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Advisers and Commoditization

Today, retirement advisers face the never-ending worry of commoditization.

Recently, this reality hit home for me. An outstanding retirement adviser who had bent over backwards for her client — often going way beyond the services required of her in her services agreement — was shown the door in an RFP process driven by corporate consolidation. The reason was simple: Someone else came in with an extremely low price, “bought the business” and won the RFP. Will the winner make money on their pricing? I doubt it, but who knows, because as we all know, advisers can be paid in many ways if compensation is properly disclosed.

The takeaway from this story is simple: Being able to explain your value proposition is more essential than ever.

Plan sponsors regularly reach the conclusion that advisers are all interchangeable because, so often, on paper, all advisers look the same. If plan sponsors adopt this assumption, adviser services can simply become a race to the bottom of a commoditized marketplace.

So what is an adviser to do? Following are four recommendations.

The Human Element

Some clients focus solely on cost, and, in those cases, the lowest-cost provider will almost always certainly be the one hired. But the vast majority of clients want a balance of service and low cost. Explaining the adviser’s human value is key. Most advisers rely on technological tools to provide some or all of their recommendations, but explaining how they add insight or provide value in presenting technology-supported information highlights an adviser’s individual value, rather than placing the focus on a commoditized product that plan sponsors can simply buy for the lowest cost.

Apples, Oranges and Pears

When a plan sponsor asks me, “How do I decide between advisers?” I often say that comparing one adviser to another is like comparing apples, oranges and pears. Each adviser offers different services, different contractual guarantees and different compensation structures. Despite the move by many to levelized fee structures, there are still so many ways levelization can work that it is essential to explain how an adviser is the same as — but also different than — his or her competition. Marketing buzzwords (which are also legal terms), such as 3(16), 3(21) and 3(38), are often thrown around when talking to plan sponsors. However, if an adviser does not explain the actual services (as opposed to marketing concepts) that he or she hopes to provide in an understandable manner, cost is highly likely to drive the plan sponsor.

Click here to browse past columns by David Levine.

Respond to the Questions Asked

Whenever preparing anyone for a Department of Labor investigation interview or a deposition in litigation, the simple starting advice I often give is: (1) keep it simple; and (2) answer the questions that are asked.

If an adviser is asked to provide an RFP answer about how they can support a particular service and instead provides a giant list of services they can offer in response, a plan sponsor may simply revert to a focus on cost. Admittedly, an adviser may validly feel that they have a wide range of services that make them unique, and it is usually fine to mention these. But a plan sponsor usually wants to see their questions answered directly, not with generic materials that upsell more services. Too often, I have seen a highly qualified adviser eliminated from an RFP because they just didn’t answer the questions asked.

Technological Tools

In 2000, an adviser who had one colorful chart showing historical performance of asset classes and another colorful chart showing red, yellow, and green status for a fund lineup was considered cutting-edge. Now this same product can be purchased off-the-shelf for a very low cost. Advisers regularly tout their technology but so often, everyone touts the same technology. Recognizing that many of these services are now commoditized, an adviser should avoid becoming too dependent on their “unique” technology. Plan sponsors will often see through this quickly, leaving cost as a fallback decision point.

Commoditization is a challenge for any service provider. However, by focusing on a plan sponsor’s specific needs, commoditization can be an opportunity for a strong adviser to shine.

David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column originally appeared in the Fall issue of NAPA Net the Magazine.