In Practice October 31, 2007

Perspective: Let AUM Guide You at Your Peril

The seventh ineffective habit of retirement plan advisers
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When introducing themselves and their businesses, many advisers jump to assets under management as an indicator of their presence in the marketplace. While this may provide a baseline for understanding the size of a practice, some advisers mistakenly treat AUM as an indicator of business health as well. They ignore the existence of unprofitable AUM via low-revenue, high-effort clients.

In the experience of Russell’s practice management consulting group, retirement plan advisers will get a better measure of business health if they focus on revenue and profit per client.

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As Jim Collins indicates in his best-seller Good to Great, “All good-to-great companies attained piercing insight into how to most effectively generate sustained and robust cash flow and profitability. In particular, they discovered the single denominator – profit per x – that had the greatest impact on their economics.”

You can’t pay yourself and your staff in assets under management so it’s best to focus on revenue as it relates to your service effort and therefore, your profit per client.

When you arrive at a profit per client figure, tracking its movement will become the best indicator of your business health. When considering any aspect of your business, ask yourself, “is this an interesting profit per client opportunity?” Apply this question to decisions about marketing, service, operations, staff, technology, products, and every other money producing or spending aspect of your business and you’ll be more likely to make decisions that impact your bottom line.

When you operate in this way — looking beyond AUM to understand service effort vs. revenue and how it impacts profit — you will have a stronger business development mechanism than many of your peers.

Seeing your client base in this light may even prompt you to disengage from low-revenue, high-effort clients, even if they represent sizable AUM. Disengagement is defined as completely severing your ties to a client and transitioning them to an adviser with a service model that is better suited to their needs.

When you have more profitable clients, you are less likely to have your lowest revenue clients creating a drag on your service capacity to your highest revenue clients.

If you have trouble getting to a profit per client figure because you don’t know the true cost to serve your clients, then track revenue per client until you understand your service costs.

In order to advance toward your ideal business vision, it is vital that you confront the reality of your current situation. It is the discrepancy between current reality and your vision that can provide you with motivation to close the gap.

Refocusing your metrics on meaningful measures that better demonstrate the health of your practice will allow you to advance from what got you here to what is required to take the next step.

 

This concludes our series examining ineffective habits of retirement plan advisers. Previous columns in the series were:
Seven Habits of Highly Ineffective Retirement Plan Advisers

Don’t Fall For the Experience and Intuition Trap

Do Your Best to Move Beyond “Doing Your Best’

Cast a Broader Net, Catch a lot of Suckerfish

Direct Marketing Often Fails the Viral Test

Don’t Confuse Sales Activities with Verifiable Advances

Avoid Being a Low-Cost-Provider Commodity

 

Matt Smith is managing director of retirement services with Russell Investment Group. He is responsible for DC research and strategic development of Russell’s defined contribution investment management business in the United States. Smith joined Russell in 2001. Over his 20+ year career, Matt’s experience spans the spectrum of the qualified plan business. Prior to joining Russell, Matt held the position of vice president and general manager of ADP’s west coast retirement services operations.

Copyright © Russell Investment Group 2007. All rights reserved. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide and is a subsidiary of The Northwestern Mutual Life Insurance Company.

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

Russell Fund Distributors, Inc., member FINRA, part of Russell Investment Group.

RFD 07-7163. First used: November 2007

 

Compliance October 31, 2007

22c-2 Deadline Comes – and Goes – Without Fanfare

With an extended time to prepare, the final kick-in date for the anti-market timing rule 22c-2 came and went earlier this month with little industry fanfare.
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Industry representatives say they are not surprised at the lack of fireworks because providers had already set up the systems allowing the required information sharing about shareholders and transactions in advance of the October 16 deadline.

The reprieve came from a September 2006 decision by the Securities and Exchange Commission (SEC) to delay the 22c-2 rule until 2007 and to put it into place with a two-stage implementation process.

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“With that year reprieve,” said Susie Thomann, vice president and chief information officer for Retirement Investor Services at The Principal Financial Group, “most of the recordkeepers already had a good start toward it anyway. I think there was a lot of hoopla early on about the deadline being so close.”

By April 16, 2007, fund families had to have in place agreements with their financial intermediaries like recordkeepers providing that the intermediaries would, on request, furnish the fund providers with information about shareholders and transactions to allow them to spot market timers.

Implementing Systems

In the second stage, regulators gave the industry until October 16 before the systems had to be fully implemented. The intermediaries – including brokerage firms and retirement plan administrators – also covered those holding shares through omnibus accounts.

At one industry provider group, the 22c-2 rule implementation date was largely a non-event. “It gave everyone enough time to figure out what their responsibilities were going to be,” said Larry Goldbrum General Counsel of The SPARK Institute. “We haven’t heard that (providers) were concerned about the implementation date.” (See Retirement Plan Intermediaries Nearly Geared up for 22c-2).

Goldbrum’s organization represents a cross section of retirement plan service providers, including banks, mutual fund companies, insurance companies, third party administrators, and benefits consultants.

Another factor contributing to the 22c-2 calm: fund companies are not exactly flooding their recordkeepers with requests for investor or transaction information, according to Thomann and Fred Teufel, a Principal with The Vanguard Group’s Institutional Retirement Planning Services Group.

Thomann said some fund companies may still be testing their transaction tracking systems that would typically trigger a 22c-2 information demand.

The Redemption Fee Issue

The remaining piece of the 22c-2 mandate requires fund boards of directors to consider whether a redemption fee policy is appropriate for their funds. More than 60% of the 50 largest fund groups charge such fees, according to a recent survey by the Coalition of Mutual Fund Investors, a shareholder advocacy group.

Teufel said he did not think such fees would necessarily be inadvertently triggered by the routine trading of asset allocation funds – an increasingly popular retirement plan option – or an investor’s deliberate move to rebalance a retirement account.

In both instances, he said, the trades are more of a long-term proposition than the rapid-fire transactions the new rule is intended to prevent. “Rebalancing is not something you do every day or every month,” Teufel noted.

Investors Beware

In any event, the providers said, investors need to be aware of the consequences of their transactions. Principal, like other providers, built in special participant notifications of the redemption fees, according to Thomann. “Our primary concern,” she said, “is that our participants get educated about the choices they are making.”

The bottom line, according to Goldbrum and the providers: the whole experience has been a positive one. “To the extent it forced the industry to focus and put in systems to track market timing, it was a good thing,” he said.

Vanguard’s Teufel said the rule merely codified what many in the industry were doing on an informal basis anyway. “The rule helped us make explicit what was already implicit,” he said. “Now it’s much quicker.’

The final 22c-2 rule is here.

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