The Solution

By Bob Keane

February 01, 2007 at 02:00 AM

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The coming "retirement crisis" in America has been the subject of countless newspaper, magazine, and evening television news stories. Experts of all stripes have voiced their concern about the vast numbers of baby boomers who will not have enough money to enjoy a traditional retirement. The millions of Americans who have socked away at least some money in IRAs and 401(k) plans can be paralyzed by the seeming complexity of the investment choices they are offered and just cross their fingers and hope for the best, perhaps defaulting to a money market fund.

Concurrent with the development of this potentially large and underserved market, more and more financial advisory firms have been focusing on smaller groups of clients with more assets. From a business perspective it makes sense: A firm being paid a percentage of assets under management makes a lot more money from 100 clients with $1 million each than it does from the same number of clients worth $1 million combined.

The average working American has a clear and obvious need for advice about planning for retirement, but most of them just don't have enough money to get it from those best able to provide it–professional financial planners. The problem for most planners is that they just can't see how they can make any money from clients with lower asset levels.

In the coming years, however, if financial planning is to achieve the oft-stated goal of being recognized as a legitimate profession, it's going to have to find a way to serve all Americans. Some of the provisions of the Pension Protection Act are expected to open up advisory services to a broader audience, but at least one firm has found a way to offer investment advice and asset management services to clients with as little as $20,000 or $30,000 in a 401(k) account while at the same time continuing to serve its original high-net-worth clientele.

PMFM, Inc., based in Watkinsville, Georgia, right outside Athens and about an hour from Atlanta, is a fee-only registered investment advisory firm that offers separate account management services and proprietary mutual funds as well as being the advisor to 401k Toolbox, its 401(k) plan asset management tool.

In fact, PMFM seems to have a pretty sure grip on all the challenges that advisory firms face today–in building a strong niche, in attracting clients, in using technology to offer not only more services to more of those clients and thus grow revenue but also do it profitably, and in finding and retaining good people. It's also finding success in marketing its services through bigger partners with larger distribution networks, which allows it to again grow revenue without adding layers to its infrastructure. That doesn't mean that the firm hasn't changed over the years, and that its leader, Tim Chapman, doesn't face other challenges. But it appears that the structure and processes are in place for future success at PMFM.

The firm's monogram, by the way, comes from Personal Mutual Fund Management, which pretty much summed up the firm's approach upon its launch in 1991 by Chapman and Don Beasley (who retired last year), as a traditional fee-based asset management firm. "We manage serious money for investors for their retirement," explains Chapman, who holds the title of CEO. "When I talk about serious money, it's money that people know has to be there. We want to take care of their money in such a way that they get a decent return over time but are protected from severe bear markets so that they don't run the risk of running out of money in retirement. Our goal is to capture most of the good times and to miss most of the bad times."

First 401(k) Stirrings

Chapman and Beasley had been pursuing that philosophy for a few years when they got their first exposure to the 401(k) market. Chapman's father was nearing retirement from Delta Airlines when that company dramatically expanded the offerings in its 401(k) plan. Soon his father's co-workers were asking him for advice on what to do with their retirement money.

In response to the demand, Chapman started writing a biweekly newsletter, with a subscription cost of $49/year, covering the investment choices available in Delta's plan. Within a few months subscribers were asking if they could pay him to manage their 401(k) accounts for them, which he started doing in 1995.

"What we learned was just how much demand there was for this type of service," Chapman recalls. "The truth is, a lot of people don't want to manage their own money. We really saw that with the Delta people. By the late 1990s when all the new online services and other startup companies were just coming out it was an area that we had been involved in for several years. So at that time we created 401k Toolbox to take the same service that we'd been offering our Delta clients to other companies."

Initially 401k Toolbox was available only to participants in plans that were direct clients of PMFM, such as Saks Fifth Avenue and Jordan's Furniture, with at least $100 million in assets. For PMFM, the economics of administering smaller plans still didn't make sense, until the firm decided to partner up with plan providers who would like to offer the 401k Toolbox services in conjunction with their own 401(k) product. The first of these partners is Lincoln Financial. "They have a group annuity product that is designed for the small 401(k) market, and by that I mean probably $500,000 to $5 million in assets," Chapman explains. "We created a collaborative marketing agreement with Lincoln whereby a broker could go in and sell the Lincoln 401(k) product and they can attach 401k Toolbox to it. Our partnership with Lincoln took us into that smaller market, which really is huge collectively, but each plan itself is fairly small. To us it all looked like one plan, because it was all coming through one product provider."

