The challenges confronting many retirement plan advisers are familiar:

  • Increasing competition from new advisers who have found their original markets and service models untenable
  • Financially stressed and more greatly scrutinized plan sponsors under pressure to find savings opportunities wherever they can
  • Fee compression -- a consequence of the first two challenges

Despite the circumstances, “less than 20% of advisers have evaluated their practices and have a business plan in place,” Fidelity Investments’ Lisa Smith told a seminar audience at the NAPA/ASPPA 401(k) Summit this week. Where to start? 
The “old thinking” that advisers need to get beyond, argued Sue Kelley, a principal of Ann Schleck & Co. LLC, is simply focusing on looking at the numbers of plans you have added and maximizing revenues (including a significant proportion of asset-base fees) by offering a standard set of services. 

The “new thinking,” she says, includes:

  • Having a clear understanding of revenue and profitability on a per-client basis
  • Implementing strict cost control systems
  • Segmenting clients by service offering for apples-to-apples comparisons and identifying profitability improvement opportunities
  • A greater proportion of fixed fees

Fixed fees of course may be the only arrangement many sponsors would be willing to accept, going forward. But “the last thing you want to do is be reduced to a number on a spreadsheet” in a bidding or re-bidding situation, Kelley said. Even in today’s environment, you can win and maintain business without being the lowest bidder if you can convey, in detail, “Here’s what we’re doing and here’s the value.” 
Documenting that involves capturing the fine details of the hours of effort and services that a client has received. Another speaker at the session, Pensionmark founder and CEO Troy Hammond, a self-described “recovering computer science major,” is an aggressive user of CRM software and analytical systems. “We know exactly how much time and energy we are spending on each client.” That data is collected both to generate information to convey his company’s value added to clients, and to gauge the profitability of each account. 

He also asks his staff to evaluate how they are spending their time, and to distinguish between revenue-generating and non-revenue generating activities. While it’s tracked in the CRM, making staff more conscious of the distinction encourages greater effort where it matter most. 

In addition to simply evaluating the profitability of individual clients, Hammond aggregated that data by client segment. “The $1 billion plans aren’t profitable,” he concluded. For his firm, the clients with $5-$25 million in assets and a few hundred participants were the best. 

He also looked for relationships between client profitability and the identity of other vendors servicing those accounts. Patterns emerged that provided insights on which vendors to recommend to clients as the opportunity arose. 

Hammond acknowledged the occasional necessity of maintaining some marginally or unprofitable clients, perhaps because they were referred by an important center of influence. But his overall approach is to “look at what kind of profit we need, than then price it, versus just looking at the competition.” 

Also, an unprofitable client may be receptive to accepting a fee structure that renders them profitable if they are satisfied with the service and perhaps didn’t fully appreciate all they were getting, Chad Larsen of Moreton Retirement Partners told the seminar audience. 

Kelley summed up with a the broad framework fundamental action steps for improving profitability as follows:

1. Identify practice weaknesses that negatively affect productivity (e.g., time-wasters, manual processes)

2. Create a written plan to address the inefficiencies, assigning tasks appropriately

3. Implement the plan

4. Review progress and take steps to remedy any lack of progress 

A final list of profitability-boosting actions presented included the following:

  • Try to turn your unprofitable clients into profitable ones
  • Clarify sponsor service expectations -- don’t provide services they don’t care about, as determined by conversations and third-party client surveys
  • Focus on revenue-generating activities -- outsource non-revenue generating activities
  • Utilize technology as much as possible to enhance and create efficiencies and deliverables
  • Manage expenses

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