Industry Insight from Fred Barstein
Wholesaling Due for Change

Wholesaling financial services products to financial advisors has not changed appreciably in the past 30 years.  It’s hard to think of an industry, product, service, or even a process that has been as dormant over that same time period.  Though many industry experts and even wholesalers have been predicting change, perhaps the recent market downturn will finally have an impact.  As price pressure is affecting almost every product and service, especially in the financial services industry, companies are scrutinizing every facet of their business to find ways to reduce costs.  Wholesaling, particularly in the DC industry, is under strict scrutiny at almost every major provider.

The current model for wholesaling is to hire as many bodies as affordable and put them in the field to face off against as many advisors as possible.  "Innovation" came when internal wholesalers were teamed with the external wholesalers, but the model was basically the same.  Built with the mind-set that the more calls you make, the more sales you get, wholesalers are instructed to conduct a minimum number of meetings each week.  While results are ultimately measured by sales, the number of meetings has always been a key metric.  Although this may make sense for mutual fund wholesalers, it is less important in the DC market.

Not to say that some providers are not making strides, but there are some basic concepts that everyone needs to adopt – starting with market segmentation.  There are 300,000 or so active advisors, but only 150,000 have ever sold a DC plan.  Of those, half have more than three plans under management and only 20,000 have more than five plans, which is the point when an advisor has decided to get serious or earn a “college degree.”  There are 4,000 “Masters” with either 25 or more plans or $100 million and 400 “PhD’s” who focus exclusively on the +$10 million market.  Advisors need to be identified by market segment and treated differently either by levels of experience, market focus, broker dealer type, affiliated organization, or even compensation models.  While some firms are using hybrid wholesaling, very few have fully leveraged the concept of more contact through phones, electronic means, and social networking.  Just asking a wholesaler trained in face-to-face selling to make more calls does not constitute hybrid wholesaling.  Those firms incorporating the concept of "every employee a business and every client a market", will be better positioned to motivate and manage their wholesalers.

The elephant in the middle of the room is wholesaler compensation.  The reality is that a vast majority of the very best performers who make the most money deserve what they get, which is also true of the bottom 10%.  The big issue is the 80% in the middle who nervously hope that nothing will ever change, which is wishful thinking at best and gross denial at worst.  Lower costs are of paramount importance to plan sponsors and participants.  Just as some providers have been able to significantly under price their competition because they have built technology and processes that maximize human capital, there will be some record keepers who are able to identify the right advisors for their services and support them more effectively at a lower cost.  It’s also essential that advisors identify record keepers that are able to successfully transition to a new wholesaling model, so that they can pass the savings on to their clients while leveraging providers to help build, grow, and manage their retirement practices.

Return to Newsletter