Change is inevitable, a fundamental, immutable and irrefutable law of nature. However, most of us resist instead of supporting, wasting valuable time, resources and energy. The defined contribution industry is no exception. As retirement planning takes center stage, emerging from what was once a sluggish financial services scene, it will further accelerate the consolidation of retainers and advisors.
According to Harvard Business Review lead article by AT Kearney consultants analyzing 1,345 mergers titled “The Consolidation Curve,” all fragmented industries that can eventually consolidate will. Social change, technology and laws, including litigation, are having major effects on an industry that has moved slowly to adapt, but now has no choice.
So what are the societal forces and how will they affect advisers, providers and asset managers?
Convergence
Some cynics still question whether the convergence of wealth, retirement and workplace retirement is overblown.. Although we're just getting started, there's no doubt that Workplace is ideal for helping people without access to personal advisors or financial planners for a host of reasons.
Falling plan fees are forcing record holders and advisers to look for new sources of income, while asset managers, particularly active managers and those without a higher target date fund, are struggling.
The explosion of small plans
Federal and state lawmakers are focused on increasing access to workplace retirement plans, leading to an unprecedented explosion of small plans through state mandates, tax credits and PEPs. Most advisors and providers face what Harvard Business School professor Clayton Christensen called the innovators dilemma as their current business models are not suited to fuel this explosion.
COVID-19 as a catalyst
The world changed forever because of the pandemic. More people are working remotely, which can be challenging but also offers opportunities. Most people, especially remote workers, are happy to get financial advice, which keeps costs down. The pandemic has also led to historic job growth, creating a war for talent, making retirement plans a key strategic weapon to recruit and retain workers, and continues to fuel the gig economy.
technology
It is hard to think of any part of our lives that has not been affected by technology. Fueled by more accessible data, people expect personalization as technologies like AI and ChatGPT are creating new paradigms.
Shifting the retirement obligation to individuals
As traditional DB plans fade because companies don't want the liability associated with people living longer, DC plans are being revamped to help participants manage their personal pension plans. However, even with the great strides made through automatic plans, wellness programs, and eventually in-plan retirement income, most people without an advisor still struggle to manage their finances and retirement planning.
So how will these external influences affect the DC industry?
RPA 401(k) Data Controllers
The inevitable consolidation beat continues as providers are and have been in the third of four stages of the consolidation curve, called “Focus.” After the wild consolidation in the second stage, “Scale”, the survivors seek to expand their core businesses and outperform their competition. This phase involves megadeals as the survivors relentlessly attack poor performers.
The poster children are Empower's acquisitions of pension groups MassMutual and Prudential, as well as Principal buying the Wells Fargo division. There have also been smaller recent explosions such as Ascensus buying Mutual of Omaha's group. There are over 40 national record holders and almost 200 other regional TPAs for record keeping, which is inconsistent.
There are about a dozen providers likely to not only survive but thrive, which include:
- Scale – those with almost 10 million or more participants
- Niche – those using convergence like Schwab or proprietary distribution like American Funds and payroll like Paychex
- Fintechs – those who pass the small plan pass through efficient technology and processes
Although consolidation for most other providers is inevitable, firms without scale or mass distribution that ride the wave of convergence, which continues to support valuations, may hold some in the market.
Convergence also creates a showdown between some providers and advisors over who owns the participants.
ADVISORS
RPAs are in the second phase of the consolidation curve, when major players emerge rapidly, acquiring competitors and improving integration capabilities, core culture, storage and a scalable IT platform. RIA aggregators like Creative Planning and Mariner see the value of large participant bases to grow their wealth client businesses, while RPA aggregators have or are trying to leverage their participant relationships and access to participants to build capabilities their wealth.
Local or regional RPAs, even those able to leverage convergence, will struggle to keep pace – larger ones will find it increasingly difficult to resist the large checks that aggregators offer. Leveraging PEPs and technology, institutional investment consultants such as AON, which recently bought NFPs and have gone through their consolidation curve, are eyeing smaller plans.
And wealth advisors who have traditionally shunned DC plans are beginning to convert as more of their clients who own or operate businesses are seeking help as technology enables them to access a subset of participants who are attractive to the business of their property during contracting. most heavy lifting and fiduciary services.
DCIO firms and broker/dealers are also experiencing their own form of consolidation, although not driven, but certainly affecting 401(k) plans. like Franklin Templeton's recent Putnam purchase.
Creating or expanding new business models is not easy, requiring different skill sets, customers and technologies, but those that resist will be overwhelmed by the wave of consolidation driven by the social forces that are growing and targeting the industry squarely. k).
Fred Barstein is the founder and CEO of TRAU, TPSU and 401kTV.