toward one that carries legal obligations. Even though casual relationships are still the most ubiquitous, these formalized strategic partnerships are becoming a more common arrangement.

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The Pursuit of a Partner

One relationship that has been underutilized is the one between advisers and ERISA attorneys, according to David Witz, managing director and a plan adviser at Fiduciary Risk Assessment. “Attorneys are not salesmen. They are not going to call you up and say ‘Hey, these are the services I offer. I think you need me,'” says Witz. In point of fact, the legal profession has long resisted such overtures as unseemly at best, and earning those in areas where sales were more aggressively pursued the unflattering tag of “ambulance chasers.”

Despite that relative passivity, Witz says it makes sense for advisers to be more proactive in finding out who local ERISA attorneys are, so that they might be able to have a one-up on plan advisers who don’t have them at the ready. Plus, Witz added “if you start feeding an ERISA attorney business, you are likely to get it right back.”

Another key partner are third party administrators, or as they are generally termed, TPAs. TPAs generally perform the tasks associated with participant-level processing-recordkeeping and reporting, compliance testing, etc. And these days they are less and less willing to be relegated to the “back office.” “All TPAs try to leverage the relationships advisers have with plan sponsors,” says Witz. This paradigm has turned some TPAs into near marketing virtuosos. Just ask Jay Scholz at San Antonio-based Scholz, Klein, & Friends Enlightenment Group Inc., who says his three-year-old firm is as much a marketing firm as it is a TPA firm.

Building out a good partnership means an adviser should be able to put together a package of better services at better prices than if an employer simply flooded the market with requests for proposals, comments Witz. For instance, if an adviser is willing to act as a plan fiduciary, or can offer a client access to an administrative firm that is willing to act as a fiduciary for a better price than the plan sponsor would find by going elsewhere, then that would be a wise partnership, argues Witz.

Independent plan advisers are not the only ones that can benefit from some TPAs’ ability to act as co-fiduciaries on a plan. Steve Wilt, who heads the Star Group at Merrill Lynch-whose advisers do not currently serve as plan fiduciaries-says that his firm has partnerships with local TPAs to do recordkeeping and advisory services, and also added the co-fiduciary services of a TPA to its bundled offering about a year and a half ago.

Formalizing the Arrangement

As the partnerships between advisers and others proliferate, it is becoming more important to formalize these relationships, changing what once might have been a casual alliance into a binding contract. The need for legal agreement when it comes to dividing up revenue is nothing new, but advisers are beginning to use legal agreements to set roles and obligations of the relationship.

“What it comes down to is that you have two professionals who are entering into a revenue-sharing agreement, or they might even agree to split roles and responsibilities in some way,” says Christopher Barlow, co-author of How To Build a Successful 401(k) and Retirement Plan Advisory Business. Advisers that do not utilize such arrangements currently can begin arranging them by targeting vendors with whom the adviser shares mutual characteristics, values, or clients.

However, there are some other things of which advisers should be aware when prospecting these partnerships. For instance, Wilt warns that some CPAs and TPAs have licensed advisers in-house, so it is important to ask about this before forging a partnership to avoid any potential conflicts of interest.

Until fairly recently, the legally binding relationships between plan advisers and their strategic partners have been limited mostly to revenue-sharing agreements with CPAs, which exist because of compensation splitting, says Scholz. However, that is changing.

There are no set rules for establishing a partnership–they can be as varied as an adviser’s business or his clients. Still, while there are not strict rules, there are guidelines that can help ensure success, since strategic partnerships are, by their very nature, symbiotic.

As these partnerships proliferate, advisers would be wise to extend legal agreements to include even roles and responsibilities of each party, which would make parties not holding up these agreements in danger of breaching a contract, rather than just souring a relationship, Barlow contends. Outlining such things at the outset allows you to ensure communication with, and clarify expectations of, parties, as well as guarantee that all parties honor the relationship. Factors to consider in defining the relationship include: exclusivity, reciprocity, opportunities for additional business, payment of fees, and compliance issues.

In addition, they can yield significant dividends. Scholz says he brings about 95% of his business through referrals, while Wilt generates about 60% to 70% of his new business from referrals, and he draws about 20% of his business from CPAs and ERISA attorneys.

Barlow thinks an agreement between two strategic partners should be crafted with room for change, and he recommends that the agreement always have an exit built into it, a consideration he says is often overlooked.

