Critical Questions for Advisors in 2024

An Interview with Mike Row, Future Capital CRO

We sat down with financial industry veteran and Future Capital CRO Mike Row to discuss how held-away asset management and Future Capital’s approach to the convergence of wealth and retirement can help advisors grow their business in 2024.

How can managing held-away 401(k) assets help advisors and their clients?

Mike Row: I was in a room full of advisors today and they told me that their clients always ask, “Hey what should I do with my 401(k)? You help me with everything else.” And the right answer up until now for that advisor was, “I can't really help you. It's a different fiduciary responsibility for managing the 401(k) and I'm sorry, maybe if you just pull up your screen, I’ll tell you what I would do if I were you and you can do it.” They get the account set up for that moment in time, but then the client has to continue to change it as the market changes, their plans change, and it’s not really helpful.

Our approach allows advisors to actually bring those held-away assets into their purview and complete the circle. It’s better for the client and better for the advisor. From a retention point of view, the client is only dealing with one person—their advisor—for everything, so advisors are more likely to retain that business.

What role do recordkeepers play in this scenario?

MR: This is an extremely important consideration for advisors in 2024. Recordkeepers like Empower or Fidelity, who have the advisor’s client on their recordkeeping system within the 401(k), take advantage of their data to offer services that compete with the advisor. Even though the client’s wealth assets are over there with an advisor, the recordkeeper is going to try to create a deeper relationship with the 401(k) account holder and, ultimately, if they can use the 401(k) plan to start a relationship with the client, maybe they convince them to keep the rollover of the 401(k) to an IRA with the recordkeeper.

When I left Pershing, Voya was our recordkeeper. They showed me a screen that said, “All you need to do is click here. Click this one box and you will roll your account into a Voya Rollover IRA.” When you're leaving or changing jobs, you're not looking for anything that adds stress or difficulty, it's just “Oh, good. I don't have to think about that”—click.

The advisor thought they were ultimately going to get that rollover, but then find out that the client clicked one box and that’s it. They’ve lost that opportunity. And then Fidelity or Voya or Empower or Vanguard says to the client, “Hey, what else you got? We rolled over your 401(k) and everything's great. Did you know we can help with more?”

The advisor sitting on the outside is under threat from ways that the plan providers are positioned to engage with clients. If I was one of those plan providers, I'd be doing exactly what they're doing, but from the advisor’s perspective, it's insidious because the recordkeepers are “leaking” into a relationship that the advisor may think is safer than it is.

So we offer an opportunity for advisors to be in the conversation for all of those assets.

How does managing held-away assets improve the advisor’s ability to offer holistic planning?

MR: In the old model, you've got this pile of money which is wealth assets and that pile of money which is your 401(k). If you're like me, I don't think of it as two different piles of money. I think of it as one big pile of money, but because of the tax rules and withdrawal penalties and things associated with 401(k) accounts, the piles are split in two, not necessarily because the client wants it this way, but because the industry and the regulators have created these two different piles.

We in the wealth industry haven’t always thought about money the way that clients do. So our platform enables an advisor to be truly holistic, meaning you look at it as one pile of money like the client does. We'll treat the assets differently and there's different tax rules and all the rest, but the advisor can say, really for the first time, “Okay, we've got it all of your assets together. What's the best thing that we can do with all of it?” as opposed to, “I've got your non-retirement assets over here, and we've got a nice plan for those. I really can't do anything for your 401(k), so I'm only going to give you a holistic service on this pile and not that pile.” By definition, that’s not truly holistic financial advice.

How can 401(k) accounts managed by an advisor help to improve client outcomes?

MR: Advisors ask all the time, “It sounds like Future Capital will do better. Do you have any proof?” The answer is tricky and easy.

I’ll start with the tricky answer. By definition, we're dealing with managing assets that are already a significantly small subset of all the possible investments in the world. Your 401(k) has, say 40 or 50 funds that you can choose to allocate your money into. There are hundreds of thousands of different ways you could allocate your money, but in your 401(k) you're picking from those 50 funds in your lineup.

So the performance that you're able to generate is going to be significantly affected by the performance of the funds that you have access to: if you've got 50 terrible funds, the best portfolio manager in the world isn’t going to have great performance because you don't have great funds to pick from; likewise, if you have the best funds in the world and you're a lousy portfolio manager, you're going to probably do okay, because the funds themselves are going to outperform. It's difficult to say “We're doing this versus the market,” because the market is everything, but when we’re inside the 401(k), we’re limited. That's why it's tricky to give a solid answer.

What we can do is point to studies that show that professionally managed 401(k) accounts outperform non professionally managed 401(k) accounts by over 3%.† It’s a simpler answer, but we're comparing professional management to somebody going it alone, by themselves. And so it's a little bit of an unfair fight. We're using all this portfolio theory and, in our particular case, the subadvisor at Wilshire and all these people to really make smart decisions to decide how to invest money in the client’s best interests, and we’re comparing that to the client picking and choosing off a screen, on their own, and maybe less aggressive than they should be, depending on their circumstances.

