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November 01, 2006 at 02:00 AM
When it comes to plowing through the complexities that are associated with retirement planning, advisors need all the help they can get. Not only do they face increasing demands from pre-retiree and retiree clients for a broader range of products and services, but advisors also have more products and services–and regulations–to sift through these days. Confounding the challenge even more is the fact that industry executives continually remind advisors that to be successful at retirement planning, they have to change their mindsets–and, in most cases, their business models. How is an advisor to cope?
Advisors are increasingly finding that their custodian is one of the best resources to turn to. Indeed, Fidelity Investments is pulling out all of the stops to make sure it’s providing all of the retirement planning tools and services advisors need to meet their challenges head-on–all while helping the Boston-based brokerage and mutual fund company to grab the lion’s share of the booming retirement market. In fact, Ellyn McColgan, president of Fidelity Brokerage Company, has stated publicly that tackling retirement issues is her top priority. McColgan even directs the executives within the three major divisions she oversees–Fidelity Registered Investment Advisor Group (FRIAG), National Financial, and Fidelity Personal Investments–to zero in on retirement.
“Retirement is the No. 1 focus for Fidelity across all of our [distribution] channels,” says Sandy Metraux, executive VP at National Financial, Fidelity’s clearing arm that offers services to broker/dealers who represent approximately 70,000 brokers. Metraux also notes that Bob Reynolds, vice chairman and COO of Fidelity Investments, pushes the retirement card just as hard as McColgan. Fidelity believes that “retirement is one of the biggest–if not the biggest–opportunities for advice givers today,” adds Gary Gallagher, a senior VP at FRIAG.
Good for Advisors; Crucial to Fidelity
Offering retirement services is not only crucial for advisors’ practices, but it’s critical for Fidelity’s success as well. Fidelity is “committed” to helping advisors and brokers navigate the complex world of retirement planning, Metraux says, because it’s “important for [Fidelity's] success, and it’s very important from a marketplace perspective.” Taken together, the three divisions that provide services to advisors and brokers–National Financial, FRIAG, and Fidelity Investments Institutional Services (FIIS)–represent $1 trillion in assets under administration. That’s larger than Fidelity’s retail business, which counts $700 billion in assets under administration. National Financial represents more than $600 billion in assets, while FRIAG, which provides wealth management, custody, and brokerage services to financial intermediaries, custodied $218 billion in assets on behalf of 3,100 RIAs and 170 bank trust and TPA firms as of August 31. FIIS, which provides product solutions to RIAs and brokers, had total assets under management of more than $231 billion as of August 31.
Citing internal data generated by Fidelity, Metraux says the retirement marketplace holds about $25 trillion in investable assets, and that 40% of those funds are controlled by RIAs, broker/dealers, or bank trust companies. Those numbers show that it’s not only crucial “to serve the advisors, but that they are hungry for the value-added services that [Fidelity] provides,” she says.
Collaboration and Education
How does Fidelity go about providing a broad array of retirement services and products to satisfy such a huge and diverse universe of advisors and brokers? The key is collaboration among all three of Fidelity’s advisor/broker divisions–FRIAG, FIIS, and National Financial. “We’re very conscious of how we leverage each other and work together, particularly on the retirement front,” says Gallagher. The “issues around retirement are getting more and more complicated, and individuals are turning to advisors,” adds Metraux. “What we need to do for the advisor is make [retirement planning] simpler for them.” Fidelity focuses on “making [the services] integrated and part of [advisors'] ongoing process so they can extend what they’re doing today as opposed to starting all over.” All three Fidelity divisions collaborate to help advisors in three areas: education, products and services, and integrated technology to support firms within each division. When addressing retirement planning issues, Gallagher says Fidelity educates advisors about “how they need to prepare themselves for changes in their businesses, and how they can be successful” doing so. For instance, in late September, Fidelity launched the Fidelity Research Institute, a think-tank made up of senior Fidelity employees that seeks to unravel important challenges–like retirement and healthcare–being faced by individuals as well as intermediaries. The research institute is “meant to benefit all of our channels,” says Metraux, noting that a recent topic that the institute addressed was on finding the most tax efficient method to withdraw assets at retirement.
Outside of the institute, Gallagher says the divisions have been developing white papers and holding educational seminars for advisors about what the Pension Protection Act means for their businesses. Dave Liebrock, an executive VP with Fidelity Institutional, along with a colleague in Fidelity’s government relations department recently conducted a conference call with advisors and brokers to discuss the Pension Act’s nuances and the opportunities it presents. “We had more than 1,800 advisors dial into that conversation,” Liebrock says. Advisors can also log on to fidelityadvisor.com and get a summary of the Act. In laying out the opportunities for advisors now that the pension reform bill is law, Liebrock said he noted the fact that the Act makes permanent the Economic Growth and Tax Relief Reconciliation Act of 2001′s increases in IRA and 401(k) plan contribution limits, catch-up provisions under 401(k)s, as well as tax incentives under 529 plans. If advisors had “clients who were on the fence with those changes–because originally they were going to sunset in 2010–now they are permanent, [and] that presents opportunities for advisors to go out and talk to people,” Liebrock says.
This year, Liebrock points out that Fidelity launched an automatic increase program that allows 401(k) plan participants to elect to automatically increase their deferral amount by 1%, 2%, or 3% each year. Other topics included “what auto enrollment means to advisors’ businesses,” and whether advisors should encourage plan sponsors to include auto-enrollment, as well as the advice provision of the Act. Liebrock notes that there are still some “technical corrections” to come out in relationship to the advice provision. There are questions about the portion of the act that states “in the case of an advisor giving advice from a fiduciary standpoint, they have to receive ‘level compensation,’” he says. What the term “level compensation” means exactly hasn’t been spelled out.
