The intensive focus of the consumer media on investment returns and retirement plan expenses has contributed to a profound misunderstanding of the true value of a retirement advisor.
Indeed, laments Dalbar’s Lou Harvey, the misperception of retirement advisors’ contribution to U.S. retirement security goes unappreciated by employers, plan participants and even many advisors.
The Dalbar CEO, who has long offered self-study fiduciary training for retirement advisors, says that enhanced investment returns are surely not a retirement advisor’s purpose since the best retirement fiduciaries use asset allocation strategies that deliberately reduce returns (as a means of wealth preservation).
Rather, in a post to his LinkedIn blog, Harvey provocatively asks members to imagine what the world would look like if there were no retirement advisors — as a means of correctly assessing their value.
Retirement in the U.S. would be far less secure absent advisors because there would be far fewer plans, vastly reduced participation rates and such plans as existed would be undiversified.
Specifically, Harvey estimates that of the more than 600,000 plans today, 90% to 95% would not exist. Further, today’s 87% participation rate would fall below 25%. Finally, stable value and fixed income investments would be the rule, and diversified portfolios including stocks the exception, in a no-advisor world.
“These estimates are not mere speculations but were the facts in the 401(k) marketplace before retirement advisors were active,” Harvey writes.
The 5 million businesses still without retirement plans makes retirement advisors an essential current need, he adds.
But moving away from the big picture of retirement advisors’ economywide contribution to the micro-view of the challenges these advisors face offers still greater clarity on their true value.
That is because of uncompensated and labor-intensive work they perform vis-à-vis the employer (to institute the plan) and each individual employee (to secure his or her participation).
The former entails persuading an employer to increase business expenses on the basis of altruism and a hard-to-quantify long-term benefit for which employees may not evince much initial enthusiasm.
If the advisor can jump that hurdle, he must then persuade employees to essentially take a pay cut and then wait years, if not decades, before seeing a meaningful accumulation of retirement assets.
While these difficult steps must occur prior to any compensation whatsoever, the advisor has the added burden of performing these tasks amid severe business and regulatory risk.
It could take years (especially in small-employer plans) for the retirement advisor to recover his startup costs, which could become a significant loss to the advisor if a competitor moves in on an already developed plan.
“Unfortunately, such a profitable plan is an attractive target for other advisors, who can offer lower fees since there are no more startup costs,” Harvey writes.
Potential plan losses and the sometimes arbitrary interventions of regulators heap further pressure on advisors, Harvey adds.
The retirement advisor surely deserves to be compensated for overcoming employer and employee resistance while surviving competitive and regulatory risks, yet we find that most sources of funding the advisor’s compensation are firmly shut.
Getting the employer to pay the advisor directly is a nonstarter, and it is similarly impractical to get employees, though they are the plan’s primary beneficiaries, to pay; Harvey adds that government funding is unrealistic given current debt levels and spending constraints.
“The successful funding approach has been to treat the advisor’s compensation as an expense of the retirement plan. This has the added benefit of creating an incentive for the advisor to succeed,” Harvey writes.
Having solved that compensation problem, the heroic retirement plan advisor still faces the original challenge — winning business in a tough environment where the advisor’s value is perceived to be linked to investment returns.
So how can advisors stay competitive while seemingly having to always be looking over their shoulders at competitors who might use that misleading benchmark to take away their hard-won business?
Harvey says the solution to this dilemma is for advisors to offer a superior standard of care, adding that this is not difficult given the significant gap that still exists between best and worst practitioners.
“Using standard of care as a differentiator to win business requires three things,” says Harvey, reached by ThinkAdvisor: “Commitment to the standard, independent evidence of consistent use of the standard, and promoting how the standard benefits the plan sponsor and participants.”
He adds that enhancing the standard of care makes increased advisor compensation necessary and defensible.
Noting that Dalbar’s 401(k) self-study course provides more detailed support for raising the standard of care, Harvey says the basic idea is to charge a fee that matches the time and resources spent, while reducing the client’s risk of loss as assets grow.
— Related on ThinkAdvisor:
- Lou Harvey: Obama Just Blew Up Your Business Model; Here’s What to Do
- Bad Behavior Cost Mutual Fund Investors 8 Percentage Points in 2014: Dalbar
- Lou Harvey: Looking for Mr. Dalbar—The 2015 IA 35 for 35