Pitching Value: Advisers Discuss How to Approach Client Fees

The modern plan adviser can use multiple options to meet plan sponsors’ personalized needs.

Today’s retirement plan advisers can generally charge plan sponsors based on what the sponsors choose from an à la carte menu of offerings. The key, according to one adviser, is to focus on the value of those items, not the costs associated.

“The fee is not the conversation,” Frank Zugaro, national practice leader of retirement plan advisory at Huntington Bank, said in a recent panel discussion. “The value that you get for the fee is the focus.”

Zugaro said their home office has for the past few years been doing training for advisers around this key idea of discussing what plans sponsors are getting for various offerings to meet their specific needs.

“Now, we’re starting to see the fruits of that labor from the past few years,” Zugaro told an audience of advisers at the National Plan Association of Advisors annual conference in San Diego.

The adviser said that, when working with plan sponsors, he goes through a list of options with the prices noted. His group begins by assuming the client will want everything on offer, from a retirement plan advisory to financial education to having access to wealth managers.

“Plan sponsors usually want everything to start,” he said. “But then when we start talking about the cost, we hone it down from there to get to what is best for them. … We won’t even generate a service agreement for them without the approval of that pricing.”

Brandon Budd, a retirement plan consultant with intellicents investment solutions inc., said his team members go to clients with a similar checklist to get a sense of what the plan sponsor is looking to accomplish. While that list does not have a price, it helps frame up the needs of the client so the advisers can then present a package catered to them.

“The discovery phase is always super important,” Budd said. “We want to ask the question of, ‘What are you getting currently? What do you want? How many times do you want to meet in person? How often do you want us meeting with your employees?’ … Those engagements can all look different, so you want to make sure it’s transparent.”

Flat Fee vs. AUM

When the subject of fees does come up, there has been a shift in recent years toward more clients wanting a flat-fee model, rather than being charged based on assets under management, according to the advisers.

About 70% of Budd’s business is based on flat fees, he said, but many of those fees are tiered to adjust according to the assets under management.

“As the plan grows, you can’t just stay at the fee that you’ve been in,” Budd said. “As it grows by the millions, the pricing is tiered due to the increased risk.”

Budd also noted that, while advisers often talk about their assets under management, it’s really the revenue from those assets that matters. Rather than focus on the asset size, advisers should consider the revenues from the plans they are servicing and ensure they are providing the best service for the cost.

Zugaro said fees at his business are still mostly asset-based, with some of the larger plans of $50 million and larger operating on flat-fee plans. More recently, smaller plans in the $5 to $15 million range are starting to inquire about flat fees, he said.

Zugaro said there are many attributes to a flat-fee structure, but he notes that, for a fiduciary 3(38) or 3(21) on the plan, the risk to manage it goes up with asset size.

 “We want to keep having a conversation that the service we’re providing is commensurate with the risk that we are taking with the plan,” he said.

3(38) vs. 3(21)

Another area of discussion for pricing is whether the advisory is acting as a 3(38) and responsible for the investment menu choices—which generally costs more—or a 3(21) advising the plan sponsor on which investments to choose.

Both advisers said being a 3(38) generally makes things easier for the plan sponsor, because while they want to be aware of investment choices, they generally do not want to be responsible for choosing them. In some ways, even clients who ask for a 3(21) end up going with the advisers’ recommendation.

“What we found is that it doesn’t really matter if you are a 3(21) or a 3(38)—the client is often using the service in the same way,” Zugaro said.

Budd noted that he has very few clients for whom his firm is a 3(21) because the conversation generally leads them toward wanting the adviser to take on the investment choice responsibility.

“They are really trying to hire you as the expert to make the decisions for you and take that fiduciary responsibility from them,” he said.

Another trend Budd has seen is an increase in requests for financial wellness offerings to be available for participants. He said he has been surprised at the meager offerings he has seen from new clients, often omitting what he considers basics such as offering a Roth IRA option to participants. “There’s a lot of low-hanging fruit out there,” he said.

Zugaro noted that regular reviews of the checklist of options with a plan sponsor can be a good opportunity to raise ideas and implement new offerings to build business over time.

“Thinking about fees can be a prompt for conversations about new services that the plan sponsors or their participants may need,” Zugaro said. “We always try to bring new, great ideas to plan sponsors to stay top of mind and make sure we’re not being complacent.”