How US advisers embraced superannuation

In the US, financial planners are no strangers to corporate pension funds and many have shaped their entire businesses around the lucrative US 401k pension plan market. DAN McGEE contrasts the parallels for Australian advisers looking to break into the corporate superannuation master trust business.

The opportunity was there for the taking. In 1981, the US Government gave the green light to 401k legislation and irreversibly changed the face of the US corporate pension fund market.

The introduction of 401k plans provided strong tax incentives for employees to salary sacrifice into their company's pension plan. At the same time, employers received tax deductions for matching their employee contributions.

The market was ripe. Companies were ready to form new business relationships with pension plan providers. Many employers were keen to move to a defined contribution pension fund structure from the more complex defined benefit design.

Not surprisingly, the explosive growth of 401k assets reached $1.6 trillion in less than 20 years and has created intense competition among the providers ever since.

In the early 1980s, a number of product providers recognised that 401k plans were the product of the future and focussed distribution efforts on small to medium sized enterprises (SME) where growth potential is the greatest.

Financial intermediaries have been one of the driving forces behind the take up of 401k by small to medium sized companies, and providers were aware of the need to position themselves as a resource for the adviser, assisting them in tapping into the market.

Although the intermediary relationships already existed at the local office level, the biggest initial challenge was to convince the distribution channel to sell financial products and not just risk products.

This required a broader distribution strategy beyond the insurance broker to a new sales channel, the financial planner and the accountant t - the typical gatekeepers to SME businesses.

As a distribution channel, commission based financial intermediaries have proven to be the most effective way to access the SME market without having fixed costs of salaried employees.

In the early days of 401k there was a need to educate the adviser about the great opportunity and to convince them that they needed to get into this market early. The argument was fairly simple: Why would you go after one individual sale when you could get the equivalent of 100 new clients with one corporate plan?

Striking up a business relationship via a company pension plan creates other cross selling opportunities, a steadily increasing stream of assets under management, a constant cash flow of commissions, plus a huge client base to assist at retirement.

It wasn't really a hard sell. Persistence was the main message. Focusing their primary pitch at an employer level was initially a bit of a cultural paradigm shift for many advisers, because they were used to providing retail individual oriented services.

An adviser's service model needed to be consistent with the revenue stream, so it was up to the adviser to determine the extent to which they wanted to involve themselves and where they saw themselves as adding value.

Generally, the adviser managed fund selection and tendering processes by positioning themselves as the conduit between the product provider and the employer. This hinged on establishing strong relationships with the main decision makers, such as the head of finance, human resources and, where possible, the managing director. If advisers could solidify those three relationships and continue to add value to those three at the employer level, then they were well placed.

The key for the adviser was to leverage the marketing resources of the product provider, including prepared presentations, submissions and educational seminars.

Beyond that it was really up to the product providers' account managers to effectively service the employers on day-to-day administration issues.

A corporate super master trust is essentially an administration outsourcing solution and when assessing a master trust, employers look at the ease of administration but also the convenience, cost, investment flexibility and performance. They look at the overall competence of the fund manager.

Alongside this branding has become more important for the pension market than it was in the past. The decision to award a contract to a 401k manager usually rests with the employer's human resources department who usually want to offer their employees a brand name they know and trust.

It is in this area that financial services intermediaries have quickly adapted to identifying and targeting profitable business. Dealing with one $5 million employer plan of 200 members is much more time and cost-effective than winning $5 million in business through individual investors.

The exciting advantage of this business is the pace at which advisers have been able to grow funds under management. Remuneration is structured on an annual 25 to 45 basis point trail and insurance-based commissions, creating an income stream that increases along with funds under management.

Many US advisers also found that 401k plans acted as an incubator, allowing them to grow their business and diversify their revenue stream.

The real pay-off occurred when plan participants left the fund and rolled over their balances to individual retirement accounts, which are now one of the fastest growing sectors in the US market.

Advisers and planners in the US are already gearing up for this transition. Over the past five years, many advisers have positioned themselves as 401k and retirement experts. It's a two pronged approach.

In fact, one of the major issues in the US now is the need for planners to become specialists rather than generalists, and 401k is one of the best servicing areas where an adviser can position themselves as a specialist.

At the end of the day, most advisers recognise that the corporate super master trust market is not about instant gratification. Product providers are constantly working to help the adviser grow their business and build an attractive revenue stream. The advisers that take hold of the opportunity now, and consolidate relationships with employers, will be the real winners. To quote one local adviser: - "It's a beautiful business."

Dan McGee is head of BT Corporate Investment Services.