The Prospecting Professor

Willie Sutton: Revisited

Willie Sutton was a bank robber, whose heyday was in the '30's and '40's. He has also been the source of the famous account where in response to the question, "Why do you rob banks?"...he answers, "Because that's where the money is." In reality, he never actually said this...these were the words of an overly-ambitious reporter during a jailhouse interview. Willie Sutton did say, "It is a rather pleasant experience to be alone at bank at night," which is an illuminating quote in itself. For more on Willie Sutton, check out this FBI file on famous cases, "Willie Sutton"

Having informed you of this useless tidbit about Willie Sutton, I'd like to ask the question, "Why do financial advisors prospect for IRA rollover business?" In this case, the answer is unquestionably, "Because that's where the money is."

Good article in the August On Wall Street entitled, "The Rollover Chase", which brings up a number of interesting points:

• The amount of money in retirement plans now totals between $2-3 trillion.
• Annual IRA rollovers are estimated to be about $200 billion in 2005, and could exceed $500 billion in a few years.
• 70% of persons who have rolled assets from an employer plan to a traditional IRA did so because of: a job change, retirement, or termination.
• Advisors who want to accumulate IRA rollover assets should focus on client niches, e.g. teachers, university professors, city workers, employees at specific corporations, etc.

Speaking of good resources on the IRA Rollover market, I would also refer to a good piece in the Horsesmouth of a year or so ago entitled, "IRA Rollover Assets - Tapping the Mother Lode." See this link:

IRA Rollover Assets--Tapping the Mother Lode
http://www.horsesmouth.com/linkpo/73826_18.htm
Retirement plan assets represent an enormous source of new business--by some estimates, annual IRA rollovers will clear $400 billion by 2010.  Here's how to target those assets and zero in on likely rollover candidates.

Hope this all helps. Talk to you soon. Ciao!

401k Prospecting: Plans in Play...Snatched Away by Birds of Prey

'It was the best of times, it was the worst of times,"...Charles Dickens

For financial advisors who specialize in 401k takeovers, it is the "best of times". In a recently completed survey by 401kExchange Inc., the number of plan providers who are "thinking about changing or actively searching" for a new plan provider...is at an all-time high.

Of course, the flip side of the coin is also true. For advisors with plans currently in place, HEADS UP!. As Satchel Paige said, "Don't look back...they may be gaining on you!"

Year-to-date through April 30th, 13,248 plan sponsors in the under $1 million market said they were thinking or looking about changing providers. That's a 75% increase from just two years ago. Similarly, for plans in the $1-10 million market, there has been a 36% increase in provider activity. Even with mid-size plans of $10-100 million there's a lot of looking...an 88% increase was noted in the survey.

Why is this happening now? It seems that in the years immediately following 9/11, 2002 and 2003, companies were completely preoccupied with making ends meet, avoiding layoffs, etc. Moreover, since all investments appeared to be doing poorly, companies were reluctant to change fund managers in mid-stream. Today, these same companies, most particularly the human resources departments, are again focusing on their retirement plans. The strong market of 2003 has emboldened them to actively survey the landscape. At the same time, the mutual fund scandals and greater government scrutiny has put the spotlight on the retirement plan stage.

There is one more significant trend that appears to be happening...a move to increased 'transparency.' As plan sponsors become more sophisticated, and retirement services becomes more commoditized, the use of an open bidding process becomes much more prevalent. The move to RFPs, away from the cozy, one-on-one approach of making deals on the golf course, is largely due to mounting concerns of plan sponsors about fiduciary responsibility and disclosure. The RFP process creates a 'paper trail', indicating that a sponsor has done the appropriate due diligence with regard to analyses of costs, access to outside funds, participant advice, etc.

"It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness,"...Charles Dickens

What Do Affluent Boomer Retirees Think?

There's nothing more "money in motion" than IRA Rollover Assets. This year it is estimated that $250 billion will flow out of company plans into self-directed IRAs...in 3 million separate transactions. More than 50% of these assets are controlled by: Mass Affluent Baby Boomers. A recently completed study by Bain & Company, Affluent Boomer Pre-Retirement Survey, gives some insight into the thinking of these wealthy near-retirees.

• 66% of affluent boomers underestimate their retirement income needs.
• 60% would prefer owning a product that guarantees retirement income.
• Survey respondents state that "investment returns" are the most important factor in choosing an advisor, yet "cost" is the least important factor in their rollover decision.
• Most rollover decisions take place within a 6 month window...3 months before or after leaving a job.
• More than 50% of all rollover candidates rolled out of their existing corporate plan to their primary advisor.
• In level of importance, asset accumulation, asset protection and income planning rank more than 50% higher than tax or estate planning.

What conclusions can be drawn from this study? In the first place, I see the need for advisors to re-orient their thinking towards income planning and management. I say re-orient because so much of the thinking of the industry has been towards asset accumulation. Now we see a huge group of near-retirees who say that they prefer guaranteed retirement income...even at lower rates of return.

