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In Defense of the ‘Blind Squirrels’

As the person credited for making the term “blind squirrel” famous (describing advisors who only have a few 401(k) or DC plans), you would think that I would be advocating for their demise and elimination. There’s no doubt that to be a successful DC advisor, you cannot dabble; you need to focus on trying to get at least 10 plans and $30 million in plan assets as quickly as possible. Many of the problems facing the DC market are caused and epitomized by blind squirrels. Yet blind squirrels are vital to the continued growth and success of the DC market, as well as the hope that we can help people retire more successfully.

Of the 600,000-plus plans with between $250,000 and $100 million, 75% of the plans that have an advisor are serviced by a blind squirrel or one that has fewer than five plans — and that percentage is even higher for smaller plans. When a plan sponsor becomes more sophisticated and switches advisors, the new advisor tends to be more experienced. These blind squirrels usually do not have the time or expertise to properly service employers.

Providers’ costs to close, service and retain plans sold by blind squirrels are higher. And broker dealers are loath to let less experienced advisors be fiduciaries, since they expose the distributors to significant liability and compliance headaches.

So why are blind squirrels important to the DC industry?

First, remember that at one point, virtually every advisor was a blind squirrel. Without new blood in the DC advisor ranks, plan sponsors and participants would have fewer choices — especially small and start-up plans, which are not attractive to experienced DC advisors. Some might even choose to eliminate the plan they have or not start a new one.

Second, most of the larger record keepers get a majority of their business from blind squirrels driven by their retail wholesalers. Broker dealers are eager to help their second- and third-tier advisors move up and into the DC market. They see it as a good way to increase revenue and cross-sell other products and services to the employers and their employees.

So what’s the answer? Relationships drive business, so small and mid-sized companies will not abandon advisors they know and trust on a widespread basis — even if that might make better business sense. Certainly the new plan and participant disclosure regulations, which require the advisor to state whether it is acting in a fiduciary capacity, will drive out some blind squirrels or force them to focus and get the proper experience. Plan sponsors are getting more sophisticated, and there is more emphasis on how to pick an advisor rather than just issue RFPs for record keeper or investment selection and monitoring. But government regulations rarely change business practices; they simply legislate existing ones. And plan sponsors, though more sophisticated, have more urgent matters to attend to than monitoring and selecting a plan advisor.

If the market drives business practices, it seems that the players with power in the DC industry should step up. This includes record keepers, broker dealers and the more experienced advisors themselves. Broker dealers are starting to step up, by creating special DC groups, educating and training less experienced advisors and brokering deals between the two groups. But remember that only 35 broker dealers have at least one person dedicated to the DC market. The hundreds of other firms with at least 250 registered reps are clueless. Record keepers want to focus on experienced DC advisors, but there is little if any real action — like higher compensation to wholesalers for plans sold to this group, for example. With pressure on annual sales numbers, very few if any record keeper sales managers will risk taking short term risks for longer term rewards.

The real opportunity for change might be with the experienced DC plan advisors. A few have stepped up, building out teams by recruiting and training less experienced advisors or even attracting really good ones that want to leverage their greater resources and brand as well as capital. These same groups are partnering with other advisors not focused on the DC market to share wealth management, health care, P&C or other benefit leads. As the DC market becomes more attractive, it would make sense that groups within the 1,500 “Super Elite” advisors (those with more than $75 million in DC assets or more than 25 plans) will seize the opportunity rather than wait for government or corporate America to lead the way.

Let’s hope that savvy broker dealers will support these progressive advisors — or at least not get in their way. Let’s also hope that record keepers and money managers support these elite advisors and help them leverage their opportunities instead of conducting business as usual. And lastly, let’s hope that the government realizes that some plan advisors really do help their clients, and starts helping them succeed in that mission instead of making it harder and more costly for all of us to do business.

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