The Evolving Retirement Plan Advisory Firm Landscape
In partnership with State Street Global Advisors, Wise Rhino Group* authored a whitepaper highlighting the changes and challenges to the retirement plan advisory firm landscape. The whitepaper reviews:
Until recently, building and maintaining a successful retirement plan advisory (RPA) firm has been a relatively straightforward proposition. However, this dynamic is changing, as RPA firms face disruptions in the form of adverse industry trends, increased and unexpected sources of competition, and changing client preferences and demands.
3 Key Forms of Adversity Unscaled RPA Firms Face
1. Margin Compression and Commoditization of Services
Most RPA firms are now being asked to do more for the same fee or provide the same services for lower fees. This margin compression is being caused by many factors including:
More educated plan sponsor buyers
An increase in the number and scale of larger firms that have reached critical mass and have built more efficient service models
Specialty firms, such as 3(38) service providers, that are charging lower fees for many core investment services
Competition from recordkeepers for certain services
RPA firms are the last service provider segment in the retirement ecosystem to consolidate, as recordkeepers, broker-dealers, and mega/large-market investment consultants are all in late-stage consolidation.
At the top of the $8 trillion retirement space, the largest national investment consulting firms (e.g., Mercer, Aon) advise approximately $3.5 trillion in retirement plan assets. The other 45 or so regional/boutique investment consulting firms advise another $525B. The 51 firms that control more than 50% of all defined contribution (DC) assets are reduced each year in number as the national firms systematically acquire the remaining regional/boutique shops.
In the “second half” of the retirement advisory space, there are now 15 – 20 RPA firm “aggregators” that advise approximately $1.3 trillion in retirement plan assets. The next largest 75 – 100 RPA firms (in terms of revenue) advise another $350B. The next 500 largest RPA firms advise approximately $740B. All told, these firms account for $2.4 trillion, or 30% of all retirement plan assets. And the consolidation of this retirement segment is just beginning to accelerate.
All retirement plan industry providers now understand that those closest to the plan sponsor and participant client will control the relationship, the experience, and the economics. Recordkeepers, asset managers, and technology firms are all competing more and more with the RPA firms to move to the front of the value chain.
Competitive threats include:
Existential threats from large players such as Amazon, Google, and Microsoft, which continue to focus on financial services and have the potential to disintermediate the financial services space in a big way.
A shift by RPAs toward engaging the plan participant through in-plan advice with the goal of ultimately offering broader wealth management services. Several scaled recordkeepers and asset managers clearly understand this dynamic and appear to be positioning themselves to compete.
Increasing business complexity as RPA firm leaders prepare to manage through the “dangerous middle” of a firm’s growth stages.
Deployment of new, disruptive technologies, which will become table stakes as RPAs engage participants toward the goal of building higher-margin wealth businesses.
Convergence of retirement, health, and wealth as key factors to a firm’s financials and overall success. More RPAs are looking to diversify their service model to include all aspects of an employer’s benefits and retirement spectrum.
Human capital risk, as many practitioners at RPAs are now in their 50s and 60s, and few RPAs have a succession plan in place. In addition, the age and remaining runway of these firm leaders is an important factor in the enterprise value of their business.
Market risk, as a 10-year bull market that began in March of 2009 has produced more buyers of RPA practices than sellers. With acquisition multiples at an all-time high, many large consolidators are looking for partners with certain attributes, creating next-stage career opportunities for many retirement advisor leaders.
The Momentum and Variability of Aggregator Model
Over the past 10 years, alternative RPA business models began to form that aligned advisors and firms with similar or complementary service models to achieve benefits of size and scale without disappearing into a larger entity. There are many names for this emerging segment of the retirement and wealth business, but we will use the term most commonly used in the marketplace, “aggregators.”
Aggregators use a variety of common models:
Platform Affiliation: Firms join an ecosystem and tap into an established platform that allows them to “rent” a platform that provides end-to-end operating and tools and services support.
RIA Strategic Acquirers: Branded RIA firms systematically acquire other retirement firms, including RPAs, to grow market share, enter new geographic regions, and achieve other growth-oriented strategic objectives. Clients become managed within the larger aggregator firm network, with advisors focusing on relationship management and new business growth with varying degrees of centralization.
Insurance Brokerage Acquirers: Firms experienced in acquisitions, and focused primarily on employee benefits, property and casualty, and personal lines. These firms have begun to think more holistically about benefits, retirement, and wealth, accelerating their movement into that space.
Regional RPA Firms: Generally, firms with annual revenues over $5 million that have established regional brands to attract the best employees and clients. Regional RPA firms typically use a scaled service model that includes participant engagement and wealth management.
Additionally, private equity (PE) models potentially overlap with many of the above forms of aggregation. Recent PE investments in retirement adviser firms have primarily come in the form of “intermediary” agreements in which PE firms invest in the insurance and brokerage space, and to a lesser extent in the wealth space, focusing on the economic aspects of the firm, rather than day-to-day operations. In these situations, PE firms see value in the cash flow an independent RIA can generate and the strategic value in acquiring a firm that is complementary to an existing investment.
Opportunities to Evolve, Survive, and Thrive
As the consolidation of consulting firms, recordkeepers, and broker-dealers has proved, the challenges of change can turn firm strategies upside down, weaken the strong, and destroy the ill-prepared. But change can also represent a once-in-a-generation opportunity.
RPA firm leaders will need to conceive business models that will be more competitive, profitable, and sustainable for the long run. Firms will need to be bigger, be managed more professionally, and provide more participant-based services.
While we do not predict the end of the sole practitioner, there will be a divergence in size and presence in different markets. We will continue to see more and bigger truly national retirement and wealth advisory firms. We will also continue to see the emergence of larger regional RPA firms.
The RPA firms that will survive and thrive in the future marketplace are making changes to their business today. For more detail on how to evolve your practice to keep pace, contact us for the full report.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.