For the most part, the biggest, most profitable companies in the 401(k) market – Fidelity Investments, John Hancock and The Principal — have relied almost exclusively on stock brokers to help distribute their products. Brokers have an advantage because plan providers use commissions and revenue sharing as the primary means of compensation.

But RIAs are starting to smell opportunity, because new regulations are likely make it more difficult for brokers paid by commission to operate in this environment. See: Why the DOL’s rules could ding brokers and leave the spoils to RIAs

“This business has really been controlled by brokers who made their living off 12b-1 fees,” says Darwin Abrahamson CEO of Invest N Retire LLC of Portland, Ore. “That market is changing big-time.”

RIAs have an advantage in the changing market.

RIAs already understand

“RIAs are already fiduciaries so they already understand [how to invest in this environment]” says Ryan Alfred, president of BrightScope, a San Diego-based company that rates 401(k) plans on behalf of financial advisors. See: How BrightScope is using technology to create order in a messy 401(k) market

One RIA seeking to make hay of the 401(k) opportunity is Capital Directions LLC of Atlanta, which launched a packaged way for RIAs to get into the 401k business. The turnkey asset management program, Advisor Access, uses low-cost mutual funds of Santa Monica, Calif.-based Dimensional Fund Advisors and Malvern, Pa.-based Vanguard Group’s institutional funds. Capital Directions doesn’t participate in revenue sharing.

The turnkey asset management program called Advisor Access was launched in September. Thirteen advisors have signed on and an additional 28 are in conversations with Scott Pritchard, managing director of Capital Directions and head of Advisor Access. Many of the advisors are referrals from DFA and CEG Worldwide, a company that trains DFA advisors, he adds.

“It’s a tremendous opportunity right now,” he says. “Everything is moving toward the RIA model right now.”

Capital Directions has $800 million of assets under management and eight employees. The assets include $200 million from high net worth individuals, $400 million in a turnkey asset management program for certified public accountants and $200 million in 401(k) assets.

TAMP for 401(k) business

Essentially the company is drawing on its experience in the latter two categories of business to create the 401(k) TAMP. The latter product includes investment management but it also involves large amounts of education, coaching and connections to get started in the 401(k) business. For example, the company is careful to introduce advisors to nurturing third party administrators.

Though Brightscope’s Alfred believes that Capital Directions has a big-opportunity idea, he says the firm has big challenges, too.

“RIAs in the 401(k) business are very experienced and have been doing it for years,” he says. “Scott [Pritchard] has an opportunity for advisors coming into the business and looking for something turnkey. The big question for Scott is whether he can convince experienced advisors to start using him. If it’s good enough for them then it’s good enough for anyone.”

Pritchard admits that he’s facing a big challenge but that he is seeing sparks of interest from the experienced advisors — some of them brokers.

Can’t kick the habit

“The problem that comes up is the revenue trail that most legacy players are accustomed to receiving. Many of them recognize the merits of a move to fee-only, but like a drug addict who knows they need to quit, the advisors just can’t 'kick the habit’, he says. “Nonetheless, some advisors with existing plans are considering a wholesale change to their book of business. Others are considering Advisors Access for new plans, while continuing to service, and receive revenue-sharing from, their old plans in the traditional manner.”

The added challenge is that an RIA needs to sit down with advisors and talk through the marketing issues. Capital Directions is badly out-manned for the task, Alfred says.

“You’re competing with large platform providers that [each] have 20 external wholesalers,” he says.

But Pritchard says he mostly isn’t competing for the business of the same advisors.

“The legacy players [of 401(k) sales] are not really our target market,” he says. “We’ve built Advisors Access primarily as a way for wealth management advisors to effectively capture and service 401(k) plans. These advisors need the full turnkey solution we provide much more than the legacy players.”

Yet Fidelity last week came out with its own turnkey bundled 401(k) product [as noted above] for RIAs. It has already been successfully tested with 25 financial advisors including RIAs. See: Fidelity brings its 401(k) muscle to RIAs with new product

Edge over Fidelity

Pritchard believes he has an edge over Fidelity in at least one important respect.

“You’re not going to get the same quality of investments with Fidelity, and we’re also going to serve as a fiduciary,” he says. By “quality” Pritchard means that Fidelity is more likely to include its own funds in its plans and not use less expensive funds, he adds.

The funds included in Advisor Access plans average an expense ratio of .28% because it relies on DFA and Vanguard institutional mutual funds

Debbie Stiger, principal of JFS Wealth Advisors in Hermitage, Pa., is convinced financial advisors can do a better job of developing their own 401(k) platforms. She has also been using DFA funds as part of an effort to take 401(k) efforts up a notch.

Not good enough

“I looked at all the [third-party] plans for the 401(k) business, but when we drilled down to the service, cost and fund performance, we said: This isn’t good enough,” says Stiger, the company’s head of the business retirement department.

The combined defined benefit and defined contribution business is now about 33% of the $700 million of assets under management for JFS. The business has one drawback relative to managing non-retirement assets. “It is more work; I can tell you,” she says.

But Stiger says that the 401(k) business also has redeeming features including:

a.) The profit margins are not necessarily as bad as people say. JFS charges .65% to .75% on 401(k) assets compared to about 1% for non-retirement accounts.

Not excessive work

b.) The workload, though greater than required for managing non-retirement assets, isn’t excessive either, she adds. One-to-one consultations are time-consuming but once those are completed at the beginning of the process, it gets easier. “Once it’s in place, it’s not as time-intensive,” she says.

Stiger, whose firm manages about $700 million, says her firm benefits greatly from the synergy of serving 401(k) plans and wealthy individuals. The smallest 401(k) plan her company services is a doctor’s office and the largest is a company with 600 employees.

“It’s the launch pad for so many things; many of these participants become individual clients on the other side,” she says. “It fuels our individual business and it works both ways.”

Pritchard says his company is also benefiting from managing both 401(k) and individual accounts.

Continually funding

The market is also becoming more attractive to many RIAs, Pritchard says. “In 2008, that diversification [into the management of 401(k) assets] really made a difference for us,” he says. “They’re continually funding.”

But as big as the 401(k) opportunity is for RIAs on paper as brokers lose out because of heightened fiduciary concerns, it’s not for the faint of heart, according to Abrahamson.

“The problem is that RIAs don’t want to learn and if they do want to learn, it’s a huge learning curve,” he says.

The best opportunity is typically for RIAs with $500 million or more in assets because they tend to have many clients that work for big firms that need 401(k) plans, he adds.

Targets law firms

Pritchard says his firm avoids getting bogged down in uneconomic accounts by working predominantly with law firms. Lawyers tend to invest large amounts of cash each year and have generous matching programs.

He’s hopeful that even legacy advisors will want to do busines in the Capital Directions way.

“I had an advisor call me today who said that he has historically used 'the usual suspects’ for his 401(k) plans solely because there was no low-cost, institutional solution available,” Pritchard says. “He is excited about now having an option that is in line with fiduciary best practices. So, it is safe to say that other legacy players may have that same view. Only time will tell for sure.”

Correction: In an earlier version of this story, Ryan Alfred’s title was incorrect.