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Monday, August 2, 1999 Advice: "It's Here to Stay" For years there has been one lament heard throughout the defined contribution and 401(k) plan industry: plan participants are poor investors! No wonder a few startup firms are catching the interest of the industry. A list of the usual defined contribution plan providers reads like a who's who of the conservative of the nation's conservative financial services industry. Yet, the firms capturing the interest of the market are Silicon Valley startups featuring everything out of the myth: venture capital funding, massive losses with little revenues, an unproven business model, and CEOs lacking the grey hair found in other industries. This mix of conservative financial services institutions and startups with corporate curriculum vitae shorter than a kindergartener's is where the future of the industry might be found. First, a little history.
The advice firms are basing their business on a simple premise: technology -- specifically the Internet -- now allows the efficient distribution of top-quality investment advice to the average average individual with an account balance in the low tens of thousands of dollars, or less. Taking the idea one step further, these firms targeted the defined contribution system as the ideal market into which to launch the advice concept. Unlike the retail advice business in which customers would have to be won over one at a time in what amounts to expensive trench warfare, the retirement plan industry held out the promise of a relatively quick sale to the plan sponsor (think strategic bombing). The plan sponsor would then act as the distributor of the advice to its employees. For revenues, the advisors' business plans typically called for payments based on the number of participants in the plan. Usually, the hoped for fee landed somewhere in the $30 to $50 dollar range. Through 1996 an 1997 the first wave of advice firms built their business based on these ideas. The two leaders down this path were Financial Engines and 401k Forum. On the East Coast Rational Investors was working on a similar product with a different distribution twist. Rational's plan called on selling its product to bundled 401(k) providers rather than directly to the plan sponsor. Meanwhile, Trust Company of the West (TCW) took a third path. The investment manager applied for and received a profit transaction exemption from the Department of Labor to provide advice to 401(k) participants. TCW's model was to offer a series of seven asset allocation funds to plan sponsors. TCW would then use a model developed by an independent advisor (Ibbotson Associates) to direct participants to one of those investment options that best fit their needs. Unlike the other firms, TCW would be paid an asset-based fee from the funds. In November of 1997, Fidelity helped kick off the excitement over advice when FIRSco head Bob Reynolds held a press conference in New York City to introduce the concept to the media. Fidelity was careful to stress, though, that Portfolio Planner was not technically advice even though it picked specific funds for participants. Think of Fidelity's product as "aggressive education." Fidelity's announcement both put advice on the map as a must-consider feature of plan design. At the same time it had the effect of freezing the market as rivals waited to see the DoL's reactions to Fidelity's step. Printed from: MFWire.com/story.asp?s=24482 Copyright 1999, InvestmentWires, Inc. All Rights Reserved |