What Are You Worth?
“Every day, we need to be able to defend and justify our fees,” says Tim Black, Senior Vice President at adviser Mosse & Mosse Associates in Marlborough, Massachusetts. “We constantly try to remind clients of those measurable pieces of value that we add.”
Employers have started learning a lot more about retirement-plan fees as new Form 5500 Schedule C disclosure rules take effect for the 2009 plan year that require plans with more than 100 participants to report provider compensation and include more details on direct and indirect compensation. In addition, new U.S. Department of Labor (DoL) disclosure regulations required by ERISA 408(b)(2) kick in July 2011, covering providers expecting to receive at least $1,000. “There will be a lot more breaking out of individual fees for lots of different services,” says David Levine, a Washington-based Principal at Groom Law Group.
Start explaining fees and services to sponsors now, sources say—or your competitors will. Several advisers interviewed for this article say they will look at enhanced fee-disclosure data for plans they want to work with, to see if the current adviser has given them good value for money. “Being proactive is obviously your best bet,” Levine says. “If you do not, someone else will; someone will be whispering in their ear.”
Mark Temple, Albany, New York-based Managing Director at National Retirement Partners (NRP) member firm O’Hanlon Michener & Douglas, agrees: “I would rather be the one telling my customers what they are paying, as opposed to one of my competitors coming to them.”
Some employers always will prefer the traditional commission model over that of an RIA flat-fee model, says James Williams, President of San Rafael, California-based broker/dealer Financial Telesis Inc. “It is going to be different for smaller markets. If they have a $1 million plan, it is very difficult for sponsors to write a check to an adviser for $20,000 or $30,000,” he says. “Some plan sponsors will never want to pay directly.”
For many advisers, that means flexibility in fee models. “I can be an RIA. I can be a broker/dealer. I can be on an hourly consultant model, depending on what the client needs,” Black says. “We are probably 75% fee-for-service and 25% traditional commissions. All the new business that we have brought in the past few years has been in the RIA model, because we are a fiduciary.”
How to earn premium fees
Regardless of what types of fees are being charged, there is “absolutely no question” of some plan adviser services becoming commoditized, says Patrick Oberlander, Executive Director and Head of Corporate Retirement Plans at UBS Financial Services, Inc., in Weehawken, New Jersey. He cites investment reviews, enrollment, and employee education as “dangerously close” to commoditization.
However, advisers still have a route to earn a premium fee, believes Williams. He suggests focusing on helping fiduciaries meet their obligations and helping to improve the participant experience. “Fees will go up as industry professionals are asked to do more and more,” he predicts.
Wanting to help clients with their fiduciary duties played a big role in the decision by adviser Doug Prince, Managing Director at Stifel Nicolaus in Indianapolis, Indiana, to become 100% fee-based by the end of 2010, a move he says also works well with his firm’s philosophy of total fee transparency. “Some clients have converted to fee-based, and some we are helping to find other advisers,” he said in September.
Advisers who want to earn a premium in the future probably will have to sign on as a fiduciary, Oberlander says. “They are going to have to be independent, and not biased toward any particular product or provider,” he says. Through its DC Advisory Group, UBS allows 200 teams of advisers to have the option of serving as a fiduciary because they meet its established criteria in areas such as plan assets under management.
Stepped-up disclosure may cause segmentation in the marketplace over time, Levine believes. “For smaller plans, we may see more price-consciousness, because some of them will understand for the first time what they are paying,” he says. “Others may say, ‘I need someone who can really add value,’ and they will put more focus on services.”
To add that value, advisers “are going to have to define their value proposition much better,” Prince says. Just servicing a plan as a generalist adviser will not be enough to earn premium fees, says Mike Goss, Executive Vice President of Fiduciary Investment Advisors, LLC, in Windsor, Connecticut. Expert advisers need to work with clients more creatively, such as designing a match structure that achieves a company’s goal of retaining employees. “They have to figure out what makes them stand out,” Levine says. That could be hyper-specialization, such as focusing on expertly working with a particular type of plan like cash balance. Or it could mean offering one-stop shopping through a full breadth of advisory services for employers. “In many cases, it is trying to explain the value-add,” he says. “It is not just ‘I do participant education,’ but ‘This is how I do participant education differently than my competition.’”
Many advisers think of themselves as being hired only to give investment advice to sponsors, Oberlander says. “However, going forward, there is going to be an increased focus by sponsors on the holistic fiduciary responsibility,” he says. For advisers, helping may start with fiduciary education for clients and communications to a plan’s committee to make sure its members understand their responsibilities. It continues with assisting sponsors in meeting their fiduciary obligations on an ongoing basis, and documenting that those obligations have been met.
To bill higher fees, advisers will have to offer “the overall package of offloading the plan sponsor’s fiduciary obligation, and a lot of the liaison work with the provider, and problem resolution─being the go-to, dependable person that, for almost any problem, the employer can pick up the phone and say, ‘This is a problem, solve it for me,’” Oberlander says. “The FA is really an agent of the plan sponsor to maximize the value with the provider.”
Four ways to prove you’re worth it
Advisers need more than just the right value-added business model. They need proof for sponsors that they actually added that value. Sources talked about four main ways to do that:
Validate your fees’ reasonableness: Sponsors need proof that they did not hire an adviser who overcharges. Unfortunately, no industry-standard database currently exists for plan advisers to benchmark their fees. “If we as fiduciaries are reminding clients that all fees should be benchmarked, then our fees should be benchmarked, too,” Black says. “If your fees are above the industry average, you better be able to show that you are delivering excess value. If not, you better be able to renegotiate the fees.”
