Asset managers shift 401(k) distribution toward RIA aggregator firms

That could mean fewer wholesalers calling on individual advisers in the field

May 7, 2018 @ 2:56 pm

By Greg Iacurci

Asset managers are changing the way they distribute their funds in the 401(k) adviser market, with many allocating more resources to the large retirement-focused advisory firms known as aggregators.

Advisers who belong to these aggregator firms, the largest of which include Captrust, NFP and SageView Advisory Group, oversee tens of billions of dollars in defined-contribution-plan assets. Aggregators are growing steadily larger through acquisitions of advisory practices specialized in working with retirement plans.

"We did redirect resources to focus specifically on these groups," said Sabrina Bailey, the head of retirement solutions at Northern Trust. "It's clearly a strategic focus of ours, now more so than before."

Asset managers' evolution is a recognition of the aggregators' growing share of the DC market and their increasing "institutionalization," as the home office takes a lead role in determining the investments that 401(k) advisers can use.

A challenging business environment also has forced asset managers to reconsider how to best use their available resources, observers said, especially for those that have largely sat on the sidelines during the indexing and target-date-fund booms. Meanwhile, fee compression continues to hurt asset managers' bottom lines.

Aggregators are emerging as the most important distribution channel for asset managers compared with other big channels, such as record-keeping firms, broker-dealers, fiduciary services groups (like Mesirow Financial and Envestnet) and individual advisers, said Dick Darian, CEO of The Wise Rhino Group, a consulting firm that specializes in DC-adviser M&A.

Aggregator firms, of which there are roughly 15, have more than $1 trillion in 401(k) assets — and it won't be long before they control half of the $5 trillion market, said Mr. Darian, who formerly led aggregator distribution for BlackRock's defined contribution group.

"The concept of having centralized decision-making at the aggregators, who are becoming more and more important, is changing the model," Mr. Darian said.

This, he said, equates to a shift away from a "feet on the street" sales approach, in which a fleet of wholesalers call on individual advisers — although that model is unlikely to totally disappear.

"Generally speaking, you'll start to see less field wholesalers and more institutional coverage," Mr. Darian said.

The distribution opportunity unfolds in a few ways: getting a fund on an approved list, which includes funds green-lit or recommended for advisers to use by an aggregator's in-house investment-research team; being included in a custom portfolio, such as a custom TDF, distributed exclusively by the aggregator's advisers; and via partnerships, in which an asset manager offers a fund to aggregator advisers at a discounted price.

State Street Global Advisors, which manages $328 billion in U.S. DC assets, is one firm that has allocated more resources toward aggregators.

Greg Porteous was hired more than two years ago as head of the DC intermediary group at State Street, a firm traditionally focused on large 401(k) plans, to build out sales in the small and midsized (or "smid") 401(k) market. That entailed distributing to plans with less than $500 million.

The firm decided to go after retirement-plan specialist advisers — who generally have more than $250 million in 401(k) assets and generate at least half their business from retirement plans. There are approximately 2,500 of these advisers — and, importantly, roughly 65% to 70% of them belong to an aggregator firm, Mr. Porteous said.

State Street has built a team of four "retirement directors" to call on the aggregators' home offices and retirement specialist advisers in the field.

"You see a lot of top DC advisers gravitating to those firms," Mr. Porteous said. "It's efficient because we're calling on 2,500 advisers as opposed to tens of thousands."

Capital Group, sponsor of the American Funds brand, has also evolved its distribution model as the aggregators, an important distribution point for the firm, have become more institutional in nature, said Walt Best, head of consultant relations.

Capital Group has hired some salespeople for its institutional consulting team to supplement its existing field wholesalers calling on individual 401(k) advisers. These employees assist the aggregator home office with investment due diligence, for example, and also try to lend ideas on non-investment-focused topics (such as artificial intelligence) as a kind of "value-add" resource, Mr. Best said.

Ultimately, Mr. Darian believes asset managers will "have to be able to cover the aggregator firms effectively" to compete in the 401(k) market.

"All this is in motion," he said. "No one has this nailed. Everyone is transitioning to these new models."

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