Clearing It Up
As the retirement plan market has expanded, custodians and clearing firms have been working on developing and rolling out new resources and services specifically geared to the retirement plan registered investment adviser (RIA). At TD AMERITRADE, this includes education for the advisers on how they can best service their clients and how to succeed in the space, says Skip Schweiss, Managing Director of Adviser Advocacy & Industry Affairs, TD AMERITRADE Institutional. The firm also provides networking opportunities for advisers to build their business, he adds.
Some of the services now offered to retirement plan RIAs include the rebalancing and reallocation of managed accounts, co-fiduciary support, fund selection and monitoring, software, plan benchmarking, retirement brochures, fund scorecards, enrollment kits, and sales material, says Jason Roberts, an attorney with Reish & Reicher in Los Angeles, California. Until a few years ago, he explains, no custodian or clearing firm had services geared to retirement plan advisers; the focus was on wealth managers.
These days, he says, larger firms may develop proprietary tools and require their advisers to use them for the sake of limiting due diligence and streamlining compliance/supervision resources. For the independents and smaller firms, he says, broker/dealers are more likely to approve the use of tools, reports, etc. offered by an approved third-party custodian than on a one-off basis directly with the developer of such support. Custodians also now are providing services to take away inadvertent fiduciary status from broker/dealers and RIAs. For example, if an adviser is constrained by its broker/dealer from taking on fiduciary status, custodians now are willing to come in and recommend funds and make periodic recommendations for updating those funds, he says. This has allowed more broker/dealers to become comfortable with open architecture, Roberts adds.
In fact, the expansion of products and services means that retirement plan RIAs now can offer plan features once previously only available to large plans, says Dick Friedman, a Partner in Business Development with IRON Financial in Northbrook, Illinois, an asset-based RIA firm. For example, custodians are willing to act as directed trustees to the plan. “We also now have the ability to use our own proprietary portfolios,” he adds,” which is a tremendous added value.” Custodians and clearing firms now also allow recapture of 12b-1 and other fees for repayment to the plan, he says. Additionally, says Friedman, today’s custodial market opens up more funds to plans that previously were not available to clients of advisers who used asset-based pricing.
Another favorable new development is that many firms will “warehouse” shares, says Harris Nydick, a Managing Member and Co-Manager of CFS Investment Advisory Services in Totowa, New Jersey. Mutual funds often have contingent fees, e.g., a rolling one-year collar around any new funds contributed to the fund. So, if funds subject to contingent fees are moved, it could generate an expensive fee. “It’s a fee that plan sponsors do not want to pay, and participants should not pay,” he says. Many custodians, however, will now “warehouse” shares, by allowing the shares to come over in kind, and hold them until contingent fees expire prior to transitioning them into new funds.
Providing educational services to advisers is another focus. Over the course of the last year, says Natalie Wolfsen, Managing Director at Pershing LTD, the firm has developed a Web-based education center for advisers at www.retirementpowerplay.com. The Jersey City, New Jersey-based firm supports advisers working with qualified plans, individual retirement accounts, and Roth IRAs and, among other things, provides those advisers information in a Q&A format, access to Pershing experts, and a blog where advisers can ask questions of others in the industry. There is also access to filtered news articles regarding the industry so that they can see in what plans and plan sponsors are interested.
Pershing also has partnered with firms to build a research center to provide information about retirement plans and sponsors, says Wolfsen. It provides statistics and information about what participants and sponsors are concerned with, and how sponsors are responding to new regulations. “The industry has changed and evolved dramatically in the last five years, so we want to make sure that advisers have the research they need,” says Wolfsen.
Overall, the developments in the custodial and clearing firm industry have been good for advisers. Prices are competitive and there are now service people dedicated to 401(k) plans, says Nydick. “They understand our business so, if we have a question, they are willing to entertain new ideas,” he says. These new developments allow advisers to have more “face time” with clients, says Roberts, because they do not have to spend as much time developing their own tools and analytics.
Behind the Shift
As recently as five years ago, custodians and clearing firms offered few, if any, services specifically for retirement plan RIAs. Then, around 2006, custodian and clearing firms began seeing the potential of retirement plan RIAs, says Roberts, and firms, such as Pershing, began building retirement-specific services for retirement plan advisers.
