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Marketing Co-Fiduciary Services to Qualified PlansPosted by SEP-SOLO-IRA-401k-ROTH on: 2007-03-07 18:02:27 in category:
401(k) [ Print | Permalink / 0 Comment(s) ] Marketing Co-Fiduciary Services to Qualified Plans Part I: Introduction to the Advisory Model and the Knowledge Base It Requires This is the first part of a three-part white paper on marketing co-fiduciary advisory services to qualified plans. The marketplace is undergoing a seismic shift in how 401(k) services are sold and delivered, and the purpose of this paper is to help advisors become leaders under the new advisory model. By Pete Swisher, CFP Do you sell qualified plan products? You should stop. The old product sales model is dead. It is rapidly giving way to an advisory service model. A qualified plan is a service, not a product, and those who continue to use a product approach will suffer in one way or another: lower closing rates, higher client attrition rates, lower profitability. The purpose of this white paper is to help advisors stop peddling product and start building high end pension advisory practices. From Fiduciary Service to Product Sales and Back Again With Improvements The product sales model grew out of the massive shift from defined-benefit and pooled pension plans to participant-directed 401(k)s beginning in the early 1980s. Before 1982, when the first 401(k) began accepting participant deferrals, a retirement plan was a pooled account managed by a bank trust department or discretionary asset manager. Rare was the client that attempted to manage its own retirement plan without professional assistance, and participants were not given any voice in the investment process. In fact, a variety of evidence points to this professional model as being superior to what evolved to replace it -- participants making arguably uninformed decisions that led to inferior performance. But when the pools gave way to individual account plans, a host of investment alternatives sprang up and were offered for sale to qualified plan customers. The difference here was significant: by and large these were brokered products sold by commissioned salespeople acting in a non-fiduciary, non-discretionary role. This contrasts sharply with the discretionary fiduciary role employed by most bank trustees up to that time. It contrasts sharply with the model of the discretionary asset manager acting as the fiduciary over a portion of an account. The new advisory model brings to clients the best of both worlds: the choice and flexibility of the participant directed account combined with the professionalism, fiduciary service, and prudent oversight more common in the old pooled account model. If you are one of the commissioned salespeople who has made a living on the sale of product to qualified plans over the past 10 to 20 years, you need to reinvent yourself and your practice soon if you wish to remain a player in the marketplace. Action Checklist for Conversion to the Advisory Model Get educated on fiduciary lore, available product/service platforms, and IRC compliance (TPA stuff) Choose your business structure RIA, broker, or both; independent vs. affiliated with a larger firm. Build your infrastructure People and Processes, including the core of your service, the fiduciary/investment oversight process. We will deal with each of these topics in the three segments of the white paper. In this first segment we will address the ideal education for the new co-fiduciary advisor. Getting Educated There are three key areas of expertise for serving qualified plans: Expertise in the fiduciary management of qualified plans Expertise in the design and administration of qualified plans Service expertise But My Unique Ability is Selling, Not Plan Administration In the olden days, (a few years ago), top producing brokers were told not to get involved in the details of qualified plan administration and governance. They had businesses to run and were careful to focus on the big money selling activities. The sales approach, in essence, said, Let me bring in my team of experts as opposed to I am an expert. While this I'll bring you the top experts approach may not be wrong, it is inferior. When you pass off even basic questions to the "specialists" you lose a significant edge in the sales process. If two good salespeople both talk to the same client, which one is likely to impress the client more? The broker who answers, Let me bring in my team or the broker who knows the answers straight off and can explain them in layman's terms? Here is an example of why I believe you need to be an expert. Early in my pension wholesaling career I joined a CPA to visit a business owner whose wife had her own small business next door. The two companies were clearly a controlled group and this fact should have been obvious to anyone who understood qualified plans. Nonetheless, two different advisors, including