Launching a New Line of Business to Serve Plan Sponsors and Their Participants

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Alexandra Horton
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PROFILES IN EVOLVING BUSINESS MODELS Launching a New Line of Business to Serve Plan Sponsors and Their Participants An advisory firm formalizes its support for retirement plans to diversify its

1 Advisors who follow a fiduciary model that puts a client s interest first, and who provide transparent pricing, are well positioned to serve the retirement plan business, especially given

Brighton Jones LLC is one advisory firm that has used the tools and resources available at Fidelity to help seize the retirement plan opportunity.

picture. In 2014, Brighton Jones undertook an in-depth assessment of the retirement plan market.

This included a daylong meeting with members of the Fidelity Retirement team at Brighton Jones s Seattle office, as well as ongoing conference calls with the team until the firm officially launched

1 PROFILES IN EVOLVING BUSINESS MODELS Launching a New Line of Business to Serve Plan Sponsors and Their Participants An advisory firm formalizes its support for retirement plans to diversify its revenue streams Millions of American workers are active 401(k) participants, and 401(k) plans hold approximately $5 trillion in assets an increase of 79% since Advisors who follow a fiduciary model that puts a client s interest first, and who provide transparent pricing, are well positioned to serve the retirement plan business, especially given regulations on fee disclosure and the much discussed Department of Labor (DOL) Investment Advice Rule. Brighton Jones LLC is one advisory firm that has used the tools and resources available at Fidelity to help seize the retirement plan opportunity. With five offices across the United States and approximately $4 billion in AUM, the firm has always helped its wealth management clients review their retirement plans and reallocate investments as needed. In 2014, the management team decided to leverage its capabilities and focus on working directly with plan sponsors to build a new line of business that could help further strengthen the financial picture. In 2014, Brighton Jones undertook an in-depth assessment of the retirement plan market. With Fidelity s assistance, the firm reviewed potential opportunities, competitive dynamics, and required skills, and developed a detailed business plan. This included a daylong meeting with members of the Fidelity Retirement team at Brighton Jones s Seattle office, as well as ongoing conference calls with the team until the firm officially launched its retirement business the next year. INSIDE Five steps to consider: 1. Explore retirement business models 2. Assess what s involved to get set up 3. Identify target clients and acquisition strategy 4. Create competitive differentiators 5. Develop and implement a business plan Lessons learned Actions to consider Other Fidelity resources We interviewed Mark Jones, Managing Director of Institutional Asset Management at Brighton Jones, to hear his views about what s involved in setting up a retirement business, and how to create a strong sales culture to attract and retain clients. This paper presents five steps to consider if you are interested in becoming a retirement plan advisor. 1 Frequently Asked Questions About 401(k) Plans, Investment Company Institute, March 31, 2017.

2 Five steps to consider: 1 Explore retirement business models Some plan sponsors find their retirement plan responsibilities to be challenging. They may not have the time to stay abreast of regulatory changes, or they may lack the expertise to select investments, monitor performance, and educate employees on asset allocation strategies. This can raise concerns about possible liability if the firm is unable to meet its fiduciary requirements under the Employee Retirement Income Security Act of 1974 (ERISA). As a result, plan sponsors look to investment advisors, broker-dealers, and recordkeepers for assistance. Advisors can help companies with one or more aspects of their retirement plans, such as: Investment philosophy Plan design Recordkeeper search Investment selection and oversight Investment committee education Participant education ABOUT PROFILES IN EVOLVING BUSINESS MODELS There are many ways your business model can evolve. Hearing stories of how advisors are working to transform their firms may provide useful insights for others looking to reshape their activities to capitalize on the changing market environment. Fidelity s Profiles in Evolving Business Models presents client case studies, featuring advisors who have initiatives under way to reach new segments of the market or offer a new client experience, providing examples to help others think about what might work for their firms. ABOUT BRIGHTON JONES Date founded: 1999 Offices: Seattle, WA (headquarters); Portland, OR; San Francisco, CA; Scottsdale, AZ; and Washington, D.C. AUM: ~$4 billion Wealth management staff: 110 Retirement staff: 6 Retirement services: A 3(38) provider, working at the committee, plan sponsor, and participant levels, helping with: Fiduciary education and liability relief Vendor search, selection, and support Participant investment education, selection, and allocation Participant financial well-being programs Advisors can also choose to operate under one of two models: Be a co-fiduciary with the plan sponsor, providing advice on funds to include on the 401(k) menu, which the employer may accept or reject. This is called a 3(21) investment advisor, based on a section in ERISA. Be the sole fiduciary with full discretion to make fund decisions, shifting risk for investments from the plan sponsor, with the plan sponsor maintaining a fiduciary duty to monitor the advisor. This is called a 3(38) investment advisor. Brighton Jones operates primarily as a 3(38) discretionary manager, helping plan sponsors with vendor search and selection, requests for information and proposals, vendor management, and education at the investment committee, plan sponsor, and participant levels. 2

