The coming “retirement crisis” in America has been the subject of countless newspaper, magazine, and evening television news stories. Experts of all stripes have voiced their concern about the vast numbers of baby boomers who will not have enough money to enjoy a traditional retirement. The millions of Americans who have socked away at least some money in IRAs and 401(k) plans can be paralyzed by the seeming complexity of the investment choices they are offered and just cross their fingers and hope for the best, perhaps defaulting to a money market fund.
Concurrent with the development of this potentially large and underserved market, more and more financial advisory firms have been focusing on smaller groups of clients with more assets. From a business perspective it makes sense: A firm being paid a percentage of assets under management makes a lot more money from 100 clients with $1 million each than it does from the same number of clients worth $1 million combined.
The average working American has a clear and obvious need for advice about planning for retirement, but most of them just don’t have enough money to get it from those best able to provide it–professional financial planners. The problem for most planners is that they just can’t see how they can make any money from clients with lower asset levels.
In the coming years, however, if financial planning is to achieve the oft-stated goal of being recognized as a legitimate profession, it’s going to have to find a way to serve all Americans. Some of the provisions of the Pension Protection Act are expected to open up advisory services to a broader audience, but at least one firm has found a way to offer investment advice and asset management services to clients with as little as $20,000 or $30,000 in a 401(k) account while at the same time continuing to serve its original high-net-worth clientele.
PMFM, Inc., based in Watkinsville, Georgia, right outside Athens and about an hour from Atlanta, is a fee-only registered investment advisory firm that offers separate account management services and proprietary mutual funds as well as being the advisor to 401k Toolbox, its 401(k) plan asset management tool.
In fact, PMFM seems to have a pretty sure grip on all the challenges that advisory firms face today–in building a strong niche, in attracting clients, in using technology to offer not only more services to more of those clients and thus grow revenue but also do it profitably, and in finding and retaining good people. It’s also finding success in marketing its services through bigger partners with larger distribution networks, which allows it to again grow revenue without adding layers to its infrastructure. That doesn’t mean that the firm hasn’t changed over the years, and that its leader, Tim Chapman, doesn’t face other challenges. But it appears that the structure and processes are in place for future success at PMFM.
The firm’s monogram, by the way, comes from Personal Mutual Fund Management, which pretty much summed up the firm’s approach upon its launch in 1991 by Chapman and Don Beasley (who retired last year), as a traditional fee-based asset management firm. “We manage serious money for investors for their retirement,” explains Chapman, who holds the title of CEO. “When I talk about serious money, it’s money that people know has to be there. We want to take care of their money in such a way that they get a decent return over time but are protected from severe bear markets so that they don’t run the risk of running out of money in retirement. Our goal is to capture most of the good times and to miss most of the bad times.”
First 401(k) Stirrings
Chapman and Beasley had been pursuing that philosophy for a few years when they got their first exposure to the 401(k) market. Chapman’s father was nearing retirement from Delta Airlines when that company dramatically expanded the offerings in its 401(k) plan. Soon his father’s co-workers were asking him for advice on what to do with their retirement money.
In response to the demand, Chapman started writing a biweekly newsletter, with a subscription cost of $49/year, covering the investment choices available in Delta’s plan. Within a few months subscribers were asking if they could pay him to manage their 401(k) accounts for them, which he started doing in 1995.
“What we learned was just how much demand there was for this type of service,” Chapman recalls. “The truth is, a lot of people don’t want to manage their own money. We really saw that with the Delta people. By the late 1990s when all the new online services and other startup companies were just coming out it was an area that we had been involved in for several years. So at that time we created 401k Toolbox to take the same service that we’d been offering our Delta clients to other companies.”
Initially 401k Toolbox was available only to participants in plans that were direct clients of PMFM, such as Saks Fifth Avenue and Jordan’s Furniture, with at least $100 million in assets. For PMFM, the economics of administering smaller plans still didn’t make sense, until the firm decided to partner up with plan providers who would like to offer the 401k Toolbox services in conjunction with their own 401(k) product. The first of these partners is Lincoln Financial. “They have a group annuity product that is designed for the small 401(k) market, and by that I mean probably $500,000 to $5 million in assets,” Chapman explains. “We created a collaborative marketing agreement with Lincoln whereby a broker could go in and sell the Lincoln 401(k) product and they can attach 401k Toolbox to it. Our partnership with Lincoln took us into that smaller market, which really is huge collectively, but each plan itself is fairly small. To us it all looked like one plan, because it was all coming through one product provider.”
Using the Toolbox
Essentially there are two marketplaces for the Toolbox, explains VP of marketing Tim McCabe: large plans that are direct clients of PMFM, and “indirect business” which is sold through Lincoln Financial or another partner. “The businesses are similar but different,” he says. “With the direct business we control our own destiny. These are our clients and we build individual relationships with the companies and then with the participants. With the advisor-sold market, we’re training their agents and brokers on our services and how to sell our services. But at the end of the day the important part is that our service is delivered to participants in person. Whether it’s us doing it or a broker/agent, there’s a live person that talks to them in either a group or individual setting.”
In the presentation meetings, participants are told that after enrollment they have two options: “Do It Yourself” or “Manage It for Me.” If they want to handle their account themselves they can go to the 401k Toolbox and fill out a risk assessment questionnaire spelling out their time horizon and receive suggestions for choosing a portfolio from the available options and there’s no charge for the service. Or they can sign an agreement to let an advisor manage the account for them.
“The services we provide are individually chosen and paid for by plan participants,” explains McCabe. “We give the advice away. Some of our competitors charge a per head cost whether you use it or not. We are definitely a ‘pay for play’ service. Only the people who use our services pay for them.”
For plans with under $3 million in assets the charge is 1.5%, which drops to 1.25% above that threshold. “For us it costs the same across our client base,” he says. “If it’s a direct plan all those fees come to us. If it’s an indirect plan, we actually share a portion of that revenue back with the advisor who is our feet on the street in providing the service to their clients.”
The average account size of the individual participants in 401k Toolbox’s indirect market is $20,000, not the type of client that most advisors are looking to handle. The challenge, says Chapman, is, “How do you get down to each individual and make it profitable? One of the things that we’ve been able to do at PMFM is create the right kind of in-house technology that allows us to manage 20,000-plus 401(k) accounts and do it profitably.”
The Tech Master