The second point concerns the 6-month window around the retirement event. That's not a window, that's a peephole. And if the majority of rollovers go to the existing primary advisors, then advisors need to find, and build relationships with, these near-retirees sooner rather than later. From a practical standpoint, how does an advisor identify and build relationships with, near-retirees who have not yet retired...and who have the majority of their investable wealth in their retirement plan?

The rollover event is becoming the best opportunity to provide full-service wealth management for mass affluent boomers. I think most of us knew this intuitively, yet it's nice to have some corroboration.

Investors Need Your Help: Exhibit A

I saw a pretty interesting survey last week...a survey that provides a snapshot into the investment decisions made by those in the corner office.

The survey was undertaken by Clark Consulting (CLK), a benefits and compensation firm, and the largest public company of its kind. The report examined the investment selections of more than 17,000 executives within their nonqualified retirement plans. Age ranges of the executives were 20 to 80, and most had annual compensation in excess of $100,000.

I think that the results are illuminating, and rather instructive regarding the need for investment advice among a group of executives and investors. In the Clark Consulting Executive Retirement Report, the #1 investment choice of the 17,000 executives, out of 11 asset classes, was the fixed rate bucket, with 26.3% of assets. #2 was Large Cap, with 24.9%. Equally revealing was the total amount in assets in the "safe" investment classes, i.e. Fixed Rate+Fixed Income+Balanced+Money Market...44.3%. In another way to look at it, the total assets in "safe" investment classes, plus Large Cap, is 69.2%.

I'm no asset allocation maven, yet doesn't this mix seem unusually conservative...especially considering that these are the retirement plans for well-compensated executives? I think it is additional confirmation that investors, even "savvy" investors, need your help.

Prospecting for 401(k) Plan Conversions

First off, at the end of yesterday's post, I promised that I would discuss how to "Avoid the Sunken Costs of Un-Winnable Deals". I will get to this in the coming days, but first I want to pick up on what I discussed yesterday...how to prospect for 401(k) plan conversions.

Yesterday, I referred to a very interesting recent study, "The Adequacy of Investment Choices Offered by 401(k) Plans". In this study, the authors demonstrate that a full 62% of 401(k) plans offer inadequate fund choices to plan participants. Furthermore, since retirement savings are the sole financial asset for over 60% of plan participants, inadequate fund choices place the participant at significant retirement risk.

What follows is a 'talk track' that you could use with a plan administrator to engage in a dialogue regarding the adequacy of investment choices. This is NOT meant to be a cold-call script, since it is rather wordy and technical. This IS intended to be used during a face-to-face appointment. Also, this should be a discussion, not a monologue. During this 'talk track', you should engage the other person with good questions.

"Mr/Ms Plan Administrator...In a recent study it was demonstrated that only 38% of 401(k) plans offered a set of choices that allowed participants to construct an efficient frontier equivalent to one constructed from a reasonable set of alternative choices.

This same study indicates that over a 20-year period, inadequate fund choices can make a difference in terminal wealth of 300%...3.2% per year.

Given that over 60% of your plan participants, retirement savings represents their sole financial asset, inadequate fund choices places them at significant retirement risk.

Therefore, as a service to you and your participant colleagues, I would like to offer you a: Fund Choice Impact Analysis.

We will examine the choices offered to plan participants, and their ability to construct optimal portfolios suited to their individual risk tolerance.

Would this be helpful to you?"

OK...at this point you may be asking...what is a Fund Choice Impact Analysis. Good question. More on this tomorrow. Promise.

Prospecting for Retirement Plan Conversions

Prospecting for retirement plan conversions is not for everyone. In the first place, the sales cycle is long (9+ months). Additionally, it is a path that is well-trod upon. Given that ERISA retirement plan filings are free and public...hordes of advisors are prospecting-marketing-cold-calling this market already. Maybe it's the allure of $11 trillion in retirement plan assets...or the $11 billion of monthly net new money flows. Either way, you won't be a pioneer if you walk this territory.

However if you stubbornly persist this forewarning, here's a nugget that will whet your appetite even more. In a recent study, "The Adequacy of Investment Choices Offered by 401(k) Plans", it is argued that two-thirds of 401(k) plans fail to offer a proper fund mix. The study's authors, finance professors from NYU and Fordham, show that a majority of 401(k) plans aren't offering enough choices and lack the right type of funds needed to create a diversified portfolio suited to each worker's risk tolerance.

There's a cost to this too. Plan participants who invested in a broadly diversified mix of funds would see their plans' average annual returns increase to 10.7% from 7.5%.  The majority of 401(k)s hold 6 to 10 funds. However, in general, plans with at least 13 or more fund choices provide enough options to create a portfolio that includes all of the investment categories that participants should be exposed to.

One final thought. If the 401(k) market is part of your business plan, I would encourage you to subscribe to Horsesmouth. In my humble view, Horsesmouth is an invaluable resource for all advisors. Consider these recent articles, "4 Steps to Prospecting More 401(k) Business", "How to Win More Business Providing 401(k) Education", "6 Steps to Becoming a 401(k) Sales Champion."

Stay tuned tomorrow for a related topic, "Avoiding the Sunken Costs of Un-Winnable Deals."