One of my favorite expressions is: “I spent a week there one afternoon.” Nothing could be truer for retirement plan advisors. Over the past three years, the changes we’ve seen could be the equivalent of the previous 20 years. Let’s start by winding back the clock.
In 2009, most retirement plan advisors sold plan services and investments as a commissioned sale. Only 30 percent of plan advisors reported using service agreements to outline the scope of their services and the fees or commissions they receive. Service agreements specifically spelled out the role and responsibilities of the advisor to their plan sponsor client. They also defined in detail the advisor’s compensation for providing advisor services to the plan. Without an agreement, the scope of services was on an implicit level at best. Compensation was disclosed within a prospectus or among the many forms the plan sponsor signed during the process of hiring plan services.
This arrangement could be summed up as a broker or agent relationship. The broker or agent was hired when the product was sold, and was fired when the client moved to a different product. In other words, the advisor was directly coupled to the product.
Today, most plan advisors report using service agreements with the majority of their clients. We started to see these changes coming more than three years ago but, as is often the case, we weren’t sure when the proverbial dam would break or how the resulting market landscape would redefine itself.
Our survey work and conversations with advisors in 2009 and 2010 indicated that a strong move toward a true consulting arrangement was taking shape. Brokers were decoupling themselves from products and providers. The implementation of service agreements was providing a defined structure to the advisor’s role.
Meanwhile, the financial turmoil of 2008 and heightened awareness of fiduciary responsibilities led plan sponsors to look for more from their advisors. In response, advisors moved to truly specialize in the business. Advisors have become more sophisticated by achieving designations and accreditations, examining and scrutinizing contracts more thoroughly and spending greater time developing higher levels of expertise. These advisors now approach their client as a consultant. The advisor’s pitch is to work as a separate service provider. Frequently, their first tasks are to resolve existing issues or search and recommend better plan solutions. The services today’s advisor provides can be very comprehensive, often topping more than 20 separate tasks. An accompanying graph illustrates a list of 24 services and the frequency each is offered as a standard or optional service in the plan advisor’s service agreement.
Several of these services stand out as noteworthy. Three years ago, more than 80 percent of advisors considered themselves functional fiduciaries to the plans they served. While that percentage is substantial, very few advisors explicitly documented their role as a fiduciary. Today, more than 70 percent of advisors state their role as a 3(21)a fiduciary in their service agreement, while virtually all recognize their role as a functional fiduciary.
The second significant development is the rise of plan benchmarking. Plan sponsor demands to measure the success of their retirement plans, legislated fee disclosures and the increased sophistication of the advisor have led to new ways to examine plan results. Traditionally, investment results have been a primary determinant of plan success. But, further scrutiny has developed more sophisticated benchmarking. Advisors now present and review new metrics such as participant retirement-readiness, participant market exposure, plan and participant fees, as well as the advisor services and fees to plan sponsors.
The third change is the evolution of advisor-provided participant education. While not new, the approach and scope have become more comprehensive. Indicators of these growing levels of education include the formation of plan education policy statements, ongoing participant education programs, online and classroom participant sessions, more sophisticated and scrutinized participant level portfolio management, plan specific online investment advice, and a continued growth in automatic participant enrollment and deferral rate escalations.
As we look into the future, we see the emergence of three significant trends.
First, the remarkable shift to service agreements and fee-based compensation has left the market in a fragmented state. Advisors report a lack of market clarity for their offerings and fees. Natural market evolution suggests this will sort itself out over the next three to five years, the usual cycle for plans to review their service providers. But the result of this sorting process may be painful to a number of established plan advisors. Younger, hungrier, and tech-savvy advisors are beginning to push advisor fees down. In addition, many advisor firms are achieving the scale to drive down incremental costs and streamline their services. As a result, many established advisors will struggle to compete at reduced compensation levels. The burden of existing overhead and less efficient operations will cause many of these practices to lose market share.
Closely related to the first market shift, will be a move to more professionally managed advisor practices. I have found that fewer than 20 percent of advisor practices develop business plans, understand their cost to acquire and service a customer, or have developed and executed plans to cut costs and improve operational efficiency. However, we’re beginning to see the formation of new advisor practices. The commonality of these practices is a very accomplished management team looking to leverage expertise and scale to gain significant market share. Their focus is to reduce fees and provide a professional level of servicing while streamlining operations to cut costs and gain scale.
We have seen remarkable change in the population. For the first time ever, the minorities in aggregate exceed half of the population. This changing face of America will lead employers to demand more from their advisors. They’ll look for advisors to develop and deliver participant programs catering to specific cultural segments rather than simply translated presentations and materials.
The final change we see on the horizon is the continued rise in plan benchmarking. While advisors, providers and consultants have developed various methods to benchmarking plans, the market lacks any standardized or universally-accepted methods. This fragmentation has led to a plethora of methods and metrics to a gauge a plan’s success without widely accepted standards. In the coming years, nationally accepted standards will emerge similar to the indices of the financial markets. These standards will begin to provide plan sponsors with a very clear picture of their plan’s success, the value of their advisor, how their plan compares to other plans and their competing employers.