A Question of Independence

Despite the growth of these relationships, one Chicago-based retirement adviser does not see these alliances as a pathway to servicing plans better, but as a forfeit of independence. Jennifer Flodin, a retirement plan consultant and founder of Plan Sponsor Advisors in Chicago, who alone services about 12 plans ranging from $1 million to $65 million in assets, says that, no matter how often the industry acclaims these popular relationships, her five-year-old firm will not make them.

“There are not a handful of vendors we go to when we are trying to figure out what services would best fit a plan,” says Flodin. “When advisers only hand over their business to a set of vendors, it skews their independence.” It begs the question of whether advisers are giving their clients’ plans the best service, she contends.

Flodin recalls a recent plan she advised for a manufacturing company whose employees were 70% Spanish-speaking. The plan, she continues, would require enrollment papers and education materials in Spanish. She argues that she could not have handed this plan over to any of the advisers she has dealt with in the past; instead, she had to search for a vendor that could serve the needs of that specific plan.

One question raised by advisers working with such arrangements is whether they need to disclose their strategic partnerships to plan sponsor clients. Witz argues that advisers are obligated to reveal these relationships, because plan sponsors “need to be educated and need to know if there is a conflict of interest.” Although Wilt agrees that plan sponsors need to be aware of all the relationships, he maintains it is not necessary to disclose relationships that will not affect plan participants.

The adviser is not the only party that puts some of its autonomy on the line when it decides to get into a strategic partnership. TPAs do the same, comments Scholz. Even if partnerships such as these have been the lifeblood of Scholz’s business, he says he will not be shackled by any agreement. “We partner with advisers, but [plan sponsors] are as much our clients as they are the advisers’ [clients].”

Advantageous Affiliations: Common partnerships for plan advisers

Third-Party Administrator (TPA)
TPAs can offer advisers technical advice about the plan, as well as administrative and consulting services.

Financial Adviser
Other financial advisers may have relationships with executives at companies with 401(k) plans.

Certified Public Accountant (CPA)
Plans that have more than 100 eligible employees require an audit by a CPA—a relationship plan advisers can leverage to get in touch with plans needing advisers.

ERISA Attorney
ERISA attorneys can keep advisers abreast of fiduciary duties.

Benefit Broker
Benefit brokers can refer advisers to 401(k) plans, and advisers can refer brokers to clients that need help with other employee benefit programs such as health, dental, or executive compensation.

401(k) Plan Search Consultant
Getting to know search consultants for plans can get advisers invited for searches they may not have known about.

Program Provider Wholesaler
They are compensated to close 401(k) plan business through intermediaries, so they want to partner with financial advisers for service and support. They also can let advisers know about plans without assigned financial advisers.

Before You Begin: Five things to consider before entering into a strategic partnership
1. Does some facet of the partner’s business already provide adviser services?
2. Are all of the partnership responsibilities spelled out in the agreement?
3. Does this partnership require a legal agreement?
4. Does the agreement contemplate a way for the parties to modify and/or terminate the relationship?
5. Does the partnership provide the ability to offer services that are better/more efficient than the plan could obtain on its own?
In Practice October 29, 2006

2006 planadviser DC Survey: Pride Guide

Advisers share their favorite providers
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Providers that get high approval ratings from retirement plan advisers have something to brag about—our first survey of advisers’ opinions of defined contribution providers shows they are tough customers, or at least more restrained in their praise than are plan sponsors.

Consider that the average scoring for service to plan sponsors was a mere 4.76 on the same 7.0 scale on which plan sponsors in our sister publication PLANSPONSOR last rated their providers 6.01 (See Chart). The adviser respondents to our survey appear to be focused on those client interests—with service to plan sponsors enjoying a stratospheric 6.69 (See Chart) on the 7.0 priority rating scale. Indeed, the clear (and perhaps obvious) importance of that criterion stands in sharp contrast to the evaluation of the delivery on that promise. Clearly, at least from the standpoint of advisers, providers have room for improvement—to put it mildly.

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Different Folks, Different Strokes

One might well expect a more demanding eye from advisers who, after all, generally deal with multiple plan providers on a daily basis, and in a variety of circumstances. Moreover, unlike plan sponsors, which may well jettison (or want to jettison) a provider at the first hint of trouble, such decisions are not always within the immediate purview of the plan’s adviser. Then, whether it is a matter of personal/professional pride in trying to make a troubled selection work, or just a real-world cognizance that such changes can have a seismic impact on plan operations, advisers must, as often as not, try to assuage the perceived gap between service commitment and delivery.