a 401(k) wholesaler for a mutual fund family, had told the business owner that he could create a separate plan for his wife's business, cover himself and his wife in that other plan, and not have to cover any of the employees in his main business. Such arrangements are indeed possible given the right fact pattern, but this wasn't it. Those advisors were steering this business owner wrong, and it cost them the case. That was several years ago. Fast forward to 2004: a large doctor group in the Midwest has numerous brokers and two attorneys telling them that their current plan design is compliant and OK. But it isn't. A ten second glance at the notice to participants confirms what I knew would be the case before I looked that the plan is not compliant with ERISA 404(c), and that the open option design with money spread across three custodians and five brokers is therefore risky. We referenced three articles on the subject and offered to discuss the issues with the docs ERISA counsel (an offer they accepted). The advisor who invited me got the business, and again we were up against the top competition. Expertise works. Maybe you don't have to be the Guru (though that is best), but your expertise needs to be obvious or you are two steps down on the best service ladder. If your goal is to be on the top rung of that ladder in other words, if you want clients and prospects to perceive your firm as being at the top tier of qualified plan advisors you need to study. So what, exactly, do you study? How much expertise is enough considering that you are in fact a salesperson (unless your firm is large enough that you have others to do the selling) and have to focus on generating revenue? In an ideal world you would become a true expert in two primary areas: first, fiduciary governance of qualified plans; second, plan design and administration (from an advisor's perspective, not an actual administrator's). Anyone who lacks the same level of expertise would be at a natural disadvantage. To these two categories add a third, service expertise, and your practice will have little true competition. Fiduciary Governance of Qualified Plans Take this pop quiz: 1. Discuss the common law of trust, what its major components are, how it relates to ERISA, and how they apply to qualified plan management. 2. What is the difference between ERISA 404(a) and 404(c)? Is compliance optional? Is it useful? Who is responsible for compliance, and under what laws? (that last is a tricky one for the unwary) 3. Describe the major prohibited transactions and their statutory exemptions. 4. Make sense of the muddle of co-fiduciary services being marketed today: who is liable for what? Which services are meaningful? 5. Describe in general terms what an overall program of fiduciary oversight for a qualified plan consists of in order to meet the requirements of procedural and substantive prudence. Do you pass? If not, demote yourself to the under $5 million market, because (in my opinion) you will be at a serious disadvantage in the larger/middle market without a firm grasp of these basic concepts. Some advisors reading this might think, This is basic stuff tell me something new. But my experience is that a surprising number of successful advisors would fail the pop quiz. Where to Go For Fiduciary Expertise Unified Trust's ERISA Boot Camp and Webcast Series One place to start is with Unified Trust Company's ERISA Boot Camp workshops. These are intensive, 1 day sessions that are designed specifically to help advisors build high end qualified plan advisory practices. The emphasis is on the practical vs. the academic, and the time spent is likely worthwhile regardless of your current level of expertise. One key aspect of the boot camp that is worth mention is the time spent on fiduciary governance at the plan level and not just fiduciary investing, about which you can find lots of material in the industry. Also, roughly every two weeks, Unified Trust conducts one-hour webcasts on a variety of topics aimed specifically at qualified plan advisors. The current series includes an overview of plan fiduciary management, a discussion of post-modern portfolio theory as applied to qualified plans, and a presentation on behavioral finance and its use in plan design. Email Advisor.Services@UnifiedTrust.com to get on the email list. Starter Resource List for Fiduciary Advisors Since the goal is to achieve a high level of practical knowledge, this list was designed to minimize academic study time. True expertise can only come with extensive study, but the key is to begin with the right breadth of knowledge depth can come in time. ERISA Facts, by Frank Bitzer and Nicholas Ferrigno (National Underwriter, Cincinnati, Ohio, 2004 Edition). This is a great resource in Q&A format and only costs about $40. With a relatively small time investment you can read all of the fiduciary questions. www.benefitslink.com, a highly rated website