Advisers' Future Trajectory

Asked about the retirement plan advisory industry of the future, some executives and analysts point to the foundational change that could come along with broad adoption of open multiple employer plans (MEPs), while others cite the potentially huge shake-up a tech giant such as Amazon or Google could cause in the robotic advisory realm. But those are long-term prospects and hypotheses.

Still others emphasize a change already happening—a blurring of the line between private wealth managers and retirement plan advisers, and the growing importance of partnerships, cross-selling and scalability amid a consolidating-provider landscape.

However these or other changes play out, sources agree that advisers must evolve their solutions and services now to keep pace with client, and competitive, demands.

Holistic, Not Conflicted

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 would rather specialize give a variety of reasons for why. These reasons have changed, over time—most recently with the defeat of the Department of Labor (DOL) fiduciary rule reforms, plus the Securities and Exchange Commission (SEC)’s ongoing work on its own conflict of interest regulations—but many retirement plan specialists say they will maintain their current fiduciary focus on serving plan sponsors and participants, even if the regulatory environment is easing under the Trump administration.

Other firms, including many interviewed for this article, 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 aggressively solicit rollovers or engage in other potentially problematic cross-selling behaviors the Employee Retirement Income Security Act (ERISA) has barred. Instead, as Dick Darian and Bob Francis, partners at Wise Rhino Group in Mount Pleasant, South Carolina, see it, 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 CAPTRUST Advisor Group, in Raleigh, North Carolina. “We are going down the route of doing both private wealth and retirement business because we know that, ultimately, all the people we help within the institutional plans are eventually going to have to do something with that money. [So], we believe being holistic is important for our future and for our clients’ well-being.”

Darian and Francis, whose firm specializes in helping advisory firms identify potential partners or merger/acquisition opportunities, agree that the barrier between wealth managers and retirement plan advisers is quickly diminishing. They go so far as to suggest that retirement advisory practices that fail to engage in wealth management may not survive the next decade.

Gone are the days, they say, when there was hesitancy to espouse wealth and retirement businesses out of fear of regulatory scrutiny or the potential for conflicts of interest. Rather, firms are embracing the holistic  philosophy and model.

As a result, they say, competition on pricing is heating up dramatically across the advisory industry.

“We’re aware of certain firms that are very large that, at this point, are almost giving away the plan services, the fund lineup and the fiduciary services to the plan sponsor, to get access to the participants’ future wealth business,” Francis says. “If you’re a retirement practice that does not engage in private wealth management and you’re pricing your service at X, you will soon be competing against firms that are willing to price at a fraction of X while also offering equal or better quality service for participants. In cases where plan sponsors are fine with the potential for cross-selling, that’s going to be incredibly tough for the retirement-only shop.”

The integration of participant services into the retirement plan business shows that certain fundamentals have remained in place over the decades, especially when it comes to the importance of meeting the needs of individual participants, notes Cathy Clauson, AssetMark senior vice president of sales strategy, operations and administration, based in San Francisco.

“At AssetMark, we’re seeing more and more individual wealth advisers who have not tried retirement plan services before embrace the approach of working with us, in a turnkey manner, to serve retirement plans,” Clauson says. “These are advisers moving over from just doing wealth [management] and stepping into the retirement plan space. We have six or eight of them making the jump every month.”

Clauson, however, has seen few advisers reduce or waive their 401(k) plan fees in order to make their money by cross-selling wealth management services. The reason, she says, is that retirement plan services carry significant value, especially when the adviser is willing to meet with participants one on one.

“Advisers working with AssetMark—because we take care of the investment management and due diligence on our end—are able to use their time to go out and meet with participants,” she says. “They don’t just serve the plan sponsor, and so it is clear that they’re delivering strong value for the plan service fees. For those advisers who do not meet with participants to justify their plan-related fees, it will, indeed, be difficult to keep up with the competition and to justify the fees, moving forward.”

