From the November 2003 issue of Investment Advisor • Subscribe!

Harvest Time

There's plenty of money in retirement plans, and you know the demographics, so why aren't you selling and servicing those plans?

As an investment advisor, your ultimate goal is to help clients manage their money and other investments in order to reach a secure retirement. Clients usually come to you with one primary request: "Help me make my money last." Why is it, then, that the majority of advisors have virtually ignored the untapped and potentially lucrative market of providing advice to small-business-owning clients on qualified and other types of retirement plans? Consider these statistics from The Principal Financial Group, the nation's largest 401(k) plan provider: There are 683,000 retirement plans at America's small businesses, which Principal defines as companies that have $5 million or less in retirement plan assets, and that employ 250 or fewer people. Kevin Morris, advisor marketing consultant, retirement and investor services at Principal, notes that turnover of those 683,000 plans (when a company moves from one plan provider to another) is anywhere from 7% to 11% annually. Given that turnover rate, Des Moines-based Principal is projecting that in 2004 "about 65,000 plans will be up for grabs in the retirement market across the country; that's about $40 billion in assets," Morris says.

Moreover, it stands to reason that advisors already have relationships with some of those small-business owners who are switching plans or are looking to establish a new one. Small-business owners need advisors' help in setting up retirement plans, Morris says, because 75% to 80% of them do not have one today. "In 2004, we project about 14,000 new retirement plans will be established for brand-new business owners who don't currently have a retirement plan," he says.

For Advisors, a Key Role

According to Nationwide Financial's 2003 Small Business Survey, small-business owners are virtually clueless about their legal responsibilities when it comes to qualified retirement plans, and that's where advisors can help. Michael Butler, senior VP of NFS Distributors, Inc., a division of Nationwide Financial, says small-business owners "should seek out a trusted advisor or retirement plan specialist to ensure they are suitably meeting their requirements and protecting themselves and their employees." The study found that most small-business owners mistakenly believe the primary fiduciary duty lies not with them, but with the investment provider, the advisor, or even employees themselves. Small-business owners also fail to evaluate investment selections regularly, the survey found, and they fail to consider whether the funds within the plan are appropriate for their employees.

Despite three years of bear market losses in 401(k) plans, more 401(k) plans are actually being established, according to a recent study performed jointly by the National Defined Contribution Council (NDCC) and Spectrem Group. At the end of 2002, according to the study, there was a 4% growth in the number of new 401(k) plans, most of which occurred in firms with fewer than 100 employees.

As the aforementioned data show, the market for servicing small-business owners' retirement planning needs is huge. And advisors really shouldn't ignore the opportunity. Congress is more focused now than ever on passing laws that provide consumers with more ways to save for retirement. So it pays for advisors to stay abreast of the latest developments. That's the rationale for our special report this month on retirement planning. That's also why we're introducing a new monthly column, "Retirement Plan Advisor" (this month on page 61) designed to bring advisors the latest news on what's happening in the retirement planning space. We'll keep an eye on legislative and regulatory developments in the nation's capital, tell you about advisors who have found success serving this market, and keep you apprised of new products and services that meet the changing needs of plan participants, sponsors, and advisors.

Why So Shy?

So why do the majority of advisors steer clear of advising small-business owners on retirement plans? The main reason is that the plans are complicated and time- consuming. But as NFS's Butler says, that's easily remedied by partnering with a good plan provider who'll "stand shoulder-to-shoulder with you at the sales presentation and beyond." Morris of Principal Financial says that because most advisors aren't "retirement experts," they fear looking foolish by "standing in front of their clients that they've sold a group medical plan to and selling something they're not comfortable selling." That's why third-party vendor firms like Principal Financial need to be flexible when providing support to advisors, says Michael Daugherty, second VP, retirement and investor services, at Principal Financial. If, for instance, the advisor has a property/casualty relationship with a small-business owner and the owner is looking for a retirement plan, the third-party provider should "feed the right information to that advisor so they can deliver the service the client is expecting, or step in and help the client [set up a plan] without the advisor's help," Daugherty says. "Either way, you don't want to make the advisor look foolish in front of the client."

