Buddy System

Retirement plan relationships are evolving from a casual give-and-take toward something more formal

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.

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?