Companies with a successful core discipline should always evaluate complementary services for their clients. This is no different for investment advisors serving the individual marketplace. Your clients trust your knowledge, insights and services, but they are constantly hearing from your competitors, some of whom have a full of complement of services to offer. Introducing new services is a risk, as poor delivery in a new service line can lead to lost clients and reduced reputation. However, by introducing additional services successfully, you can increase your revenues and profits in addition to building sturdier client relationships.

Common Errors of Entering the 401(k) Sector

Those who enter the 401(k) marketplace often select a service provider because someone else recommended them without due diligence, which is a big risk considering you will have to follow their service model. The 401(k) service sector is in a mature service phase, thus your entry risk is reduced if you select a service provider that best fits your current delivery strategy. The four key criteria include:

  1. Investment menu solution
  2. Participant communication strategy (integration and leveraging their services)
  3. Service model (low price, efficient or premium)
  4. Price/Revenue model.

Another common mistake advisors make when entering the 401(k) marketplace is looking solely at out-of-pocket fees to the client, the “sell low” price solution. For those of us who have been around for a long time, this often results in a higher overall fee to the participant. This is not going to meet the fiduciary prudence test going forward and may put the plan sponsor at risk, especially if the revenue to the advisor and service providers is substantially higher compared withto similar service providers.

Working With Investment Advisors

Instead of selecting recordkeeping service providers and third-party administrators, some investment advisory firms with proven solutions will permit independent investment advisors to sign up to use their service delivery models. This is as close to plug and play as you can get, but the key variable in the selection is making sure the solution fits your current delivery model. Investment advisors that focus on individuals are a natural progression to the defined contribution/defined benefit service sector, especially if your clients are small-business owners or individuals with influence at their company.

Managing Your Clients’ 401(k)

Asking individuals about their retirement plans is a component of your services and, although you do not get paid on the 401(k) assets in an individual retirement plan, your insight can help improve their overall retirement portfolio. In most cases, especially with married couples, the money is invested in silos and the combined asset allocation is most likely not optimized. You may notice a strange investment plan, such as 50% in a lifecycle fund and 50% in money market funds. On the other hand, you may notice a lifecycle that is correctly invested based on age but is inappropriate because of the remainder of their investments outside the plan.

Where is the opportunity for those with excellent process for individual services when providing investment advisory services to 401(k) plans? Provide a similar process to participants. Most 401(k) service providers have excellent technology and call centers, but they typically cannot provide direct advice to the participant. This is exactly what participants want: direct answers to their questions based on their overall retirement portfolio. 

In fact, it is possible for you to retain more assets from participants outside the plan, as long as the individual fee is reduced by the fees paid by the plan sponsor. In this scenario, the participants have already received their retirement planning from you, the advisor, as part of the fee in the 401(k) plan, but want to engage you to manage their money outside the plan.

By integrating your individual retirement planning and investment solution with a 401(k) solution, you have extended your competitive advantage and service process to the 401(k) marketplace. It is important not to look at the 401(k) marketplace from the perspective of higher assets or higher profits as the cost of providing service is not the same as the individual marketplace. The key to success is integrating your story and process with your selected 401(k) service model, recognizing the plan sponsor of the 401(k) plan as your client, but the success of your services is based on not only the plan sponsor but the plan participants. The successful 401(k) advisor provides services the plan sponsor and the participant rate highly and is profitable on a stand-alone basis.

With the new Labor Department fiduciary rules, investment advisors with excellent service models at the participant level can transition more quickly in the new regulatory environment.