Consolidation of the defined-contribution market

Know your partnership options for growth

Jun 2, 2018 @ 6:00 am

By Dick Darian

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 retirement space.

Defined-Contribution Intermediaries by Type
Firm type # firms # advisers Assets under advisement ($B)
Traditional consultants (e.g., Aon, Mercer) 7 N/A 2,958
Regional & boutique consultants (e.g., Curcio Webb) 35 N/A 825
Aggregators/emerging consultants (e.g., CAPTRUST, NFP) 15 2,560 750
Elite regional firms with >$2 million in revenue (e.g., Blue Prairie Group) 396 2,772 410
Elite practices with >$750,000 1,287 6,256 743
Non-elite firms 1,150 1,725 529
Wire, bank, insurance B-Ds 3,629 8,738 357
Total 6,519 22,051 6,572

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 segments.

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.

Most organized

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 their models.

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.

Dick Darian is chief executive of The Wise Rhino Group.

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