Do RPAs need wealth management to survive?

Few have figured out how to serve the participants who cannot afford traditional advice. Managed accounts are just a start.

When defined-contribution aggregators were asked whether RPAs who remained independent could survive, the answer from most of the attendees at the March 2018 InvestmentNews DC Aggregator Roundtable was “yes,” but that it would be difficult for them to grow.

These same DC aggregators are facing a similar existential question: Can retirement plan advisers survive or grow without wealth management capabilities? The answer is a resounding “no,” says DC industry veteran and Wise Rhino Group CEO Dick Darian, whose firm is in the middle of almost half of the acquisitions of elite RPAs.

At a Wise Rhino private event in February 2020 with 13 of the top aggregators, just 50% understood they needed to be in the wealth management business, 25% weren’t sure and 25% hadn’t considered it. Much of the discussion was about managed accounts and whether they should charge separately.

“Managed accounts are just a tool to get into plan advice,” Darian said. “To get into the wealth management business, you need to acquire like Captrust.”

He outlined three stages of evolution for RPA firms:
1. Building an institutional retirement practice.
2. Creating scaled back-office efficiencies, including plan advice.
3. Creating a viable wealth management business that includes leadership, capabilities and support.

Captrust focuses on finding seven-figure wealth opportunities within its plans. Those are referred to the local wealth management firms, leaving financial wellness to record keepers and third parties, eschewing IRA rollovers unless it is part of a bigger financial picture.

Few have figured out how to serve the participants who cannot afford traditional advice. Managed accounts are just a start.

Although the easiest opportunity is with the wealthy participants, firms like Fidelity and now Empower realize the value in being able to cross-sell a whole host of financial services to all participants.

“There are 20 million participants served by 15 DC aggregators,” Darian said. “They need to figure out how to monetize them, because firms that do can charge close to nothing for plan-level services. Institutional investment advisers had to move to OCIO as their consulting fees dwindled.”

And those that don’t transition to wealth are likely to be acquired by their competitors, just like institutional consultants. A case in point is Captrust’s acquisition of Cammack Retirement, which had $200 billion under advisement but little to no wealth management capabilities.

The advantage that RPAs have is the chance to build relationships with the plan sponsors and participants. Only larger firms like record keepers and aggregators have the financial and intellectual capital to build a participant tech platform and the ability to know who wants to buy what, and when, as well as the ability to hire, train and manage virtual CFPs to serve the underserved.

Only record keepers have access to the data.

“RPAs need to buy wealth management advisers, not just for the knowledge but also for their leadership,” Darian said.

Most successful wealth managers are not focused on DC plans, because the margins are dwindling and the liability is growing. With the focus on acquisitions of $1-billion-plus RIAs, deals for which doubled in 2020 according to Echelon Partners, there are tens of thousands of RIAs for RPAs to partner with or acquire. Finding them, doing a deal and integrating are other matters entirely.

There are exceptions.

Prime Capital, one of the top 15 national DC aggregators, has 50% of its revenue coming from wealth management. Intellicents, a regional firm, is buying RIAs and placing them near their bigger plans or RPA firms they have acquired. Greenspring Advisors, located in the Baltimore area, started as a wealth manager that grew its retirement business, and those work together.

It will be harder, though not impossible, for RPAs to grow and keep up with firms that have wealth management capabilities that can give away the “triple F” services — fees, funds and fiduciary — not to mention national RPAs with scaled practices. There’s a lot of money in motion, and big players trying to monetize participants. This is forcing local RPAs to be nimble by leveraging relationships with their clients and buying, merging or partnering with local RIAs, scaling technology and services and partnering with record keepers willing to support their business goals.

Nobody said this would be easy.

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.