M&A Brings Wealth, Retirement Together

CAPTRUST talks with PLANADVISER about its growth through mergers and acquisitions—and how this speaks to industry trends impacting private wealth and retirement plan business.

Art by Patrick Edell


Retirement plan advisers with any significant experience will have run into the fundamental question of how to structure a practice that can effectively serve both private wealth management clients and institutional retirement plan clients.

Not all advisers choose to work on both sides of the business, of course, and the firms that choose to specialize only in institutional or private wealth services give a variety of reasons for not stepping across the aisle. These reasons are changing over time with the defeat of the Department of Labor’s fiduciary rule reforms last year—and with the ongoing work at the Securities and Exchange Commission on its own conflict of interest regulations—but many retirement plan specialists say they do not plan to shift their focus, even if the regulatory environment is easing under the Trump Administration.

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Other firms, including CAPTRUST, are eagerly building business models that can support advisers working with both private wealth management and institutional clients. They say that serving retirement plans and private individuals does not mean a firm will be aggressively soliciting rollovers or engaging in other potentially problematic cross-selling behaviors barred by the Employee Retirement Income Security Act (ERISA). Instead, they say building a firm that does both private wealth and institutional retirement plan business is about creating a holistic service ecosystem that clients want and need, especially as the defined contribution (DC) plan system matures and becomes a key component of individuals’ retirement income. 

“When I talk to a lot of our institutionally focused peers, they’re all trying to figure out their relationship with the wealth management space,” says Rick Shoff, managing director of the CAPTRUST Advisor Group. “We are going down the route of doing both private wealth and retirement business because we know that, ultimately, all the people we are helping within the institutional plans, they’re eventually going to have to do something with that money. For that reason, we believe that being holistic is important for our future and for our clients’ wellbeing.”

According to Shoff, CAPTRUST was built with this holistic vision from the beginning, and the approach is increasingly being adopted by other firms. He adds that, for CAPTRUST, putting a holistic business model into action has caused the firm to engage in a very aggressive amount of merger and acquisition (M&A) activity in recent years. He expects as many as five possible mergers for 2019; the firm in fact announced three new acquisitions in the last month alone.

One firm that was brought most recently into CAPTRUST is Watermark Asset Management, based outside of San Francisco, which “handles individual client accounts with a high-touch approach” and has $400 million in assets under advisement across nearly 400 clients. On the other hand, the newly acquired Rogers Financial, out of Harrisonburg, Virginia, is an institutional advisory firm that advises on more than $2.5 billion in assets for 35 retirement plans. Underpinning its holistic vision, the firm announced these two acquisitions at the same time, although the incoming firms are themselves quite different.

Less than a week after these deals were announced, the firm noted it was bringing on board three new partners and supporting team members from the Atlanta-based and institutionally focused firm FiduciaryVest. The FiduciaryVest team, led by Philly Jones, brings more than $13 billion in client assets under advisement to CAPTRUST and will assume the company’s brand as part of this merger. One interesting point in this deal is that a remaining partner and his team will continue to operate independently under the FiduciaryVest name—ostensibly to keep the focus on pure institutional business.

“Part of why our M&A activity is getting the attention is that people know it’s hard to do both private wealth and institutional business well,” Shoff observes. “We agree that it is a challenge, but we know it is one we can solve as a unified firm. Our clients understand and support our M&A goals, as well. They know there has been a huge accumulation of wealth in DC plans, and there is not really much of an infrastructure at this point to help people spend down these assets.”

Asked what additional M&A activity the longer-term future could bring, Shoff says the target remains three to five acquisitions per year over the next five to 10 years. Organic growth is “still the main event,” he adds, which means going out and finding clients and keeping the promises made to existing clients.

Context for these projects can be found in Fidelity’s recently published 2018 Wealth Management M&A Transaction Report, which analyzes merger and acquisition activity in the space for the full year. According to the report, 2018 transaction numbers were actually down compared with 2017 figures—though assets in motion were up. In total, Fidelity says there were 95 transactions totaling $563.4 billion in 2018. This figure is down 13% from 2017, but that number hides the fact that the assets transacted more than doubled—up from 2017’s $265.5 billion—across the registered investment adviser (RIA) and independent broker/dealer (IBD) channels. At year’s end, RIAs accounted for 87 of the 95 wealth management transactions.

Matching findings from the last few years, Fidelity says “strategic acquirer models” have come to the fore in the RIA space. They are increasingly capitalized by private equity and continue to drive the majority of M&A activity. Indeed, Fidelity says strategic acquirers accounted for 68% of RIA buyers in 2018.

“Overall, but particularly in the RIA space, 2018 was a seller’s market,” Fidelity says. “It remains to be seen whether the market’s volatility and recent decline will shift to again favor well-capitalized buyers, and how that would impact the valuations sellers have enjoyed of late.”

