Out of Sight?
Do you know who has custody of the assets of the retirement plans you serve? More likely than not, you do not—and perhaps do not care.
Even if advisers know who the custodians are, they likely have little or no relationship or communication with them. Is there a valid reason or is there a case for advisers to seek solutions offered by custodians to aid them in their business?
As summarized by Joseph Healy, Director, Defined Contribution Services at Alliance Bernstein, a mutual fund provider, custodians provide: custody of a plan’s assets, trust accounting for those assets, and, depending on a custodian’s business model, transfer agency services to facilitate trading of those assets. However, custodians also may offer other services and products that could be useful to advisers.
Investment Menus
Other than asset custody, the most common solutions for retirement plans offered by custodians are investment vehicles and trading platforms. According to Mark Davis, Principal at KDS Advisors, “What is clearly true is that most retirement plan advisers do not realize there is open architecture available for smaller plans if they are willing to work with custodial firms.” However, Davis points out that how an adviser is paid often dictates what custodial services can be used. If an adviser can work as a registered investment adviser (RIA) and not get paid by the product, more custodians are accessible, he says.
On the other hand, Andrew Gorder, Field Vice President, Charles Schwab Corporate & Retirement Services, says Schwab Retirement Advisor Services specifically supports commission-based advisers, making funds available that allow TPAs to better serve commission-based retirement advisers who control the majority of assets in the small-to mid-size 401(k) market, as well as fee-based advisers. Other offerings from Schwab are geared toward specific business models of advisers, such as the Schwab Personal Choice Retirement Account, an offering that allows company executives and key employees to use the same investment vehicles for their retirement assets as they do for their personal finances. Schwab spokesperson Michael Cianfrocca said the product is like having a brokerage account within a retirement plan, and warns that different plan sponsors may have different guidelines about what investments are available.
Additionally, Schwab offers an open-architecture solution, Schwab Advisor Portfolio, that allows advisers and TPAs to select retirement account investments from among all assets that can be held or traded at Charles Schwab & Co., including a mix of stocks, bonds, ETFs, or other investments. The service is available to sponsor clients for investing assets of retirement plans that are not participant-directed, such as profit sharing, money purchase, or defined benefit plans. While the service is available to plans of all sizes, Cianfrocca said, from a plan expenses standpoint, it makes more sense for larger plans.
“There is certainly an opportunity for creative advisers to assemble best-of-class investment menus by working with custodians,’ Davis says.
Helping advisers assemble an intelligent solution for plans is one of the services offered by custodian Matrix Settlement & Clearance Services, LLC, (MSCS) through its MG Advisory group. John Moody, President of MSCS, explains that, while MG Advisory helps advisers make better decisions about what funds to use for a retirement plan, the company has chosen to be “agnostic’ to fund choices. This allows advisers to do ultimately what they think is best for their client. MSCS provides a completely open architecture platform allowing advisers to choose from any fund choice, including mutual funds and managed accounts.
According to Moody, advisers frequently come to the firm for referrals to TPAs. Advisers often go with packaged investment solutions, alliances already available thru TPA relationships, rather than assemble investment menus based on participant demographics or desires, he says, which might not necessarily be in the best interest of the plan sponsor.
A common point made by these industry professionals, which may help explain why an adviser may not utilize open architecture solutions offered by custodians, is that the recordkeeper for the plan generally dictates what investment and trading solutions can be offered in the plan.
Healy says, particularly in the small-plan market, it is not likely the adviser to the plan can choose investment products on his or her own, but must choose from those options available through the recordkeeper. The investment selections should not only be in the best interest of the participants, but also must work for the recordkeeper operationally; so, offering a custodian’s solutions to plan participants must involve the recordkeeper’s endorsement.
However, an adviser given the task of helping choose a recordkeeper for the plan will have more flexibility in selecting investment options for the plan, and can select or reject a recordkeeper based on its ability to accommodate the investment selections. Additionally, utilizing the open architecture platform of a custodial firm that also offers recordkeeping services eliminates the potential conflict.
Healy comments that one advantage of working with custodians on customized plan solutions is the ability to negotiate fee ratios. An adviser who develops expertise on fee disclosure and wants to pursue ease of disclosure can negotiate with a custodian for a hard-dollar fee amount and convert it into basis points, he says. Such an arrangement results in lower fees for plan sponsors and participants.
Additional Support
Even if it is not feasible for an adviser or plan to pursue investment products and trading platforms offered by custodians, some firms offer other ways to help an adviser in his or her business with plan sponsor clients.
MSCS’s Moody says advisers regularly turn to his firm for help in finding a recordkeeper for a plan, a service that also could solve the problems with adopting a custodian’s investment products. Gorder says Charles Schwab Corporate & Retirement Services also is being asked by advisers on a frequent basis to help connect them with third-party administrators (TPAs)—a function he calls “one of the real value-added services custodians can bring to relationships and help advisers grow.’
Custodial firms also can be a good source of education and industry information for advisers via conferences and Web sites. Schwab, for example, conducts national and regional conferences at which advisers can share best practices, and also sponsors and produces Web casts on various retirement plan issues for advisers and plan sponsors. The firm provides advisers access to its Web site, offering resources, tools, databases, and benchmarking reports to help advisers in their individual practices. In addition, Gorder says the company recently has added resources to field calls from advisers who do not currently have a relationship with Schwab to answer questions related to serving retirement plan clients.
Pershing Advisor Solutions LLC, provider of outsourcing solutions for RIAs, has launched a new practice management program, Ideas Without Limits, through which Pershing meets with RIA firms, then develops and implements customized solutions to help advisers maximize the growth and profitability of their practices. In addition, Pershing offers RIAs business strategy resources including guidebooks and research; compliance support and access to third-party resources; acquisition, merger, and transition planning services; the ValueAlliance program offering discounts on business services; and independent studies and continuing education services.
TD AMERITRADE also offers tools for advisers via its Institutional division, including a TD AMERITRADE edition of Morningstar Advisor Workstation. The firm also conducts conferences covering topics including investments, compliance, and practice management.
“We see advisers as the driving force for growth in this industry,’ Gorder states. The products and services now being offered by custodians indicate a recognition that the number of advisers serving retirement plans is growing. Whether looking for a customized investment solution for a plan or for industry education and information, custodians can be a valuable resource for retirement plan advisers.