Data & Research October 11, 2021

DCIO Service Providers Report Significant Momentum

As they head into 2022, DCIO sales and marketing units report appreciating stock prices and improved net sells that they expect to continue.

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The average defined contribution investment-only (DCIO) provider’s assets under management (AUM) rose 30% over the 12 months leading up to June 30, aided by market gains of around 10% in just the first half of 2021, according to a new Sway Research survey.

The analysis is based on surveys and interviews with 21 DCIO sales leaders and defined contribution (DC) plan intermediaries. It shows that not all the AUM growth is the result of increasing stock prices, as two-thirds of the managers captured positive net sales during the first half of this year—a marked improvement over full-year 2020, when seven in 10 managers experienced net redemptions from DCIO assets.

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This run of asset growth and improved net sales has the DCIO market projected to reach $6 trillion of assets by year-end 2021 and nearly $8 trillion by the end of 2025. Sway estimates DCIO assets will reach 60% of the total DC market at year-end 2025, up from nearly 57% this year. Similar projections are included in the 2021 PLANADVISER DCIO Survey, which was released in June.

Fueled by a demand for lower-cost vehicles, the firm says DCIO assets invested in collective investment trusts (CITs) will surpass $2 trillion of AUM during 2021. There has been a significant shift in DCIO assets, with mutual funds possessing a 39% market share and CITs reaching 34%. At year-end 2018, mutual funds controlled an estimated 45% of DCIO assets, compared with just 28% for CITs. If CIT usage continues to surge, Sway expects these products will overtake mutual funds in DCIO asset share by the end of 2025.

Most of the growth in CIT usage is coming in large and mega DC plans—those with more than $50 million in assets. Small and midsize plan markets, where Sway’s survey is focused, remain more concentrated in mutual fund vehicles, but CITs are seeing increased use among advisers, as roughly one in three plans served by these intermediaries features CITs (not including stable value options).

Usage in smaller plans is mostly driven by the need to bring down expenses, the report adds. One-third of specialist DC plan advisers indicated that squeezing costs out of plans to enhance plan retention and/or new sales is a very or extremely important business goal, while another one-third indicated this is somewhat important to their current strategy.

The research indicates active strategy managers may not see this as good news for DCIOs. Two-thirds of asset managers surveyed this year indicated earning less revenue on assets in CITs than mutual funds. Most say the difference is slight, however, while nearly one in five indicates the drop in profit margin is 10% or more.

When asked to indicate the share of DCIO sales currently generated in products using environmental, social and governance (ESG) screens and managed account solutions, few DCIOs believe either product type is making a major impact—though these sales can be difficult to track. While ESG investing is seeing increasing usage among plan advisers, with about three in five plan specialists now using ESG products in DC plans, only about one in five of these DC plan-focused advisers surveyed use managed accounts as a qualified default investment alternative (QDIA), which is most commonly a target-date series.

Overall, many DCIO executives remain optimistic that the customization allowed by managed accounts will eventually win out, with these products grabbing additional market share and driving greater sales in the years ahead.

“Portfolios designed to meet ESG screens and managed account solutions will grow in importance as participants take a more active role in determining how their dollars are invested,” writes Chris Brown, Sway Research founder and principal, in the report. “But, as with all enhancements to retirement plan menus, success will be achieved via a combination of compelling returns and, most importantly, competitive fees. Without attractive fees, few plan sponsors will take a chance on these plan enhancements. And building and maintaining products with these two key attributes is never as easy as it seems.”

Data & Research October 11, 2021

Adviser Industry Posts Another Quarterly M&A Record

Echelon’s latest merger and acquisition research finds U.S. private equity firms and strategic acquirers are pivoting their attention overseas as the competition for assets and talent heats up.

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Echelon has published its third quarter adviser industry merger and acquisition (M&A) update, finding that deal volume hit yet another record high.

According to Echelon, prospective tax code changes might have helped fuel the new record quarter, which saw 78 deals announced. The previous record was 76 deals, set in the first quarter of this year. The third quarter analysis shows large strategic acquirers, many of which are backed by private equity firms, maintained their status as the most active dealmakers in the wealth management and advisory industry.

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At this rate, Echelon researchers expect the number of 2021 deals to outpace the total 2020 deal count by a significant margin. They point to strong secular trends such as overall financial services industry consolidation, growing competition and a need for broader succession planning as key drivers of the rapid pace of M&A. Adding fuel to the fire are supportive capital markets, cheap debt and heightened corporate cash balances—as well as the “transitory trend” related to potential changes in tax rates that could be included in the federal budget legislation making its way through Congress.

“Private equity interest in the wealth management sector has reached all-time levels,” the third quarter report notes. “The majority of deal activity involving private equity capital has come via their portfolio companies, such as M&A powerhouses Mariner Wealth (backed by Leonard Green) and Mercer Advisors (backed by Oak Hill). This buyer group, which we largely categorize as ‘strategics’ or ‘consolidators,’ accounted for 58 transactions during the quarter. … [These buyers] are outpacing even the most grandiose of expectations.”

Simply put, Echelon says, the strategics and consolidators are dominating total M&A activity, accounting for more than 70% of all transactions this quarter and more than 50% of all transactions in 2021 year to date. Echelon also finds average assets under management (AUM) per transaction continues to increase. There were 51 deals involving over $1 billion in assets announced during Q3 2021.

“This was a giant leap quarterly for total deals this size relative to the first two quarters of 2021, and significantly higher than the quarterly levels that were observed prior to this year,” the report explains. “The quarter’s average assets per deal of over $2.3 billion highlights the strong supply of available dealmaking capital from sophisticated buyers that is allowing demand from buyers to exceed the supply of firms looking to sell, even with the significant increase in the number of sellers that Echelon has observed in the past six to 12 months.”

According to Echelon, the growth in average assets impacted per deal can also be attributed to increases from investment performance, as major indexes continue to perform well—despite some growing concerns about a potentially cooling economy.

“Overall, we expect 2021 to be another year of record average assets under management transacted due to robust equity markets, new avenues for organic growth and feverish interest from current and emerging buyers,” the report concludes.

The Echelon research also points out a notable new trend. The researchers say some strategic buyers, spurred by opportunity as well as increasing competition, have ramped up dealmaking activity in the United Kingdom—and they have already been followed by prominent U.S. private equity firms also looking to establish a presence in the region.

“One direct private equity investment from the quarter that is worth noting was Lightyear Capital’s strategic partnership with international RIA [registered investment adviser] and U.K.-based wealth management firm Wren Sterling Financial Planning Limited,” the report notes. “This deal represents an important macro-trend that has developed throughout the year: domestic private equity firms turning their attention overseas as the U.S. M&A market becomes increasingly competitive for large-scale platforms that can support M&A. In 2021, the U.K. has seen an especially large increase in deal activity and general interest from U.S.-based financial and strategic acquirers.”

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