Retirement services: Adapting to a changing market can pay off
Small retirement consultants will have more opportunities, but more competition
By Len Strazewski
Steady double-digit growth in health insurance premiums makes a nice offset to what the perpetually competitive property/casualty insurance rates generate, and many independent agents and brokers now balance their strategic commitment to commercial property and liability coverage with group life and health insurance services.
Agencies, however, are more uncertain about how to meet their clients' needs for retirement benefit services. Most retirement advisors must be licensed as securities broker dealers and comply with state and federal financial regulations. Retirement plan design must conform to standards set by the Employee Retirement Income Security Act of 1974, which imposes strict fiduciary responsibilities.
As a result, some agencies have built retirement benefit practices internally by hiring experienced producers with the appropriate licensing or by sending group benefits producers to school for certification. Others have developed strategic partnerships with local financial planners.
But agencies may want to rethink how they handle retirement benefits, industry experts say. Clients' needs are growing and bringing opportunities with them, and post health-care reform regulations have made professional retirement advice more important, experts say.
“Individuals struggle to find the discipline, confidence, and guidance to properly prepare for retirement. On top of that, employees greatly value access to resources that their employers can provide to help with any of the critical planning issues of life such as traditional benefits, eldercare, will preparation and retirement,” says Kevin S. Trokey, president and chief executive officer of Benefits Growth Network, a St. Louis, Missouri-based agency consulting company.
“The employers who provide those resources are only going to enhance the employment value proposition and strengthen the employer/employee relationship. A benefit program really should be viewed as part of the financial safety net for individual employees. Obviously, preparing for a successful retirement is also a critical part of that safety net.”
Employers want to get their benefits support from their trusted agency advisors—if they can.
“The more an agency can provide the resources, products, and consultative advice to assist employees in weaving together a complete financial safety net, the more value they will be bringing to the client relationship,” Trokey says.
And the retirement plan advisor business is booming, according to a new study from the Retirement Research Council, a subsidiary of Diversified, a retirement plan administration company in Harrison, New York.
The report, Advisor Practices of the Future 2012-2015, indicates that new fee disclosures and health-care reform regulations will fuel double-digit growth for retirement benefit advisors. However, the growth could primarily benefit advisors who work exclusively with retirement plans as small, independent regional advisors merge with larger national companies.
According to the report, the market share for large retirement plan advisors in the $10 million to $500 million market will grow to 40% in 2015 from 25% this year, and the number of plan advisors will increase by nearly 50% during the next three years.
To support this growth, firms will need to focus on recruiting and developing talent, as the pool of qualified candidates may not be large enough to meet demand.
“Thousands of advisors generate some revenue from retirement plans, but the number focused primarily or exclusively on mid- to large plans is estimated at approximately 550 professionals,” says Joe Masterson, senior vice president and chief sales and marketing officer of Diversified. “With an increasing number of health and welfare advisors and wealth management advisors poised to migrate toward this market to enhance their practices, the industry is about to embark on a new era of growth and development.”
The study, which is the first of its kind, is based on insights from Diversified's own retirement practice and more than 50 recognized retirement plan advisors, consultants, and practice leaders representing the spectrum of the profession, according to the report.
Though the study didn't focus on smaller plans, the growth pattern is still likely to encompass smaller employers, notes Peggy Santhouse, vice president of national distribution and relationship development at Diversified.
The trends affect a range of different business markets, she says, and create room for growth for a majority of those models. “We see dramatic growth in the number of employers that will want to redesign their retirement plans and need the technology and expertise to accomplish their goals.”
Large employers are likely to gravitate to large consulting firms—and the newly merged advisory firms may also expand their targets to include small to medium-sized employers. Small advisors, including agents and brokers, may have to expand their resources to compete.
The small benefit consultants will have to build “centers of efficiency” by partnering with ERISA attorneys, actuaries and other specialists, Santhouse says.
Grace Basile, market intelligence consultant with Diversified, cites an earlier study that supports the need for greater sophistication. The Value of a Professional Advisor Study, completed last December, polled 409 retirement plan sponsors about their consulting needs.
She says that the aggregation of skills and resources is important to meet the future needs of plan sponsors—and employers will see greater value in the professional skill set as their needs evolve.
The report says:
“We recommend that generalist advisors who already have retirement plan clients forge a partnership with a professional retirement plan advisor who can help service retirement plan clients.”
Other trends noted in the more recent report include:
— Greater focus on participant outcomes. As the transition from defined benefit pension plans to defined contribution plans continues, plan sponsors' interest in measuring participant retirement readiness will surge. As a result, advisors will focus more on outcomes and less on means such as enrollment, asset allocation and debt management services.
“Advisors will spend more time discussing tools and resources that enhance the retirement readiness of participants. Advisors will focus on running group employee meetings, particularly those dealing with retirement income solutions and participant advice,” the report says.
— Greater reliance on retainer compensation. The percentage of plan sponsors with $5 million to $500 million in plan assets who rely on advisors paid on retainer is expected to increase to 49% in 2015 from 33% in 2012. The retainer compensation will help protect retirement plan advisors from fluctuations in market performance and commission income.
“Consistent with industry fee compression, the shift toward a retainer model is expected to spur additional advisor search activity, which will prove difficult for advisors attuned to an asset-based compensation system while creating new opportunities for advisors who successfully operate within the retainer model,” the report says.
Agents and brokers who want to capitalize on growth and industry changes will have lots of competition from the large consultants and plan administrators, but if they plan ahead and identify comparable resources, they have a shot at capturing a share of the action.
Len Strazewski has been covering employee benefits issues for more than 30 years. He has an M.S. in Industrial Relations from Loyola University in Chicago.