3 Being a 3(38) advisor is a definite differentiator, and is our preferred model. We have the experience to make sound investment choices on behalf of our clients, and this puts investment decision-making directly in our hands. 2 Assess what s involved to get set up Brighton Jones s strategy was to start by building the infrastructure needed to grow over the long term, even though that meant having expenses initially outpace revenues. STAFFING Salaries are the largest expense item, explained Jones, especially when you want to hire experienced people who have been lead advisors with retirement plans. We currently have six employees dedicated to the retirement space, and will expand staffing over time to cover all our offices. Jones and his team also chose to separate the retirement group from the firm s larger wealth management activities for individuals. We need to stay highly focused on this area, he said. To achieve that, we won t commingle the roles a person is either in the retirement group or the wealth management group, not both. TECHNOLOGY For plan management We use a third-party application that s been designed for all types of investment fiduciary and non-fiduciary service providers, said Jones. The solution provides the analytical, management, and reporting features needed to document a prudent investment process and do analyses for plan reviews. It s easy to use and understand. For a new provider coming in, you don t need to make large investments on the technology front, but there are some tools out there that can make things easier. Setting Up MARKETING STAFFING LEGAL COUNSEL THE PRICING MODEL TECHNOLOGY THIRD-PARTY RELATIONSHIPS 3

4 For prospecting The firm also subscribes to a lead-generation database that contains DOL filings by all plan sponsors. The same information can be accessed free of charge on the DOL website, but Jones likes the tools that are available with their database service, to quickly dig into the information. LEGAL COUNSEL An ERISA attorney can help you set up initial client agreements and provide advice on regulatory issues. We have a relationship with a law firm for our wealth management business, and there is an ERISA attorney on staff, said Jones. Given that, we didn t have start-up costs or the need to put a retainer in place, so this wasn t a large expense for us. I know other firms use ERISA attorneys who charge an annual fee and provide agreements, marketing materials, and some ongoing support. I think it s incumbent upon advisors to tap into all the available resources to be educated about regulations. Fidelity does a great job keeping us up to date, as does our ERISA attorney. THIRD-PARTY RELATIONSHIPS Third-Party Administrators (TPAs) are hired by plan sponsors to create the plan document, do compliance testing, and assist with any taxfiling documents. Recordkeeping firms provide administration services and manage day-to-day aspects of the plan, including who s in the plan, what investments they own, and what money is going in or out via contributions or distributions. The lead-generation database tool I mentioned contains information on TPAs and recordkeepers, too, so it s easy to identify firms to meet with to discuss joint prospecting opportunities, said Jones. We meet at least quarterly with the third parties we have business with to figure out where we can help each other. THE PRICING MODEL There are different fee structures to consider since there are two schools of thought, explained Jones. Some advisors have an à la carte approach, offering an inexpensive fee to assist at the plan level, with a limited number of meetings for the investment committee. They then charge more for additional meetings and for working with participants. Others have an all-inclusive approach for a higher price. We are playing with both models at the moment, and will decide which one works best for our clients. 4

