Metamorphosis of DC investment-only wholesalers

Why asset manager units focused on these plans, facing some harsh realities, are in a state of change.

Mar 19, 2017 @ 12:01 am

By Fred Barstein

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In the 1949 Arthur Miller play "Death of a Salesman," 63-year-old Willy Loman confronts his future. Bombastic and unrealistic, Mr. Loman looks in the mirror and sees few, if any, viable or attractive alternatives.

Though it's not as bleak, financial services wholesalers, especially with defined contribution investment-only firms, are facing some harsh realities, as are retail mutual fund wholesalers. Are we finally at a point where selling investments in defined-contribution plans will change dramatically, and what does that portend for DC advisers and the industry overall?

Many DCIO firms, especially long-only active managers without a viable target-date fund, are facing harsh realities, either exiting the market entirely, or effectively, by cutting back on outside reps. It's interesting to note that two firms entering the market, TIAA-Nuveen and State Street Global Advisors, have robust TDFs and passive strategies.

So what's causing these current changes?

• The move to index funds, even for those that benefit, affects profitability.

• Asset allocation funds like TDFs are attracting 60%-70% of new contributions, leaving less for single funds to draw upon.

• Asset allocation funds take the underlying investment decision from advisers, so why send wholesalers to meet with them?

• Multimanager collective investment trusts, like asset allocation funds, take underlying investment decisions from advisers.

• Tracking results of DCIO wholesalers has always been hard and, though it's getting better, is not very good.

• Advisers looking for more revenue are using index funds to maintain or increase their fees by shifting costs.

• The DOL rule is a harbinger of a movement that limits support for advisers. The days of trips to Hawaii and even high-priced steak dinners may be over.

(More: Some active target-date fund managers shine as passive management continues 401(k) onslaught)

What does the future likely hold for DCIO firms and their external wholesalers? Successful firms will be more focused on:

1. The right advisers. Not just the ones with significant assets, which is obvious, but also those who are growing aggressively and are sympathetic to the firm's investment strategies. DC plans are attractive because assets are sticky — DCIOs should build deeper relationships with advisory practices that believe in the firm and their philosophy over different market cycles.

2.The right broker-dealers. All B-Ds will not survive the DOL rule in whatever form it may take but, more importantly, they will not survive the move to a fee-based fiduciary world where advisers need different types of support, not just compliance and access to different products.

3.The right record keepers. Not all record keepers will survive the consolidation. In the end, there will be nine survivors in the adviser-sold "smid" market ($3 million- $250 million), not including those affiliated with banks, payroll companies or micro-market outsourcers. Betting on the wrong platform can be costly and finding the right fit (those not pushing competing prop funds) will be just as important.

4. The right value add. Actionable support that not only helps advisers, but also benefits their clients and the market overall.

5. New platforms. Aggregators or specialty groups are growing and will only continue to expand as DC plan advisers need special support. Despite fewer advisers and overall assets than larger B-Ds, time and resources spent with these aggregators will be more fruitful. Also, next generation qualified default investment alternative providers like Envestnet, which are product-agnostic and may even allow advisers to use the plan's underlying investments, are another burgeoning market.

6. New markets. 403b plans are ripe for DCIOs, especially as they move to single-vendor platforms. Government plans should open up as states and municipalities move from DB to DC plans as private entities did over a decade ago.

7.New wholesalers. As advisers move to a fee-based, fiduciary world, they need coaching on how to build and manage their businesses. DCIO wholesalers should morph from selling products, like Willy Loman, to consulting on all aspects of the adviser's business.

Optimally, advisers should be able to run their practices without any financial support from providers — some are there already. Regardless, advisers should start weening themselves off of this direct financial support over time.

(More: Taking value into account could improve target-date results: study)

Beyond support, advisers should only work with DCIO and record-keeper firms and wholesalers that understand their businesses and are willing to provide support as well as business coaching, which includes shared wisdom with access to peers to discuss what others like them are doing.

The world is changing, heralded by the DOL rule but not caused by it. Are you prepared?

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University.

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