Using the Toolbox

Essentially there are two marketplaces for the Toolbox, explains VP of marketing Tim McCabe: large plans that are direct clients of PMFM, and "indirect business" which is sold through Lincoln Financial or another partner. "The businesses are similar but different," he says. "With the direct business we control our own destiny. These are our clients and we build individual relationships with the companies and then with the participants. With the advisor-sold market, we're training their agents and brokers on our services and how to sell our services. But at the end of the day the important part is that our service is delivered to participants in person. Whether it's us doing it or a broker/agent, there's a live person that talks to them in either a group or individual setting."

In the presentation meetings, participants are told that after enrollment they have two options: "Do It Yourself" or "Manage It for Me." If they want to handle their account themselves they can go to the 401k Toolbox and fill out a risk assessment questionnaire spelling out their time horizon and receive suggestions for choosing a portfolio from the available options and there's no charge for the service. Or they can sign an agreement to let an advisor manage the account for them.

"The services we provide are individually chosen and paid for by plan participants," explains McCabe. "We give the advice away. Some of our competitors charge a per head cost whether you use it or not. We are definitely a 'pay for play' service. Only the people who use our services pay for them."

For plans with under $3 million in assets the charge is 1.5%, which drops to 1.25% above that threshold. "For us it costs the same across our client base," he says. "If it's a direct plan all those fees come to us. If it's an indirect plan, we actually share a portion of that revenue back with the advisor who is our feet on the street in providing the service to their clients."

The average account size of the individual participants in 401k Toolbox's indirect market is $20,000, not the type of client that most advisors are looking to handle. The challenge, says Chapman, is, "How do you get down to each individual and make it profitable? One of the things that we've been able to do at PMFM is create the right kind of in-house technology that allows us to manage 20,000-plus 401(k) accounts and do it profitably."

The Tech Master

The man responsible for creating most of the technology that has allowed PMFM to radically expand the scope of its business through the 401k Toolbox is Michael Chlan, who is in charge of both technology and operations. One of Chlan's proudest accomplishments was the development of the Web site giving participants the tools to do it all themselves, but he was surprised by its level of usage. "Our clients want us to do it for them," he says. "They want to stay in touch with us, but they don't want to have to deal with the day-to-day issues of managing their own money."

"We have the same options they do, but it's what we do every day," explains McCabe of the typical plan participant. "The average person is not a professional and despite the 401(k) industry's efforts to make the average Joe a financial professional over the last 25 years, it hasn't worked and we are probably the best example of that. It's not that [plan participants] can't do it, they don't want to do it."

With the ability to offer 401(k) plan participants asset management services for a fee of 1.5%, regardless of the account size, the future of this market would seem wide open, particularly as partner firms are added to the mix. "Currently we have agreements with Lincoln and with Guardian and we're looking at some other providers to partner with in '07," explains Chapman. "We're very selective, though. We're not interested in being hooked up with every provider out there. We want to be able to do a good job and we want to have a good fit."

Investing Not to Lose

While the firm's 401(k) business involves an estimated 20,000 clients and about $700 million in assets, it's only part of what PMFM does. "There's a little bit of overlap among clients, but for our direct business, if a client has less than $500,000 they would go into one of our funds and over that we would do a separately managed portfolio," explains Jud Doherty, who is PMFM's CFO and CCO. He estimates that PMFM has about $110 million in its separate accounts for 125 clients and another $100 million in the three publicly traded PMFM funds (PMFM Tactical Preservation Portfolio Trust, PMFM Managed Portfolio Trust, and PMFM Core Advantage Portfolio Trust) for another 750 clients. What both he and Chapman stress, however, is that regardless of the level of investment andwhether it's in a separate account or in one of the mutual funds, the investment approach is the same.

"To us the mutual fund looks like one more client," says Chapman. "We only use exchange-traded funds, ETFs, and if we're trying to buy the S&P 500 in our separate accounts, we're also buying it in our mutual funds, so they mirror each other exactly." Doherty adds that in addition to the low-cost of ETFs, a real attraction is the liquidity of being able to implement an active allocation model in a much more efficient way than is possible using traditional no-load mutual funds.

