The Defined Contribution (DC) Plan segment is attractive to many financial advisors as a hedge against volatile markets, since participants in DC plans supply a dependable stream of income, due to automatic deductions. More advisors are leveraging their relationships with employers to cross sell wealth management, group benefit, rollovers and retirement income services.
As attractive as the DC market is, only half of advisors are currently servicing any plans. According to a 2010 industry report from The Retirement Advisor University:
There are 300,000 financial advisors (FAs) actively servicing the investing public; 50% or 150,000 have at least one plan; 75,000 have at least 3 plans; and 15,000 or 5% of the market have 5 or more plans which signals that they are starting to get serious. There are fewer than 5,000 “elite” DC advisors (advisors who have 10 plans, $30 million AND 3 years of experience).*
According to Fred Barstein, Founder and Executive Director of The Retirement Advisor University, of the 625,000 DC plans with assets between $250,000 and $100 million, 18% do not have an independent advisor.
This represents a huge opportunity for advisors to expand their business and diversify their revenue sources. But most would probably need help in order to break into the DC market.
I recently interviewed Kurt Miller, CEO of Financial Soundings, an investment advisory firm that has developed a technology solution that advisors can leverage to scale their advice model and support multiple DC plans without adding staff or impacting other parts of their business.
Their main product, Retirement Planning Insights™, is a cloud-based solution that provides individualized advice to employees whether they are participating in the plan or not. The system works with any defined contribution plan, record keeper or TPA.
The program utilizes a simple data feed to generate personalized reports for each and every eligible employee, without requiring them to go on-line or input extensive personal information. Employees receive the individualized advice with simple implementation instructions to facilitate much greater usage.
According to Miller, industry surveys show that only 6% of employees are using some form of investment advice. Firms that have implemented Financial Sounding’s online solution have seen utilization rates over 50%, he claimed.
The firm, which is headquartered in Alpharetta, Georgia, was founded to provide investment advice to 401(k) participants, without requiring individual meetings with an advisor. They designed an advice report that went to all participants in a qualified plan to proactively provide them with direction, as well as measurement tools for plans to understand employees utilization over time, Miller said.
Financial Soundings has just launched a completely redesigned version of their website and retirement recommendation engine that can expand an advisor’s reach to be able to support plan participants without encumbering them to sit down with every employee personally. This increases an advisor’s scalability, acts as a lead generator, and encourages employee participation through distribution of customized, printed reports, Miller stated.
Their web-based retirement readiness tool is powered by a totally redesigned decision engine that analyzes the current contribution levels and investment model of each participant as well as demographic data such as age and planned retirement date, Miller described. It then runs through multiple iterations of Monte Carlo simulations and other logic to provide recommendations to increase the projected probability of reaching their retirement goals, he said.
Employers are increasingly focusing on improving participant outcomes and their ability to retire with sufficient funding, Miller claimed. It’s no longer good enough to just provide a great fund menu and a wonderfully designed plan. His customers are asking how does it translate into their employees’ ability to retire effectively?
Their system is flexible enough to not only provide basic investment advice, but also supports custom portfolios provided by the advisor or even target date funds. The delivery model Is Software as a Service, with role-based access to give advisors control over the look and feel of reports, recommendations, capital markets assumptions and underlying investment recommendations, Miller explained.
Unlike most of their competitors, Financial Soundings doesn’t charge an asset-based fee. Instead, they charge a flat, annual fee of between $7-$14 per employee, depending on services to the plan sponsor, Miller stated.
While the world is going paperless, one of the core beliefs of Financial Soundings is that paper is still the most effective way to communicate with employees. To that end, report generation, printing and mailing are included their monthly price, with customized reports sent to both participants and non-participants with recommendations that should drive them toward better behaviors, Miller stressed.
There are a number of different options that advisors can take advantage of to defray the cost of Financial Soundings’ services, Miller pointed out. They can go through a broker-dealer, pay out of the ERISA budget or just pass through the costs directly to the DC plans as an expense because it is a plan benefit rather than an optional service, which doesn’t impact the employer’s budget.
Advisors have numerous options available to them in the system including providing their own investment models or having Financial Soundings provide them. They can also modify many of the underlying assumptions used by the analysis engine in order to provide customized solutions to different clients.
Miller related a success story from one of their clients, which provided a rich matching contribution in their 401(k), but saw poor participation rates in the under-30 age group. Financial Soundings helped them to develop a communication effort that resulted in an increase of the under-30 participation rate from 60% to over 80%, he reported.
Some of the new features in their pipeline include a Retirement Asset Manager product that will carry forward the recommendation process into retirement to help employees effectively manage their assets during the distribution phase, Miller promised.
Disclaimer: In the past, I have provided strategy and software development services as a consultant to Financial Soundings.