Growing pains for 401(k) advisers

Support for newbies dwindles as fees decline and profits shrink

Mar 17, 2018 @ 6:00 am

By Fred Barstein

Darwinian forces are resulting in the survival of the fittest.

With 401(k) provider fees declining and profit margins shrinking, especially for defined-contribution investment-only providers, the budgets to support retirement plan advisers are shrinking. But rather than pull back their support to elite advisers, DCIOs are less likely to support less-experienced plan advisers, which could lead to an even bigger gulf in the services available to the two groups and in their levels of experience.

Five to 10 years ago, 401(k) and 403(b) record keepers gladly stepped back and allowed DCIOs to take on the bulk of the support for retirement plan advisers. Whether it was in the form of value add, intellectual capital, training or prospecting, DCIOs took the lead, with firms like Columbia Threadneedle and Allianz spending millions annually.

But the move to passive investments and the rationalization of the DCIO industry, especially those providers without a target-date strategy, has meant smaller budgets to support advisers. Consequently, DCIOs have become more selective about supporting the less experienced plan advisers. And that situation will only get worse, making it more difficult for these core ($25 million to $250 million in DC assets) and emerging plan advisers to compete with established plan advisers and elevate their practices.

The emergence of aggregators and regional advisory firms, and the use of independent registered investment advisers rather than a broker-dealer's corporate RIA have added another level of payment for providers. Along with the individual adviser, providers are being asked to support the broker-dealer and aggregator or regional firm that an adviser has joined.

That makes the aggregators more important in the food chain to DCIOs — arguably more important than the broker-dealer, which must support emerging advisers along with the more experienced ones — as well as more attractive to advisers who want to leverage the aggregators' clout to get the tools and services they need to build, grow and manage their practices.

It will only get worse

Getting marketing support to increase their practices as well as needed training and education will only become more difficult for core and emerging plan advisers with dwindling margins and support from many broker-dealers, especially independents.

Will record keepers step up? They have to focus on the core and emerging advisers, where small-market providers get the bulk of their business, while the DCIOs pay even more attention to elites, aggregators and regional firms. Record keepers are not likely to get much more money from DCIOs, as most have pushed the envelope on the support they can expect to receive.

Which puts the aggregators in a great position.

They have leverage with DCIOs, which are attracted to their large pool of assets. In fact, many DCIOs have created a new position to focus exclusively on these groups. Unlike generalist broker-dealers or RIAs, defined-contribution aggregators understand and focus on the needs of plan advisers developing needed support services. Even small DC adviser firms that might have over $250 million will struggle in the future to get support compared with aggregators or even regional firms, making them a more likely exit strategy.

The retail DC adviser market is maturing, going from an energetic teenager to an anxious adult, forcing tough decisions that will have far-reaching consequences. Even though the Department of Labor's conflict-of-interest rule will open up opportunities for advisers who are willing and able to act as ERISA fiduciaries, they will face bigger barriers and greater competition than ever before — and have fewer resources available.

It will be interesting to watch how younger, ambitious plan advisers meet these challenges and whether any progressive record keepers, DCIOs, broker-dealers or even entrepreneurs will find innovative ways to help them.

(See other stories from the latest Retirement Plan Adviser here)

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

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

Events

Behind the scenes at Pershing Insite 2018

What goes on behind the scenes at one of the industry's biggest conferences? Join us for an all-access sneak peek!

Latest news & opinion

Mutual funds feel the pinch of platform fees

No-transaction-fee options are a big hit with investors, but funds wind up paying the costs — and passing them on.

Divorce reduces retirement readiness

The new tax law could increase financial challenges for divorced people, but planning opportunities abound.

Merrill Lynch fined $42 million for misleading customers

In addition to the practice of 'masking' trades, the wirehouse went to extremes to cover up the wrongdoing.

Advisers with billions in AUM leaving Wall Street

Merrill Lynch has seen two teams exit recently, each with more than $4 billion in client assets.

Wells Fargo weighs changes to wealth unit

The move would reflect the bank's effort to cut $4 billion in costs.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print