5 MARKETING A strong marketing strategy may help you attract attention. We didn t have internal marketing resources when we launched the business, so we used an outside agency, recalled Jones. Together, we developed website content in order to have an online presence when prospects researched our firm. In addition, we created a one-page service description for trade shows and for our wealth managers to use when asked about our retirement capabilities. We complemented this with a PowerPoint sales deck. Today, Jones s team is in the process of redesigning the web content and updating the one-page document. They have also honed the sales deck, and will be launching several outreach campaigns later in the year. 3 Identify target clients and acquisition strategy As with every business venture, it s important to understand who you best serve, and develop a sound process for reaching prospects and closing deals. TARGET AUDIENCE We work with a broad spectrum of clients, said Jones. Some are in start-up mode with few employees, and others are well-established firms with many employees. The commonality is that they are all highly interested in providing a 401(k) plan it s not just a check the box item. Through our discovery process with the plan sponsor, we determine why the plan is in place, what the firm hopes to gain from it, and if it s viewed as a competitive differentiator. If it s important for the firm and they will be an engaged client, it s likely a good fit for us. PROSPECTING When we launched the business, we first looked for potential opportunities with our individual wealth management clients, as that was the lowhanging fruit, commented Jones. We looked at who was in a position to make a decision about their company s plan so, a CEO, CFO, COO, or an executive in finance or human resources. As we have grown, we have expanded our outreach activities and are networking at trade shows and through centers of influence. Today, about 40 to 50 percent of our retirement business leads come from our individual wealth management clients, but that will quickly change given our other prospecting efforts. We have a pretty buttoned-up sales process, Jones added. When a lead is generated, we have a discovery meeting to understand more about the company s plan, their objectives, and their pain points. We spend two weeks or so on analysis, and then have a solution presentation where we review what we found and what we recommend. The time to close a deal varies; some have taken a long time, and others are wrapped up in a few weeks. The average is about four to six months. The firm is beginning to see plan sponsor executives and employees express an interest in learning more about its wealth management capabilities. This is early-stage, but the team expects to see these opportunities increase as the business grows. 5

6 4 Create competitive differentiators The team is also creating a scorecard for all clients. It will contain firm-specific as well as industry Many retirement plan advisors are increasing the information, so plan sponsors can look at where value they bring to relationships with a range of they stand relative to a peer group. In addition, financial well-being programs. they may undertake employee surveys to gather details on how well individuals are meeting their financial goals, in order to establish and monitor improvements on a year-to-year basis to share with plan sponsors. EDUCATION We offer education on a number of topics, including budgeting, managing your debt, estate planning, college savings, and insurance, explained Jones. We don t sell anything because we are a fiduciary, but strive to help participants make more informed financial decisions. Some of this is done on site, in group or one-on-one meetings, and some is done via webinars. 5 Develop and implement a business plan If this looks like an area you would like to pursue, a well-documented plan can help you stay focused on your objectives and monitor progress. FINANCIAL PLANNING Some of our clients provide their employees with access to our financial planning resources, either by subsidizing it or paying for it in full, said Jones. We have CFP On Demand, where we charge an annual per-employee fee for ongoing access to our practitioners to address a wide range of financial issues. Where appropriate, we may recommend that they speak with a wealth manager on the other side of the business. AGE-SPECIFIC ASSISTANCE We use tools provided by recordkeepers for analyzing investment selections of participants, to identify individuals who may not have the best asset allocations given their age, explained Jones. For example, they may be late in their career but not deferring enough, or early in their career and being super conservative. We reach out to these individuals to review their decisions and potential steps to take so they can be better prepared for retirement. Before entering the business, we spent time with Fidelity to better understand the space, and reached out to other retirement plan advisors to discuss their experiences, explained Jones. We asked how they were set up, the challenges they faced, their operating goals, and revenues. We then developed a five-year plan that included revenues, employees, goals, milestones, and more. Our strategic plan for this business serves as a useful roadmap and helps us assess our success. 6

7 Lessons learned Jones thinks the firm s retirement business is a great revenue diversification opportunity, and there will be wealth management clients who come from it. He has three recommendations for others thinking about this area: 1. Be fully committed. If you are going to do it properly, you should have people who are dedicated to the initiative. You need to be focused on it for it to work. It can t be viewed simply as a lead generator for the wealth management business. 2. Hire the right team. In our retirement business, you are selling or servicing, not both. That s not the traditional way, so we went outside the financial services industry to find great people with business-to-business experience who were selling insurance, payroll, or benefits solutions. These people are used to the traditional sales model and have grown up prospecting. ACTIONS TO CONSIDER After reading this case study, you may be interested in learning more about becoming a retirement plan advisor, to help diversify your business and strengthen your financial position. If so, you may want to consider the following: Become familiar with what s involved and the potential financial commitment. Determine what services you might provide to plan sponsors and participants. Assess the expertise needed for this line of business. Identify low-hanging fruit in your existing client base. Describe your target market, and whether to focus on a niche. Develop a strategic plan, should you decide to pursue the opportunity. 3. Spend time educating prospects. It s important to explain the difference between a relationship where the advisor takes on the fiduciary role and where they don t, so the plan sponsor fully understands their responsibilities. We have come across instances where a plan sponsor thinks they have shifted liability related to investment selection to the advisor, but in fact they haven t. 7

