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Flat Fee Opens Small 401(k) Manager Niche


Glencrest Investment Advisors, an affiliate of PFF Bancorp in Pomona, Calif., has found a fast-growing niche: providing active asset management to small and midsize 401(k) plans. The small Claremont, Calif., firm more than doubled its 401(k) assets under management last year, to about $192 million, and Shawn Ecklund, its managing director, said he expects to maintain that pace.

"We can reach over $1 billion in the next three to five years," he said.

Ecklund said this is a far cry from Glencrest's position two years ago when it had less than $200 million under management overall, and less than 1% of that was in 401(k) assets. Today, 36% of Glencrest's $533 million of assets under management is in 401(k) accounts, and Ecklund expects that to reach 50% in 2007.

"I expect to continue to grow at this rate for a number of years," he said. "We are adding plans with larger and larger levels of assets."

Ecklund said Glencrest built its niche by focusing on 401(k) plans with $20 million to $50 million that were not traditionally offered active asset management. From January 2005 through the end of April, Glencrest signed up companies in its home state, including California Steel Industries in Fontana, Los Angeles Fairplex, V-Tek in Diamond Bar and First Regional Bank of Century City.

Glencrest emerged from its parent bank's trust department about 3-1/2 years ago. Many of its model portfolios were originally constructed for trust clients, Ecklund said, but the advisory affiliate began to market them to institutions and smaller individual customers. "When the market turned in 2001 and 2002, clients needed a disciplined investment strategy," he said. "We developed this model portfolio that could be actively managed with mutual funds, individual securities, exchange-traded funds or stocks and bonds, and we could adjust it based on the markets."

The portfolios worked well, he said, and marketing beyond the bank's customers began to grow. "We began looking for pools of money, and 401(k) plans were the next logical step," he said.

Ecklund explained that most 401(k) plan sponsors do not want to pay for active investment management services, which typically charge a fee that is a percentage of assets under management. So Glencrest removed the fees, he said, and rebated all the expenses back to the plans. His firm turns a profit by charging a flat amount for its services, which sponsors may pay directly with no deduction from 401(k) balances.

"The same upper management that is making the decisions about who should manage the company's 401(k) plan is the same upper management that has the most saved in these plans," Ecklund said. "They'd rather have a lower expense ratio and [have their company] pay for our services outside of the program."

Analysts said that small companies like Glencrest can find it difficult to get into managing 401(k) plans without a gimmick.

"Smaller firms need to offer something more than just investment management," said Burton Greenwald, president of B.J. Greenwald Associates of Philadelphia. "They have to find a niche and offer something no one else has."

Ecklund said he had been wanting to manage 401(k) assets since beginning his career as a broker with Smith Barney but never had the tools or the niche to be competitive. Generally, it is very tough to find 401(k) clients, he said, adding, "We had to offer a major value proposition with a proven track record before people would talk to us."

Most big 401(k) providers, like Fidelity Investments or Vanguard, offer a series of lifestyle funds, he said, but since these products are not actively managed, "participants are left in a tough situation if the markets melt down again."

Glencrest is receiving a lot of referrals from customers who are interested in the model portfolios the firm is running, Ecklund said. "Our customers are happy, and it is helping us build a significant pipeline," he said.

The advisory firm is beta-testing whether it can offer its actively managed portfolios to 401(k) plans with less than $10 million of assets. "There are only a small number of vendors providing these type of services to that market," Ecklund said. "I think it has the potential to really take off for us."

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