The defined-contribution industry is complex because partners that aren’t affiliated must come together for each plan to provide a seamless service. It’s simpler if the record keeper sells direct and provides all services and investments — but that arrangement has become rare indeed.
When the goal is winning a DC plan, the issues are clear. Record keepers and advisers both compete against their peers, while the fund providers — often defined-contribution investment-only firms — split up the investments. Fee compression made this arrangement a bit tense, especially with declining fees. A dollar that disappears or goes to one entity comes out of someone else’s pocket. Some describe it as a knife fight.
But when it comes to servicing and monetizing participants, there will be a fight among record keepers, advisers and eventually DCIOs over the same client that they initially partnered on. That can make for strange bedfellows and strained partnerships.
Private-equity firms have jacked up the prices of record keepers and retirement plan advisers, with the promise that they can each cross-sell other financial services to participants. This B-to-B-to-C model should yield better results than straight B-to-C robo-advisers and fintechs, because there’s better access, data, trust and fiduciary oversight at the workplace.
Record keepers have the advantage of branded technology that participants most often access, as well as data, capital and organizational skills to create the business model to cross-sell financial services, starting with IRA rollovers, to participants.
Advisers have relationships and greater trust from plan sponsors. They are the general contractors who set up and oversee the construction and maintenance of the plan. Record keepers are the builders, while DCIOs are building blocks. While they’re theoretically in a better position, even larger RPA firms are unable to build the technology, brand and infrastructure to compete with record keepers to cross-sell financial services to participants.
Many RPA firms, especially aggregators, are hoping to follow the Captrust business model, which now generates much more revenue from participants, primarily the wealthy, than the plan. No one I know has developed a business model to serve and monetize the 97% of participants who cannot afford traditional wealth management, otherwise known as financial wellness.
Who wins among record keepers, advisers and asset managers? That depends on the answer to a few other questions.
Will the DC industry ever be able to serve the underserved participants profitably? Can RPA firms build the tech stack and business model for either wealth management or a viable financial wellness service? Will record keepers ever share participant data? Will some record keepers decide to partner with RPAs and share the pie? Can RPAs come together and partner to create the needed tech stack as well as have a voice in Washington that isn’t funded and controlled by providers and larger broker-dealers?
It would be simpler if one entity controlled the sale, service, technology and asset management. Providers cannot hope to create a sales force that competes with the 25,000 RPA specialists and hundreds of thousands of RIAs that dabble. But once the plan is sold, who has the right and ability to monetize the participants? And advisers will be hard-pressed to become or buy a record keeper and may be too conflicted to manage the money.
For some providers, especially the ones that started out selling directly to plan sponsors, the rules of engagement are clear. The difficult discussion that many RPAs must have is with the others.
The even more difficult question is how RPAs can build what they need to monetize participants, both wealth management and so-called financial wellness, as plan fees dwindle, because competitors that have viable participants services can drive the fees down even further.
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.