More Than Middle Men
“The client is our client. Vendors are working with us to service our client,” declares William Beale, Division Head of Retirement Plan Services for Henderson Brothers in Pittsburgh. “We are very clear, without being egomaniacs, when we define our roles and what we expect our service partners to do.”
Client advocacy is at the heart of the successful adviser relationship. However, fulfilling that integral role often requires an intricate balancing of plan sponsor wants and needs alongside the capabilities of investment managers, defined contribution providers, third-party administrators (TPAs), and others who deliver services to the plan. It is a delicate dance between sometimes apparently competing forces that have potentially lucrative plan business at stake and have to keep the all-important plan sponsor satisfied, while maintaining an appropriate profit. How those partners deliver their services can make or break an adviser’s relationship with clients.
“There is a self-preservation element to it,” admits Beale. “If the client gets mad at the provider and fires it, you could go as well. That is the line we have to walk. There is a definite balancing act there.”
Inside Scoops
“The advisers are really, really key to these plan sponsors,” asserts Kristin Gibson, Director of U.S. Retirement Services for Russell Investments. “I think [advisers] are sort of the quarterback to help call the play and the plan sponsor is the coach and owner of the team.’ Just like a professional football team on a winning streak, when things are going well, everyone seems to be happy and congratulatory of other members’ efforts. It can be tougher when service hits a slump, or a personnel change disrupts a smooth communication flow; that’s when pressure can mount for a change in direction—or quarterback.
“It’s incumbent upon the provider to step up with solutions to make us all look good, to be an active player in the process,” declares Bob Clark, Managing Director of the Retirement Services Group at the Bostonian Group. Remember, asserts Michael Francis, of Francis Investment Counsel in Pewaukee, Wisconsin, “The adviser is the client’s advocate, not the vendor’s advocate.”
True enough from the perspective of the plan sponsor. On the other hand, providers also have a reasonable expectation that a competent adviser will be able to help plan sponsors understand and appreciate a specific solution, even if it is not exactly what the client had in mind. “A little bit of the onus is on the plan advisers since they are engaged in delivering the value,” notes Gibson.
Advisers are uniquely positioned to navigate these waters. They frequently enjoy an especially intimate relationship with the plan sponsor, one that predates the current provider relationships, and, perhaps, the existence of the plan itself. They have an opportunity to understand and appreciate the plan sponsor’s goals and aspirations for the plan—and are often in a position to pick up on signs of disquiet before they add up to a crisis.
“We’re looking for the adviser to do the right thing by the client,” agrees Hugh O’Toole, National Sales Manager for MassMutual’s Retirement Services Division. MassMutual admits up front, with peace overtures at the ready, that the plan adviser community can play a critical role in determining which vendors get the available plan business.
Moreover, advisers have an opportunity to really get “inside” the capabilities of providers, and across a potentially wide range of various plan settings. That kind of working knowledge not only helps ensure a better match on the front end, but also frequently translates into an ability to resolve apparent conflicts between delivery expectations and realities. That can mean a better, and more sustainable, solution for both the plan sponsor and the other service providers.
As advantageous as it can be to work out problems, most advisers and providers would just as soon things not slip to that level. The best way to avoid a disconnect in expectations is to start with a clear articulation of the various roles, responsibilities, and deliverables. It is, in fact, a discussion the adviser may well want to have with providers prior to any engagement, and it is a discussion that should include a solid understanding of not only what will be delivered, but also how and by whom.
“[The inner working of the relationship] has to be discussed,” says Francis. “It’s just good business practice to negotiate it up front so the expectations are set. I think it is critical that the adviser understand what the provider intends when it comes to client interaction.” Francis says his firm tries to have client contact at least four times a year.
Another key element of the adviser/provider service agreements: precisely how—and how much—everyone gets paid. “That way,” asserts Clark, “everybody understands the flow of a dollar.”
The adviser-provider relationship also can represent a bottom-line advantage for all concerned. Dorann Cafaro, General Partner at Little Silver, New Jersey-based Cafaro Greenleaf Retirement Plan Advisers, cites recent pricing concessions “due to vendors identifying us as “experts” who reduce their costs and keep their clients happy.”