Of course, advisers frequently are the lightning rod for change, and often act as a potent source for demanding better from the provider community. Advisers tend to see more of what the market has to offer—and more often—than the plan sponsor clients whose causes they champion. When it comes to activities such as doing a provider search/evaluation, plan sponsors seldom have a chance to become true experts, after all—and, if they change providers often enough to obtain that expertise, well, they may prove to be a difficult client for the adviser, as well as the provider.


The challenge for advisers—perhaps even more than for plan sponsors—is how to stay fresh with the full range of capabilities that the industry has to offer, to find ways to reach beyond the core group of “comfortable” provider relationships that have been cultivated and nurtured over time. It is one thing to study, to conduct repeated site visits, to review the results of surveys, and to glean insights from colleagues; how does one arrange for a “test drive” with a provider without subjecting a valuable client relationship to risk?

While advisers frequently are viewed by some as having a strong sense of self-interest, that was not evidenced in their provider evaluation priorities. Range/quality of investment options barely bested service to participants in the provider importance attributes, and fee structure for plan sponsors placed well ahead of the adviser fee structure in their evaluations. In fact, adviser fee structure, adviser support post-sale, and adviser sales/marketing support were cited as significantly less important than factors affecting plan sponsor and participant servicing.

Fees are always a sensitive issue, which may explain why the lowest average and median scores in the survey were given to both categories of fee structure-both for the plan sponsor and, even more abysmally, for advisers. Additionally, those structures, already under pressure, are sure to undergo intensive scrutiny and potentially disruptive change in the relatively near future. Consider that, at present, the vast majority of the respondents to this inaugural survey (80.5%) are compensated via asset-based fees, while 38.7% receive some commissions, a scant 3.4% are paid a per-participant fee, and 14.5% report receiving some other form of compensation.

Top Tips

Nonetheless, the laser-like focus on service is borne out in the results. Our Best in Class list of providers chosen by advisers for service to plan sponsors and service to plan participants overlaps in nine out of the 10 provider slots (and two of the top three).

It should come as no surprise, however, that there is also a strong provider focus on nurturing their adviser relationships. That focus is perhaps most evident in the firms that top the Best in Class lists for three separate adviser-focused services that, perhaps not coincidentally, are identical, although the criteria-adviser fee structure, adviser support post-sale, and adviser sales/marketing support-are quite different. Ironically, considering the prominence accorded plan sponsor and participant service in these evaluations, John Hancock, which topped all three adviser-oriented Best in Class lists, failed to crack the top 10 for services for plan sponsors or participants.

Ultimately, of course, the best advisers choose to work with providers that are able to strike a balance-that offer high-quality services to plan sponsors and plan participants and, thus, allow advisers to focus on adding true value to the plan, rather than being relegated to a position of “damage control.” While every individual plan is unique, and every combination of plan and provider has its own chemistry (even more so when an adviser’s influence is added to the equation), the best advisers build their practices by not only getting to know the players, but also understanding those chemistries and sharing a unique ability to craft and help cement long-standing relationships. If the best advisers are not quite able to finish their client’s sentences, they surely are able to anticipate the tone and tenor of the words before they emerge.

These are momentous times for our industry, particularly for financial advisers. The shift from employer-funded defined benefit plans to employer-fostered defined contribution models may present challenges for this nation’s long-term retirement security, but it surely plays to the advantage of a profession dedicated to helping plan sponsors construct the right programs, and participants make the best of them.

Methodology

In September 2006, approximately 8,000 advisers that service defined contribution (DC) plan clients were sent a link to an online questionnaire developed by PLANADVISER editorial and research staff. The list of advisers was derived entirely from PLANADVISER’s own proprietary database. The questionnaire consisted of approximately 40 questions, including size and scope of the adviser’s qualified plan business, assessments of defined contribution providers, as well as a section on investment evaluation and selection process vis à vis qualified plans, which will be published in the Winter issue of PLANADVISER; 452 total usable esponses were received from qualified plan advisers.

In order to qualify for a Best in Class rating in any of the seven service categories, defined contribution providers needed a minimum of 15 adviser evaluations in that category.

Best in Class awards were given to those providers with top 10 average scores in each service category. In addition to the data published here, customized research reports are available by provider, by adviser type, and by adviser size. For more information, please contact Mike Stratton at (203) 595-3272 or mstratton@plansponsor.com.


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