Shoff says there has indeed been a lot of talk over the years about consolidation in the adviser space, but from where he sits, consolidation is “definitely starting to accelerate in a real way.”

“We still have to go out and earn this business, scratching it out of the dirt, as they say. But there is no doubt that it is getting harder to be fully independent, because there is growing complexity to be in this business and clients are demanding so much more,” Shoff says. “And advisers are getting older, frankly. So there are a lot of reasons we believe the pace of M&A activity will pick up even more.”

As Shoff observes, the motivation for why institutional firms may want to bring on wealth management expertise and to start to build out that type of client service infrastructure is baked into the aging demographic trends of the U.S. and the fact that DC plan assets have grown exponentially in recent decades. But what benefit do the wealth managers see in joining forces formally with retirement plan specialists?

“What we have seen in the private wealth space is that it is hard to get a competitive advantage over your peers if you are purely doing traditional wealth management services,” Shoff says. “When a wealth firm joins CAPTRUST, they are naturally going to be in much closer proximity to the DC plan assets than they otherwise would be. Our major advantage on the wealth management side is that we have all these institutional clients that already know us and trust us. Let me be clear, we are a fiduciary on both sides and we do the right thing by all our clients. We will never be in the business of aggressively capturing rollovers. I’m simply saying there is a big need for pure wealth management out there beyond the retirement plans we focus on.”

Shoff says the relationship between private wealth clients and institutional business will always be somewhat nuanced, as there are very important conflict of interest considerations to be weighed and resolved under ERISA.  

“When we say we’re not in the rollover business that means we’re not out there aggressively soliciting rollovers—that’s just not what we do,” Shoff continues. “If a plan participant down the road decides their best interest is to move their money out of the plan and to invest with us, our increasing wealth management capabilities mean we can facilitate that and continue to prioritize the client’s best interest. I think there are firms out there that do not think about wealth clients and retirement clients in the same way. They think they can just get in line first for the rollovers. We don’t think that way because we know our clients would not respond to that.”

According to Shoff, another part of the motivation behind bringing in wealth management firms is that participant-level advice services is the fastest growing segment of the CAPTRUST business at this stage. This fact underscores the notion that people need individualized help in knowing what to do with their accumulated assets, both during their working years and as they enter/navigate retirement.  

“We’re giving them individual holistic advice, not just advice on what’s in the plan, but on whatever assets they might have,” Shoff says. “And the client is paying us a fee to do this, which is separate from managed accounts, I should note. A lot of recordkeepers and advisers are launching their own managed accounts as one way of delivering individual advice at scale—but we’re not approaching it that way. We are getting paid a fee and for that fee we deliver this holistic advice.”

Asked what sources of drag Shoff thinks could prevent CAPTRUST from hitting its growth targets in coming years, he points to a few different but interrelated areas.

“If you look at our strategic priorities, our No. 1 goal is adding great adviser talent,” Shoff says. “We have a strong business structure in place, and the need and demand for our services is there and growing. So from that perspective, our biggest challenge is continuing to find and to resonate with the strongest adviser talent. If we can do that, as we have, we will remain successful, because there has never been a better time to be an adviser.”

Shoff adds that, to continue to earn more revenue per client, the firm will need to continue to add to its value proposition.

“The succession planning discussion is a tailwind for us,” Shoff concludes. “It’s harder than people expect to transition a business ownership, and doing it internally is even harder. The chances of a really great adviser finding someone within their own team to step up and fill their shoes—it’s just really hard. Most of the talent on the institutional side is very unique and dedicated, so they are hard to replace. This is a part of when you don’t see very many intergenerational hand-offs on the institutional side. It’s more common on the wealth management side, I think. Sometimes I think advisers believe leaving their business will be an easy and natural transition, but that’s not how it works in many cases.”

Millennial Misconceptions: Younger Workers Prioritize Retirement

Millennials may make different life choices than previous generations, but they are also more engaged at an earlier age with retirement savings in the workplace.

 

Art by Mark Wang

Art by Mark Wang


A lot of ink has been spilled maligning the Millennial generation and lamenting their motivation to save for retirement and otherwise plan for the future. For instance, it has been written that Millennials are short-term thinkers who prioritize life experiences over saving for the future. They’re also typically described as budget-conscious consumers who have little loyalty to businesses or brands. And, of course, they’re viewed as lifestyle predators, having “killed” everything from condiments to vacations.

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In truth, Millennials simply make different life choices than previous generations have. One of those choices is saving for retirement earlier—on average, at age 24—than previous generations. A typical Gen Xer began saving at age 30, and Baby Boomers didn’t start setting aside retirement funds until age 35 or so.

The 2018 Millennium Trust Small Business Retirement Survey found that many Millennials already have accumulated sizable retirement savings, as the chart above shows. On average, Millennials who participated in the survey had saved more than Gen Xers.

