The retirement-plan intermediary space has been "a game of two
halves" for many years. Traditional consulting firms have dominated the
market for large and mega-size plans, while broker-dealers and registered
investment adviser firms have done the same in the small, midsize and lower end
of the large-plan market.
This story begins in the first half of the chart. The numbers reflect
not only the dominance of the traditional consulting firms in the large market,
but also highlight the extent to which these firms have consolidated. In fact,
the seven largest traditional consulting firms and their 35 smaller national,
regional and boutique counterparts now advise to approximately $3 trillion and $825
billion, respectively, in defined-contribution assets under advisement. This
represents more than 50% of the $7 trillion DC space.
The second half of the chart has been the domain of established
broker-dealer-centric firms and elite "emerging" independent shops
and RIA adviser firms. This has been a cottage industry since 401(k) plans
emerged. We estimate there are about 1,700 of these advisory firms that are
truly elite in terms of capability and size.
But history often repeats itself.
The balance of business
The two-halves dynamic is being flipped on its head. A growing number of
adviser practices have emerged as scaled and competitive national consulting
firms, the so-called "aggregators." This has not only created more
competition in the upmarket battle for the big plans, it is also beginning to
dramatically alter the balance of business for the entire second half of the
The winds of change have also come to adviser practices in the form of
changing economics and other adverse industry trends, increased market
complexity and a shifting focus toward participant-based services.
So what should retirement practices do? A good start: Recognize that
what got them to this point probably won't get them where they want to be.
Adviser firms will face exactly what the smaller consulting firms faced during
the first consolidation wave years ago. The consulting firms that recognized and
embraced the realities of consolidation and evolved were the early winners,
striking the best deals with the best firms, which ensured their place as
"the steamroller rather than the road."
Advisers need to practice what they preach to their own clients: Prepare.
This begins with a deep understanding of their own practices relative to this
changing environment. What should follow is a thorough process of understanding
each of the viable growth-through-partnership options thriving in the
marketplace. The right questions include: Am I better off going it alone or
buying into a larger vision? Should I merge or bring on capital and expand?
Even if a practice ultimately does nothing, understanding the various
partnership options available now will, at a minimum, inform how to best build
the business to thrive and maximize enterprise value.
In terms of understanding the growth-through-partnership options, firms
are aggregating in different forms. This includes RIAs, insurance brokerages,
elite regional firms and platform/affiliation firms, as well as emerging
private-equity-backed enterprises that potentially overlap with many of these
The RIA strategic acquirers have been dominated by CAPTRUST and include firms such
as SageView Advisory Group and a few
other firms just now breaking out of their regional footprints. Expect this
segment to grow dramatically.
The strategic insurance-brokerage firms are arguably the most organized
and experienced acquirers, as most have been buyers in the property &
casualty and employee-benefit-firm sides for years. There are six established
players here, including NFP Corp. and Hub International, and at least five
other emerging firms are looking to grow through DC-adviser-firm acquisitions.
Elite regional firms are emerging rapidly in number and size, with some
in the early stages of executing successful acquisition strategies. Most of these
firms are now in an enviable position of being able to choose among growing
through acquisition, merging with an equal partner or buying in to one of the
national aggregator firms.
Tools, services and affiliation platforms continue to expand, and private-equity
firms are just beginning to focus on opportunities with DC-practice
aggregation. Lastly, the wirehouses and broker-dealer firms continue to evolve
As the consolidation of consulting firms, record keepers and
broker-dealers has proved, the challenges of change can turn firm strategies
upside down, weaken the strong and destroy the ill-prepared. Or, change can
represent a once-in-a-generation opportunity. Retirement-adviser-firm leaders
will need to conceive business models that will be competitive, profitable and
sustainable for the long run. Firms will need to be bigger, be managed more
professionally and evolve from practices to businesses.
The practices that recognize the most productive
growth-through-partnership opportunities early and act on them may be
best-positioned to thrive.
Click here for the original article from Investment News.