Smart Design

Striking the right balance between client service and profitability is more of an art form than a science, but it is an important exercise for every retirement plan advisory practice to utilize. Blue Prairie Group LLC took a deep look into this issue last year, tracking how many hours the team spent working on each client’s plan, who did what, as well as rating the difficulty of working with each client. “One thing I felt we weren’t doing as good a job on as we could was segmenting our client-service model,” recalls Ty Parrish, managing partner and senior Employee Retirement Income Security Act (ERISA) consultant at the Chicago advisory firm.

Based on how much time it spent with each client, Blue Prairie backed into an estimated hourly rate it earned, and then used that rate to analyze client profitability. “We realized we were over-serving our small clients,” Parrish says. “We decided to have a conversation with those clients about our being paid for the actual services being delivered, or to possibly trim back the frequency of service delivery. In the end, we were able to right-size our business.”

For advisers who may recognize it is time to evaluate—and increase—their profitability, here are some key strategies that can help in the effort:

Segment your service model. Blue Prairie Group has segmented its plan clients by a combination of services required and revenue received. “We can tweak the service levels based on a client’s needs and budget requirements,” Parrish says. For example, some clients receive an in-depth qualified default investment alternative (QDIA) due-diligence report every year, while others get that reporting every three years.

In its work with plan advisers, investment manager Nuveen has seen that such client segmentation turns out to be one of the key components of an efficient and profitable practice, says Christine Stokes, managing director and head of defined contribution investment only (DCIO) practice management for the firm, in New York. For an adviser who has not previously segmented his client base, she suggests a four-step process.

First, she says, to begin developing a profitability profile, think about the demographics of current plan clients: What service models are provided to each of the plans, and what are each plan’s cost and revenue characteristics?

Next, think about the compensation structure you want to receive, as well as the characteristics of your ideal plan client: type of plan; employer’s industry and geographic location; employer’s financial situation; and the plan’s participant demographic profile, including participation rate and average deferral rate.

From there, Stokes recommends grouping the clients into categories: high time and high revenue; high time and low revenue; low time and high revenue; and low time and low revenue.

Finally, start thinking about service model tweaks, especially for those in the “high time and low revenue” category. She suggests considering adjustments in the deliverables these clients get and possibly who within the advisory practice will handle those deliverables. These situations often involve what she calls “service creep,” meaning the service level has gone up gradually since the initial client-service agreement. Also, the adviser may not have delegated enough of the client work to his team or not leveraged service providers enough, she adds.

Have a well-defined service agreement. When creating a service agreement with new plan clients, avoid using an open-ended contract, recommends Randy Fuss, practice management coach at CUNA Mutual Retirement Solutions in Madison, Wisconsin. “I suggest a two-year service agreement,” he says. “Until you get in there and roll up your sleeves, you don’t know how much time it will take to work with that client.”

Often these new client relationships involve a recordkeeping conversion. “Having a two-year contract allows you to reassess early on, ‘OK, I spent a lot of time on this client: How much of that was related to the conversion, and how much was ongoing work?’” he says.

And remember that a detailed service agreement, reflecting an advisory practice’s client-segmentation approach, can make a big difference in profitability. Adviser Dan Peluse, director of retirement plan services at Wintrust Investments in Chicago, used to pass up working with small-plan clients because of profitability concerns. “Now, the startup-to-$20-million-plan segment is the most profitable part of our practice,” he says.

Wintrust developed an efficient model for working with small plans that resembles an open MEP [multiple employer plan]. It includes a 3(38) fiduciary investment management service—utilizing a single recordkeeper for all of these plans—and clearly defined service parameters. Its service agreements spell out that model’s deliverables and establish expectations for time-consuming work such as committee fiduciary training and on-site participant education.

“Our profitability in that segment has doubled over the past six years,” Peluse says. “We’ve learned to deliver those services in a repeatable manner. If you can develop a scalable model for each client segment, you can build a profitable business, over time.”

Clearly explain costs for extra services upfront. Wintrust stresses transparency and flexibility with its fee approach, so it makes clear what the cost will be if a sponsor client wants services above and beyond the service agreement. “If there are extra services our clients want us to provide, they understand the costs associated with that,” Peluse says. “We are upfront with all clients about the model we need, to be profitable.”

In its service agreement, which typically involves an asset-based fee, Wintrust prices for a specified number of on-site education days. “Anything above that has an added billable amount, and that is spelled out to clients in the service agreement,” Peluse says. Other Wintrust service areas that can carry extra fees include supporting a sponsor’s recordkeeper search, providing advice on health savings account (HSA) investments, or conducting extra participant education programs on such topics as student-debt repayment.

Fiduciary Investment Advisors LLC (FIA) charges most plan clients a flat fee and also includes flexibility for additional services that cost extra. “Our standard service level is spelled out in advance to clients,” says Mark Wetzel, president of the Windsor, Connecticut, advisory firm. “In the service agreement, we also model out, ‘If you want additional items, here is the cost.’ We want to make sure we’re protecting our brand, but also being consistent and fair in our services and pricing.”

Use technology and outsourcing to improve efficiency. Sponsors’ growing fee awareness has increased advisers’ need to operate their practice more efficiently, sources say. “The fee pressure is not so much about fees going down as it is about services going up,” Wetzel says. “Clients are expecting more and more services from us, to help them with their fiduciary responsibilities.”

