If we weren’t sure about the convergence of wealth and retirement, or the focus on serving and monetizing 401(k) and 403(b) plan participants, then Empower Retirement’s pending acquisition of Personal Capital gave us 1 billion reasons to believe.
Though some question the $1 billion price tag for a company with an estimated $50 million in earnings before interest, taxes, depreciation and amortization, Empower really had no choice. It needed to keep up with its main defined-contribution rivals, Fidelity and Vanguard, as well as with Charles Schwab, a giant in retail finance with a foothold in the DC space.
For Personal Capital, Empower provides easy access to 10 million potential clients.
“Growth in the wealth management business will not come from traditional marketing,” said Mark Bruno, managing director at Echelon Partners. “Wealth managers that add new clients, especially younger mass affluent investors, will be those that make it easy to do business with them.”
Though retirement plan advisers may be rightly concerned about the potential conflict that Personal Capital poses, they should take this acquisition as a warning sign. They too need to step up their game, if they want to monetize participants. Standing pat is not an option if they want to grow.
The DC market is rapidly maturing, accelerated by the COVID-19 crisis and the opportunities around pooled employer plans in the SECURE Act, the most significant legislation since the 2006 Pension Protection Act.
But with maturity come commoditization and price pressure, which hit record keepers a decade ago, leading to massive consolidation. Principal’s purchase of Wells Fargo’s DC business was the most recent example, with more to follow as providers seek to maintain profits through scale.
But Empower, the most active acquirer in the DC record-keeping industry over the past two decades, passed on Wells Fargo, going in an entirely different direction by using the same $1 billion to buy a hybrid robo-adviser. Why?
Like Fidelity, Vanguard and Schwab, Empower realizes that the real value of being a DC record keeper is not the fees earned as a utility. Rather, it is the participant data, access and relationship. Unlike the other three plan providers, Empower has had little to no retail presence or capabilities. Now it does, and other record keepers in the same position, especially larger ones, will need to follow suit. Or sell.
When people change jobs or retire, money leaves plans. Empower now has the capability to retain those assets, and importantly, to form relationships with younger investors early on.
“There’s a general awakening of the value of engaging participants early in the process within 401(k) plans,” noted NextCapital co-founder Rob Foregger, who was also a co-founder of Personal Capital. “The heart of the Empower acquisition is the convergence of wealth and retirement, with $1.5 trillion of money in motion in DC plans every year through rollovers and new contributions.”
Now RPAs are going through the same process a decade behind record keepers, as committee-level services have been commoditized, fueling consolidation. While many RPAs grew out of wealth management practices, few can competitively serve high-net-worth or mass affluent participants – never mind those with less than $250,000. They need to either partner with wealth management advisers that sit on a robust retail platform, create their own or join a DC aggregator.
RPAs should not blame Empower for seeking to form direct relationships with participants. It had no choice in order to compete with Fidelity, which captures an estimated 50% of rollovers from its DC plans, and Vanguard, which has $160 billion in its hybrid robo-adviser. It’s why Financial Engines, the largest robo-adviser in the DC space, combined with sister company Edelman and why Fisher Investments has turned its attention to the relatively low-margin DC advisory market.
“There’s no way in the world for Empower not to go direct,” said Dick Darian, partner at the Wise Rhino Group. “Everyone needs to get closer to the end client — the participant. They cannot afford to sit back, counting on a third party.”
But unlike Fidelity, Vanguard and Schwab, which make no secret of their desire to capture participant revenue from plans brought to them by advisers, Empower has been steadfastly devoted to its RPA partners. The acquisition of Personal Capital now puts Empower in potential conflict with RPAs who sold the plan. Or, it’s a nice service for clients if the RPA does not work directly with participants.
These arrangements are here to stay. Rather than complain, RPAs need to step up.
“We get most of our participant engagement from Fidelity, TIAA and Vanguard record-keeping clients,” said Rick Shoff, managing director at Captrust. “We are comfortable competing against their participant services.”
But how many RPAs have 40 people dedicated to working with participants, as Captrust does, along with a wealth management business that will soon be 50% of its revenue and access to hundreds of millions of dollars of capital through its recent investment from private equity firm GTCR? Most DC aggregators are units of benefits firm that do not have robust wealth management, never mind participant services.
The times are changing — rapidly. Rather than worry about whether Empower will be coming after their participants, RPAs need to evolve their business strategies. Empower did, brilliantly.