for employee benefit professionals. You'll find the crowd to be more technical on this site and less focused on the work of investment advisors, but if you do article searches on fiduciary monitoring or just fiduciary and other topics you'll find excellent material. I'm a big fan of articles as a way to self-educate because a small time investment can yield great results. ERISA. Yes the actual Employee Retirement Income Security Act of 1974, as amended. Read it. It's short. The easiest way to find it is to go to www.benefitslink.com, then click on ERISA under Source Documents on the lower left side of the screen. In fact, read it twice. ERISA 404(a). I know I just said to read ERISA, but you need to MEMORIZE 404(a). It's very short. One paragraph. Retirement Success, by Gregory W. Kasten; a very worthwhile read for anyone serious about advising 401(k)s. At a minimum read chapters 5, 9-11, and 13. www.reish.com, the website for Reish Luftman Reicher & Cohen (the firm of Fred Reish, the closest thing to a celebrity in the 401(k) business). These guys are prolific writers and I am routinely amazed at how concise and useful their stuff is. Go to publications, then search under employee benefits and don't limit the dates (i.e., pull it all in). In particular I would focus on articles concerning fiduciary monitoring, investment advice, and ERISA 404(c). www.UnifiedTrust.com, the Unified Trust website; go to [Advisors] then log in and browse the Library. In particular read The Legality of Kickbacks (on revenue sharing), and Solving an Employer's Fiduciary Dilemm. Prudent Investment Practices, The Center for Fiduciary Studies booklet describing the elements of a prudent investment process. Order the Fiduciary Toolkit, which includes the guide, for $37. Since this handbook is short (go to www.fi360.com for information on how to order) you can read it relatively quickly. Ultimately you should consider attending one of the Center's programs, described below. The Center for Fiduciary Studies By now, virtually all of us who take qualified plans and trusts seriously have heard about the Center for Fiduciary Studies and its founder, Don Trone. Don and his team, in conjunction with the University of Pittsburgh, have created a combination of nonprofit and for-profit entities whose purpose, among others, is to standardize an approach to procedural prudence and educate fiduciaries on how to implement it. Their material is first rate and the program itself is highly professional. Take a couple of days, spend a couple of grand, and get yourself the AIF (Accredited Investment Fiduciary) designation from the Center for Fiduciary Studies. If you are more ambitious you can add a little time and money to make it the AIFA (Accredited Investment Fiduciary Auditor) program. The reason for attending either program is not that another designation will help you sell more plans, but that you genuinely need to know what they have to teach. But be prepared: this is the academic studying. The material offered by the Center is mostly general and theoretical, yet it is foundational material that you must learn sooner or later. I suggest sooner. Plus they offer a variety of practical tools once you're through the theory. Senior Consultant and the Society of Fiduciary Advisors Senior Consultant is an online resource and periodical for senior investment management consultants, and a founder of the Society of Fiduciary Advisors. The Society is a group of experts throughout the industry that hope to define an investment process down to a sufficient level of detail that it is usable at the practice level. Go to www.srconsultant.com to learn more. Qualified Plan Design and Administration for Investment Advisors While being knowledgeable can't make one a good salesperson, true expertise makes a good salesperson better. But investment advisors must strike a compromise and develop a reasonable knowledge base without overdoing it. How? Though it might sound labor intensive, I suggest you pursue one of several designations described below. Make a goal to complete one in the next year (these are easy enough to make that realistic). At a minimum, however, even if you do not choose to pursue a designation you should memorize the chart of plan types (see below). What You Need to Know The chart of plan types and limits. It's not hard and this is the most basic level of administrative knowledge. Example: you should know about the different flavors of PSP and 401(k), including the limitations such as the maximum annual additions (going to $42,000 in 2005). Go to www.franklintempleton.com under Employer Plans (find the Employer Plans Chart) for a sample most fund families offer a similar chart. Basic Plan Design. You don't need to be able to do the math yourself, but you need to be knowledgeable enough to get the client on your side so you will be permitted to bring in your guru. The Unified Trust ERISA Boot Camp includes a