PANC 2014: Rethinking the Profitability of Your Practice

Surprisingly, only one-third of retirement plan advisers know their gross and net margins, said Blake Thibault, senior vice president and adviser with Heffernan Financial Services.

Blake was included as a moderator on the “Rethinking the Profitability of Your Practice” panel at the 2014 PLANADVISER National Conference Tuesday. Another firm represented on the panel, Blue Prairie Group, tackles this challenge by assigning various service tiers to its clients, “with tier one clients, for instance, being assigned a senior consultant and customer relationship manager (CRM),” said Ty Parrish, senior ERISA [Employee Retirement Income Security Act] consultant and managing partner at Blue Prairie. “See how you can streamline your practice through automation and what clients value the most. We also ask clients where we are inefficient.”

Likewise, CUNA Mutual Retirement Solutions instructs retirement plan advisers to strive to assign the appropriate (and profitable) manpower to each client because, in reality, many advisers accept clients with assets lower than their standards, said Randy Fuss, practice management consultant at CUNA. “I ask retirement plan advisers, ‘What is your minimum plan size?’ They might tell me $5 million. Then I ask, ‘How big was the last plan you brought on?’ and they might well say $1.5 million. Then I ask, ‘How big was the plan before that?’ And the answer inevitably is $600,000. The point is, don’t just have one line in the sand. Figure out your billable hourly rate, what you actually make an hour.”

CUNA recommends retirement plan advisers charge between $250 and $300 an hour and has a report titled “Rethinking Your Profitability” to help advisers raise their revenues. It lays out 20 activities to profitably support a retirement plan.

“Profitability varies depending on the prism through which you look at it, whether you are a wirehouse or independent registered investment adviser (RIA),” said Anders Smith, senior vice president at Nuveen Investments, which offers the 401(k)ollege to guide retirement plan advisers on building a thriving business. “It also depends on how focused you are on the retirement planning business. If you offer wealth management as well, your retirement planning business might not need to be as profitable.”

Nuveen advocates four central metrics for financial advisers to measure profitability: financials, productivity, client retention and satisfaction and onboarding new clients to raise assets, Smith said. Study these measures throughout the year and then put appropriate goals in place at year-end to make improvements, Smith said. Nuveen offers a web-based tool called the Plan Profit (k)alculator that assists advisers in refining their service model, cost structure and prospecting efforts; determine if the plan is providing the financial return they seek; and identify the variables that impact plan profitability.

Before signing on a new client, it is also imperative to ascertain how time consuming the sponsor’s plan will be, Parrish said. “Is it local or not?” he noted. “Is it a public company with employer stock and inherent risk? How complex is the plan? What service level will it require? How have you priced similar plans?”

To that point, Smith added: “A lot of advisers don’t take into account how much time it will take to support a plan. Time is our most valuable resource. That’s where you can drive more revenue and business, by delegating our outsourcing. That makes a big difference. Benchmark your services to specific clients.” To this direct point, Nuveen has created a retirement plan adviser time allocation tool.

Nuveen Investments recently asked 50 retirement plan advisers whether they track their time, Fuss said. Only one said yes. “Sixty to seventy percent of your time should be spent on billable hours,” he said. Retirement plan advisers, in particular, tend to want to micromanage the plans they oversee, but they should delegate and outsource, Fuss aid.

Then there is the question of varying levels of service needed to support a plan as its asset size and objectives change over time and what are the appropriate fees an adviser should charge. New clients may have labor-intensive problems with their plan that can be ironed out after several months, Parrish said. “After that, it’s just ongoing maintenance,” he said. For these clients, Blue Prairie charges them on a project basis.

An adviser also may not be able to anticipate the level of service a new client will require, and could find themselves strapped with a fee that is too low, speakers said. In these cases, it makes sense to sign a two- or three-year contract with the plan sponsor client and then to revisit the fees after that period, to see whether they should be either appropriately raised or lowered, Fuss said. Don’t ever forget to remind your clients of all of the actionable, real improvements you have made for their plan and their participants, Thibault added. That justifies your service and your fees to sponsors, he said.

As to the question of knowing when it’s necessary to add new staff, in Blue Prairie’s experience, client relationship managers can successfully handle 10 to 15 meetings a month, Parrish said. Anything above that signals that it’s time to hire a new manager. In CUNA’s experience, a retirement plan adviser can successfully handle no more than 20 plans, Fuss said. Another very important way to look at staffing levels is to conduct client surveys, Smith said. “When client satisfaction goes down, that’s when you need to hire someone to deliver on the value proposition you’ve promised,” he said.

When hiring an additional adviser, it’s critical for a practice leader to assess his own strength’s and seek out an individual to complement those talents, Fuss said. CUNA has identified four core areas that retirement plan advisers gravitate to: sales, CRM, educating participants and technology. “Think about what you are passionate about and hire your polar opposite,” he said.