RPAs seeking revenue streams

To combat fee compression, many look to diversify their businesses

May 18, 2019 @ 6:00 am

By Greg Iacurci

Financial advisers who specialize in the retirement-plan market are combatting rampant fee compression by seeking out new revenue streams, primarily in wealth management services.

As advisers see their fees squeezed and some of their traditional 401(k) services commoditized, they're looking to diversify their businesses to maintain healthy balance sheets, according to industry consultants and executives of large advisory shops.

"In the past, you could have a client and do one thing, and do it very well," said Dick Darian, CEO of The Wise Rhino Group, a consulting firm. "In light of fee compression, in light of the adviser's role being marginalized to some extent, it's really forcing advisers to think more broadly. What are the [other] services we can provide?"

The average advisory fee for a $100 million 401(k) plan decreased by 9% in 2018 from the year prior, according to Fi360. The fee has declined 20% since 2013.

Broader narrative

The drop is part of a broader narrative playing out in financial services. Cost-conscious investors have poured money into mutual funds that track a market index like the S&P 500 as opposed to actively managed funds, which are often costlier. In addition, 401(k) fee-disclosure rules from the Department of Labor in 2012, burgeoning lawsuits targeting the fees charged for retirement-plan services, and the DOL's fiduciary rule have contributed to clients' hyperfocus on fees.

Technological developments have allowed vendors such as Morningstar Inc. to deliver investment services to 401(k) clients more cheaply. Advisers, in a frenzy to win new business, have worsened the trend by continually undercutting each other.

Industry cannibalism

"[Clients] are getting calls from the average adviser saying, 'You're way overpaying. We can reduce your fees by half,'" said Jamie Greenleaf, principal at Cafaro Greenleaf. "Then you're having to reprove your value to the [plan sponsor's chief financial officer]."

To offset declining revenue, advisers are trying to monetize services for employees, Mr. Darian said.

"For us, I mean, that's everything. That's the holy grail: the convergence of wealth management [and retirement]," said Vincent Morris, president of Resources Investment Advisors.

Captrust Financial Advisors, which has historically focused its efforts on retirement-plan consulting, is in the process of building out a wealth-management strategy. The firm aims to boost its share of wealth management revenue to 50% over the next few years, from around 30% today.

To do that, it's acquiring wealth management shops across the country in the same cities as its institutional advisory firms. Captrust advisers in those cities would then be able to offer wealthy business owners both individual wealth management services and advice to their 401(k) plans and participants. Eight of its 10 acquisitions over the last 12 months have been wealth management firms.

Captrust also has built a tiered advice model that allows it to reach 401(k) participants of all affluence levels, said CEO Fielding Miller. The three-level pyramid encompasses financial wellness services for the bottom tier of participants, one-on-one financial counseling for the middle tier, and higher-touch wealth advisers for the top-tier and C-suite executives. The one-on-one counseling services for employees are Captrust's fastest-growing revenue model, Mr. Miller said.

Participant advice is billed as a separate fee that's paid by the plan sponsor. Increasing numbers of advisory firms will likely introduce these types of tiered, scaled participant services, Mr. Darian said.

Leg-up over would-be competitors

Retirement plan advisers have a leg-up over would-be wealth management competitors, executives said, since they are able to get in front of employees and market services to them right as they're entering the workforce.

Revenue opportunities extend beyond wealth management, said Mr. Darian, to nonqualified deferred compensation, employee benefits and other areas of workplace distribution such as property and casualty insurance.

Some of the largest advisory firms in the defined-contribution market, such as NFP, Arthur J. Gallagher & Co. and Lockton Retirement Services, are also part of big insurance brokerages that can provide client referrals among their different business lines, including retirement.

Building out wealth management and other services has the additional benefit of helping firms recruit retirement advisers, said David Reich, president of HUB Retirement Services, which is housed within a large insurance brokerage.

"It's remarkable," Mr. Reich said. "I don't think [firms] understand how much impact it's going to have on overall income and the retention of their business."

Advisory firms have also become more sophisticated with their pricing models, said Randy Long, managing principal at SageView Advisory Group. In the past, advisers would typically charge one fee encompassing all their services, such as investment and plan-design consulting. Now, Mr. Long said, advisers have shifted to charging separately for various services, and are therefore able to charge more money for the more time-consuming, rigorous projects.

"[Fee compression] is just beginning," said Gary Josephs, managing partner at Retirement Benefits Group. "It's still going to go down. We've got to find a way."


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