segment on plan design, including case studies; there will be a similar webcast in 2005. Nondiscrimination Basics. Again, you'll never complete a 401(m) test yourself, but you need to know enough to be useful to your client in your role as advisor with one of your jobs being to assist the client in oversight of vendors such as TPAs. Prohibited Transactions. Unfortunately you have to know a lot about PT's before it will be useful, but it amazes me how often I find plan sponsors doing goofy things that are PT's, yet their TPAs, brokers, and other advisors have never caught on that there is a problem. Time for another example. As I was finishing this article I got a call from an advisor who just completed a vendor search for a large medical practice in New England. He was calling to offer preliminary congratulations that my firm had been voted in by the board of directors, but with the caveat that a disaffected group of four doctors was insisting that their guy (a broker who currently holds about $6 million of the plan's $20 million in assets) get a chance to make a formal presentation on the basis, among other reasons, that he was offering free financial planning to all the doctors. But,the advisor continued, As you know that's a guaranteed failure of 401(a)(4)discrimination with respect to benefits, rights and features and this guy is nothing but a clueless broker�¦I'm gonna make him put it in writing. (In other words, cruelly let the broker put into writing his offer of a service that technically disqualifies the plan ) That's pretty much exactly what the advisor said. My question for everyone reading this: who do you want to be? The advisor who knows 401(a)(4) BRF discrimination when he sees it and has permanent fee only relationships with clients, or the clueless broker making a sales pitch? My point is not to bash anyone: these are real examples, and the message is simply that the product sales model will not work anymore. The message, furthermore, is that the I'm not an expert but let me bring in the experts approach is a losing bet. Be the expert. Designation Programs Accredited Pension Representative (APR), offered through the National Institute of Pension Administrators (with the evocative acronym NIPA). The program consists of two courses only, and a large minority of the material is investment related and therefore easy for experienced brokers/advisors. Several people in my office have taken the program and emerged very knowledgeable. Go to www.NIPA.org for details. Chartered Retirement Plan Specialist (CRPS), offered through the College for Financial Planning, which also trains a large percentage of applicants for the CFP credential. Go to www.fp.edu for details. The content and purpose is similar to the APR program. The new program offered through ASPPA (American Society of Pension Professionals and Actuaries name of credential yet to be announced). It's not available yet but should be in 2005 or early 2006, and since I'm a member I'm biased enough to think this will be the best of the designation programs once it's complete. Expert Service The Thing You Sell In Selling the Invisible, service marketing expert Harry Beckwith gives the best advice I've ever seen on how to market a financial service: The core of service marketing is the service itself�¦The first principle of service marketing is Guy Kawasaki's [of Apple Computer] first principle of computer marketing: Get better reality. This does not mean that a better mousetrap markets itself the best mousetrap in the world still needs good marketing. But it does mean that the best marketing in the world won't help you if your reality is unimpressive. Getting a better reality will not happen by accident or because you really desire it to be true. To build a better service machine you must do it on purpose: Know what better reality looks like: what's out there? What are the vendors and your competitors doing? Who is on the cutting edge and how can you duplicate their innovations? Plan. Decide what concrete actions you will take. Implement, with someone overseeing the implementation, checklist in hand. This is not the sort of business task at which most financial advisors excel, but it's a business reality that the high end fiduciary consulting practice of the future must have a service edge their actual service must be superior. The planning and implementation are up to you, but in this section we will discuss what better reality looks like in the marketplace today. Resource List for Service Expertise The Center for Due Diligence Undoubtedly the single best resource for information about the qualified plan marketplace. CFDD serves as an independent reviewer of products and platforms and makes its research available for a fee. Unlike other due diligence engines on the web, CFDD is not a pay to play system, making it unique to the best of my knowledge. For example, a provider that wants broker referrals from one