Retirement plan advisers' fees are getting squeezed.
As with other service providers to defined contribution plans, price compression for adviser services has been rapid and deep. Price compression in the retirement plan arena isn't new, but it's gotten to a point where observers believe advisers could be in trouble absent some sort of change.
"It's getting ridiculous," said Fred Barstein, founder and CEO of The Retirement Advisor University. "It's at a real tipping point."
Larger defined contribution plans, which is the target market for advisers who focus mainly on retirement plans, is where the biggest squeeze is occurring. Advisers' average revenue for providing services to a $50 million plan decreased 12.5% during the two-year period over 2014-16, according to Ann Schleck & Co., a consulting firm. The story was worse for $200 million and $400 million plans, for which advisers saw fee reductions of 22% and 26%, respectively, over the same period; $100 million plans entailed a smaller reduction, in the single digits.
"We start to see dramatic cuts in adviser revenue" among large plans, said Robin Green, head of research at Ann Schleck & Co.
Conversely, advisers servicing smaller plans — those with $25 million and less — saw their average fees increase modestly, by 5% or less for all plan sizes.
But, just because these fees aren't decreasing doesn't mean advisers aren't facing profitability pressures. Employers sponsoring these smaller plans are demanding more services from advisers to justify their fees, observers said.
"It's still hurting our margins, because now I have to deliver twice as many services to the $10 million client," said Vincent Morris, president of Bukaty Companies Financial Services, a network of advisory firms with approximately $9 billion in DC assets. "How do you deliver more services and not have your margins crushed?"
The rapid decline in price and increase demand for higher service quality is creating a situation whereby advisers can't afford to be squeezed much further, observers said. That is, unless something gives.
A few things could occur: Profit margins could decrease, in which case the firm's principal will have to take a financial hit, service will suffer and firms will lay people off; or firms will become more efficient, via technology and processes, for example, although new tech isn't advisers' strong suit, according to Mr. Barstein.
To a certain extent, adviser fees are captive to the same market forces leading to fee reductions by other DC-plan service providers, such as investment managers and record keepers. Record-keeping fees, for example, have been cut by roughly a third since 2012, from $92 per participant to $57 in 2016, according to NEPC, a consulting firm.
Plan sponsors have grown more aware of their fiduciary duty, which includes a responsibility to ensure that participants are paying reasonable fees for plan services, partly because of a targeting 401(k) plan fees. More recently, the Labor Department's fiduciary rule, which went into effect in June, brought fiduciary rule into the public eye.
Fee structure also plays a role. Large-market advisers primarily charge a flat dollar fee to service plans, and along with that structure comes price breaks that drive down fees when a plan hits a particular asset threshold, Ms. Green said. Conversely, small plans predominantly use asset-based pricing, and adviser revenue increases with plan size, absent a change to the fee.
INFLICTING THEIR OWN PAIN
But advisers aren't solely victims of market forces; they're inflicting much of the pain on themselves, partly by blindly undercutting one another to win business, suggest practitioners and analysts.
"Advisers did the race to the bottom," Joshua Yost, an investment consultant at Oakeson Steiner, which oversees around $350 million in DC assets, said. "If there's someone willing to make $100,000, there's someone willing to make $90,000."
This sort of ad hoc business model isn't sustainable, according to Troy Hammond, president and CEO of Pensionmark Financial Group, an advisory network with roughly $50 billion in DC assets. The only way to make it so is with a lot of volume, and over time advisers will have to service that additional volume with an inadequate amount of resources, he said.
Undercutting also poses a self-perpetuating problem for advisers if that pricing makes its way into industry benchmarking data, observers said. The problem is partly symptomatic of advisers doing a poor job of assessing their profit margins.
"Very few advisers I've met understand their cost of service," Mr. Barstein said. "That's why they're undercutting, because if they really knew, they'd realize, 'I'm losing $10,000.'"
"No one's taught them how to run a business," he said. "And that's sort of the heart of the problem."
Some retirement plan advisers are rethinking what services justify higher fees, and being more deliberate in their cost of service. Some services consistently correlate to higher fees. Advisers providing one-on-one employee meetings earn an average $45,130 in annual fees on a $25 million plan, which is about $8,900 more revenue than those who don't, according to data from Ann Schleck & Co.
Similarly, advisers offering and supporting model portfolios, a type of custom asset-allocation investment option, make an average $43,327 annually, roughly $6,200 more than those who don't.
Advisers are increasingly having to go beyond investment consulting to earn their fees, advisers said. That business is becoming more commoditized and can be delivered at a low cost, due in large part to technology-driven providers.
"If you're saying, 'I can pick 10 funds better than the next guy,' technology is going to take you out," Mr. Yost said.
However, intellectual capital is still in demand, and something that advisers can charge a premium for because of the wide variation in knowledge out there about DC plans, according to practitioners.
Douglas Prince, CEO at ProCourse Fiduciary Advisors, which oversees $3 billion in DC assets for around 100 clients, says 10%-20% of his firm's fees are investment-related and 20%-30% are fiduciary-oversight-related.
The remainder 50-60% is for what he calls "strategic thinking." That includes helping employers identify problems before they occur — easier-to-spot issues such as an employer's likelihood of failing annual plan testing, and more difficult ones like a plan's ineffectiveness at helping employers achieve workforce objectives from the standpoint of their company's benefits philosophy.
"At the end of the day, human-resources and finance departments are getting [skinnier], and need to rely more on their outside partners," Mr. Prince said.
Reductions in fees for "basic services," such as investment meetings, reviews and monitoring, have also forced advisory firms to scrutinize and account for pricing variables, said Chad Larsen, president and CEO at MRP, an advisory firm overseeing about $3.5 billion in DC assets in more than 200 plans.
For example, asking questions such as: Are we doing two days of employee education or are we doing 10? Are we driving to meetings or getting on a plane to fly? Are we implementing a full-blown financial-wellness program or doing a webinar?
"All these things are being looked at and evaluated from an internal process standpoint to make sure we're properly pricing plans on the front end," he said.
Many of MRP's service agreements are a blend of fixed-dollar and asset-based fees. For example, charging a base fee of $10,000 may cover most or all of MRP's fixed costs to service a particular plan; and charging an additional 0.075% or 0.10% asset-based fee, depending on the requested plan services, adds an incremental revenue increase as the adviser's liability also grows along with the plan assets, Mr. Larsen said.
Advisers can also think about which services to include in a bundled fee, and which to charge as a separate line item. Bukaty Companies, for example, typically charges $12 per participant for financial wellness, Mr. Morris said, but for small plans the service is sometimes included.
Ultimately, advisers need to be able to dismiss a client rather than try competing with an unrealistically low price. "We're willing to walk away from the business," Mr. Morris said.