FIA uses technology in multiple ways to serve clients more efficiently. “Doing ‘virtual’ committee meetings is a big one,” Wetzel says, because these involve less time and expense than an adviser traveling. “And our CRM [customer relationship management] system creates all kinds of efficiencies.” For example, FIA has a 500-plus-plan database that it uses to access data for its annual plan fee-benchmarking reports. “Now we can pull all the benchmarking data we need out of the system,” he says. “In the old days, it used to be very manual.”

Some plan advisers may take a cue from other advisers who have begun using artificial intelligence (AI) technology to help serve clients more efficiently. Nationwide Advisory Solutions’ “Advisor Authority 2018” report finds that early adopters have been using AI to grow their practice.

For example, these early adopters may utilize predictive analytics to gain insight that better protects clients’ assets against future market risk and to more efficiently personalize the individual financial-planning advice they give. “Year over year, we ask advisers, ‘What is the greatest driver of your profitability?’ Year over year, adding new customers is the top answer,” says Craig Hawley, head of Nationwide Advisory Solutions, in Louisville, Kentucky. “Sometimes advisers don’t feel like they can take on additional customers because of the amount of effort required. AI is allowing some advisers to go down-market, because the time and attention it takes for each of those customers is less.”

Beyond improving technology, Fuss also suggests thinking about whether it makes sense to outsource some client work. “Many plan advisers are doing everything for their plan clients,” he says. “There might be areas where it is cheaper to outsource much of that work.” The adviser could partner with a plan’s recordkeeper to provide participant education and, depending on his expertise, outsource investment legwork to a 3(38) or 3(21) fiduciary adviser, or administrative work to a 3(16).

Fuss recommends analyzing outsourcing opportunities on a client-by-client basis and putting them into categories according to how much of an investment you want to make: “None of me,” “Some of me,” “Most of me,” or “All of me.” Plans below a certain asset and fee level may not be worthwhile clients for an adviser, and so they fall into the “None of me” category. Those in the “Some of me” category are modestly profitable, and an adviser can look to outsource as much of that work as makes sense. Those in the “Most of me” category have solid profitability, but outsourcing some specialized work can be viable. Clients in the “All of me” category generate the highest profits, and an adviser may not want to outsource any of that client’s work.

Track time spent on client work. When it began studying client profitability more closely, Wintrust defined the cost for every client service it provided by meticulously tracking the hours its team members spent on each. “We went back to old-school Excel spreadsheets and tracked it that way,” Peluse says. “Anytime a member of our team did anything related to a client relationship, we were tracking that time. Then, at the end of the year, we looked back at how much time and resources we spent on each service.”

Attorneys and Certified Public Accountants (CPAs) track their time closely, and advisers should do the same, Fuss recommends. “You need to look at your ‘billable hourly rate,’” he says. “You might not send an invoice to a client that says, ‘I worked on your plan for 19 hours this year.’ But you want to have an internal clock that calculates that number for each client, for your use.”

He suggests $300 an hour as an appropriate benchmark for a lead plan adviser’s hourly rate and utilizing timesheets that have 15-minute blocks of time. “Unless you have good information on the time element of the work, it’s really difficult to say whether a plan is profitable for you or not,” he adds.

Review client profitability regularly. It makes sense to broaden a client’s annual plan review to include the adviser’s services and fees, in order to ensure the value of the services is a win-win for both the client and the adviser, Stokes advises. “You should not just look at client profitability at one point in time,” she says. “You should look at it annually.”

Blue Prairie Group includes its advisory services in clients’ annual reviews. “Every year we look at profitability by client and make an assessment of where we are with each,” Parrish says. The firm’s analysis sometimes finds a mismatch of services-given and fees-received, and that leads to a matter-of-fact dialogue with the sponsor. “We say, ‘Hey, this isn’t adding up to where we need to be. What levers do you want to pull to get us where we need to be?’” he says. That can mean raising fees or lowering service levels somewhat.

For these conversations, Blue Prairie Group shows a sponsor third-party benchmarking data on plan adviser services and fees charged for similar work. “A client may say, ‘Oh, we can’t pay that,’” Parrish says. “Then we’ll say, ‘OK, let’s talk about ways to right-size our service model for your plan.’”

FIA regularly reviews its client fees and will proactively lower them if they benchmark excessively. “But if a client’s fee is too low, we also feel very comfortable saying something like, ‘You’ve been a client for 10 years, and you’ve been paying a flat fee of $25,000 a year. But if we bid on your plan today, our fee would be more like $55,000. We understand that we can’t get to $55,000 overnight, but let’s have a three-year plan to get to where we need to be,’” Wetzel says.

In those discussions, Wetzel says, it is important to show the client benchmarking data that illustrates what similar plans pay for advisory services, so as to demonstrate the value that the plan and its participants have gotten from the advisory firm’s work, and to have a reasonable plan for increasing fees to where they need to be.

Often, FIA gives sponsors a timeline illustration of all the improvements made since the firm started working with their plan. The timeline shows not just asset growth over that period, but also specifies any fee reductions achieved, as well as improvements in plan design such as implementing automatic features and adding a stretch match. “The only way you can talk to them about raising fees,” he says, “is if they understand the value you’re already adding.”

Art by Jun Cen