Identifying new opportunities and managing scale were cited by retirement plan advisors as the biggest issues they struggle with in growing their practice, but a new study suggests they are not taking steps to create additional efficiencies.
In “Evaluating Operational Challenges to Drive Scale and Efficiency,” 39% of advisors stated that identifying new opportunities is their biggest hurdle to growing their practice, followed by 33% who see managing scale as their biggest hurdle. Yet, an even smaller percentage are outsourcing their most basic functions, according to the study by digital platform firm Vestwell.
The firm conducted a survey in August 2019 of 420 retirement plan advisors, all of whom have sold at least one retirement plan, to learn more about their reigning attitudes and how they are successfully approaching plan sales and engagement.
Areas of Outsourcing
Vestwell notes that, given advisors’ focus on relationships, it’s no surprise many outsource some of their non-core functions. The firm found that nearly 70% of advisors outsource plan administration and 41% outsource data and reporting. But they still aren’t outsourcing other non-differentiating aspects of their businesses. The study shows that less than 27% of advisors outsource fund management, front-to-back 401(k) and 403(b) management, integrations, RFPs, financial planning or practice management.
And for the areas they outsource the most, some believe that might not be the right move. While 68% of advisors currently outsource plan administration, only 64% of those advisors believe they should. “This may be a preview of an upcoming trend to either take back more control over administration or begin looking for 3(16) services that will do a better job,” Vestwell observes.
Noteworthy discrepancies also exist when it comes to integrations and RFPs, both of which advisors believe they can outsource at a significantly higher rate than they currently do, the study notes. “This leads us to conclude that this is an area where we can expect advisors to begin exploring options outside of their practices in the near future,” the report concludes.
When comparing what services advisors currently outsource, Vestwell notes that the results follow a similar pattern between specialists and non-specialists. Those who focus on 401(k)/403(b) plans are more hesitant to outsource common services than those who focus elsewhere:
- 28% of specialists outsource data/reporting versus 49% of non-specialists;
- 55% of specialists outsource plan administration versus 75% of non-specialists; and
- 16% of specialists outsource front-to-back retirement services versus 29% of non-specialists.
Digging deeper, Vestwell found that the more plans an advisor sells, the less likely they believe they can outsource a service. The likelihood of an advisor thinking they can outsource a service is lowest for those who have more than 26 plans, but the likelihood gradually increases as the number of plans goes down.
The study suggests that this highlights a key reason why scale continues to be a struggle for retirement plan specialists. “If specialists could identify their core competencies and outsource the areas that are more operational and routine, they could use outsourcing as a way to better address efficiency without compromising quality,” the firm advises.
Recordkeeper Consolidation
As for recordkeepers, Vestwell notes that more than half of respondents have relationships with two to five recordkeepers, while another 20% work with six or more. And just as those who manage more plans are most worried about scale, those who work with more recordkeepers share the same concerns. The study shows that 45% of advisors with six or more recordkeepers said that managing scale was their No. 1 hurdle, versus 30% of those with fewer than six recordkeepers.
In addition, 33% of those with 11 or more recordkeepers said that price compression was their No. 1 hurdle versus only 9% of those with fewer than six recordkeepers.
To help manage both scale and cost, Vestwell asked advisors if they would be willing to move their business over to one recordkeeper, but only 20% said they would be willing. Of those who said yes, 94% currently work with just two to five recordkeepers, so it appears to be an easier jump than when working with fewer relationships, the study observes.
When it comes to what advisors view as their key differentiator, 75% said some form of relationship management, including employee education and holistic wealth management. The firm notes, however, that distinctions again come into play when looking at the different types of advisors.
While 29% of those who focus on retirement plans chose participant communication and education as their key differentiator, only 16% of non-specialist advisors selected the same.
