Will RIA and RPA worlds converge?

Most retirement plan advisers started in the wealth business, many from wirehouses. So you would think that cross-selling wealth to their retirement plan participants would come naturally to most RPAs. Yet few larger firms other than Captrust and a handful of regional groups like Greenspring Advisors have been successful.

With the RIA valuations and M&A market even frothier than the hot RPA market, it seems logical that these worlds will converge. But there are many obstacles and challenges that investors in RPA aggregators expect their acquired firms to overcome based on the prices being paid.

There are two types of cross-sell opportunities within 401(k) and 403(b) plans:
1. Benefits and human resources consulting to plan sponsors.
2. Financial planning and wealth management to participants.

There are two distinct participant groups:
1. Wealthy — those with more than $500,000 in investible assets.
2. The 100 million of the 106 million defined-contribution participants who cannot afford traditional advice.

Financial wellness programs, of keen interest to plan sponsors, are designed for the second group, which few if any providers or RPAs have monetized. Record keepers like Fidelity and now Empower, with its Personal Capital acquisition, are more likely to be able to reach and serve this group, where technology and access to data are key — they are better positioned to hire and train financial coaches than even the largest RPA firms.

But RPAs are more likely than record keepers to be able to build relationships with wealthy participants who can afford a personal touch using data accessible through the plan and the participant and wealth technology already developed.

Wealthy participants are the intersection of the RIA and RPA worlds. Captrust’s buying spree of wealth managers in areas where it has RPAs is a recognition that these participants are better serviced by RIAs that specialize rather than RPAs that dabble.

All the DC aggregators know that they must develop sophisticated wealth management capabilities to be able to grow at levels their private equity owners expect by leveraging relationships within their DC plans. As RPA firms figure out how to find and serve wealthy participants, plan fees will continue to decrease pushing those that cannot to either sell or grow at a substantially slower rate.

Though RIA firms could benefit from hunting for new clients at the DC plans they manage, will they begin to acquire RPA firms? With wealth opportunities out pacing the number of RIA firms and margins higher, it may be a bridge too far. Why bother?

RPAs have been forced to move from a cottage industry to real businesses faster than RIAs because of fee compression and greater transparency because of greater fiduciary oversight - RPAs have to deal with the DOL and SEC. Fewer RIA firms are leveraged because they don’t need to be, yet.

“Once an RPA firm is able to develop a scaled wealth business, they can tuck in smaller RIAs in regions they need to cover,” said Wise Rhino CEO Dick Darian. Getting there is the challenge, along with the integration with their DC business.

So look for RPAs that have capital to buy RIA firms in regions where they have retirement plans but not the opposite. “RIAs have a bias against DC plans,” notes Darian. “Lots of people and liability, and not much revenue.”

Though it could take five years for most DC aggregators to get there, Darian predicts that they will have to look like wirehouses, where advisers are owned and are forced to cross-sell many services, some of them proprietary. That's ironic because many RPAs left wirehouses and insurance agencies to be independent fiduciaries.

Scaled RPAs sitting on a technology stack that have leverage with record keepers funded by DCIOs will buy RIAs following the Captrust model, which uses one-on-one advice mostly to uncover wealth opportunities.

At the inaugural DC Aggregator Roundtable in 2018, Captrust’s CEO Fielding Miller declared that his firm’s participant fees dwarfed plan fees and that RPAs should let record keepers build financial wellness tools and stay away from IRA rollovers. I’m beginning to see why.

[More: How the 401(k) industry can help attract young advisers]

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.