Record-keeper consolidation is happening even faster than predicted, in part because of the recent Empower buying spree, which continued recently with its purchase of Prudential's retirement business. But what does that mean for both specialist and generalist retirement plan advisers?
When a company goes on a buying spree, either it's uniquely positioned or it sees value differently than its competitors, both of which appear to be true for Empower. The value is in cross-selling to the participants as well as unique positioning, because Empower’s main competitor, Fidelity, does not grow through acquisitions, which allow Empower to make up ground more quickly than through organic growth.
Prudential has been the clear leader in financial wellness as well as retirement income, both of which will help Empower recoup its investment in its recent purchases of MassMutual and Fifth Third Bank, as well as current participants. Prudential also has a strong nonqualified business, as well as GoalMaker, an asset allocation tool.
Acquisitions are not easy, but Empower has mastered the art, starting with its predecessor Great-West, which had a process of more than 10,000 steps, which Empower has inherited. No one is as proficient, which means it has less risk. Empower also has some of the best record-keeping technology, again as part of Great-West’s FasCore system, which is the leading outsourcer for other providers like American Funds.
Profit margins are greater for acquirers that can eliminate redundancy, which includes technology, which is huge and growing, as well as expensive and redundant C-suiters, senior management and sales teams.
Empower has distanced itself from its other competitors; the only one that matters is Fidelity, which is bigger and more profitable because of its ability to cross-sell wealth management and financial planning services to participants as well as offer proprietary products. Though Empower bought Personal Capital for $1 billion to provide these services, it would be unfair to compare them to the capabilities Fidelity has developed over decades. Empower has “partnered” with many money managers, yielding significant revenue sharing, but nothing like what Fidelity earns on proprietary assets.
And it’s probably not a coincidence that two of the leaders that built the Empower business, Bob Reynolds and Ed Murphy, came from Fidelity, as did many senior and mid-level managers, like the current president, Rich Linton, and chief marketing officer Stephen Jenks.
The one advantage that Empower has over Fidelity is its history and relationships with advisers from all segments and types, including defined-contribution aggregators, retirement plan adviser specialists, registered investment advisers and wirehouses, as well as independent and insurance broker-dealers. Though Fidelity has embraced advisers over the last decade, its relationships and capabilities, including its sales force, pale in comparison.
That raises an interesting question: What is the value of an adviser to record keepers?
The overwhelming answer is that advisers sell the plan. They represent a sales force of almost 300,000 with personal relationships with plan sponsors. Providers do not have to recruit, manage or pay these advisers directly. Everything else is ancillary. In fact, most record keepers would prefer to service the plan directly, which would be cheaper than having to serve advisers as well and keep them in the loop. And if the provider has the capability to cross-sell participants, the value of advisers decreases accordingly.
Advisers know that when they take over or bring a plan to Fidelity, the participants are in play. It would be hard to believe that the same will not true for Empower competing against Fidelity without the benefit of proprietary assets.
Empower, with its technology, adviser support and ability to serve plans of all sizes and types, is and should continue to be the dominant adviser-sold 401(k) record keeper for the foreseeable future. Rather than shun providers that are smart and capable enough to cross-sell wealth services to participants, advisers should step up and compete. They have an advantage over providers because they have personal relationships, act as a fiduciary and are not selling proprietary products and services, all of which should result in greater trust.
Just because an adviser sells a plan doesn’t give them the exclusive right to cross-sell. That right must be earned, though advisers can expect providers to play fair, such as by sharing data, and be transparent. Like providers, advisers need to invest in people, wealth management capabilities and technology to leverage the enormous opportunity to sell financial services to people at work. That’s an opportunity that Empower sees clearly.
Please share your thoughts and example of how RPAs can effectively cross sell to participants in comment box below.
Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ RPA Convergence newsletter.
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