November 5, 1999

TCW hands off its advice business

By Arleen Jacobius -

From Pension and Investments - The International Newspaper of Money Management.

LOS ANGELES- TCW Group Inc. is all but getting out of the investment advice business it pioneered in 1997.

TCW is handing over its Internet advice product, Guided Choice, to Sherrie Grabot, formerly senior vice president in its defined contribution unit. Ms Grabot is launching her own firm, Inc., San Jose, in which TCW will be a minority shareholder.

And, Brian Tarbox, a TCW senior vice president who spearheaded the move into advice, is not connected to Guided Choice any more. "He is on the retail side and not involved in the new entity," Ms. Grabot said.

TCW retains the prohibited transaction exemption it won from the Labor Department in connection with launching its advice product. Ms. Grabot said her new firm, as an independent third-party advice-giver, doesn't need an exemption.

The original advice model devised under the TCW exemption application offered only TCW's Galileo funds. The new one will include other offerings as well, Ms. Grabot said.

"There's no significant differences except different user interfaces. It will be easier to take the product to other service providers instead of being limited to plan sponsors, who are slow to buy it.

"In addition, we have a greater ability to exploit Internet technology, which is easier outside of a large company," Ms Grabot said. "We not only can move fast and maximize on the technology, but at TCW, the system was limited to using TCW's Galileo funds. Now we can come out with other versions of the product."

Guided Choice will now be able to give advice using other money manager's funds.

A spokesman for TCW confirmed the spinoff and said the new Guided Choice should be up and running in the first quarter of 2000. The model, which had been stalled since October of 1998, now is ready for beta testing, Ms. Grabot said.

Under TCW's model, Ibbotson Associates Inc., Chicago, provided the calculation engine and constructed the advice portfolio software, said Mike Henkel, Ibbotson president.

A problem arose in 1998 with an outside company that was developing the interface system into which Ibbotson was to plug its advice software, Mr. Henkel explained.

Guided Choice is now working on developing that interface, Mr. Henkel said.

After halting work on the project, TCW executives looked at a multitude of proposals, including joint ventures with large service providers, Ms. Grabot said.

Some market observers wonder if TCW has missed its moment. "While the company was busy securing its prohibited transaction exemption, the advice market may have passed it by, " said Peter Starr, consultant with Cerulli Associates Inc., Boston.

"In our opinion, there are three was to distribute advice: Do it yourself with proprietary models and prohibited transaction exemption; use outside investment advisers; or offer near-advice," he said.

Near-advice is investment education the service provider asserts is not investment advice under Department of Labor guidelines.

"The least attractive (option) is the one TCW has chosen to adopt," Mr. Starr said. "In the time TCW took getting their exemption letter, the market moved quickly and strategically in other areas."

"The most workable model is for service providers to use independent investment advisers as a short-term solution and then move on to a long-term solution that ultimately gives the service provider control with a proprietary advice model," he explained.

"The problem is that under Labor Department guidelines, the service provider must be willing and able to 'flatten out' the pricing schedule, so it earns the same fee no matter what investment option is recommended to participants," Mr. Starr said.

"It is more difficult for active managers to replicate that exact model," he said. Actively managed funds are more expensive than passively managed funds, so it's more difficult for active funds to charge a flat rate and keep fees down.

Mr. Henkel said he doesn't agree that the market passed TCW by.

"It's no mystery TCW has been slow bringing it (advice) to market," Mr. Henkel said. "Sometimes that's the way the ball bounces."

But, he added: "I still believe that TCW's exemption and business model provide some of the best and safest advice for a plan.

"We have a good, clean product, and that's a pretty good marketing pitch," he said, referring to the joint effort of Ibbotson and TCW.

Mr. Tarbox, TCW's original advice architect, has his own business model for providing participant advice, dubbed the "Human Network Organization." It calls for a central management team that focuses on strategic objectives. Next is a layer of independent experts and specialists who provide technical expertise for advisers who deal with participants directly, he said.

"The idea is for service providers to convert their call center personnel into qualified advisers. Eventually, the participant advisers direct qualified employees to meet face-to-face with certified advisers for more comprehensive service," Mr. Tarbox said. "This system is more expensive than the Internet solution, but the human touch is needed to make investment advice work."
© 1999 Guided Choice, all rights reserved.