With the passing of another defined contribution holder, the only surprising aspect of Voya's deal to buy OneAmerica's pension division was the price paid, estimated at a fifth of what Empower paid for MassMutual's DC business and a quarter of that up front. The pertinent question for counselors is “who is the other?”
When a record holder leaves, it creates a free-for-all, with competitors aggressively pursuing clients of exiting providers, who may ask a lot of uncomfortable questions of their current advisor.
There are objective indicators of whether a record holder is strong enough to not only survive, but win the war of attrition as the industry dances with consolidation curve mind, which will eventually result in four to five providers with 80% of the market. These attributes include:
- Scale – close to or more than 10 million participants
- Strong distribution
- Cross-sell/proprietary fund capabilities
In the RPA 401(k) market, five have tiers, and another five have unique distributions and/or cross-selling and proprietary funds. King of the Hill, Fidelity, has all three — in spades.
But beyond qualitative metrics, advisors can also understand whether a record holder is likely to leave by observing wholesalers, who are the giraffes of the industry.
In the Serengeti, other animals stand near giraffes at waterholes because giraffes can act as an early warning system, allowing other animals to see danger from a distance because:
- Giraffes are tall and can see danger from afar,
- They were easily frightened, and
- When a giraffe senses danger, it can quickly alert other animals.
Like wild animals standing next to giraffes, wholesalers often have early warning systems. Patterns of major wholesalers leaving a provider can signal trouble ahead or even when a wholesaler stops calling or doesn't sell aggressively.
I recently got a call from a long tenured OneAmerica wholesaler. They were nearing the end of their careers and were being recruited by a ladder record holder. While I didn't tell them what to do, I told them the reality of the situation.
Can advisers really afford to do nothing? While putting an entire book of business up for bid may seem impractical, the risks of poor selection can outweigh the benefits. But doing nothing could result in advisers scrambling when one of their key record-keepers leaves, damaging their reputation.
There are now 40 national record holders. Eliminating fintechs and those like Alight that focus exclusively on the DC institutional market or TIAA working with educational 403(b) plans, there are 15 providers that will struggle to compete with scaled competitors or those with unique or able to cross sell or sell their high quality proprietary products.
Consolidating the drive is the rising cost of technology due to cyber security concerns, distribution costs and, of course, the convergence of wealth, retirement and work benefits. With more power concentrated in the home office or aggregator and broker/dealer, buyers are smarter and likely to spot issues before an individual advisor can.
Payroll and fintechs with streamlined processes will be able to capitalize on the explosion of smaller plans. Neither is well-positioned to capitalize on convergence as fintechs, which have raised over $1 billion, will struggle to meet the high expectations of their PE firms (one of the largest fintechs reportedly had a flat round recently) and payrolls struggle to sell off their base payroll.
Because unlike ERISA investment selection, advisors won't be judged on their process—they'll be evaluated on results. So, as the knight warned at the end of Indiana Jones and the Last Crusade, “You must choose, but choose wisely.
Fred Barstein is the founder and CEO of TRAU, TPSU and 401kTV.