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:
Contact us for the full report.
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.
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:
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:
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:
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.
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.
*For more information on Wise Rhino Group, visit https://wiserhinogroup.com/
©2021 State Street Corporation. All Rights Reserved.
EXP: January 31, 2022