So how many Fidelity advisors are actually servicing and selling retirement plans? “We have over 50,000 advisors that we do business with today in the institutional services company, and we’re dealing with about 3,000 advisors that are selling a 401(k) of some sort,” Liebrock says. The number is growing, however, he says.
Another educational initiative at Fidelity involves conducting seminars around retirement income planning. To prepare advisory firms in helping their clients prepare for retirement, Fidelity execs tick off what Fidelity sees as the five biggest risks to consider when prepping for retirement. First is longevity, which is the risk of outliving one’s savings. Fidelity says there’s a 50% chance that at least one member of a 65-year-old couple will live to age 92. Second is the excessive withdrawal rate. Fidelity warns advisors that a withdrawal rate of more than 4% increases the chance that a client will run out of money too soon. The third risk is inflation–as inflation pushes prices up, the buying power of the dollar plummets, so it’s crucial for clients’ investments to outpace inflation. The fourth risk is asset allocation, meaning that not having the right mix of equities and bonds in a client’s portfolio can affect the portfolio’s long-term growth potential, increasing the chance that a client could outlive her money. The fifth risk is escalating healthcare costs. Fidelity estimates that a 65-year-old couple retiring today will need $200,000 to cover medical costs in retirement. National Financial’s Metraux says that helping clients with healthcare issues “will be a spotlight for us in the future.”
Products and Services
The next area that Fidelity focuses on in helping advisors is providing a suite of comprehensive products. The advent of retirement income planning “is creating a new category of product innovation,” FRIAG’s Gallagher says. Fidelity has “a comprehensive retirement product set that’s available to all of our channels–like individual, and small–business products, IRAs, rollovers–you name it, we have it.” For instance, FIIS–which provides investment management services through advisors at wirehouses, regional and independent broker/dealers, banks, trust companies, and insurance companies–offers the Fidelity Advisor 401(k), a fully integrated investment management administration, custodying, recordkeeping service for advisors to sell to their clients, plan sponsors, and participants. The Advisor 401(k) offers both Fidelity and non-Fidelity funds. Recently, Fidelity raised the number of outside funds advisors can select from for their 401(k) plans to 850, Liebrock notes.
Stace Hilbrant, a planner with 401(k) Advisors LLC in Northfield, Illinois, says that when comparing custodians, Fidelity’s investment options stand out. “Fidelity does a nice job of offering investment choices–all the investment style boxes that you might need for those who want to select investments on an individual basis.” He also likes Fidelity’s prepackaged options, like the lifecycle or lifestyle funds offered through Fidelity’s Freedom Funds, which are often used as default options in 401(k) plans (though there are issues with such funds–see The Benefits and Drawbacks of Auto-Enrollment on page 52).
Fidelity offers both retail and advisor versions of the Freedom Funds, and the advisor funds are growing much faster than the retail version. “The Freedom Funds are very upfront about how they create their [lifestyle fund] models, the allocations utilized by each one of the models, and the promotional materials that go along with them to explain to participants their value,” Hilbrant says. “The materials have to be employee-friendly. Fidelity’s [Freedom Funds] are very user friendly to the advisor channel because advisors first need to understand what’s in the model.”
FIIS also recently launched a program called Retirement Plan Review, which helps advisors sell and service more retirement plans. The program gathers “all of the data of a particular plan and boils it down for the advisor to help them pinpoint where they should be spending their time,” Liebrock explains. For instance, the program “looks at participation deferrals, asset allocation by age group, and then also benchmarks that against companies of similar size in the same industry. So instead of the advisor having to put all this data together to have a conversation with the plan sponsor, Fidelity puts it together so the advisor is spending 90% of their time talking with the plan sponsor about solutions, instead of 90% of their time trying to get the data together.”
Advisors can enlist the aid of Fidelity’s Retirement Education Consultants–Series 7-licensed individuals who assist advisors with enrollment and diversification meetings. If an advisor can’t get to all of the different plan sponsor locations, the consultants can fill in for advisors and conduct the meetings. The consultants’ “only role is to support advisors from an educational standpoint for participant meetings,” Liebrock says. Fidelity now has six of these consultants spread across the country and is looking to add more.
Fidelity’s First Person Communi-cation program was launched a year ago, and is designed to send out personalized messages to plan participants encouraging them to either enroll in a plan or start deferring more. “Historically, communication and education to participants in a 401(k) plan was very broad-based,” Liebrock says. “It wasn’t personalized and most people said, ‘It doesn’t pertain to me,’ and threw it away.” Fidelity “did a lot of research and found that the more personalized the message, the better the chance the person will react to it.” So it did. For instance, for those participants who aren’t deferring up to the company match, we send them a notice addressed to them saying, ‘Did you know you could be deferring more and taking advantage of your company’s match?’” Fidelity found that with the personalized communications, “deferrals increase significantly and diversification changes, and people enroll,” he says. The program also helps advisors, who have limited time, “to get more people into the plan, increase deferrals and diversify assets.”
Something Special for RIAs
On the RIA side, Gallagher of FRIAG cites the Fidelity Retirement Network, which matches advisors with independent third-party administrators across the country that help advisor and brokers deliver retirement solutions. “We have a very strong channel of third-party administrators which are independent TPAs who also provide services in the smaller plan market,” he says. The service was just what Harold Evensky, the well-known planner with Evenksy & Katz in Coral Gables, Florida, needed when his eyes opened to what he saw as a “great opportunity in the 401(k) market,” with his firm now serving as the fiduciary advisor to the trustees of 401(k) plans.