A study by McHenry Consulting found that only 5% of investment advisors are well versed in the Employee Retirement Securities Act (ERISA). "So 95% of the advisors out there in the market are not comfortable selling retirement plans," Morris says. That's why it's so important for advisors to hook up with a plan provider, or third-party administrator, that knows ERISA inside and out. "There's a fairly high degree of complexity" in recommending and selling retirement plans to small-business clients, and especially in understanding the ins and outs of ERISA, says Daniel Galli, a CFP with Boston 128 Companies, Inc. in Rockland, Massachusetts. "I know accountants who still don't have all this stuff straight. You can't just do this as a hobby. You have to study and know why someone should be in a SEP versus a profit-sharing plan," he says. "You need to know that you can't take loans from a SEP because it may not be protected from creditors. And you need to know that you can't elect a deferral into a SEP anymore."

You Can Get Paid

Besides wanting to avoid getting bogged down in a 401(k) plan's administrative complexities, advisors also ignore the plans because they think they don't pay well enough. But Butler of NFS says advisors fail to see the recurring annuity stream they can get from servicing a qualified plan. He uses this example: An advisor may see a single plan with 20 participants as a burden rather than a solid revenue stream. But advisors have to remember: "Commissions are paid on all funds, so as periodic deposits are made--both by the participant and company match, when applicable--[the advisor's] commission base increases." Never mind the fact that most 401(k) participants contribute to a plan through automatic payroll deductions, even in down markets, which ensures a recurring deposit for the advisor. Butler adds: "Don't forget to factor in plan dollars that come from an existing plan if you're transitioning an existing plan to a new provider."

Joseph Ready, director of Wachovia Retirement Services, a division of Wachovia Corp., is spearheading his company's push to distribute 401(k)s through advisors. Wachovia has "always been in the 401(k) market," he says, but didn't start distributing the products through financial intermediaries until about three years ago. Now, Wachovia sees the advisor channel as a great way to boost its market share in the 401(k) market because plan sponsors with $2 million to $50 million in plan assets are clamoring for relationships with advisors. Wachovia has noticed that more and more of these "sponsors were looking for [plan] providers with relationships with financial advisors that could help sponsors with what they struggle with most: investment selection," Ready says.

Sponsors also wanted help from advisors, notes Ready, "for their employees' individual education needs or on how to allocate assets or create a financial plan for retirement." As Wachovia noticed more plan sponsors seeking advisors' help, Ready says, "we thought [distributing 401(k) products through advisors] was a place that you were going to have to be in order to be successful and continue to grow your market share in terms of 401(k) activity."

So there's a quid pro quo going on in the retirement planning market, really: Advisors need the expertise from the plan providers on many aspects of retirement planning, and plan sponsors are seeking advisors' help and know-how.

Keeping an Eye on the Long Term

Wachovia manages $55 billion in retirement assets, and 30% of the company's annual sales have come through advisors. Ready says he's noticed that more advisors are interested in tapping into the retirement planning market because "it provides an annuity-based income, and leverages a lot of their core competencies." There is also a market opportunity for advisors "as sponsors are turning [to them] for help in fund selection and all the complications that come with the investment side," Ready says. "And it's consistent that as the [sponsors] build their 401(k) practice, they have rollover events that the advisor is there to help with. So in terms of building a strong long-term plan base, it makes a lot of sense from the advisor perspective."

Wachovia is offering two products: one for small companies looking to start a 401(k) plan, and another for the middle market. Evergreen Connect K is tailored to the small end of the market--those companies with 15, 10, or even 5 employees that have startup plans with less than $2 million in assets. Evergreen Connect K "really centers around the financial advisor selling and servicing that product," Ready says. "At [the small] end of the market, 401(k) plans are sold and not bought; the sponsor needs a lot of guidance and handholding. Also at that end [of the market], the small-business owner doesn't have the time" to spend on a company retirement plan. "It's easy to use," he says. "A plan can be set up in 20 minutes and it's very straightforward. It's a good starting point for some advisors who say they want to build their practice in the retirement [planning market] and maybe were intimidated. We think this is a good place to start so they can learn the 401(k) market at the less complex end."