It is a good thing Millennials are tucking away tidy sums at an early age. While recent reports from the Employee Benefit Research Institute (EBRI) indicate retirement security in America has improved since 2014, those gains are likely to be lost again in 2034 when the Social Security Trust Fund Reserve may be depleted and benefits reduced by 23%. Consequently, younger Americans may need to save more than earlier generations to secure comfortable retirements due to increased life span and overall increased cost of living.

In the Millennium Trust survey, the majority of respondents—across generations—indicated that having a retirement plan at work would help them save for the future. Not having access to a plan was seen as an obstacle to saving by some Millennials, as was confusion about how much to save.

Plan availability appears to be a key to retirement security. No matter how old retirement savers are or how much they have saved, workplace plans can have a significant effect on saving behavior.

The Pew Charitable Trusts reported that Americans who did not have access to employer-sponsored retirement plans were less likely to have retirement savings. In addition, about 40% of Americans who began saving for retirement in one employer’s plan stopped saving when they accepted a position with an employer that did not offer a retirement savings option.

The majority of Millennials consider the availability of employer-sponsored retirement plans to be an important consideration when deciding whether to stay with a current employer. It also is an important consideration when deciding whether to accept a position with a new employer.

How Can Employers Help Millennials Better Prepare for Retirement?

Millennials have become the largest generation in the U.S. workforce. The Pew Charitable Trusts reported that as of 2017, the most recent year for which data are available, 56 million Millennials (those ages 21 to 36 in 2017) were working or looking for work. That was more than the 53 million Generation Xers, who accounted for a third of the labor force. And it was well ahead of the 41 million Baby Boomers, who represented a quarter of the total.

Employers who want to attract younger workers need to adapt their benefits to the needs of a younger, financially-conscious workforce. From the employer perspective, key considerations include:

  • Whether to sponsor a workplace retirement plan. Many smaller employers believe that sponsoring a retirement plan is simply too expensive. Ironically, the Millennium Trust survey found relatively few have researched how much a plan would cost.
  • Understanding that programs tailored to small businesses exist. Typically, the costs associated with retirement plans designed for smaller businesses, like SEP and SIMPLE IRAs, are lower than the costs associated with 401(k) plans. Plan participants also usually pay plan costs. In addition, employers may want to consider payroll deduction IRA programs, which are available to businesses of any size and have limited employer involvement.
  • Whether to reduce plan eligibility requirements. Often, lack of participation is not the result of procrastination. It’s due to limited access. Almost one-half of working Millennials are not eligible to participate in employer-sponsored plans because they are part-time workers.
  • There is a potential solution. By lowering the 1,000-hour year of service requirement under the Employee Retirement Income Security Act (ERISA), retirement plans would become more accessible to part-time workers. This would be of particular interest to Millennials, who are far more likely to participate in the so-called “gig economy”.

Employers who fail to offer competitive benefits are likely to find themselves at a disadvantage in a competitive labor market. The needs of Millennials, who comprise the biggest portion of the labor force, are particularly important.

What Does This Mean for Advisers?

As Millennials transition to become a dominant financial force in the American economy, advisers will need to find a way to tailor their services to fit their needs. Some themes advisers should consider as they position their practices for the next 15 years and beyond are the following:

  • The importance of portability. According to the Bureau of Labor Statistics, the median tenure of workers ages 25 to 34 was 2.8 years, more than three times less than those aged 55 to 64. Some of that is to be expected, as older workers are likely more entrenched at their places of work.
  • A new paradigm in our labor force. Millennials are more likely to work multiple part-time jobs and participate in the gig economy. According to research from Intuit, the gig economy is expected to make up 43% of the workforce by 2020. For those part-time or contract employees, a retirement vehicle, like an IRA, would provide more portability and flexibility.
  • Expanding workplace options and education. Fifty-five million employees in the United States lack access to a workplace retirement savings option. Of the employers surveyed by Millennium Trust, 64% said their business wasn’t big enough to offer a plan, and 66% cited money as the largest barrier to offering a plan to employees.

This data points to a lack of understanding among employers related to plans designed specifically for small business, like SEP, SIMPLE and payroll deduction IRAs. On the flip side, it also points to a need for better communication of these lower-cost plan options on the part of advisers and other providers.

The Millennial generation is expected to equal or surpass the size of the Baby Boomer generation over the next two decades, and, as such, will come to define our industry’s sales and marketing efforts. The sooner advisers understand that, the better positioned they will be to take advantage of the tremendous, yet misunderstood, opportunity Millennials present.

 

*Note from the editor:

Kevin Boyles is a vice president and business development director at Millennium Trust Company LLC. He has nearly 20 years of experience in the retirement plan and health savings marketplace. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.

The Millennium Trust Small Business Retirement Survey cited in this article was commissioned by Millennium Trust company, and conducted by CITE Research.

This feature article is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of PLANADVISER Magazine or Institutional Shareholder Services.

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