Practice Management August 9, 2022

Why Are Financial Services Firms Looking to Wealth Management Leaders?

The short answer is that more financial services firms are looking at their wealth management divisions as drivers of growth; the long answer is a lot more complicated.
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Amid compressing margins in traditional financial services profit centers, such as investment banking and retirement plan recordkeeping, more financial services firms are looking at their wealth management divisions as potential drivers of growth going forward.

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“Wealth management is becoming more important,” says Mike Wunderli, a managing director at Echelon Partners. “It’s the steadiest part of the business and the most highly valued part of the business, because it is recurring and transparent.”

By contrast, the investment banking business is highly profitable, but it’s less predictable and less sticky, Wunderli says.

“I think there’s a paradigm shift in the importance of wealth management in all of these bulge bracket investment bankers or in the international diversified financial services firm,” Wunderli adds. “Many of them may be seeing a future that is morphing toward a greater emphasis on wealth management, and they want their leadership to come from that space and help drive that space.”

As wealth management becomes more important to financial services firms, so does the leadership and viewpoint of wealth managers. That has led to an increasing number of wealth management professionals moving into high-profile leadership positions.

Recent Moves

When UBS recently announced that Iqbal Khan would soon take over as the sole president of the organization’s global wealth management business, CEO Ralph Hamers said in a press release that the firm’s global wealth management business and its Americas region, in particular, are strategically important.

“Both offer significant growth opportunities for us,” Hamers said. News reports suggested that Khan’s promotion put him in line to eventually succeed Hamers as the company’s CEO, though that was not addressed directly by the firm at this time.

Competitor Credit Suisse, for its part, announced in July that it had tapped Ulrich “Ueli” Körner as its new group CEO. Körner was previously Credit Suisse’s CEO for asset management and spent six years leading UBS’ asset management division earlier in his career.

“With his profound industry knowledge and impressive track record, Ueli will drive our strategic and operational transformation, building on existing strengths and accelerating growth in key business areas,” Credit Suisse Chairman Axel P. Lehmann said in a statement.

A Credit Suisse statement announcing the appointment, which came as part of comprehensive review, said one of Körner’s objectives would be to help the company transition into a more “capital-light, advisory-led business,” with the goal being more consistent performance.

Citigroup CEO Jane Fraser, who took on her current role in 2021 after leading its wealth management and retail banking operations, has also cited wealth management as a key driver of growth for the company. Her plan involves combining the company’s private bank and consumer wealth businesses to create a more streamlined experience for clients, and one that can serve a broader swath of consumers.

Beyond the Banks

The focus on wealth management is not exclusive to banks. Voya has announced that Heather Lavallee, CEO of its wealth solutions business, which includes the retirement plan business as well as a growing retail wealth management channel, will take over as CEO of Voya in January.

“As the CEO of our wealth solutions business—which delivered record earnings during 2021—and in her prior leadership roles, Heather has distinguished herself as an extraordinary executive focused on growth, innovation and culture,” current CEO Rod Martin said in a statement on the appointment.

And SageView Advisory Group, a traditionally retirement-focused advisory group, has just named Jorge Bernal as its chief operating officer. Bernal previously served as a managing director and co-head of advisory services for Goldman Sachs Financial Management.

Bernal’s appointment was the latest in a flurry of hires following the acquisition of SageView by Aquiline Capital Partners last year and a renewed commitment by the firm to expand through mergers and acquisitions. Randy Long, SageView founder and CEO, says that Bernal’s appointment came after a nationwide search. 

“How fortunate we were to land Jorge,” Long says. “He saw what we were trying to do and the vision of trying to bring wealth and retirement together, and he brought all of his wealth experience and his background in operations and technology.”

Long says SageView has doubled in size over the past 18 months to more than 250 employees, and has been evolving to meet growing demand from plan sponsors for not only portfolio management but also financial and wealth management services for plan participants. Meanwhile, Sageview’s wealth management division has grown to more than $4 billion.

“You can make the argument that there are greater margins in the wealth management than in the institutional consulting side,” Long says. “But I don’t think that’s necessarily what’s driving it. There’s just this void, a huge need among Americans for a trusted adviser. And when you are already working with their retirement plan, there is almost an implied trust between the employer and the provider.”

A Fidelity survey last year found providing advice and guidance to participants was one of the top three drivers of adviser value among plan participants, after improving employee outcomes and service satisfaction.

As more retirees keep assets with their 401(k), there’s also a greater need for assistance with withdrawal strategies, Long adds.

“They want someone to help them with asset location and which account to withdrawal from, when to take Social Security,” Long says. “It’s a much broader perspective, and that’s where the holistic approach comes in.”

