David Kudla launched his planning firm in 2001 in response to a dramatic shift in retirement planning. An engineer by training, Kudla recognized the growing number of companies increasingly phasing out their pension programs for less costly 401(k) plans.
Employees were largely unprepared for this sudden control over their retirement security. To make matters worse, ERISA had set up somewhat bedeviling standards for providing investment advice to participants, creating a void in the marketplace.
"Employees were supposed to become their own pension fund managers - and they weren't exactly investment experts," Kudla says. "If someone was offering a solution for these people, I thought they would take it."
After having worked as an industry consultant for more than a decade, Kudla decided to open his own firm, Mainstay Capital Management in Grand Blanc, Mich., and specialize in helping nearby employees manage their 401(k) plans. Mainstay now has $1.6 billion in assets under management, nearly half in 401(k) plans, and Kudla has been rated among the 100 best advisors in the country by Barron's.
EFFICIENCIES OF SCALE
Mainstay specializes in providing planning to the employees of just a handful of companies - primarily the big automakers and employees of the United Auto Workers union.
Because these clients account for 70% of Mainstay's business, the firm can employ an assembly-line approach, diving deep into the details of each company's plan to stay on top of changes. Providing comprehensive advice becomes simpler - a matter of plugging personal needs into a formula that's already populated with tons of common financial details. (Among them: investment choices, performance and risk, and various savings options and terms.)
"When we meet a new GM employee or a new Ford employee, we already know their saving plan. We know their pension plan, their buyout options - their whole program," Kudla says. "There are tremendous efficiencies in that."
Mainstay's narrow focus also lets Kudla offer analysis on any buyout programs or new benefit plans offered by the auto companies. Kudla says a significant portion of what the firm does is track these benefit programs, analyzing every change before it's even available to employees so that his planners can provide timely advice the moment a worker asks.
"It comes back to focusing on a few plans, not a few dozen," Kudla says. "That allows you to be very knowledgeable and deliver a significant value proposition."
These efficiencies also allow Mainstay to welcome a range of income levels. Officially, the firm's investment minimum is $200,000 in a non-401(k) account, but those who work for the right companies can walk in the door with just $50,000 to manage - and even that's negotiable. Not every client relationship is immediately profitable, Kudla says, though he expects them to be over time as 401(k) balances grow.
One reason auto company employees typically need advice is because their plans are so rich with investment options. Ford employees, for example, have 24 funds to choose from; GM workers select from among 30. That's a huge benefit, Kudla says, because it allows employees to diversify widely and have good investment choices in any environment. But it can also befuddle those unfamiliar with the different risks and rewards presented by, for instance, an emerging markets fund versus an international fund. Or for those who don't have the financial grounding to fathom how investment conditions might weigh on returns in various segments of the markets.
ACTIVE ALLOCATIONS
Because he manages 401(k) money, Kudla's firm must comply with ERISA's standards demanding fiduciary duty and is regularly audited to ensure that it isn't playing fast and loose with client accounts. But that doesn't stop him from fast-paced trading within the plans.
Kudla says he is constantly researching market conditions and economic trends, using that research to actively manage client portfolios.
At the beginning of 2013, for instance, Kudla thought stock market fundamentals looked good only in the U.S. and Japan. So he took his clients out of diversified international funds, which exposed clients to emerging markets and troubled foreign economies, while holding just fractional exposures to the more attractive U.S. and Japanese markets. In May 2013, he was moving clients out of most conservative bond funds in response to the threat of rising interest rates. Instead, Kudla loaded them up with junk bond funds, figuring the improving economy would make the debt issued by highly leveraged companies safer and more attractive.
When all investment options look risky, Kudla says he puts client assets into "stable value" funds - usually insurance products that guarantee principal values and offer a set (though low) rate of return. When conditions look better, he'll switch into small-cap stocks. Or emerging markets - or whatever seems primed to benefit from either market or economic conditions.
And because his clients work for just a handful of companies with common investment options, all the clients with similar risk profiles are likely to get similar portfolio tweaks at the same time - which makes Mainstay's fast-paced portfolio management possible. He estimates that Mainstay shifts its clients' 401(k) assets an average of six to 15 times each year.
While that's not necessarily standard, Kudla isn't shy about forging his own path. In fact, he's got three U.S. patents and one pending for Mainstay's own retirement planning software because he felt the off-the-shelf planning software just wasn't good enough.
Mainstay's retirement software accommodates shifting variables that reflect the way clients might change their investment strategies as they age. The system breaks a typical retirement plan into four distinct phases, during which the firm can plug in different assumptions for how much the clients would save and how much risk they could take, for example. This better matches real-life cycles, he contends. Moreover, the software allows the planners to throw in variables that could stress the viability of the plan - a long-term medical emergency, a job loss, a market crash. He believes this sensitivity analysis leads to more precise estimates of future prospects without the overwhelming variability of a Monte Carlo analysis.
A niche practice like Kudla's faces one big threat - another auto industry meltdown - but Kudla says he isn't worried. In times of turmoil, he says, his clients need him more than ever; moreover, they tend not to leave the firm when they leave the industry.
"Five years ago, General Motors and Chrysler were on the brink of bankruptcy; there were massive buyouts between 2006 and 2008. And now Ford has just announced that they're going to hire 5,000 employees and GM is investing $400 million just down the street from us," he says. "Despite everything the industry has been through, we have grown like gangbusters."
Kathy Kristof, a Financial Planning contributing writer in Los Angeles, also writes for Kiplinger's and CBS MoneyWatch.
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