In Practice October 24, 2019

Slower Quarter for Adviser M&A, But Record Year Remains Likely

Deal volume and value eased during the third quarter after an “unprecedented” first half of 2019.

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PwC has published updated asset and wealth management industry consolidation statistics for the third quarter of 2019, finding deal volume decreased somewhat relative to the highly active first two quarters.

Still, asset and wealth management merger and acquisition (M&A) deal activity remains on track to set an annual record during 2019, PwC’s data shows.

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According to Greg Peterson, financial services leader for PwC deals, and Gregory McGahan, asset and wealth management leader, three forces have been spurring consolidation: fee pressure, slowing growth in assets under management, and the persistent shift from active to passive investing.

PwC’s data shows wealth management remained the most active sub-sector, with dealmaking fueled primarily by continued consolidation among registered investment advisors (RIAs). Notably, PwC finds reported deal value fell to the lowest level since the first quarter of 2018, because of the absence of a reported megadeal.

“While deal volume fell, the pressure to streamline, adapt, and change isn’t declining,” Peterson says. “Transforming operations is one potential strategy. The other is M&A, which could be the only viable way to survive in this rapidly consolidating industry.”

Peterson and McGahan highlight how disclosed deal value during Q3 slumped 74% compared with the second quarter. Deal volume also fell, to 48 transactions during the third quarter, compared with 63 during the second. Yet, even with this slump, the total deal value of $13.7 billion during the first nine months of 2019 is nearly three times the total during the same period of 2018.

From a strategic viewpoint, Peterson and mcGahan expect that more investors and acquirers outside the asset management space will pursue deals. Insurers will probably be especially active, they explain.

These findings match the latest update of Fidelity Clearing and Custody Solution’s quarterly merger and acquisition report, which shows the registered investment adviser (RIA) channel continues to see strong deal activity.

According to Fidelity, at the end of the third quarter of 2019, M&A activity in the RIA channel had already surpassed the number of transactions and the total assets under management (AUM) the channel saw in all of 2018. Compared to the same period in 2018, the total number of transactions increased 43% (from 72 to 103) and the client assets increased 13% (from $487.8 billion to $551.4 billion).

Fidelity further finds RIAs completing multiple transactions accounted for two-thirds of total activity so far in 2019. The review points to the growing concentration of AUM among the largest firms. The findings bring to mind Hub International’s RIA buying spree in September, when it announced in rapid succession six retirement plan advisory-focused acquisitions. In one week, the firm announced acquisitions of EPIC Retirement Services, StoneStreet, Washington Financial, Perennial Pension & Wealth, Inter-Mountain Retirement Partners (MRP) and WhartonHill.

The Markets October 23, 2019

Correlating Market Share and Quality in the TDF Marketplace

The largest funds tend to have the highest ratings from objective third parties, while the smallest funds generally fail to receive positive marks.

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ERISApedia.com has published an extensive 401(k) Target-Date Fund Market Share Study, which among other key findings argues there exists a “fair amount of correlation between market share and the quality of a target-date fund vis-à-vis its peers in the target-date category as measured by an industry-recognized fund scorecard.”

In this case, ERISApedia.com analysts utilize Fi360’s Fiduciary Scores to conduct their research. According to the study, the correlation between market share and third-party rated quality is “especially strong” in the bottom 100 target-date families by market share. In fact, none of these target-date funds have favorable Fi360 Fiduciary Scores.

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The report thus asks whether market share can be used as a predictor of the quality of a fund in the target-date investment category—and likely an even better predictor of poor quality. While there is some evidence for this case, the report explains, a simple assessment of market share alone obviously cannot be used as a substitute for normal due diligence.

Still, thinking about target-date fund (TDF) industry market share is an important exercise. According to the 2019 PLANSPONSOR Target-Date Fund (TDF) Survey and Buyer’s Guide, the top five TDF families continue to dwarf the competition—and the biggest provider continues to get bigger. Vanguard, which according to PLANSPONSOR data managed 33.6% of TDF assets in 2017, has grown to control 37.8% of the marketplace. The four next-biggest providers are Fidelity, which controlled 21.2% of assets in 2017 versus 19.4% in 2019; T. Rowe Price, controlling 16.4% in 2017 and 12.4% in 2019; American Funds, managing 7.2% in 2017 and 10.5% in 2019, making it the only other top-five provider besides Vanguard to gain market share; and J.P. Morgan, which managed 5.0% of TDF assets in 2017 and now manages 4.3%.

Those figures imply that all other TDF providers manage just 15.6% of the marketplace—down from 16.6% in 2017. The other largest providers include Nuveen/TIAA, BlackRock, Principal Funds and John Hancock Investments.

ERISApedia.com’s report also finds Vanguard is “the clear leader of the target-date funds category, with three of the top five target-date families by market share.” According to ERISApedia.com’s analysis, the single largest target-date family by market share is the Vanguard Target Retire collective investment trust.

The 30,000 Ft. View

ERISApedia.com’s analysis shows there are slightly over 200 TDF families present in 401(k) plans in its database. These 200 families are comprised of approximately 2,000 individual funds.

“As our data indicates with nearly all the investment categories found in 401(k) plans, the top 20 funds dominate each investment category,” the report states. “In the case of target-date funds, the top 20 fund families account for nearly 90% of the assets and 74% of the plans in the ERISApedia.com database. The bottom 100 target-date families with the least market share barely make a dent in market share. The bottom 100 target-date families only comprise 0.63% of total target-date assets and are only found in 869 plans, or less than nine plans on average.”

Again, according to ERISApedia.com’s report, this low market penetration could be an indicator that a given fund may be of questionable quality, as none of the bottom 100 target-date families have favorable Composite Fi360 Fiduciary Scores. However, market acceptance alone is a not a conclusive indicator of quality, the report concludes. To demonstrate this point, the report shows how the Vanguard Target Retire CIT—the largest single TDF by market share—is actually only found in 378 (relatively quite large) plans and has not necessarily been subject to a massive amount of plan sponsor due diligence.

The Small Plan Disadvantage

The ERISApedia.com report shows the smaller the plan, the more likely its TDF family will be a pooled separate account (PSA) held inside a group annuity contract. The larger the plan, the more likely its target-date fund will be a collective investment trust (CIT).

“Target-date CITs are the leading investment vehicle in the larger, arguably more sophisticated plans,” the report notes. “It may be wise to investigate whether target-date CITs are appropriate for smaller plans. Target-date pooled separate accounts are popular among smaller plans. In many cases, these PSAs invest solely in a single mutual fund—a “look-through” PSAs. For plans holding such investments, the question is whether it is better to hold the underlying investments outright versus the benefits of holding the investment in a pooled separate account held inside a group annuity contract.”

Fund rating companies such as Fi360 provide little coverage of the over 5,000 look-through PSAs tracked in ERISApedia.com’s Fund Data Intelligence Database, the report warns. “This leaves smaller plans at a disadvantage vis-a-vis their larger counterparts. There is an opportunity for PSA providers and ratings companies to work together to meet this need.”

Interested parties may obtain a free copy of the TDF market share report by emailing support@erisapedia.com.

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