Industry Insight from Fred Barstein
Buying Out Blind Squirrels

MOST OF THE problems in the small and mid DC market are caused by the blind squirrel advisors who do not have the knowledge, experience or resources to properly help sponsors and participants successfully manage their retirement plans. There are many providers and investment options available that will enable both parties to get a better outcome, but blind squirrels will only find them by accident. Providers would prefer not to work with the inexperienced advisors who create greater costs and risks, but with more than 80% of new sales generated by blind squirrels, most providers have little choice. Though we will never completely eliminate the blind squirrel problem, we can take small, sometimes controversial steps, which is why we encourage providers to consider offering blind squirrels a buy out.

It is estimated that over 150,000 advisors have at least one corporate retirement plan under management but less than 20,000 have more than five plans and less than 4,000 have more than 25 plans or over $100 million. Most blind squirrels do not realize the time and effort expected of them for what is relatively small compensation when they sell a 401(k) plan. Experienced retirement advisors need to accumulate a relatively large book of business before they start realizing any significant return. Though blind squirrels can make money by doing nothing except collecting the check, most of their clients bought based on a personal or business relationship which could be jeopardized once they realize the danger and liabilities. Therefore, we suggest that providers approach these inexperienced advisors and offer to pay them three times the value of their trail, for example, and move the case to an experienced advisor. Blind squirrels should not be forced to take this offer but many may be more than willing, especially as their transactional based revenues are diminishing. Providers can recoup some of the money by paying the experienced advisor who just received this gift at some reduced rate. The compensation of an advisor is not just based on the cost of servicing a retirement plan – much of it is based on the initial acquisition cost. Most retirement advisors would be willing to take less for a case which is just handed to them and reward the provider with more new business over time.

Many providers squirm in their seats when I suggest buying out blind squirrel cases but, in the next breath, they admit that everyone would be better off if only experienced retirement advisors were managing their plans. In fact over 90% of appointments set by 401kExchange are for advisor of record opportunities as sponsors begin to wake up. No one should be forced to divest plans, and cases might be transferred to an advisor in the same broker dealer to assuage home office concerns. Providers that win in the small- and mid-size markets will have a stronger network of loyal advisors and more plans serviced by these advisors that are less vulnerable to poaching. Inevitably, more sponsors will gravitate to better advisors – proactive providers that stay ahead of the market rather than just reacting to it will ultimately prevail.

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