At one point in Dr. Seuss’s classic The Grinch Who Stole Christmas (which I read to my kids about 100 times too many every December), the Grinch is just about done completely pilfering his first Who-ville family when he gets caught, by a two-year-old, Cindy Lou-Who. First, he panics, but quickly the Grinch thinks of a way out of the jam. Here’s the masterful scene:
Why in the world do I lead with Christmas cartoons in May? Sadly, our retirement plan industry may feel a bit like this scene when someone recommends a record-keeping platform change. While we at Marcado don’t believe the record-keeping function is a commodity, we do believe that undergoing a platform change is often an unnecessary administrative burden sold to plan committees much too quickly.
Let’s briefly look at the unnecessary reasons we’ve seen an industry player recommend a conversion.
1) They get paid more. This can take a lot of forms, but it’s the simple truth. It can be as blatant as opaque direct compensation structures between third parties and record-keepers. It can also be more subtle, like third parties making strategic decisions to partner with certain record-keepers in less formal ways. The understanding, of course, is that the change will lead to future revenue opportunities. Other times, an advisor that also provides higher margin individual wealth management services might prefer a record-keeping platform that helps them win and manage those types of assets.
2) They need to justify their existence. Charlie Munger once stated that active investment managers often buy in and out of security positions not to gain return advantage, but because, “What else would they do with all their time!?” The financial services industry is unique. Oftentimes, less is more. Nevertheless, the temptation is real for third parties to act so their clients can feel all their busyness and misconstrue it as value.
3) Industry Aggregation. There is a lot of consolidation going on in the third-party administrator, advisor, and record-keeper spaces. Large shops are swallowing up small ones to grow assets under advisory/management as fast as possible. Ownership turnover obviously brings a lot of changes to small advisory firms. The list of platforms that are sanctioned for use can change with such aggregation, prompting new recommendations.
4) The advisor and the record-keeper are the same. There are still several shops in the industry who do both. No matter how much independence an advisor claims, if they work for the record-keeper, they will not be agnostic towards the industry in their recommendations.
5) The mentality of firm growth as the top priority. This is the most nuanced and discrete of the five points, but the most prevalent so stick with us. Key drivers of point 3 above, industry aggregation, include the following: 1) Big firms want more assets; 2) Local advisors want cash from a sale, and 3) Local advisors want to outsource day-to-day work, freeing up more time for sales. Spend some time in an industry conference or publication, and you’ll find these to be common themes. To paraphrase (so as not to call anyone out specifically) directly from a website of a larger aggregating firm: We outsource a large percentage of your actual work, so you can focus on growth and increase the value of your firm. The point: the retirement plan advisory world is hyper-focused on growth of assets, revenue, and profit margins.
The growth-oriented mentality affects record-keeper conversion recommendations in a lot of ways. We gave a couple examples in point 1. The most important point to make here, though, is that advisors can make recommendations to change because it’s quite simply easier and/or profitable for them, thus, decreasing their work while increasing margins. Here is a quote directly from an industry player giving us advice on this topic: “You might consider consolidating your plans with just two or three record-keepers and very similar investment line-ups to streamline your workload, make life easier, and sell more plans.” This is considered “smart” in our industry that prides itself on acting in plan participants best interests.
Here is the sole necessary reason why a third party would recommend a record-keeper conversion:
1) It makes sense for the client and its plan participants, not the third-party.
So What?
“Does it really matter?” is a legitimate question. It’s not breaking the law to recommend a platform change for bad reasons. But often it’s certainly not in the client’s best interest, and, honestly, sometimes it’s a nightmare.
We don’t believe all record-keepers are created equal, and we have our favorites based on what makes sense for our clients. There are real differentiators out there – cost, fund availability, technology, service, and other unique factors. We figure out the sponsor’s demographics, culture, general desires related to the plan, and then maybe make a recommendation for change if in the best interest of the client and their employees. We didn’t get into this business just “to sell more plans” and aren’t about to…pat the plan sponsors on the head, get them a drink, and send them to bed.
Does it seem a little mean to compare third parties in the retirement industry to the Grinch? Maybe. In response, we first should say we know a lot of these folks, and, unlike the Grinch, they started with a healthier mentality; somehow the industry pushed an alternative idea onto them. Secondly, in the end, he (the Grinch) changes, and his heart grows three sizes in one day!