of the online engines typically has to pay a fee as if it were paying for magazine ad space. CFDD, on the other hand, does not ask permission to review a vendor's products and services, does not charge the vendor for the review and posting of information, and is therefore not beholden to the provider no conflict of interest. Furthermore CFDD is very sales oriented and intensely practical. Try their conference in Chicago, October 4-6, 2005 as with everything else CFDD does, the flavor and practicality are very different from the typical convention. The ASPPA 401(k) Sales Summit Held March 17-19, 2005 in San Diego. This is a great conference for qualified plan salespeople, with the added bonus that you can extend for a day and do a one-day AIF crash course put on by the Center for Fiduciary Studies (see above). Go to www.asppa.org for details. ASPPA is the American Society of Pension Professionals and Actuaries and the source for credentials like QKA, QPA, and CPC (Certified Pension Consultant, the holy grail of pension geek designations). The Emerging Model for Qualified Plan Solutions In 1999 no one had heard the term open architecture. Today even packaged products and mutual fund families with a few hundred funds claim to have it, suggesting that they fear not having it. As recently as 2002 almost no one offered co-fiduciary services: now vendors are stampeding to show how they solve employers fiduciary woes with a variety of fiduciary toolkits, Morningstar alliances, and co-fiduciary hype. As a professional advisor you need to keep abreast of innovations in the marketplace and be on the lookout for those that might apply to your clients. Any list of innovations in the marketplace is bound to leave out something, but here is a partial list of things to be aware of for 2005 and beyond: Behavioral finance. Plans that are structured to make participant success likely instead of unlikely. Here are a few behavioral finance concepts with direct application to plan design (one of Unified Trust's webcasts, mentioned above, covers this topic): o Inertia and procrastination (it probably took years of government-funded research to discover this heretofore unknown aspect of human nature) o The endorsement effect o Shortcutting o The anchoring effect o Decision framing o Choice overload o Hyperbolic discounting (a good one; sounds so scientific) o The fallacy of education: awareness does not translate to action o Lack of intuitive dread risk and uncertainty risk o Overconfidence Participant education services. Check out Financial Finesse in San Francisco impressive. Online advice: old news. Verdict: a nice tool that few people use and is rapidly becoming an included at no extra charge service. Online enrollment: mostly hype so far. Nearly any vendor can do online enrollments�¦but does anyone mention the fact that someone still has to do the payroll part, and that the vendor can't do anything without the payroll data, and that a non-spouse beneficiary still requires notarization, and that 404(c) compliance is impacted, and�¦ Cheap recordkeeping due to emphasis on use of Internet: hogwash. Guess what happens behind the scenes human beings doing exactly the same tasks they did before, using the same software, and having to field phone calls from the same clients who want a human explanation vs. an Internet tutorial that doesn't answer their immediate question. Count the firms that have gone broke on this business model before rushing to embrace the next one. Cheap recordkeeping due to outsourcing to India: reality. It's happening, but unlikely to impact larger plans mostly affects micro plan market for now. But I know some brilliant, highly credentialed pension professionals from India, with extended family in India, who are very busy people. Web reporting tools for sponsors: worth spending time investigating with an eye toward application. Is the data useful for instituting change or is it merely pretty or interesting? Each vendor is different but most now offer basic online reporting plus extensive ad hoc capability, plus the ability to create custom formats for regular access online. The SMarT�® program (more behavioral finance do a search and you'll find the original research on the net, but you only need the one paragraph version. Try Vanguard's website for a start they were an early adopter. Auto-enrollment or negative election enrollment. But beware: without adding the progressive savings component (SMarT) there will be no improvement in overall plan savings rates, suggesting that the two features should be combined or skipped completely (read chapter 5 of Retirement Success, mentioned above). Managed Portfolios: all over the map, but clearly a necessity for any sane fiduciary who understands ERISA basics. Opinion: having participants pay an extra 50-150bp for such services is probably a breach of fiduciary duty�¦and happening all over the U.S. Asset Allocation: MPT as currently