Mistake in Identity

Now in his fourth year as a financial adviser and working with 10 qualified plans, Aaron Moody opted to start the current phase of his career as an employee at a large financial services company. “I came from an education and mental-health background, and I did not have a lot of experience with finance,” he says. So, for him, MetLife Financial Services offered the training, support, brand name, and open architecture he needs to get established as a retirement plan adviser. “I have colleagues who are independent advisers, and their advice was to start out with a major company and take advantage of the training and the system, and consider becoming independent at a later date,” he says.

Pittsburgh-based Moody has taken advantage of MetLife’s training to become a financial planner, for instance, and he has utilized its business-development tools in signing up the qualified plans with which he currently works. He has not made many tradeoffs in going with a big company initially, he believes, but some issues, such as the company’s prohibition on serving as a fiduciary with plans, may loom larger in the future. He has thought about going out on his own with a colleague, he says, “but it is not the right time yet. I still have a lot to gain here at MetLife.”

For Paul Powell, beginning his career at a Wall Street giant in 1997 turned out to be a double-edged sword. The name recognition of his wirehouse employer sometimes helped him get new business. Yet, he also felt that the brokerage ultimately thought of him as a salesperson. “That is the bottom line: Your job is to collect assets,’ he says.

After leaving the wirehouse in 2001, Powell had a fruitful stint developing plan clients at registered investment adviser (RIA) firm CapSouth Partners. He ultimately founded his own Dothan, Alabama-based firm in 2006, rather than work with one of the many companies that also do a lot of individual wealth management. “I liked the idea of focusing solely, 100%, on retirement plans,’ he says. He now owns his own advisory firm and affiliates with the retirement plan consulting company 401(k) Advisors, Inc., using its brand name for his company, which works with plans with about $1 billion in total assets.

Advisers seeking an affiliation have several options for their business model: Work as an employee at a large national company, regional player, or retirement specialist; own your own business but align with a retirement-affiliation specialist and possibly co-brand; or strike out on your own, working with a regional broker/dealer or as an RIA, and build a brand name from scratch. As the examples of Moody and Powell make clear, there is no single best business model for affiliations—it depends on where your career is now, how you want to spend your time as an adviser in the next several years, and where you want your business to go in the long term.

Do not go into the affiliation decision with prejudices about business models, recommends adviser Thomas Robertson, a 401(k) Consulting Director at Smith Barney in Columbus, Ohio. “If I see advisers making any mistake, whether it is on the wirehouse side or the RIA side, it is not understanding what the competition can bring to the table,” says Robrtson, who works with more than 50 plans. “Sometimes people get pigeonholed into thinking, “If you are with a wirehouse, you can only do this,” or “If you are an RIA, you have to operate this way.””

There is a lot to think about, and making the wrong affiliation decision can derail your career. So, sources recommend avoiding these major mistakes:

1. Making it all about the payout. Advisers looking to move often make a big blunder, believes adviser Walter McDonald, Co-Founder of Diamond Financial Services of Southwest Florida in Fort Myers, Florida, which currently works with 14 retirement plans. “They are almost always looking for, “Where can I get paid the most?” He knows that from personal experience: When he and his partner founded their company three years ago, they initially started out with an independent broker/dealer that offered them an alluring 89% payout. “It turned out that the 89% was not anywhere near 89%,’ he says. “Number one, you get “fee’d” to death: The payouts are high, but the fees are ridiculous, and there is very little support.” The advisers, who have since switched broker/dealer affiliations to Principal Financial Services, Inc.’s Princor Financial Services Corp., felt bogged down by fees at their previous broker/dealer. “Ticket charges were triple or more than what we were accustomed to,” he says, while monthly access fees totaled $200, monthly platform fees ran $150, and E&O insurance premiums of $265 per month were “two to three times what we pay now, and what we paid before the move.”

“It happens often that people jump from one firm to another because they get paid a big upfront check,” says Fielding Miller, Co-Founder and CEO of Raleigh, North Carolina-based CAPTRUST Financial Advisors, an independent RIA and broker/dealer with 34 advisers.

“Will the highest payout always be the best option? Maybe not,” says Lisa Kottler, Austin, Texas-based Vice President, Retirement Services at NFP Insurance Services, Inc., and its affiliated broker/dealer NFP Securities, Inc. (both subsidiaries of National Financial Partners Corp.). To look solely at the numbers is a mistake. It needs to be a much more comprehensive look at the value.”

As a general rule, the more support a broker/dealer provides, the lower the payout to advisers. “At some Wall Street firms, the payout might be 30% to 40%,” says Kevin Twohy, Vice President, Partner Development, at Carpinteria, California-based broker/dealer PlanMember Securities Corp. At PlanMember Securities, the payout ranges from 75% to 90%, depending on an adviser’s gross fee and commission income. “While we do not pay for an adviser’s office staff or rent and utilities, as do most Wall Street firms, we offer greater support than other independent broker/dealers,” he believes. “Our call center for clients and onsite business-development support is unique within the independent broker/dealer channel.”