‘Naturally Attractive as Candidates’

The emphasis on wealth management—and on leaders with a wealth management background—is also occurring at middle-market firms, says David Speicher, a principal co-leading the financial services practice at JM Search. This reflects the experience that wealth management executives have in leading their side of the business, including front-line perspective around profit-and-loss, investment knowledge, product knowledge, technology, digitalization and the customer experience.

“The asset management side tends to focus on some of those things, but not all of it,” Speicher says. “It’s helpful to have talent coming in with so many arrows in their quiver in terms of the experience and exposure that they have. That makes them naturally attractive as candidates.”

In addition, the revenue generation coming from wealth management has been growing over the past few decades and will continue to do so for the next few decades as wealth transfers to the next generation, sources agree.

“The growth projections are absolutely insane, so these multi-faceted financial services companies where wealth management is one piece of the overall business can’t help but see the writing on the wall with those dynamics,” Speicher says. “And as fintech continues to grow and automate wealth management, that’s just going to increase profitability.”

Many firms are also recognizing how wealth management overlaps with other areas of their business. For investment bankers, for example, helping a successful Baby Boomer sell their business might also be an opportunity to create a wealth management client.

“There are so many potential wealth management clients out there right now that may not have two nickels to rub together, but on paper they are worth $2 million,” Wunderli says. “The banks are recognizing that if they help them sell the business or go public, they might be more likely to get the wealth management business afterward.”

These shifts could represent a boon to individual wealth managers who may find their services in greater demand, even as the existing talent pool shrinks due to aging advisers and a dearth of new entrants.

“If the money is supporting one side of the business and there is a need for and a lack of available talent, companies are going to take care of the wealth managers and advisers who do a good job,” Wunderli says. “There is just going to be much more money going toward that. We have clients that just pretty much have to pay whatever they ask for because they can’t afford to lose them.”

That’s particularly true for advisers with a strong relationship with their clients.

“There’s always the risk that if they leave the company, the client will leave with them,” Wunderli says.

Client Service August 8, 2022

The New Vesting Schedule Debate

Surveys and anecdotal evidence suggest plan sponsors are shortening their plan’s vesting periods, but there remains disagreement in the industry about whether vesting schedules may in fact disappear.
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Normally a topic of relatively little discussion in financial services media, vesting schedules have become the stuff of headlines.

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Personal-finance writers around the U.S. are offering advice and insight into how employees should regard the schedule in which they vest in their employers’ contributions to their defined contribution retirement plans.

For workers in businesses that have shorter employee tenures, a long-graded vesting schedule could be seen as unfair to workers. But for plan sponsors, vesting schedules can control costs and help with employee retention.

Safe harbor plans must follow some clear vesting rules, but beyond that, sponsors have a lot of flexibility in strategically structuring their plan’s vesting. “My book of business is probably skewed toward non-safe-harbor plans,” says Joe DeBello, managing consultant at OneDigital Retirement + Wealth in Orlando. “So the topic of vesting is a constant in our discussions.”

The Rules

Qualifying as a traditional safe harbor plan requires immediate 100% vesting for participants. A qualified automatic contribution arrangement safe harbor plan with automatic enrollment can have up to two-year cliff vesting, says Eric Droblyen, president and CEO of Employee Fiduciary, a Mobile, Alabama-based third-party administrator. “A lot of times, sponsors go with the QACA safe harbor instead of the traditional safe harbor specifically because they can do two-year cliff vesting,” he adds.

“I would say that more often than not, if somebody’s not forced to allow for immediate vesting in their plan, then most sponsors choose to subject participants to a vesting schedule,” Droblyen continues. ERISA does require that plan sponsors limit cliff vesting to a maximum of three years of service to become 100% vested, and graded vesting can take no longer than six years of service to become 100% vested. “Employers can definitely make their vesting rules more liberal, if they choose,” he says.

The End of Vesting?

One of the primary trends that Kristi Baker and her colleagues at CSi Advisory Services are seeing is sponsors shortening their plan’s vesting period. “We’re having a lot of conversations with our clients around how to recruit and retain employees, and in looking at their retirement plan holistically, one of the issues they’re looking at is, ‘Does a six-year vesting schedule still make sense, for the kind of employees we’re trying to attract?’” says Baker, managing partner at the Indianapolis-based firm. “I’m not seeing many plans use immediate vesting unless they’re a safe harbor plan, but more commonly we see a move to a three- to four-year graded vesting schedule.”

