From the May 2004 issue of Investment Advisor • Subscribe!

Tackling the Retirement Market

Whether your firm can benefit from the coming 401(k) boom will depend on how it's positioned

It's no secret that advisors who have concentrated on the 401(k) business have had a pretty good run. Since 1990, defined contribution plan assets have doubled. According to the Employee Benefit Research Institute, at the end of 2002 there were about 47 million Americans participating in more than 432,000 401(k) accounts, holding some $1.8 trillion in assets.

Most advisors' training and experience tells them to be wary of such trends: Once you can identify a bandwagon, it's usually way too late to jump on it. But if your practice still needs a niche or you want to refocus the direction you are heading, then you may want to consider the 401(k) market. According to Greenwich Associates, 401(k) and other defined contribution plans are expected to grow another 59% by 2012, fueled by the 12,000 "boomers" turning 50 every day. Combine that with the fact that only 23% of companies with fewer than 100 employees and only 49% of employers with between 100 and 500 employees have defined contribution plans, and it all spells opportunity for financial advisors.

But if you are thinking about this market, you also might think about doing some strategic planning. Many 401(k) specialists today are drowning in opportunity, with little time to manage their business and without the staff to handle the work they have now, let alone implement a plan to attract new business. At the same time, as you might expect in a booming market, there is a growing number of service providers in this space. The challenge for advisors specializing in the 401(k) market today is to differentiate their firm while coping with the demands of low operating leverage, a profit margin squeeze, and the need to respond to a more demanding clientele.

The first step is differentiation. Research we recently conducted at Moss Adams to understand the characteristics of what might be called "elite" retirement plan advisory practices, revealed some potential for differentiation:

o Only a small percentage of 401(k) providers offer "advice," as opposed to education, to plan participants.

o There is an industry shift focusing on expanding existing relationships with 401(k) plan sponsors rather than getting new relationships.

o Sponsors are demanding that providers offer integrated solutions, more automation, and a suite of asset allocation products.

Our study found that any one of these factors can lead to a strong differentiator for advisors. Several potential strategic choices emerge that will enable your firm to take advantage of these market opportunities: specializing in small defined contribution plans; developing an expertise in retirement plan distribution; becoming the low-cost provider to small plan sponsors; offering financial advice to plan participants; or providing innovative technology solutions to small businesses. But no matter which strategy you choose, the question remains troublesome: Where will you find the human capital and financial resources to offer one or more of these services?

To find the right answer for your practice, we recommend that you consider what business consultants call the classic "SWOT" analysis: an in-depth review of your firm's strengths, weaknesses, opportunities, and threats. Here's a good example of a SWOT analysis we did for a 401(k) specialist firm.

Internal Strengths. The firm was very good at documenting client information, advising its clients on compliance with employment and securities laws and regulations, and had an excellent reputation with its clients.

Internal Weaknesses. However, we also found that client surveys revealed a low level of client satisfaction, and that the firm had a weak organizational design, a compensation plan that discouraged team behavior, high staff turnover, inadequate tools to serve certain clients, low profitability, and an overdependency on the owner.

External Opportunities. The good news was that there were: a growing number of new local businesses, including professional service firms and other small businesses; the lack of a dominant advisor in the local market; and the need for an efficient process to add retirement plans to local businesses.

External Threats. Downside factors were the poor recent performance of the stock markets; the entry of large direct competitors; the overall poor behavior of plan participants; a tightening regulatory climate; and plan sponsor sensitivity to fees.

With this analysis in hand, this advisor began identifying goals and, consequently, to focus on tactics to close the gaps and implement his strategy. In addition, by exposing these gaps, he was able to recognize that his firm's inhibitor was not marketing or selling per se, but not having the right environment--or people--to achieve his goal. He then identified the steps he needed to build his business further:

Implement a compensation policy that aligns with business, team, and individual goals.

Enhance relationships and increasing income from existing clients.

Increase the ratio of optimal clients in the 401(k) market.

Increase the number of optimal client referrals from clients.

Minimize the labor element in the monitoring and investment process.

Increase the number of relationship managers with expertise in retirement planning.

Let's take the third step--increasing the ratio of optimal clients in the 401(k) market--as an example of how to build an operating plan to support a strategy. This advisor recognized that he had too many small clients to service, and the overhead necessary to support these clients was eating into his profitability. By examining his client base, he recognized that his firm was living the 80/20 rule big time. In fact, his client base was more like 90/10: 90% of his income was coming from 10% of his clients.

So tactically, what should he do? He recognized the need for incremental improvements rather than taking an axe to his problem. So with the goal of "improving the ratio of optimal clients in the 401(k) market," he identified the following action steps in order of priority:

Define characteristics of the optimal client.

Identify existing clients who fit this model.

Conduct a client survey of these optimal clients to elicit their needs and level of satisfaction with the relationship.

Build a process and product offering that responds to the optimal client need.

Refine a pricing strategy to achieve profitability goals with the new process.

Design a marketing plan that incorporates the needs assessment, in order to replicate the optimal client.

Track results of the marketing initiative.

Each year for the next three to five years, the principal will monitor improvements in the optimal client ratio, and be able to fine tune the tactics he uses to improve this statistic. By focusing on a similar linear, tactical solution for each of its goals, this firm will be able to respond to the changing market and address each challenge one by one.

It's clear that there is opportunity for practice growth in both the pre-retirement and post-retirement markets. But practitioners in this space also need to manage a rapidly changing environment, including the evolution of new product features, especially asset allocation funds; increasing service demands by plan sponsors, especially integration and technology; higher expectations by plan participants, especially regarding clarity of reports and performance; rising costs of administration and pricing pressure; the challenge of low plan participation; and a greater regulatory focus on this business.

Successful advisors in these markets will need to be conscious of how the service has been commoditized, and price will not be a differentiator. Advisors likely to succeed will be those who focus on enhancing advice to and education of both the employer (fiduciary) and participants; who are able to stress independence over the direct providers, who may have a conflict; and who can get ahead of the likely regulatory and legal pressures.

If you develop a strategic framework that allows you to better define your market, and consequently the needs of that market, you can build a practice specializing in the pre- and post-retirement needs of your clients. That practice can also be clearly differentiated from all the other providers in your community. The 401(k) market will continue to evolve, and for many, it will be a career-defining evolution. If you think strategically about your choices, however, you should be able to conceive of a plan to capitalize on these changes.

Mark Tibergien is a nationally recognized specialist in practice management for financial services firms, and partner-in-charge of the Securities & Insurance Niche for Moss Adams LLP, the 10th largest CPA firm in the U.S. He can be reached at mark.tibergien@mossadams.com.

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