We have our origin story, how our founder’s mom was picking and choosing how to invest her money when she was in the school system. She was in that system for 20 or 30 years, and she basically invested treasuries, which are not going to go up much, but they're definitely not going to go down much. Her mindset was, “This is money I'm going to have to live on when I retire. I don't want to lose it,” which is completely understandable.

However, the fact is that when you're in a 401(k) or 403b, you're still investing, you can't even touch the money until you're 60. If you're a 32-year old teacher, you should probably be much more aggressive with that money. We know that and advisors know that, so we can take those kinds of circumstances into account and maybe invest it more aggressively than the client would typically do on their own. There are no guarantees, obviously, but the history of the market is that, over time, it's going to trend to go up. When our founder’s mom retired with $50,000, it probably should have been more like $240,000.

Even though it’s an unfair comparison, if we show 2.5% returns year over year, that’s 250 basis points of return. The client is going to pay 60 basis points for the professional management for 190 basis points, almost 2% better returns. After 10 years at 190 basis points of return, you could have around $20,000 more than if you just went by yourself. That’s real money.

What are some competitive advantages advisors can gain by managing held-away 401(k) assets?

MR: Number one, we've talked about truly holistic planning, looking at everything, creating a better route for the customer. If you have your customers walking around their country club, or their church, or their job saying, “I’ve got a great advisor, they handle everything, including my 401(k),” you create vibes, you get referrals, and that's going to create a good reputation and a competitive advantage.

Then there’s the competition from recordkeepers. Other companies—big, powerful financial institutions—they want assets, too. Future Capital’s held-away 401(k) asset platform equips advisors to compete, to manage those assets, have a better chance to win rollovers, and so on.

Frankly, there’s hardly anyone helping clients with their 401(k) assets today. o It's easy, at least right now, to go in and say, “I can help you with everything.” And the client isn’t going to say “I've got John down the road who helps me with my 401(k),” because that’s almost certainly not the case.

What’s the potential for AUM and revenue growth for advisors that include held-away 401(k) asset management in their 2024 plan?

MR: I wouldn't say that it is going to turn a so-so business into a screaming crazy success all by itself, but 401(k) management can be a wonderful supplemental chunk of income. If you want to talk about revenue—and I said this to a group of advisors this morning—there’s revenue sitting there in your client’s 401(k) account. They already trust you to manage everything but their 401(k). It's not like you're going to a brand new person and trying to convince them to sign up. Your existing clients represent easier sales than trying to find a new dollar from a new client. It’s “Guess what, Joe? The $200,000 in your retirement account at work, I can help you with that now.”

From a revenue growth perspective, it's a relatively easy thing to do, because we support the client, we have a great client success team, we provide the client portal, and do cover the fiduciary bases to act in the client’s best interests. And we provide the advisor with a portal so they can see what's going on. To get started, all the advisors really have to do is understand what we're doing and invite the clients. We take it from there and keep the advisor in the loop. It's not a lot of work.

An advisor who's earning gross 20 basis points from us on this business, that's relatively low in comparison to what they earn on their regular wealth business, 80 basis points or 1% or whatever. So 20 basis points isn’t huge, but it's low cost for them. Advisors think of time as money, and they want to spend it building business not answering questions about why it's 6% allocated to this and not 7%. The clients can call us for that.

Advisors have spent a lot of time building these relationships, so they understandably get nervous when we say we’ll have a client call us because they think we're gonna pick them off. We're not. We actually put into some of our agreements that we're not going to solicit clients for a relationship away from the advisor. We also provide data like, here's the customer who called us, here's the customer who sent us an email, here's where we are. The advisor can ask us, “Hey, I saw the client sent a couple of emails. What was that about?” They don't have to get involved in the details, but they can keep track of things and stay engaged. They’re not in the dark as to what's going on with their clients and the relationship.

How can managing held-away 401(k) assets help advisors stay relevant in the convergence of wealth and retirement?

MR: I'll start with the way the market's changing. SECURE Act 2.0 mandated that clients be defaulted into a 401(k). If a company starts now, after SECURE Act 2.0, and they open a brand new 401(k), they're required to default employees into the plan. That’s the government's way of saying 401(k) accounts are important and people need to be saving automatically for their retirement. We recognize that Social Security is not going to be there like we thought it was going to be for everybody in the next 50 years, and that means 401(k)s are now going to be our way of guaranteeing people have income in retirement. They're also now significantly stepping up the maximum contribution through catch-ups and things like that.

What that means is the amount of money we're talking about in 401(k)s will be dramatically higher than the large number it already is. If you're an advisor and you're not paying attention and those growing 401(k) assets remain held-away, then clients are going to have more money in their 401(k) assets and less money to put into their investing accounts with you. The balance of investable assets will tip toward retirement plans over time. Advisors can pay attention to the trend, they can take steps to capitalize on the trend, or they can wait and risk missing out.