Some employers are doing that because the shorter vesting period is more attractive to employees, Baker says. Whether employees and potential new hires actually pay attention to vesting is industry-specific, she finds. “With some employers that have a lot of hourly or part-time workers, it never comes up,” she says. “But with employers that have more executive-level positions or professional-level positions, people do look into those kind of details now.”

Vanguard’s recent “How America Saves” report found that in 2021, nearly half of plans immediately vested participants in employer matching contributions, while 25% of plans with employer matching contributions used a 5- or 6-year graded vesting schedule. The report covers 4.7 million participant retirement accounts from the more than 1,700 plans for which Vanguard serves as recordkeeper.

Usually the first step in the vesting decision tree with plan sponsors is whether they’re going to go with a safe harbor design, says Jim Sampson, national practice leader for Hilb Group Retirement Services in Cranston, Rhode Island. If not, then an employer needs to start by understanding its goals for vesting. “Are they using vesting to try to retain employees for a certain period of time? Are they using vesting to protect the company’s money?” he asks.

At that point, Sampson also wants to understand whether the employer wants to utilize its retirement plan to help attract new employees. “That is becoming a much, much larger part of the equation in the past year or two,” he says. “Because they’re having a really hard time attracting new employees, a lot of companies now are trying to beef up their entire benefits package, especially the 401(k). We’ve seen a lot of companies go to immediate or shorter vesting. The thought is, if people have to wait years to get the money, it’s not necessarily seen as a strong benefit.”

“That’s especially true when you’re talking about a higher-level employee, in maybe a technical space or medical space,” Sampson continues. “We work with a lot of pharmaceutical and biotech companies, and they’re trying to pull people out of big, big employers, so they’re trying to mirror the benefits those big employers provide. Vesting is almost a non-starter for those companies. But in other workforces—such as restaurants, hospitality and retail—where turnover is high, having a vesting schedule can make sense to an employer.” It saves the company money when an employee leaves quickly, and potentially can motivate employees to stay longer.

Sampson understands the strategic value that some employers see in having a vesting schedule. “But the reality is that vesting might be becoming a dying breed, in this post-COVID workforce we’re all experiencing. Vesting might go out the window because companies find that it’s a detractor to hiring good people,” he continues. “We live in an instant-gratification world: People want it now, and the end of vesting might be a byproduct of that.”

The Conversation Is Changing

Droblyen is asked about the pros and cons, from an employer perspective, of immediate vesting versus having a vesting schedule. “Simply put, if a sponsor goes with immediate vesting, it’s seen as a more generous plan for employees: That money is their money, as soon as it hits their account,” he answers. “The ‘pro’ of having a vesting schedule is that you’re getting some money back, if somebody doesn’t stay with you for long.”

The decision “boils down to a tradeoff” for employers, Droblyen says. “You need to pick what you think is more valuable to your business. Is it more important to have immediate vesting that’s seen as a more valuable benefit by employees, or is saving some money for the employer more valuable? I wouldn’t say there’s a hard-and-fast rule to answer that: It’s more facts and circumstances for individual employers.”

DeBello has read with puzzlement recent media coverage criticizing employers that have a vesting schedule. He doesn’t see a fairness issue with promoting the concept of an employer match to employees as “free money,” while also having multi-year vesting. “We very rarely see employers that tout, ‘It’s free money, with no strings attached.’ If you go on participant sites, almost every modern recordkeeping system is going to show participants their total balance and their vested balance. And every group education meeting for a plan that I’ve been to covers vesting,” he says. “I don’t subscribe to the idea that this is some kind of ‘bait and switch’ or mystery to employees. It is something that employers do strategically, to mitigate costs and hopefully to retain employees.”

For employers with a vesting schedule, the key is to communicate clearly about it with employees and potential hires, Baker says. “Vesting is one of the topics we often talk about in employee meetings, and we explain it in a way that’s straightforward and simple to understand: Vesting in the employer money is based upon an employee’s years of service they have with the company,” she says. “We don’t get much pushback on that.”

The debate about vesting really speaks to a broader issue that’s worth considering, DeBello thinks. “The heart of this issue is, these vesting schedules tend to impact lower-income parts of the workforce that are moving between jobs more,” he says. “I think the bigger issue with retirement security for lower-income employees is coverage: whether an employer offers a retirement plan to its employees. We’re spending too much time focusing on something [vesting] that isn’t the big issue for retirement savings.”

“The employer is giving you money as an employee, and expecting loyalty in return. I think there is nothing wrong with that,” DeBello says. “But the conversation around vesting is changing, and I have to acknowledge that. The types of jobs out there are changing—there are more ‘gig economy’ jobs, and service jobs—and maybe the conversation about vesting needs to change, too.”

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