However, two wirehouse advisers interviewed for this story say advisers get a somewhat larger payout, and that they also get lots of support from those companies. For instance, adviser Joe McLaughlin of The Kelliher Group at Morgan Stanley says the total payout for advisers varies by annual revenue at Morgan Stanley, but a seasoned adviser typically has a payout in the mid-40% range. Smith Barney’s Robertson—who pegs the company’s payout for retirement-plan advisers at 40% to 50%—was working at press time on an RFP for a sponsor that has multiple locations throughout the country, and wants interested employees to get financial-planning advice in person. Smith Barney’s network of offices makes it possible for his bid to meet that need.

The support/payout tradeoff that works best for an adviser depends a lot on career stage, McDonald says. A beginning adviser with a small book of business likely needs lots of education about both retirement plans and sales, and may belong at a large company with a lower payout. On the other end of the spectrum are what he calls “super-brokers,” advisers with a very well-established and prosperous business. “If they are at a Merrill Lynch or a Morgan Stanley, they are wasting time and just leaving commissions on the table,” he thinks.

For Robertson, affiliating with a financial giant like Smith Barney makes sense to help him build his business for the long term. “I am sure that we have a lower payout than certain RIAs,” he says, “but I do not feel we are at a disadvantage. Our firm, over the past several years, has committed significant resources in terms of the 401(k) business.”

2. Misgauging how important ownership is to you. Some people find owning their own business thrilling. “You either want to be an owner, or you do not. If you do, you are never going to be happy until you do that,” Powell says. “You will always regret not doing that.”

Others do not want to spend time negotiating for an office lease and buying printer ink, nor do they want to pay someone to do it for them. Advisers join CAPTRUST as employees, and they get a percentage of their revenue production as well as quarterly dividends from profit-sharing, but they also get significant support, Miller says. “That plays for some people, and not for others. Some people like running their own business,” he says. “CAPTRUST appeals to advisers who want to focus more on their practice and less on running a business.” For advisers who own their own firms, he says, “you spend a lot of time doing things that any small-business owners would have to do, such as personnel issues, technology, and accounting.”

For McLaughlin, working with The Kelliher Group at Morgan Stanley gives him the best of both worlds. “We can and do serve as an RIA. We are dually registered: Our group is one of a handful that has been designated as retirement-plan advisory specialists, which allows us to do fee-for-service billing in an RIA model. In those cases where we are engaged as an RIA, we are not allowed to use any of Morgan Stanley’s products,” says McLaughlin, a Vice President and Senior Institutional Consultant in Norwell, Massachusetts, whose group serves roughly 100 retirement plans, representing more than $1.3 billion in assets. “Yet, we also have all the resources; it is what attracted us to Morgan Stanley.” Moreover, despite some negative publicity for Wall Street firms, Morgan Stanley’s well-established brand name helps recruit new clients and comfort existing ones during volatile markets, he adds.

Advisers who decide to start their own business and choose an affiliation usually need to build their own local brand name, as Diamond Financial Services’ McDonald does. So, he and his partner devote a lot of time to increasing awareness through things like teaching continuing-education courses on financial planning for professionals such as veterinarians.

Those affiliating with NFP subsidiary 401(k) Producer Services can take one of two paths, says Nick Della Vedova, President of the Aliso Viejo, California-based company, through which advisers can rent tools, technology, and training that help them work with retirement plans. They can just use their own brand name or, as of September, they can continue renting those services while also co-branding with the company’s new Retirement Plan Advisory Group, a national brand name it is launching. (Prior to creating the new brand, the company allowed 10 advisory firms seeking a deeper relationship while remaining independent to brand themselves with its sister company 401(k) Advisors’ name, as Powell has.) Currently, 230 firms representing more than 300 advisers utilize the first option.

Advisers linked with firms such as National Retirement Partners (NRP) and National Financial Partners (NFP) operate with their own brand name and typically co-brand with those organizations. “We are attracting advisers who are true entrepreneurs,” Kottler says of NFP. “They have spent a lot of blood, sweat, and tears building a business, and they have a great name in their own market.” NFP Securities, Inc., has about 200 reps who have retirement-plan business, she adds.

3. Mismatching business models. Whether it works best to go with a retirement plan specialist, a company that focuses on a broader spectrum of employee benefits, or a partner that values the retail and institutional markets equally depends on your goals. “Our firm is small, and we are very focused on the retirement space,” Miller says, adding that its business breaks down to 70% retirement plans and 30% wealth management. “The wirehouses are wealth management-oriented, and a retirement [plan] adviser is almost swimming upstream.”

When Powell talked to companies about affiliating, he did not gravitate toward those that do lots of private wealth management. “If I am going to affiliate with someone, I want to see a singular focus,” he says. However, many other advisers do lots of wealth management in addition to working with retirement plans, he says, so it could work better for them.

NFP takes the multidisciplinary approach, so it can help advisers work with clients to lower health-care costs, for example, or provide marketing materials for advisers who want to attract individual investors, Kottler says. “Look at: “What is the growth potential? Can I move into benefits and wealth management, and really grow my practice?”” recommends Debbie Vince, Senior Vice President of member firm services at San Juan Capistrano, California-based NRP.

