DCIO Providers Evolving With Adviser Demographics

A report from Cerulli Associates finds even those defined contribution investment only (DCIO) firms satisfied with their current retirement specialist presence are rethinking strategies to detect and cultivate the next generation of adviser relationships.

The third-quarter issue of “The Cerulli Edge – Retirement Edition” predicts the next decade will very likely bring a sharp acceleration of long-tenured and experienced adviser retirements.

Even if recruiting picks up in the next several years it will do little to stem the impending talent crisis among advisory firms, Cerulli warns, in no small part due to the significant time and training required to develop a skilled and trustworthy adviser. This has DCIO firms asking whether they will be able to maintain strong access to defined contribution plans currently generated by specialist advisers.

The Cerulli report shows a relatively small and aged group of professionals makes up today’s retirement specialist adviser industry—defined as the group of consultants and advisers who derive more than 50% of annual practice revenues through work with defined contribution (DC) plans. Jessica Sclafani, associate director at Cerulli, notes these retirement specialists are “the ultimate sales target” for DCIO providers. Winning the favor of one retirement specialist often means winning expanded access to hundreds of millions or even billions of dollars in new DC plan assets.

But more and more the quality of a given retirement specialist as a DCIO prospect is tempered by the fact that there are so few of them. Across all advisory business models (broken down by Cerulli as bank, wirehouse, regional, insurance, independent broker/dealer, dually registered, and registered investment adviser models), Cerulli finds there are only about 4,200 practices in total. In other words, the true DC retirement plan specialists only represent about 5% of the total adviser headcount. While only a small minority in terms of headcount, this small segment of advisers has for years enjoyed outsized influence.

As these 5% of practices mature and even begin to unwind, the numbers make it clear that DCIO providers are going to look more at “dabblers” in DC as top drivers of future growth—defined by Cerulli as practices with between 15% and 49% of revenues generated via DC plans. This segment is attractive today because it has some familiarity with the strict regulatory requirements involved in serving DC plans, while also presenting significant room to capitalize on the knowledge and maintain substantial growth in the next decade.

NEXT: Crafting new partners 

Cerulli suggests that, by targeting the emerging DC advisory specialist, DCIO providers have the opportunity to “rear advisers within their system of investment beliefs and products.” For the advisers, there is opportunity to gain helpful value-add and tools to more efficiently and effectively pursue retirement plan business.

Given the ongoing fiduciary rulemaking at the Department of Labor and the Securities and Exchange Commission, Cerulli feels registered investment adviser (RIA) firms are particularly likely to be targeted for more collaboration by DCIO firms.

“Excluding insurance advisers, the channels with the highest prevalence of retirement specialists are registered investment advisers and the dually registered, defined as registered representatives who also maintain an independently owned RIA,” the Cerulli report explains. “The RIA channel is particularly well suited to participate in the DC market given its independent model, fiduciary mindset, and transparent positioning. This structure aligns well with the concerns of plan sponsors.”

Across business models, Cerulli estimates that as of year-end 2014, there were approximately 11,150 dabbler adviser practices that influenced $417 billion in DC assets, excluding the insurance channel. The research further breaks the dabbler segment into two subcategories.

“On one hand, there are ‘dabbler’ advisers who have a handful of retirement plan clients, but no intention to tilt their business in this direction,” Cerulli explains. “Alternatively, there are dabblers who some asset managers refer to as the ‘emerging specialist.’ The emerging specialist is still an adviser with less than 49% of revenue generated from retirement plans, but is focused on growing this part of the business.”

Cerulli concludes that, to date, most asset managers remain focused on true retirement specialists, “but some firms are shifting their attention to also address dabbler advisers who exhibit certain characteristics that signal the potential to become a retirement specialist over time. For example, some asset managers emphasize the emerging specialist as a way to establish a strong relationship early on with an adviser who is positioned to bring them more retirement business.”

Information on obtaining full Cerulli reports is here.