It is an expanding segment of the market, confirms Wolfsen, and one designed with an eye toward helping retirement plan advisers address and understand a new model of doing business that involves fee transparency. Shifts in the regulatory environment are the major drivers for this change, says Wolfsen, but pending litigation also is increasing sensitivity to conflicts of interest and the reasonableness of fees.
With advisers realizing the difficulty in avoiding fiduciary status, more are moving to level compensation, and seeking firms that can help both in the transition from commissions to fees and in servicing clients, says Roberts.
Trying to adapt platforms originally designed for a wealth management focus has uncovered some problems along the way. Nydick notes that things like taking two to three days for the full cycle of selling, settling, and buying into a new position could be an issue in the 401(k) universe because you do not want to be out of the market for that length of time, particularly in tumultuous periods. Although the trade is processed by the recordkeeper, Nydick chooses the platform on which the plan is run, and makes sure the platform clears the same day.
With the new retirement-specific platforms, it became possible to set up an omnibus account for a plan that enabled his firm to bid on plans of all sizes, says Friedman, whose firm currently manages 300 retirement plans nationally with an average size of $1 million in assets. Previously, they shied away from the omnibus world because the costs made it hard to compete, but Friedman says this shift in focus not only gave his firm scalability (from a trading standpoint), but also enhanced its competitiveness for plans of all sizes. The platform provided the ability to recapture the revenue that funds charge and rebate that to plan participants. For example, for a $20 million plan that is invested in their current recommended fund lineup, they are recapturing more than $30,000 in revenue that is given back to the plan.
Part of the reason for the new focus, says Roberts, was to create differentiation. Trust, custody, and clearing services had all become somewhat commoditized, he says. This led to plan custodians looking for ways to differentiate themselves, and some realized the potential of retirement plan advisers. Now, he says, firms are going after not only stand-alone RIAs but also RIAs affiliated with broker/dealers. While most broker/dealers require reps to clear through a particular firm, he says, they could set up open architecture plans with multiple custodians. For example, he says, Matrix has a broker/dealer-friendly approach which packages investment policy statements with software tools to monitor data points in those statements.
With the regulatory environment now favoring fee leveling, and demanding fee transparency, 401(k) plans now are being unbundled across all market segments, explains Robert Cirrotti, Director at Pershing LTD. In this unbundled universe, clearing firms appeal to RIAs, because advisers can coordinate services among multiple service providers. Unbundling enables the RIAs to distinguish their services more easily than when they advise on a bundled product, he says, and it affords them an opportunity to separate their compensation structure from the provider rather than just change their compensation model.
The open architecture environment of today’s 401(k) market is aligned with the strength of clearing firms, agrees Wolfsen, and the robust investment platform of a clearing firm, like Pershing, enables advisers to offer a broad menu of investment alternatives; not only multi-manager but also multi-product. This provides greater flexibility when it comes to investment strategy and the factors that are important to a sponsor including cost structure and product diversification. For example, the PIMCO Total Return Fund has more than 15 classes of shares that have just as many different formulae for expenses. TD and a few others do a great job of making the least expensive versions of the mutual funds available. “This reduces costs for the plan and for the participants,” says Nydick. Furthermore, Wolfsen notes, since advisers now can select specific products that best fit the needs of the plan, this creates new opportunities for RIAs to target plans.
The new flexibility in designing plans, however, means advisers should give thought to the firms they do business with, say experts. It always mattered which firm an adviser chose to do business with but, going forward, it will matter much more, because advisers, plans, and plan sponsors now have to meet new rules regarding how fees are charged and the transparency of those fees, explains Schweiss, Advisers have to ensure that whoever they choose to work with can help them meet these new requirements, he says. The ease of processing and clearing trades is another factor advisers should consider when choosing with whom to do business, says Roberts.
However, first and foremost, it is about the capabilities of the platform with respect to open architecture and pricing, says Friedman. Advisers have to understand pricing to communicate it to the plan, so transparency is critical. An adviser’s comfort level with the service term is also an important consideration, he adds. “It’s a lot about relationships and building relationships you’re comfortable with,” he says.