practiced is wrong. Go to www.sortino.com and be amazed. Also tune in to Unified Trust's webcast on Post-Modern Portfolio Theory for an easy intro to the future of asset allocation. True discretionary fiduciary services offered by institutional trustees. Contrast to the various co-fiduciary services cropping up all over. For a technical discussion see Solving the Employer's Fiduciary Dilemma from the February 2004 Journal of Financial Planning. Suggestion: your co-fiduciary oversight of a discretionary trustee, in your role as ERISA Investment Advisor per ERISA 3(21), is a powerful combination and one of the primary ways for you to market your co-fiduciary services. More on this in parts two and three of this white paper. Plan design: 410(b) and 401(a)(26) carve-outs; advanced new comparability (beware: just because a TPA does it does not mean they do a lot of it, or do it well). But beware of recent DoL guidance on taking the new comp concept too far. Separate account GICs as an ideal form of Stable Value and a hot item in the current interest rate environment. IPS's: a year ago you were ahead of the game if you made sure clients had them. But now everyone has a boilerplate IPS from somewhere, and these vague, watered down documents do not even come close to describing a true fiduciary governance process. This seems to be the time of the check in the box IPS but just having one doesn't cut it. Fiduciary audits. Due in large part to the package offered through the Center for Fiduciary Studies, it is becoming popular for advisors to offer ERISA auditing. Sounds good but its real value is as part of an integrated service, not stand-alone. If you're out there pitching audits I respectfully suggest that a business model that requires a client to get excited about being audited might have some marketing flaws. Open architecture. As mentioned above, this is fast becoming the standard platform for advisors in the middle market. Clients like it. 100% Frost Model revenue sharing. Full pass through of rev share by a fee only, full disclosure, revenue neutral vendor. Banks must either adopt Frost by 2006 or register as broker-dealers per Graham-Leach-Bliley (GLB). This coupled with Eliott Spitzer's investigations and the SEC's investigations suggest that we should expect a massive shift in compensation practices soon. For more on this topic see The Legality of Kickbacks from the August BenefitNews magazine, or tune into the webcast of the same name (article and details available on [Advisors] portion of www.unifiedtrust.com). Conclusion of Part I If you are an advisor serving as a co-fiduciary and accepting that role in writing as an investment advisor as defined by ERISA; if you help clients achieve a true delegation of fiduciary responsibility through the use of discretionary vendors; if you take an advisory role and remain product neutral; if you help your clients with fiduciary governance using open architecture programs; if you operate on a fee basis with full disclosure, mandate the same from all vendors, and actually understand where all the fees are hidden; if you have a formal, systematized fiduciary governance process and meet regularly with each client to oversee and document that the process is happening; if you deliver superior participant education/advice programs that actually achieve something; if you keep abreast of all the technical/service developments in the industry and make sure your client has all the bells and whistles that make sense; if you structure your client plans in such a way that the best developments in behavioral finance are applied to drive participant success if all of these things are true, you are well on your way to building the co-fiduciary advisory practice of the future. Parts Two and Three of Marketing Co-Fiduciary Services to Qualified Plans In part two, we will talk about the second action step in converting to the advisory model: choosing your business structure. Should you be a fee only RIA, a broker, or both? Is an independent firm better than a large organization? What are the pros, cons, and legal issues? In part three, we will wrap up with the third action step in converting to the advisory model: building your infrastructure, consisting of people and processes. And the core process is the advisory service itself. We will outline a comprehensive fiduciary governance process as a framework to assist in creating your own written process. Pete Swisher, CFP, is Vice President of Wealth Management and Advisory Services for Unified Trust Company, NA, and can be reached at pete.swisher@unifiedtrust.com or at Advisor.Services@unifiedtrust.com Unified Trust Company, NA 2353 Alexandria Drive, Suite 100 Lexington, Ky 40504 877-411-8781 ext 228 toll free 859-296-0880 fax To review Fiduciary news, and services we believe this is a very good web page. http://www.durig.com/category-19.php |
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