Temple and his colleagues want to be proactive, so they use benchmarking data from NRP to give each sponsor a report annually about plan fees and how they benchmark against their peer group. They also have a face-to-face meeting to talk about fees in depth, where they get the discussion going by giving each client a one-page document summarizing which providers get what compensation. That document starts with a gross fee number, then breaks out the expense ratios of the underlying investment managers, the recordkeeping fees, the advisory firm’s own fees, and any other charges for services such as a trust company, third-party administrator, or auditor. “We do not get into basis points and revenue-shares,” he says. “We aggregate the information and boil it down to a hard-dollar number: ‘The plan expenses were $500,000 for the past year, and here is where it went,’” for example.
Mosse & Mosse advisers use a third party to get fee-benchmarking data, Ann Schleck & Co.’s Monarch Online Fee Benchmarker. They get a four- to five-page report to give to each sponsor, which lists the advisory fees for that plan and ranks the fees in relation to the marketplace by quartile. Black and his colleagues get the report in PDF format and give it directly to clients, without any alteration by Mosse & Mosse.
Gauging fees’ fairness goes beyond benchmarking databases. An RFP process often can provide helpful information about the going rate for advisers in a particular market, Prince says. Even if an advisory firm ultimately does not get hired, he recommends asking the sponsor why and talking about fees and services. Employers usually will let an adviser know if the proposed fees fell out of line with other competitors, he says.
In addition to giving clients an annual fee review, Prince and his colleagues do a return on investment (ROI) analysis every two years, so the advisers get a better sense of their fees’ fairness. “We calculate, if we had to convert the fee to an hourly rate, what is the hourly rate?” he says. “Is that comparable to what another professional-services firm such as a law firm would charge?”
Document that money spent equals services received: Giving sponsors fee-benchmarking data alone can be risky, Temple says, as that does not explain value for money spent. “You should not just say, ‘Here are your aggregate fees, and here is how they benchmark against your peer group,’” he says. An adviser might charge Plan A 10% higher fees than Plan B because servicing the first plan involves more labor-intensive tasks. “We are hyper-sensitive to that,” Temple says, so O’Hanlon Michener & Douglas discusses it with clients and provides an annual checklist for each of the work it did for their plan that year. It describes specific services received in areas such as fiduciary help, investment policy development, fund-menu design, replacement-manager services, building asset-allocation models for participants, vendor searches, compliance reviews, education strategies, and employee meetings.
Advisers should express the results of their work in ways that human resources staffers and investment committee members want to hear, Black says. For instance, Mosse & Mosse recently swapped out money-market and stable-value funds in a client’s plan, and Black and his colleagues calculated that the expense savings led to a 1.7% increase in return—or $1 million total annually—for participants invested in those options. “At the next investment committee meeting, we were able to say, ‘We just increased returns to investors by $1 million,’” he says. “Since my fee is far below that, it becomes pretty easy to justify the fee.”
To help ensure that clients feel their plan gets its money’s worth on services, Stifel Nicolaus does an annual client survey “to grade us on what we do,” Prince says. The online survey has about 30 questions, such as asking clients if they feel they need more fiduciary education. “We are trying to get a handle on what else the committees think they need,” he says.
Make it easier for sponsors to prove their own worth: Advisers who want to earn healthy fees need to help employers document that they met their fiduciary obligations. Sponsors facing many demands on their time want a hand with “creating the fiduciary trail,” as Goss says. “Make sure they are doing all the right things, but document it, so they can show they are doing the right things,” he suggests.
“The regulators have a phrase they use now: ‘If it is not documented, it did not happen,’” Williams says. “Sponsors need tangible documentation that they are meeting their fiduciary responsibilities to participants. A lot of plans have appointed trustees who do not have any real knowledge of ERISA, so they may not be able to meet the standard on their own.”
Help each employer put together a fiduciary calendar at the end of each year for the following year, Goss recommends. Then work with the sponsors to make sure they follow their calendar throughout the next year. Establishing written goals beforehand is key, Oberlander says. “If you are going to measure it, it is best to know where you started from, and what the goal is,” he says. Goals could include things like updating the investment policy statement or doing a communications campaign to improve participation, he says.
The documentation duty means sponsors “need to have minutes of meetings but, more than that, they need to have a strategy and document its implementation,” Williams says. That strategy could involve things like increasing participant deferrals. “Plan trustees need to have a game plan, so, when the DoL comes in, they can see the plan sponsor is making a credible effort,” he says.
Verify that you helped participants help themselves: The DoL has put a huge emphasis on participants’ experience, Williams says, so plan sponsors are intent on making it better. Advisers can prove their worth by helping employers help employees and having the numbers to prove it. While advisers tend to think of their value on the investment side, he says, sponsors increasingly will think of it on the participant side. “More and more, it is going to be the ability to document the participant experience,” he says. Not so much in terms of participant-satisfaction surveys, as “the cold, hard numbers” of participants’ results, he says.
Participant satisfaction can be a very gray area, Goss says. “However, what you can measure is participation, whether participants have increased the money they put in the plan, and their choices in investments,” he says. Sponsors increasingly want data on participants’ retirement readiness, he says and, to gauge that in a particular plan, “we have had to look at each individual record, which is tedious. We can put together a retirement readiness report that says ‘In general, X% of employees are on target, but this percentage is behind.’”
Temple recommends giving each sponsor a plan-utilization report, which his firm does, that breaks down results such as savings rates of participants for that year by age groups. What data do sponsors care about most? “The participation rate is number one, but they also are beginning to look at the investment allocation: How many participants are in too-conservative allocations or too-risky allocations, and how many are utilizing target-date funds,” Oberlander says. “They also are looking at the trends in inertia, such as no rebalancing, and they are looking for more activity in that vein.”