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Guest John Kelly

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Guest John Kelly

As a recruiter, it appears to me that consulting firms and TPAs are remarkably disinterested in sales, or in retention of good salespeople when they're serious enough about their businesses to have sales professionals.

The sales people they do have are typically very poorly paid, yet are usually very hard-working and reasonably expert, often having risen from serious experience in the trenches. And they're almost invariably sharper in business than their employers. In general they leave after a few too many years, and make twice as much money immediately, working for a package provider.

Some TPAs actually go so far as to hire unemployed family members and failed insurance agents for the purpose, apparently believing the role to be a dreary obligation, rather than an essential part of their businesses.

What gives?

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Guest RRS

John,

I'm a sales person who (as you say) has risen from serious experience in the trenches. I think that one problem might be that TPAs by nature tend to be more technical and not as sales oriented. Sales people, on the other hand, are typically not the type of personality that can focus for hours on complex allocation formulas or compliance tests. Most investment professionals come from a sales culture where they learn to be "asset gatherers" as opposed to "asset managers". After all, with no assets to manage, your skills as a manager are irrelevant.

Maybe the marrying of these two personalities would be a possible solution where both parties would benefit. We are currently developing a program where we would partner with TPAs to service qualified plans in our market. The investment professional would be responsible for gathering assets, asset management/asset allocation, and employee communications. The TPA would be responsible for recordkeeping, plan design and maintenance, testing, etc... In return, the TPA would share in a portion of the asset based fees earned by the investment advisor. This would give the TPA three competitive advantages; 1) the TPA would have additional revenue to subsidize or offset hard dollar charges where the plan sponsor is sensitive to the TPA fees, 2) fees are generally billed against plan assets which mitigates some of the collection problems that TPAs have when sponsor has to write a check, and 3) the TPA can build a source of recurring fee income that grows as plan assets grow. The average plan in our area grows at about 11-14% rate (contributions + market growth - distributions & fees). How many TPA firms grow revenue 11-14% year after year?

What do you think?

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Your model of the TPA working with the asset managers and salespeople, each sticking to their specialty makes a lot of sense. Why should asset manager/salespeople who are not plan administrators try to administer plans and why should plan administrators who are not asset managers try to manage assets--it makes no sense, provides mediocre service to the client and is not cost effective.

However, the model of the TPA sharing in the asset fees is not the only model. Our firm specifically does not accept asset fees since we are independent and want to stay independent. We want to be able to offer our services to many asset managers and financial institutions, without any one of them having to worry that we will try to switch the client to an asset manager who pays us a larger asset fee. A model we like is for an asset manager/financial institution to outsource its administration operation to us--we do the admininstration, which is what we know how to do, and they do the assets, which is what they know how to do.

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Guest pensiondoc

Agree with Lorraine.

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Guest Headhunter

The market prices Administrators and Salespeople accurately and fairly.

Most firms pay people with CEBS accredations no more than 25% of what they pay people with sales capability (eg Administrators @ $40K, Sales @ $160K.

TPA firms should be led by salespeople rather than people whose first love is the complexity of ERISA. However most TPA firms are stuck with ownership by non-businessmen with affinities for cheapness and struggle(as opposed to economic efficiency, growth, and survival).

Exceptions to these practical rules are rare.

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I don't think things are as cut and dried as Headhunter describes them.

SUCCESSFUL TPA firms are headed by people who understand the clients' needs, pension law and administration and how to run a business, whether they started out as sales people or pension

geeks.

It's necessary to sell to bring in the business and it's necessary to do the detail work to serve and retain the client. Neither one can stand alone. Just because some salespeople are paid more than some technicial people (and this is not always the case, by the way) does not mean that salespeople are more important than technical people.

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Guest Headhunter

I suppose the wiggle-word in Ms. Dorson's post is "successful."

My cut-and-dried definition of "success" has to do with only one factor: Does the operation "successfully" meet the needs of the ownership?

What are their needs? Here are the two cut-and-dried business models(neglecting for the moment Amazon.com etc) that fit most situations:

Goal#1: Near-term sale of the firm, which tends to result in a "success" definition involving maximum raw numbers of employer clients, which in turn points to affiliation with Charles Schwab. Raw numbers of clients relates directly to the sales price, profitability does not, the acquirer will know that he can modify the firm to make it far more profitable.

Goal#2: High cash flow, which correlates closely to an interest in high technology and aggressive marketing of group annuity products rather than mutual funds.

#1 points to elderly TPA ownership with doubtful successor possibilities. They squeeze salespeople and administrators, paying poorly.