Evergreen 401(k) Now, on the other hand, is designed for the middle market--those companies with $5 million to $50 million in retirement plan assets--and offers a "rifle shot approach in the sense that as you move upmarket, the plans get more complicated and the demands from the employer or sponsor get higher," Ready says. "So you need to be more sophisticated and more familiar with the product."

Ready says Wachovia is using this approach by actively focusing its wholesaling efforts on advisors who get at least 50% of their revenues from retirement plans. Only about 15% of advisors meet this criteria, Ready estimates, but the number is growing.

The Planner's Perspective

Planner Galli of the Boston 128 Companies wouldn't reach that threshold himself: About 25% of his firm's business comes from servicing retirement plans. However, he's been an advisor for 16 years, and has been helping small medical practices and professionals with 401(k)s, SEPs, and Simples for the last 10. Galli's small-business clientele employ from one to 25 workers, he says, and "these are the people that are not going to get the attention of the big [retirement plan] providers."

The opportunity for advisors to help this segment of small-business owners is "huge," he says, because they "desperately need advisors' help." Galli says when he helps an employer set up a retirement plan, "part of the service that I'm providing to the employer is to be able to provide services to the employees." He's found that many employers shy away from 401(k) plans because they think they're complicated. "They are [complicated], and may be expensive to set up," he says. That's why he stands at the ready to recommend an alternative like a Simple plan, because it "can do the same thing as a 401(k) for an employer and be much easier and cheaper and therefore much likelier to be implemented."

To keep up to date on the most recent trends in the retirement planning space, Galli teaches a retirement planning class to CFP candidates at Northeastern University in Boston. "That forces me to really dig into this material on the theoretical side, and to know my facts," he says. For those students who didn't know squat about retirement planning before coming to class, he says, "as they see what you can do with this [market], they are seeing it as a terrific opportunity."

Here's How to Do It

So how do advisors tap into servicing small-business owners if they currently don't have any among their clientele? Galli suggests taking a lesson from the salespeople of yesteryear: "Go around and see people," he says. "Identify a business that you can learn something about--like an auto body shop or beauty salon. Figure out who you know that can introduce you to the business owner, and say, 'I'm looking to start specializing in this area and want to help you.'"

Or, better yet, Galli recommends trying to get referrals or introductions to business owners and then "ask them what they would like." This is often a better approach, he says, because people often make the mistake of saying, "I'd like to talk to you about a 401(k), SEP, or Simple plan." Instead, Galli recommends advisors say: "What would you like to do to prepare for retirement? Do you want to save pretax dollars for yourself and your employees?"

It's also important for advisors to identify several reputable third-party administrators, Galli says. His experience has shown that if an employer is unhappy with a particular plan, it's usually because the administration and recordkeeping is not up to par. "Everybody sees the funds--that's the glaring front page on these [retirement] plans," he says. "But the problems that occur happen on the administration side. So knowing a couple of good third-party administrators that will do a good job is a powerful act."

About 5% of Tom Grzymala's revenue at Alexandria Financial Associates in Alexandria, Virginia, comes from advising retirement plans for two small-business owners--a healthcare provider and an association--but he's hoping the recent merger of his practice with another firm will boost that percentage.

Last month, Grzymala's firm merged with BoTree Asset Management, a wholly owned subsidiary of BoTree Investments, LLC, based in Princeton, New Jersey. "BoTree deals with institutional clients strictly for fixed-income asset management," Grzymala says, managing $1.2 billion for seven institutional clients. Alexandria Financial--which is now called Alexandria Financial Associates, a BoTree Asset Management Company--will now be able to bring "financial planning to the high-net-worth individuals" within BoTree's institutional client base such as tax planning, investment planning, and college planning, Grzymala says. Alexandria Financial has been itching to attract higher-net-worth individuals, and BoTree's experience in performing "very sophisticated fixed-income asset management for accredited investors--those with net worth over $1 million," Grzymala says, will give the firm access to such individuals. "We're looking to do personal business for the CEOs, CFOs, and CIOs of these institutional clients."

Grzymala has also been looking "to cultivate a bigger share of the retirement planning spectrum by serving as an investment advisor to qualified retirement plans." His firm already does this kind of work, but by merging with BoTree, "we're bringing greater expertise to the game now."

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