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When American Airlines dumped about $3.5 billion of retirement money into the laps of its pilots late last month, the winners were the wealth managers who got a piece of the action.
The bonanza came from a pension plan that American had closed last fall following the 2011 bankruptcy of its parent, AMR Corp. Stockbrokers, financial planners and other advisers who spent much of the year competing to manage the pilots’ money, are now celebrating a windfall of fees.
The pilots, still reeling from their company’s bankruptcy and bewildered by the unanticipated need to manage their money, are still digesting what amounted to a marketing onslaught.
“Advisers who knew what was going on with American viewed this as a one-time opportunity to increase their book,” said David Boardman, a pilot who also runs Diablo Investment Advisors, which manages about $11 million for about 10 clients through index funds and exchange-traded funds.
As company pensions have collapsed or been replaced with do-it-yourself 401(k) and individual retirement accounts, U.S. workers from pilots to plumbers face a bewildering array of options and tax strategies.
The fee-hungry financial services industry, however, has milked that anxiety by developing a rich lode of retirement products and services.
When American shuttered the plan in October, it gave its 10,000 pilots about six months to decide where to direct the money that the company had contributed and administered for them.
They could take a taxable lump-sum payout, invest in an annuity or roll over their nest eggs to a company 401(k) plan or an outside individual retirement account. The bulk of the money – some of which is still being distributed three months after pilots made their choices – went to investments through the 401(k) and outside IRA plans, American said, but declined to be more specific.
The average distribution to senior pilots topped $500,000 – and roughly 140 with more than 35 years got more than $1.5 million each, said a person with knowledge of the distributions. Pilots with less than 14 years of experience at American received on average under $200,000.
It didn’t take long for the financial services industry to come calling when word of the pension plan shuttering leaked out. Assuming an average 1 percent annual fee for managing the assets, individual advisers were competing for a quick $35 million.
National brokerage firms, small investment advisers and self-directed retirement plan administrators culled Federal Aviation Administration databases for pilot names, crafted customized websites, mailed out souvenir key chains and sent delegates to hand out business cards outside pilot meetings.
A Merrill Lynch office in Toledo, Ohio, for example, got a special phone number ending in 74568 – digits that spell out PILOT. It posted a webpage featuring a captain’s epaulet set against a brilliant blue sky, promising “a team of financial advisors dedicated to airline pilots …(that) stands ready to vector you through.”
Pilots who fielded dozens of emails and phone calls were annoyed, and at times confused.
“Firms popped up that I had never heard of before,” said Mike MacMurdy, chairman of the pension committee of Allied Pilots Association, the union for American Airline pilots.
Solicitations were so heavy that the union suspected for a time that the securities industry had commandeered its member database – a suspicion that proved unfounded.
‘Money in Motion’
Some pilots, to be sure, resisted the pitches, and many turned to hometown advisers they have worked with for years.
Julio Gomez, a 14-year veteran, deposited the check he received into a self-managed IRA at Fidelity Investments.
“I don’t really trust anybody with my money after seeing all those stories about investigations of big banks,” said Gomez, who is based in Salt Lake City. Gomez kept the money in cash because he thinks the stock market is too expensive right now.
Some pilots are hearing about colleagues who are buying Florida strip malls and small hotels or trading excessively, but they say most are making more conventional investments.
Retirement planning is bewildering to everyone, advisers say, but especially to those who never had to give much thought to process.
“The airlines didn’t do them any favors in telling them, ‘Come work for us and we’ll take care of you,'” said Robert Warner, a managing director at Cleary Gull Inc., a Milwaukee, Wisconsin, broker and advisory firm that has targeted pilots since a former Eastern Airlines pilot joined the firm in 1998.
Cleary Gull rushed out a marketing campaign to American Air pilots that included national mailings and a personalized URL for each pilot ending in @myBPlan.com It expects to add 150 pilot clients this year, double its annual average.
When Karp and his partner at Raymond James Financial Inc heard the news, they designed a web page featuring an ascending plane silhouetted against an orange sky and full yellow sun, aiming for some 1,500 pilots in southern Florida.
“Some of our competitors will be taking on hundreds of American Airlines pilots as clients,” the web page says. “In order to ensure first-class service and attention, our intention is to take on only a select few.”
As it turned out, the team added about 20 new clients with an average age of around 50.
“It’s absolutely fantastic,” said Karp, who estimates almost 15 percent of the team’s clients are pilots. “There was a lot of money in motion.”
No matter how much friendly attention they are receiving, pilots say the journey has not been easy.
Between the start of the fund liquidation last October and last month’s distribution, the S&P 500 stock index gained about 19.5 percent. American, though, had parked the pilots’ money primarily in U.S. Treasury bills that yielded about .05 percent over the same period, according to the pilot’s union.
Though the main event is just about done, advisers are still on alert. American expects to leaves bankruptcy and merge with US Airways Group Inc by year end, triggering distribution of about 9.5 percent of stock in the new company to pilots over four months.
“We certainly don’t want to see a fire sale on the first day,” said MacMurdy.
His members won’t have to worry about finding advice – they can just check their key chains, lunch invitations and voicemail messages.
Reporting by Jed Horowitz. Editing by Linda Stern and Lisa Shumaker.
Copyright (2013) Thomson Reuters. Click for restrictions