Art by Jing Wei
What do retirement plan advisers view as their biggest
challenges? Their greatest opportunities? What are the primary benefits they
receive from custodians and broker/dealers (B/Ds)? The 2016 PLANADVISER
Practice Benchmarking Survey of 613 retirement plan advisers shares insights
into these and other key questions—and gives you a guidepost to see how you
compare with your peers.
Although the industry often talks about moving away from
focusing on just the “three Fs”—funds, fees and fiduciaries—two of those still
lead many conversations. Among retirement practices of all sizes, the most
frequently cited top concern is fee compression, selected by 34%. Rounding out
advisers’ top three concerns are compliance/fiduciary issues and government
regulation, tied at 33% each.
Adviser Ed Chairvolotti, chairman of Chairvolotti Financial
in Winter Park, Florida, says worries over fee compression do not surprise him.
“Most advisers are all selling the same commodity and, therefore, can’t
differentiate their value,” he says.
Quinn Keeler, senior vice president of surveys and research
at PLANADVISER’s parent company, Strategic Insight, in Stamford, Connecticut,
agrees. “Plan sponsors are less willing to pay for services that have now
become fully or partially commoditized through the disintermediation of the
Internet, such as investment research,” she says. “Advisers have had to reduce
their fees as many of these services are no longer seen as differentiators.”
This also comes with the current climate in which everyone
is still evaluating the implications of the Department of Labor (DOL) fiduciary
rule. When asked what they think will be the most significant growth area for
their practice over the next 12 months, the biggest increase was seen in
fiduciary services, cited by 46% of advisers—up from 36% last year.
The survey, fielded in September, showed a large increase in
advisers serving as fiduciaries to plan sponsors and plan participants. The
percentage of advisers acting as a fiduciary to participants increased to 53%,
up from 44% in 2015. There was also a sizeable jump in the percentage of
advisers acting as a 3(38) fiduciary to plans (to 60%, up from 56%) and as a
3(21) fiduciary (to 92%, up from 90%).
These developments make perfect sense to Virginia Taylor,
principal with Taylor Financial Solutions in Belmont, California. Any
retirement plan adviser who wants to “remain competitive” needs to provide
these services, she says.
According to Chairvolotti, 3(38) and 3(21) fiduciary
services have become “the minimum standard in the industry.”
Fees and Fee Disclosure
Advisers are also moving away from relying on industry
forms—e.g., Form ADV or a 408(b)(2) disclosure statement—as the vehicle for
revealing fees. Advisers are growing more apt to discuss them with plan
sponsors in the annual review (81%, up from 75%), in their contract (79%, up
from 76%) and in a fee disclosure statement (69%, up from 68%).
For all of the discussion about retirement plan advisers
moving away from charging fees based on assets, to flat fees, 88% of advisers
continue to charge a percentage based on assets, the same as in 2015, while 80%
charge a flat fee, up only slightly from 78% in 2015. “I am still charging an
asset-based fee because it is hard to switch over to calculating the time we
spend on each client and determining that annual fee,” Taylor says.
Chairvolotti concurs: “As over 90% of all retirement plans
in the U.S. are under $5 million, and 90% of all companies have fewer than 20
employees, asset-based fees will continue to be passed on to the participants.”
Home Offices and Affiliations
There has already been much conjecture about how the
fiduciary rule will influence adviser affiliation. As of September, the
retirement plan community looked relatively similar to last year: 24% of
advisers are with a national full-service wirehouse, and 24% are dually
registered as a registered investment adviser (RIA) and a broker/dealer, on par
with last year’s findings. However, 22% of advisers are aligned with an
independent B/D, up from 17% in 2015.
Per the advisers surveyed, it is clear B/Ds offer advisers a
plethora of benefits. “Fee compression is happening everywhere, not just with
advisers’ fees but among organizations that serve advisers themselves, such as
broker/dealers,” Keeler says. “Therefore, it should come as no surprise that
providers of all types are expanding their value propositions.”
For advisers, the top two such B/D services are compliance
oversight (cited by 79% of advisers) and technology/information technology (IT)
support (cited by 58%). But in terms of which services saw the biggest growth
in adviser use this year, these would be lead generation/referrals (39%, up
from 14%), participant education (42%, up from 32%) and marketing support (46%,
up from 38%). In fact, Taylor, who has doubled her assets under advisement
(AUA) in the past five years—and expects AUA to double again in the next
three—gives much credit for the growth to her B/D and the advantages she says
that affiliation provides.
Considering this, and given the expansion of services
offered, it may come as a surprise than only 24% of advisers rate their
custodian as excellent and 44% rate their B/D as excellent.
Defining Plan Success
The top three success measures that advisers use for their
plan sponsor clients are participation rates (77%), deferral rates (70%) and
competitive benchmarks of the plan design (65%). Only 50% calculate the
percentage of participants on track to meet their retirement income replacement
goals. Chairvolotti believes that advisers who rely mostly on participation
rates and deferral rates offer their plan sponsor clients “a false narrative.
We need to have the tough conversations with our clients,” he says. “The only
success in a retirement plan is an effective income replacement ratio for each participant.”
Taylor views these success measures slightly differently.
“Increasing participation and deferral rates is a noble beginning, but we do
need to put more energy toward retirement readiness,” she says. These metrics
may be why only 22% of advisers are confident and 4% very confident that the
majority of their plan sponsors’ participants will achieve their retirement
income goals by age 65.