FIDELITY CLEARING & CUSTODY SOLUTIONS 200 Seaport Boulevard, Boston, MA 02210 For more information, please contact your Fidelity Representative or your Home Office.

8 FIDELITY CLEARING & CUSTODY SOLUTIONS 200 Seaport Boulevard, Boston, MA For more information, please contact your Fidelity Representative or your Home Office. Take the next step to educate yourself about the retirement plan servicing business. Visit go.fidelity.com/rpgevaluator to assess your engagement model, as well as to obtain access to additional information. For investment professional use only. Not for distribution to the public as sales material in any form. Guidance provided by Fidelity through the Fidelity Retirement Income Evaluator is educational in nature, is not individualized, and is not intended to serve as the primary basis for your investment or tax-planning decisions. The Fidelity Retirement Income Evaluator is an educational tool developed by and offered for use by Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company. IMPORTANT: The projections or other information generated by the tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. This tool uses Monte Carlo simulation methodology to estimate potential income growth, using a minimum of 250 hypothetical market simulations. The market return data used to generate the illustrations is intended to provide you with a general idea of how an asset mix similar to your portfolio (or a selected target asset mix) has performed historically. The analysis assumes a level of diversity within each asset class that may differ from that found in your portfolio. Numerous factors make the tool s calculations uncertain, such as the use of assumptions about historical returns, tax rates, and inflation, as well as the data you have provided. The tool uses financial data provided by third-party vendors in the simulations, and the accuracy or timeliness of that data cannot be guaranteed. Taxes, fees, and expenses will generally reduce your actual investment returns and are not reflected in the hypothetical illustrations generated by the tool. Results may vary with each use and over time. Fidelity does not provide legal advice, and the information provided is general in nature and should not be considered legal advice. Please seek the advice of your legal counsel with specific questions about your fiduciary obligations. The Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code) are complex statutes. An advisor who is considering acting as a fiduciary for a plan subject to ERISA and/or the Code should consult its legal counsel to review specific fiduciary requirements, prohibited transactions, prohibited transaction exemptions, and other considerations and regulations that may apply with respect to its business model or services to be provided and its specific situation. Federal and state laws and regulations are complex and are subject to change. Fiduciary obligations may vary with respect to services that are provided to a qualified plan subject to ERISA and/or the Code. Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with any investment or transaction described herein. Fiduciaries are solely responsible for exercising independent judgment in evaluating any transaction(s) and are assumed to be capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. Fidelity has a financial interest in any transaction(s) that fiduciaries and, if applicable, their clients may enter into involving Fidelity s products or services. The information provided is as of the date of its publication, is subject to change, is general in nature, is not intended to be comprehensive, and should not be considered legal, tax, or compliance advice. Fidelity does not provide legal, tax, or compliance advice; you should consult your legal, tax, and compliance advisors regarding the requirements of ERISA and other laws, rules, and regulations that may apply when you act as a fiduciary under ERISA and/or the Code, or provide services to retirement plans or accounts. The Retirement Plan Growth Strategies Evaluator and the Retirement Plan Growth Strategies Program (the Program ) are provided as a service. The use of the evaluator, its output, and any of the presentations or other materials available through the Program is solely at the discretion of the advisor and his or her firm. The third-party provider(s) listed herein is neither affiliated with nor an agent of Fidelity, and is not authorized to make representations on behalf of Fidelity. Its input herein does not suggest a recommendation or endorsement by Fidelity. This information was provided by the third-party provider(s) and is subject to change. Third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or its affiliated companies. Fidelity Clearing & Custody Solutions provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC FMR LLC. All rights reserved

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