3 Reasons Your Firm Should Delegate Plan Management

Written by Ezra Group

For some advisors, being successful means being busy. If you’re not working on five tasks at once and putting in 10-12 hour days, it means you’re not working hard enough.

When it comes to developing a great practice, many financial advisors eventually realize that a bigger to-do list does not lead to the improvements they were seeking.

In fact, top advisors perform a regular assessment of their internal processes and prune what they do not absolutely need. That’s what has allowed them to provide the highest quality service to their clients, even as their assets grow. In the process, these professionals discover that delivering more value can come from doing less.

In a professional practice, investment management is just one component that can be outsourced with great success. However, misconceptions about outsourcing exist, which can discourage progress and expose advisors to costly professional liability. Below, three myths about outsourcing, debunked.

Myth# 1: Your value as an advisor comes from picking the perfect investments.

Investment selection has become increasingly commoditized. From Vanguard to Betterment to Morningstar, new consumer-direct tools are available, which also allow professional investment selection at a fraction of the standard advisor fee.

Fee compression is just one side-effect of this development. Today’s advisors must prove that they are better than an algorithm that charges less, never sleeps and does not make human mistakes.

As a result, top advisors are re-framing their value proposition around helping clients get organized, define priorities, and stay accountable. This requires a shift in the workflows of the professional practice.

In order to create the space and time to have deeper client conversations, advisors must let go of the idea that they are uniquely qualified to select every client investment.

This point is equally valid for high net worth clients and 401(k) plans. The lesson of the last decade is that advisors create success through client relationships, ongoing education and proactive counseling, not through hand-selecting the “perfect” mix of mutual funds.

Myth #2: You must pick investments yourself.

Some advisors might feel that they offer no value if they are not doing the investment selection. In reality, picking investments for a plan is only a small part of what must be done. If the ultimate goal is to create optimal retirement outcomes for the plan participants and to maximize the value of the plan offering as an employment benefit for the plan sponsor, the advisor has his/her work cut out..

That includes helping plan sponsors select the right service providers, designing dozens of features to shape the plan offering and educating employees on their retirement readiness. None of those are one-time tasks that can be done at the launch of the plan and then put on a shelf for a decade!

The plan will need to morph with the changing needs of the plan sponsor. Employee education and outreach is an ongoing and labor-intensive commitment. In short, there is no risk that the advisor will run out of things to do, even if he chooses to outsource investment management!

Myth #3: A 401(k) plan is not that different from selecting investments.

Many advisors have fallen into an erroneous belief that the fiduciary standard for 401(k) account management is the same as the fiduciary standard for wealth management clients. They feel comfortable offering 401(k) management services because they think that their standard procedures address all requirements.

In reality, the decision to provide 401(k) plan management places a higher standard on the advisor. Creating, documenting and following a prudent investment process to meet the ERISA fiduciary standard is complicated. Advisors often find themselves unprepared for the amount of time and effort they must dedicate to ongoing maintenance, monitoring, and management of associated documentation. That commitment doesn’t go away as long as they remain an ERISA fiduciary, which is a tough lesson to learn after they have made a costly investment in developing the internal logistics to set up a separate workflow.

It’s not all about the time commitment. Although as long as nothing goes wrong, the advisor’s exposure is limited to the ongoing resource allocation. Should the process ever fail at any stage, the entire firm is exposed to risk and fines.

When a 401(k) plan participant or a sponsor client raises a complaint, the investment manager could be held professionally (and in some cases personally) liable. Few advisors have considered this possibility and taken the proactive step of boosting their balance sheet and reserves to the level that can handle the potential expense of a lawsuit, investigation and fines.

Time to outsource investment management

Investment management for a 401(k) plan is a necessary but time-consuming part of your practice. It does not yield high premiums, nor does it help you stand out when competing for new plan clients. Therefore, it makes sense to opt into the convenience and savings that come from buying a fully automated bundled solution for a low basis point fee.

In exchange, you receive a professional investment manager who will follow a documented prudent process, provide all plan communications and provide a layer of liability protection.

Some advisors are apprehensive about the “black box effect” of outsourcing and the possibility of giving up control over a core function of their business. Contrary to the common belief, outsourcing the day-to-day aspects of 401(k) plan management can have the effect of putting you back in control of your practice.

Most importantly, outsourcing can allow you to concentrate on developing deeper relationships with your clients and creating more impact. Whether your goal is growing your practice or maintaining it at a comfortable “lifestyle” level, finding the right partner for investment management outsourcing can improve your efficiency, focus and risk management.

With a modern all-in-one solution from Vestwell, you will have the right tools to create optimal outcomes for your plan sponsor clients and their employees, no matter what your vision for your practice is.