All retirement plan advisers face an important and lingering question: How many record keepers should I work with?
There are clear advantages to having a short roster of "preferred" or "approved" record-keeper partners, such as ease, efficiency and leverage, advisers said. But there are also drawbacks, such as greater difficulty winning new business and client risk.
"We have up to 10 preferred vendors, and probably six we like a lot for different reasons," said Jason Chepenik, managing partner at Chepenik Financial. "We've had as many as 18 and it's not fun. It's hard. So we're actively trying to manage that list."
"You don't want to have one or two, but if I have 20 it's too many," he added.
Record-keeping firms, which track participants' money in defined-contribution plans and perform other administrative functions, come in many varieties. Some specialize in 401(k) plans, others in nonprofit or government-sector plans; some focus on large plans with hundreds of millions or billions of dollars, while others may target plans with less than $20 million. Some have specific investment requirements, while others are indifferent.
For this reason, working with a limited number of providers can help advisers manage their business more easily from an operational standpoint, said Nathan Fisher, senior executive vice president of Fisher Investments' 401(k) Solutions business.
"Each of the record keepers will have its own web interface, terminology and reporting standards," Mr. Fisher said. "If you end up with 10 record keepers, you end up with 10 different reporting standards."
Having too many partners can make it more challenging to track exactly what each partner is doing, and client service could be negatively affected as a result, advisers said. And concentrating more business among a smaller number of firms can give advisers more leverage with the partners they work with.
For example, if there's a service problem, an adviser may be able to more easily reach a record keeper's service manager to resolve the problem, said Mr. Fisher, whose firm actively places business with around five record keepers
"If we have enough plans with that record keeper, they're more likely to take that call," Mr. Fisher said. "It's the adviser's ability to advocate for the client."
The concept of culling an adviser's list of preferred providers gained steam — especially among broker-dealers — as a result of the Department of Labor fiduciary rule, which raised investment advice standards in retirement accounts. In order to better manage their exposure to regulatory risk, many brokerages limited their partners to record keepers that provided access to third-party investment fiduciary services.
However, shortening the list of providers doesn't guarantee that the total number of record-keeping options will also be low. For example, a record keeper may have different platforms or different service models based on a client's plan size that advisers must vet, said Susan Shoemaker, a partner at Plante Moran Financial Advisors.
Her firm has a list of roughly seven go-to providers, but works with about 25 different vendors total.
"If a client is happy where they are, is being served well and fees are reasonable, we're indifferent as to where they are and don't try to move them," Ms. Shoemaker said. "Unfortunately, that's how we end up with as many as we have, which makes our life a little more difficult."
Forcing a new client to convert to an adviser's preferred record keeper could deter business, Mr. Fisher said. It could ultimately dissuade a prospective client from selecting an adviser. So opening up a preferred list helps advisers to grow faster, he said.
Ms. Shoemaker also believes that narrowing a list too much could pose problems for clients from the standpoint of their fiduciary liability.
"You could put the plan sponsor at risk for not really doing enough due diligence just because you're not being more open about what you're looking at," she said.