Wealth & Retirement Drive M&A

There are many high-profile examples of large retirement plan advisory groups that have made a plan/wealth connection.

One cited by Darian and Francis—the acquisition of Blue Prairie Group by Cerity Partners—demonstrates the coming together of retirement and wealth management. At a high level, Cerity Partners has been more focused on high-net-worth individuals and their families, while also serving businesses and their employees and nonprofit organizations. Blue Prairie Group, on the other hand, has concentrated in the areas of tax-qualified retirement plans and foundations/endowments, with some wealth management as well.

“Cerity Partners was looking for a practice in the large-employer market, because that’s where they’ve had great success already with their executive counseling, financial coaching and wealth management services,” Francis says. “The bigger the combined company, the greater the cross-selling opportunity and the greater the opportunity to productively engage with participants.”

On this emerging theme of creating greater cross-selling opportunities, another recent retirement industry M&A deal is the acquisition of Sheridan Road by Hub International Ltd. That arrangement pairs a retirement plan and wealth advisory shop with a full-service global insurance broker that provides property and casualty, life and health, employee benefits, and investment and risk management products and services. Hub has more than 11,000 employees in offices located throughout North America.

After the transaction closed, when speaking about their goals for the acquisition, Hub International leadership noted cross-selling goals similar to Cerity Partners’.

Sheridan’s advisers, for their part, pointed to the opportunity to provide solutions and services for health savings accounts (HSAs) and supplemental benefits.

Over time, according to Dave Reich, national president of retirement services, Hub International Investment Services Inc., in San Diego, the combined entity will find ways to bring the conversation about retirement plans closer to the discussion of health and welfare benefits.

Apart from gaining new capabilities to deliver to existing clients, Sheridan anticipates that its advisers, working under the Hub umbrella, will be able to make and receive numerous referrals across the larger organization.

One recent CAPTRUST acquisition is Watermark Asset Management, headquartered outside of San Francisco. The firm has $400 million in assets under advisement (AUA) across nearly 400 clients. It “handles individual client accounts with a high-touch approach,” Shoff notes.

On the other hand, CAPTRUST’s 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, CAPTRUST 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 reported it was bringing on board three new partners and supporting team members from the institutionally focused firm FiduciaryVest in Atlanta. The FiduciaryVest team, led by Philly Jones, brings more than $13 billion in client AUA to CAPTRUST and will assume the company’s brand as part of this merger. One remaining partner and his team will continue to operate independently under the FiduciaryVest name—ostensibly to keep the emphasis purely on institutional business.

“Part of why our M&A activity is getting attention is that people know it’s hard to do both private wealth and institutional business well,” Shoff says. “We agree that it’s a challenge, but we know it’s 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. That means going out and finding clients and keeping the promises made to existing ones.

Context for these projects can be found in Fidelity’s recently published “2018 Wealth Management M&A Transaction Report,” which analyzed merger and acquisition activity in the financial advisory space over the past year. According to the report, 2018 transaction numbers were actually down compared with 2017 figures—although assets in motion were up.

In all, Fidelity says, there were 95 transactions, totaling $563.4 billion. 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 (B/D) channels. At year’s end, RIAs accounted for 87 of the 95 wealth management transactions.

When comparing findings from the last few years, Fidelity discovered that “strategic acquirer models” have come to the fore in RIA transactions. These 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 last year.

“Overall, but particularly in the RIA space, 2018 was a seller’s market,” Fidelity says.

Shoff says there has indeed been substantial talk over the years about consolidation in the adviser space, and, from where he sits, that 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’s getting harder to be fully independent, because there is growing complexity in this business and clients are demanding so much more,” he says. Moreover, “advisers are getting older, frankly. So there are many 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 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.

More Services Are Expected

Apart from retirement plan advisers moving into the areas of private wealth management and also HSAs, firms are finding ways to support clients via 529 college savings accounts.