#2 points to entrepreneurs who have longer views of the business that don't involve sales near term. They want high incomes over a longer haul. They pay everybody better.

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Headhunter and I have a fundamental difference--I do not see that goal #2 (high profit, long term) requires sale of investment products. Some TPAs have decided that product sale is the way for them to make a profit and that is their choice. My firm has decided not to sell product because we believe we can be most profitable by concentrating our efforts in providing administrative and consulting services. Again, it's a choice that we made.

Headhunter sees product sales as important and therefore places high value on salespeople. I see administrative and consulting services as important so I put a high value on technical people. This is not a difference to be resolved, but a function of our different business models. If we can both find markets for the services we wish to provide, we can both be successful.

(Being a little less cut and dried about it, I prefer to define success for a business owner as being profitable doing something he wants to do. My firm could probably be profitable doing something else, but if that something else was not what I wanted to do, I would not consider that success.)

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Guest Headhunter

Lorraine Dorsa and I probably don't

disagree about personal definitions of "success," but success FOR EMPLOYEES has to do with pay, reliability of employment, benefits and working conditions...doesn't it?

If the firm's not paying them well and isn't building its book of business and its sales value, the employees will leave, unhappy about the money and anticipating the inevitable bargain-basement buyout.

Certainly some corporate clients do "buy" technical consulting from technical people, but most need to be sold it by sales people, often positioned as consultants. Without sales there's no growth, without growth there's not future.

Few actuaries make nearly as much money as average salesmen (but some do). Few CEBS/ASPA professionals make as much money as second year incoming telephone service people at mutual funds. The employment market is not a fool, it pays appropriately.

Consulting firms don't build market value as strongly without continuing "annuity" revenue from product sales. No doubt there are exceptions, but there's a reason investors buy TPA firms, outsource technical services, fire administrators and consultants, and then start selling product.

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It seems to me that the reason to fire all the technical people is to maximize the profit for the firm without regard to the quality of the work to the client.

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Guest Headhunter

Yes, it's terrible isn't it? Darn employers are trying to make a bunch of money! You'd think those consulting firms and TPAs were businesses rather than service organizations, the way God intended.

They ought to continue to operate losing operations (any business that's not growing very strongly in this market is losing) in the buggy whip business, maintaining a low-pay sheltered workshop.

Again, the pay that administrators and consultants get precisely reflects their worth.

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Guest RRS

A few questions, please:

1. How do most TPAs build their business - by marketing their services directly to plan sponsors, or, by forming an alliance with an investment provider who is trying to gather assets and needs administrative/technical support?

2. What type of fee arrangements exist - TPA fees paid by sponsor, TPA fees paid by investment provider, or, TPA shares in the investment revenue?

3. Most of the TPAs that I have come across operate in a balance-forward environment. While they can handle the more complicated plan designs, new comparability, etc... isn't the market moving towards daily valuation. Daily valuation/VRU/Internet is available from the packaged providers (mutual funds) but these products are limiting from an investment perspective (proprietary funds). Are there alternatives?

Thanks.

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Guest Headhunter

Questions #1 and #2 could best be answered by market studies. There are several firms that primarily conduct such studies for the industry.

Actually, it doesn't make much difference what "most" firms do, the market is highly segmented, has many niches, and if a service sold well, is priced right and is adequate to the needs of sufficient customers, it stands a chance of doing good business.

Firms not offering daily valuation are operating on borrowed time, even if they do provide good service* to loyal clients: When the firm is sold (the owner's goal in almost every instance, save those situations where family members are taking over or where there are significant shareholders or partners) the accounts will be rolled into packaged products in order to generate sufficient profits to pay for the purchase.

*The reason a few remaining consultants don't offer daily valuation is that they're doing poorly financially and can't capitalize the technology, retrain personnel, or hire new people with contemporary skills.

As for #3, daily valuation is a given. The clients who don't ask for it are uneducated. It usually comes with reduced expenses, not increased expenses, due to the utilization of packaged providers whose benefits of scale make high technology, advanced telephone service and polished communications materials affordable.

Some consultants will argue that the packaged providers come up short technically, but that's self-serving and blindered, the market proves otherwise.

Defined contribution plans need to be maximally user-friendly in order to have high participation: Plans without dv hinder high participation, are therefore not in the employees' best interests, and are therefore nearly unethical.

If the packaged providers weren't adequate, Principal Financial Services, Fidelity (in its various guises), Manulife, T.Rowe Price, Great West, American United Life, Vangard and only a few others wouldn't currently run (one way or another) the vast majority of the defined contribution plan accounts in the country.

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www.k-consult.com

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