How Many?”
Even if an adviser’s vendor relationships are all cordial, there are no hard and fast rules about how many such affiliations the adviser needs to maintain. Advisers say it depends on the size and type of practice including the sector of the retirement plan market in which the advisory firm operates and whether the firm has plan sponsor clients with more specialized needs. Plan fiduciaries are required by the Employee Retirement Income Security Act (ERISA) to ensure that the fees paid and services rendered to the plan are reasonable. The question for advisers seeking to help those fiduciaries fulfill that obligation is: How many providers do you need to be able to compare to determine “reasonable.” Just as critical from a practical standpoint is how many provider relationships an adviser can manage credibly.
Providers, perhaps not surprisingly, seem inclined to recommend a limited pool, but advocate more than one; O’Toole says having three to four providers gets the adviser the most credibility from the plan sponsor. “I do think there is a [vendor relationship] limit on really being able to advise the client effectively,” agrees Russell’s Gibson.
“It’s very important for us to have close, deep relationships and, if you go more than that [in the number of providers], that becomes harder to do,” says Beale, whose firm, with a little more than $300 million in assets under management, has four “key’ vendor relationships and is in discussions with a fifth. A reasonable goal is four to six key provider relationships, Beale advises.
Francis, who works with 15 active vendors, including banks, insurance companies, mutual funds, and TPAs, disagrees, arguing that it is helpful to have relationships with more than one of each provider type. After all, a provider’s performance could deteriorate at any time (or it could be acquired in an M&A deal) requiring a last-minute substitution to maintain the service level to the plan sponsor. “[The pool of providers] is a rapidly changing sea right now,” Francis says. Therein lies a real downside for advisers in too narrowly limiting their network. In short order, a certain marketplace myopia can set in—particularly as new features come online, as target markets shift, and providers cut back, or exit the business.
Clark, whose unit at the Bostonian Group has more than 100 clients and works with more than two dozen vendors, contends that a possible consideration in the discussion about the optimum number of provider relationships should be whether that vendor has signaled its readiness to partner with advisers—by, for example, creating an adviser panel to give the provider input on the provider’s business. Declares Clark, “That’s a clear indication that they want to work with us.”
Those working relationships can provide advisers with an intimate knowledge of which conversion and servicing teams are strong—and not-so-strong—and can provide a level of personal contact that ultimately can provide for a better match between provider and plan sponsor. If a problem arises, the multiplan business relationships between adviser and provider can bring a sharper focus to a satisfactory resolution than the plan, or the problem, might command on its own merits.
Cafaro notes, “Most vendors now are falling into asset ranges for their sweet spot and, thus, the lists of possible matches are more targeted today.” She also notes that, with that list, “some have strengths reflected by their pricing for a particular plan in terms of size, number of participants, assets, or average account per participant.” That, of course, is the kind of “inside” intelligence that comes from a solid, consistent working relationship with the provider.
Heads Up
However, as with any relationship, communication is key, and a lack of communication can be disastrous. Beale had one such vendor relationship go sour because the provider had maintained a unilateral relationship with the client—including delivering the results of a plan discrimination test—without first briefing Beale’s firm. Beale’s firm found out when the understandably concerned client called to discuss the problem.
“We have backed away from that vendor to an extreme level, because that was a consistent pattern, unfortunately,” Beale admits.
Providers committed to working with advisers understand and appreciate that communication commitment. “We make it very clear that the adviser is our client and that they own the plan sponsor relationship,” O’Toole declares. “For us, this is an adviser-controlled market…It’s much more dangerous to our business model to have advisers who think we are trying to go around them [to the client].”
Communication is a two-way street, of course, and ill-informed or “blind” client advocacy can also be a disservice. Plan sponsors rightfully rely on their advisers to help shape their view of what is reasonable and realistic, though they certainly can entrench behind a “customer is always right” discussion barricade.
Beale, whose firm has turned down business from potential clients who were not going to be able to fulfill their obligations, acknowledges, “Setting expectations is a big part of our job, but it is as important to make sure that your plan sponsor client is delivering what he is supposed to as it is to ensure the provider is doing the same.”
*Illustration by Olaf Hajek