While the direct revenue opportunities in 529 plan services may be limited to broker/dealers and asset managers rather than RIAs, a number of RIA retirement plan advisers have already added 529s to the services they provide, in order to reinforce their relationship with sponsors and participants. These RIAs are generally compensated with a fee for one-on-one advice or, perhaps, through a financial wellness fee, under either of which arrangement they counsel participants about 529 plans.

Adding 529s can bolster advisers’ engagement with both the plan sponsor and participants, says Peg Creonte, senior vice president of business development for Ascensus’ government savings division in Newton, Massachusetts. Certainly, while some advisers view offering 529 plan services as a complementary service, there are those who see such a high take-up rate of 529 plans among participants that they consider them an important offering (see “Educating Is Important With 529s,” Trendspotting).

Essex Financial, an RIA firm in Essex, Connecticut, began offering the service eight years ago. James Sullivan, vice president, says advising on the plans, for which he increases his fee by 50 basis points (bps), “is more of a value-add than a true revenue generator. I do it to help solidify the relationship with the plan and the participants rather than as opportunistic cross-selling.”

Jerry Ripperger, vice president of consulting at Principal Financial Group in Des Moines, Iowa, points to a further, far less explored potential service: employee stock ownership plans (ESOPs). He says his firm encourages plan sponsors to offer an ESOP to complement their 401(k).

“Often, an ESOP is set up without plan sponsors understanding how to wrap it with their total retirement program,” Ripperger says, noting that the adviser can come in with a holistic plan design to help both employers and employees meet their goals. “The adviser should be front and center, driving the whole retirement plan strategy,” he adds.

According to Mark Kossow, a member at Clark Hill law firm in Princeton, New Jersey, whose practice focuses on ESOPs, to begin a client company’s transition to employee ownership, the adviser brings in two attorneys—one for the plan sponsor and one for the ESOP. ESOPs also need an independent trustee that has control over assets and considers buys and sells, as well as an appraiser that works with the trustee to determine the fair market value of the employer’s stock. In addition, a third-party administrator (TPA) or recordkeeper determines benefit allocations to participants and beneficiaries after the ESOP transaction has been made.

“Plan advisers can help with the selection of all of these parties,” Kossow says. “Advisers may also provide employee communications to explain how the ESOP works.”

The Scalability of Advice for Plan Sponsors Matters

Reflecting on the changes he sees in the retirement advisory industry, Fielding Miller, CAPTRUST’s CEO and co-founder, says his firm and others are in the midst of a real push on 3(38) discretionary fiduciary investment management services. Some clients still prefer the nondiscretionary 3(21) relationship with their adviser, but, Miller says, more are coming to see the benefits of 3(38) service.

“Recently, the business model has clearly been evolving in favor of greater use of 3(38) fiduciary arrangements,” Miller says. “In today’s environment, the discretionary management arrangement makes a lot of sense for a lot of different clients. It makes a ton of sense on the smaller end of the market, and, in fact, it’s one of the few ways you can try to scale an advisory solution for that otherwise-tricky marketplace.”

Miller observes that the 3(38) fiduciary relationship requires less input from the plan sponsor than when the adviser is a 3(21). “You’re still managing the money and doing your job as an adviser,” he says, “but you don’t have to wait for the committee meetings to effect a given fund change, for example. So, in that sense, it can be a lot easier to build scale based on 3(38) relationships.”

Of course, the 3(38) arrangement has its own hurdles, from the advisory-firm growth perspective.

“It’s pretty intuitive why 3(38) seems more scalable—because you can create your investing models and manage them directly on behalf of many clients at once,” Miller explains. “However, if you zoom in and think about how trading and processing works in 401(k) plans, you can see that the benefits of this scale will come into play only once you reach a certain amount of back office sophistication and client volume.”

The idea is that, because each retirement plan provider has a different set of rules for trading and processing, the adviser taking on 3(38) services must have a very strong back office operation—it will need to create the whole 3(38) architecture that will allow more efficiency by enabling bulk omnibus trades.