"Everything is model driven," Chapman continues. "We have the various funds with different objectives that fit different risk tolerances. Our most aggressive fund and when I use the word aggressive, it's almost a misnomer, our Core Advantage Fund, it could just as well be our Core Advantage Separate Account, because it's the same philosophy. In that fund our exposure to equities goes from 50% up to 100%. So even with our most defensive position, those people are 50% exposed to equities. And for a growth investor having 50% defensive, overall that would be a pretty defensive posture. Then we have our Managed Portfolio and there the exposure to equities could go from zero to 100%. In really bent markets, those people could be 100% in fixed income or cash and have no exposure to equities. In really strong markets they could be 100% exposed to equities in the various asset classes. Our Tactical Preservation Fund never has more than 65% exposure to equities."

While Chapman calls the PMFM approach an active one, he stresses that "active" is a relative term. "In our investment models we tend to have three or four major reallocations in the portfolio a year. We're trying to capture longer-term up trends or avoid down trends. We're increasing our equity allocation or decreasing it at times, but we're not making huge jumps. It's not like we're going from 100% in equities to zero. We might go from 100% to 80% and from 80% to 70%. We're changing incrementally and just trying to keep the money where it's being treated the best, and sometimes that's cash."

"Our primary goal is safety of principal. Making money during good times is important, but it is equally important to protect your assets during bad times," readsa desription of the the firm's philosophy found at www.pmfm.com. Most advisors would agree with the sentiment, but how does one make that a reality?

"We have a quantitative model that we use to measure the risk level of the market," explains Doherty. "The purpose is not to pick off tops or bottoms of the market, but to let us know when the probabilities are against us. We have an overall asset allocation that is impacted by the risk level of the marketplace and we also have individual risk level protections. With every position we buy, we have a predefined line in the sand where we're going to get out. We have stop losses at both an individual position level as well as an overall portfolio level. We're not going to get out at the top, but we're not going to ride it to the bottom either."

Doing What We Do Best

While Chapman holds a CFP designation, as does another staff member, and has two others sitting for their CFPs, he stresses that PMFM is an asset management company, not a financial planning firm in the traditional sense. "We don't do comprehensive financial planning and we're not out there selling financial planning. But we do try to help our clients get a good grasp of their total financial plan, if they want us to. We have people who will go out and sit down with clients, and clients can certainly come in and visit with us. If they need some estate planning, obviously we refer them to someone to do that. When we do give them advice on the total financial picture, they know it's objective, because we're not trying to sell them anything. If they need to buy an insurance policy for estate tax purposes and we tell them that, they know they can believe that, because we're not going to sell them the insurance policy. We do offer that service, but it's–not to sound too hokey–almost like a friend offering it to a friend, than it is doing it as a business model. There's no cost for it at all."

Facing Forward

PMFM has grown considerably since its start with just Tim Chapman, Don Beasley, and a secretary. By 2000 the partners had grown assets to a couple of million dollars and added another four or five employees. Since then staff has grown to 35 and assets of around $800 million. There's more growth to come.

"Right now we're poised to take a really big move forward without having to add a whole lot of infrastructure," Chapman says. "We're starting to offer our services more and more through brokers as opposed to marketing directly. We just launched separate account management through a broker/dealer. We see a lot of our growth as being driven in the broker-sold market, even on the separate account and mutual fund side."

It's not building the business or crunching the numbers that Chapman finds the most challenging. It's getting the right people. "I always want to put a focus on having the right people here because PMFM is not a Registered Investment Advisor, it's not a building, it's not a name," he says emphatically. "It's all the people who make up the company and maintaining great people inside the company allows us to be great at delivering what we do. That's always the biggest challenge for growing any business–having the right people. If we partner with the right people, if we're providing our services to the right people, all the numbers take care of themselves."

There was a time when Chapman says he knew all his clients personally, as well as the names of their kids and pets. His direct contact with the individual investors isn't what it once was, but it still drives him to show up at work every morning. "What really still excites me," he says, "is when a client calls and up and tells me what a difference we've made in their lives."

While he says he'll focus on the process and let the assets take care of themselves, he has given the matter some thought. "I really think that in five years we could be at $3 or $4 billion," he says in conclusion. "That would still be a very small player in terms of the size of the overall market, but it would be a pretty good number for a little firm like ours."

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