Those who own their own business but want to affiliate also have to find a partner with the best broker/dealer setup for them. At NFP, which both acquires and affiliates with advisers, independent advisers pay a flat membership fee, while those with acquired firms that do not join one of its membership groups do not pay that fee. “Generally, we require that firms and advisers transition to our broker/dealer,” Kottler says. “However, we have made a few exceptions for acquired firms.”

In the past, NRP has given advisers the option of using its broker/dealer or keeping their own and paying a quarterly fee but, in the past year, it purchased its broker/dealer NRP Financial Services and now prefers for advisers to use it. “Right now 95% of our member firms, both owned and affiliated, are with our broker/dealer,” Vince says.

Most affiliation shifts require an adviser to change broker/dealers, Della Vedova says. “[At 401(k) Producer Services,] there is not a requirement to move to a common broker/dealer. We are broker/dealer-agnostic,” he says. “[It is] strictly a fee-for-service relationship, where the advisers choose the services they want, and we charge a flat fee for those services. That is what allows us to not require a broker/dealer affiliation.” Its sister company 401(k) Advisors utilizes Financial Telesis as its broker/dealer, but Della Vedova says that does not affect 401(k) Producer Services’ broker/dealer-neutral policy.

“Anyone who has moved from one broker/dealer to another in the past few years knows that it is difficult,” Della Vedova adds. “You have to have every client sign paperwork with the new broker/dealer, and there are times when you are not paid for 60 to 90 days.”

4. Not focusing enough on the cultural fit. Advisers need to consider this issue most of all, believes Twohy of PlanMember Securities, whose 380 rep/advisers all work with retirement plans. “It can be very intangible, but it is very important,” he says.

“You really need to look at this from the 30,000-foot level,” Della Vedova says. “Is this [firm] something you will want to be a part of for two, five, or 10 years?”

Meet in person with key contacts at the headquarters office, sources recommend. Della Vedova suggests finding out, “Is the corporate office full of retirement plan geeks, or financiers?” Ask questions such as, “Tell me about your key people: How long have they been at the firm? What kind of turnover do you have?” Twohy says. “Stability is a key question in terms of how an adviser will be serviced.”

As Twohy acknowledges, getting a good grasp of an organization’s culture can be tough. There are ways to make that issue tangible, though. For instance, know how a potential partner feels about advisers serving as plan fiduciaries. While some companies do not let advisers be fiduciaries and others give advisers the option, Kottler says, NFP just assumes that they are fiduciaries. “We have built our business to support fiduciary and non-fiduciary advisers,” she says. “However, we tell our advisers to assume they are fiduciaries as a guide to developing their service model, because that is the way we see the industry moving.”

In addition, before making a commitment, advisers need to make sure that a potential affiliation partner sees compliance issues similarly. Try to meet with the chief compliance officer, Twohy suggests. Ask that person to explain the organization’s business model for compliance—for example, whether it centralizes that function at a home office, or decentralizes it at locations around the country. Also, ask that person to walk through the nuts and bolts of how it does compliance reviews for retirement plans and find out whether the company has any compliance complaints against it.

5. Neglecting to do enough due diligence. Potential partners may give advisers a flashy sales pitch in an attempt to recruit them, but sources interviewed for this story say that much of the decision should depend on a very un-flashy factor: the everyday usefulness of their adviser tools. Talk to advisers who already use a broker/dealer’s tools, Powell says. “See if the adviser you are talking to is experiencing what you want to experience over the next one, three, and five years,” he suggests.

Other advisers can serve as a crucial reality check about the depth of a potential partner’s resources. For instance, does the company have a sales and marketing team in place that actually helps other advisers grow their businesses? “Try to speak with as many retirement plan advisers as you can to understand their service models and see if your practice is similar to theirs,” McLaughlin suggests.

Twohy advises talking to advisers who already have affiliated with a potential new partner—not just those that have been there for 10 years, but those that have just joined. Ask them about tangible issues such as what specific help they got from the new broker/dealer during the transition process, and how well the platform works for them.

Look beneath the surface at a potential partner’s tools, Della Vedova recommends, and beware of “tools for tools’ sake.” As he says, “There are tools coming out that are great in concept, but they do not have the data behind them to make it work.” A company may show an adviser a snazzy sample report, for instance, but the adviser needs to ask enough questions to make sure the company has enough data available for it to work just as well with many clients.

Advisers need to ask themselves a couple of very straightforward questions about a potential partner’s tools, Powell says. First, do they create efficiencies that save you time and resources? Second, do they help you succeed in signing new clients?

The decision to switch affiliation ultimately gets back to a single question, CAPTRUST’s Miller says: “If you do not know for sure that it will allow you to serve clients better, then there is no point in switching,” he says. “If there is not going to be a visible uptick in client service, I do not know why you would do it.”

See accompanying chart:Guide to Broker/Dealers’ Retirement Plan Services

Illustration by Chris Buzelli