Sometimes a great business opportunity just falls into your lap. The trick is to recognize its potential and run with it.
So it was with Harris Nydick and his partner, Greg Makowski, co-founders of CFS Investment Advisory Services, in the mid-1990s. That was when the Totowa, N.J., wealth management firm began getting urgent requests for help from their business owner clients. “They were saying, "You've got to help me with this,'” Mr. Nydick recalls.
“This” was their 401(k) plans, which typically were insurance-based annuity products wrapped into a 401(k) structure. “It was getting messy for them to administer their plan, and they weren't getting the support they needed” from their service providers, he said.
Also, their employees wanted to understand the value of individual assets held in their accounts but couldn't reconcile their 401(k) statements (based on “phantom” mutual fund shares) with the mutual fund prices they were seeing in the newspaper.
Fast-forward 20 years, and nearly half of CFS' approximately $700 million in assets under management are in 125 retirement plans. Mr. Nydick, 50, said he would never have predicted this outcome when he first began working with plan sponsors.
NO MERE DABBLING
An insight he did have then — one often echoed by successful advisers in this arena — is that you can't “dabble” in the retirement plan advisory business. There is just too much required expertise and administrative infrastructure, especially in today's more competitive market.
So Mr. Nydick made a large investment of his time, receiving extensive training through the Foundation for Fiduciary Education (now called fi360), boning up on the Employee Retirement Income Security Act of 1974 and attending pertinent conferences.
Along the way, CFS developed what may have been the first open-architecture platform for 401(k) plans. Mr. Nydick's clients wanted to be liberated from the constraints either of working with a single bundled provider or several independently. One client's plan “was being serviced by several providers, and the client wanted it all under one platform,” Mr. Nydick said. “We looked all over for someone who could do that, but couldn't find anyone.”
Back then, large fund complexes were not keen to work together. So Mr. Nydick found a custodian willing to work with multiple asset management organizations and allow their funds to be mingled in individual 401(k) plans. Making that resource available to CFS clients fueled the company's accumulation of 401(k) plans and assets.
But being successful in this field isn't just about investment platforms. “I have always believed that the mindset and the business model that are necessary to run a successful 401(k) business would grind the service model of a high-net-worth business to a halt,” he said.
In particular, advisers who work with retirement plans and want to deliver a high standard of service need to be able — and, ideally, happy — to spend time assisting participants with very low account balances. That high-touch element “is one of our value-adds,” Mr. Nydick said.
“Employees who only have a 1-800 number to call will just get some random person in a call center who will never come visit them,” he added.
Another innovative service that CFS began early on: annual fee benchmarking. A plan sponsor may be drowning in fee data from 408(b)(2) disclosures but lack context. “It's like having a compass and not knowing where north is,” Mr. Nydick said.
Acquiring the capacity to serve 401(k) sponsors well requires more than training. It requires cash — in the form of added personnel and administrative systems.
“After you get your third or fourth plan, you start to suffer” under the demands of the new role, Mr. Nydick said. He stressed that the importance of developing a process to service retirement plans, and implementing it to ensure efficiency, is imperative to make any money.
PATH TO PROFITABILITY
“The profits from your first few plans have to be plowed back into the business to hire people to run it who are dedicated to this side of the business,” Mr. Nydick said. It takes about $100,000 in revenue from plan advisory fees before an adviser can be confident the business will become viable, and then begin staffing up, he said.
The path to profitability for CFS in the retirement plan sector is not based on being the cheapest. “There are three ways you can compete: on price, on service or on the product itself,” he said. “We don't compete on price.” And fortunately, clients don't seem to mind.
That approach led Mr. Nydick to reject the idea of tiers of client service packages. One reason is that any bare-bones service level probably would lead to skimping on one service you can't afford to skimp on: regulatory compliance. It's an all-or-nothing proposition, he said.
Mr. Nydick acknowledged that today's 401(k)-servicing field is more competitive than when he moved into the business. Building up a 401(k) clientele from scratch today is no easy accomplishment.
Yet he does believe that opportunity remains. One reason is that some large “legacy” vendors with expensive structures in place cannot operate profitably at the lower- fee structures that exist today. Some already have pulled out of the business, and others may follow. “The new adviser doesn't have these legacy costs to deal with, and can learn from the experiences of others for free,” he said.
Meanwhile, Mr. Nydick's 401(k) business has come full circle. Originally, he secured 401(k) accounts from business owner accounts. Now that he is serving several large plans of companies with highly paid employees, he has picked up new personal-asset-management clients from those plans. He warns, however, that doing so involves paying heed to strict ERISA conflict-of-interest rules governing such arrangements.
Richard F. Stolz is a freelance financial writer based in Rockville, Md.