“So it’s not a complete net savings, in other words,” Miller says. “You have to do all that difficult work in advance of creating these systems and negotiating with providers to make it as efficient and cost-effective as you can. But this challenge is surmountable, and, more and more, we’re having success leading with 3(38) as our recommendation for many new clients. We do think it’s the right way to go for a lot of folks.”

Gig Workers and Phased Retirements

With a financial services career stretching back to 1998, Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group in Des Moines, Iowa, has spent considerable time observing the slow but steady evolution of the retirement plan industry. Asked to predict the biggest source of potential disruption in the industry today, Reddy points to the growth of the gig-based economy and the changing demographics of the U.S. work force. Even if gig work is not the norm by 2030, as some studies have suggested, Reddy says, the relationship between employer and employee is changing.

“We are starting to see a fundamental reconsideration of how people think about their relationship with their employer and, as a result, what their expectations are for compensation and benefits,” Reddy says. “Structurally, there will undoubtedly be changes to come in the next 10 to 20 years.”

One main structural change he foresees is that “the whole notion of retirement being a one-time event at age 60 or 65 is becoming obsolete.”

“That idea made sense when most of our economy was based on physical labor. Your body was unable to continue to work beyond this age,” Reddy says. “But I would argue that the jobs we have now, which are more service- and knowledge-based, make older workers more valuable. They can give back more as they age. The practical result is that, as people hit age 62 or 65 in this environment, they want choice. They want choice on how many days they work, how much they engage, and what types of roles they will fill or not fill.”

This will transform what retirement looks like, over time, Reddy says. Simultaneously, with the aging of the Baby Boomers, the U.S. now sees its first generation to enter retirement generally much healthier than were previous generations.

Opportunity or Threat?

According to Jim Young, vice president, product management, retirement, asset management and annuities at Broadridge Financial Solutions, Inc., in Silver Spring, Maryland, there are two possible routes the open multiple employer plan, or “open MEP,” market could take as it develops—both significant for advisers. One would be “from the top, down, by recordkeepers,” and the other “from the bottom, up, by advisers,” he says.

Young anticipates that advisers may be able to act as a gateway for new and existing small and even midsize business clients, encouraging them to join a MEP to provide retirement benefits to their employees. Advisers will be needed to support participants and to provide education as the numbers of plans and participants swell, he says.

“While there’s a likelihood that availability and proliferation of open MEPs will enhance the opportunity for advisers to interface with a larger number of small-business owners, it’s likely that their role and compensation will no longer center on plan investment responsibilities,” Young says.

According to Young, it may be rough sailing as advisers try to win open MEP business. Recordkeepers will have an advantage in creating and growing the plans. Leading payroll service providers are possible competitors in this potential market, too, Young says, as they already have a small-business client base and the necessary administrative resources.

“Local advisers also often provide advice or even discretionary management to plan sponsors regarding plan investments,” Young says. “Under an open MEP, that approach would underscore one of the key benefits of most MEPs—the aggregation and concentration of money into investment sleeves to enhance buying power, increase investment policy oversight, and lower costs. With the leverage of large asset pools, most open MEPS will be managed by institutional investment managers. This is a good thing for small-business employees but not necessarily for advisers.”

At the same time, the open MEP market will “likely coalesce around a variety of specialized open MEPs that target specific industries and employer/employee characteristics,” he says.

“For example, current MEPs sponsored by some professional associations offer a wide array of complex investment options. Such offerings may be appropriate for groups such as doctors and lawyers but not for industries in which employees are generally not investment savvy,” Young says.

“Given this potential landscape, the expectation is that many advisers could primarily serve in a consultative capacity, helping small-business owners decide which open MEP would be right for their unique employee needs. They’ll also serve in an educational capacity, helping employees navigate investment options and the enrollment process.”

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