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Retirement Needs Are Forcing Wealth, Retirement Plan and Benefits Advisors to Adapt

But most are still stuck in silos and old business models.

There’s a lot of discussion within the 401(k) and defined contribution industry about the convergence of wealth, retirement and benefits at the workplace. The reality is that there is more talk than action and only retirement plan advisors, driven by declining fees and margins, are actively trying to leverage the convergence. But all three groups—wealth, retirement plan and benefits advisors—will need to meet the needs of clients breaking out of their silos or face irrelevance and extinction.

The three societal trends outlined in my April column 401(k) Plan Changes Are Coming include:

  1. Explosion of new plans due to state mandates and tax credits in SECURE 2.0
  2. Convergence of wealth, retirement and benefits at the workplace
  3. In-plan retirement income

Of the three advisory or brokerage sectors, retirement advisory is the smallest and least profitable—for now. At the pre-roundtable workshop for aggregators last month conducted by Brandon Kawal at Advisor Growth Strategies and Dick Darian and Peter Campagna from the Wise Rhino Group, one aggregator group that focuses on benefits and risk management looking to increase their wealth and retirement presence noted how few RPA firms are available to buy compared with benefits/P&C and wealth practices.

Profit margins for wealth managers are much more robust and have not been under the same pressures faced by RPAs. Of the 288,000 active financial advisors, Cerulli estimates that less than 15,000 focus on DC plans, almost 20 times less, though they account for over 40% of the assets.

RPA fee and margin compression, along with outdated technology, heavy regulations and multiple parties to satisfy—employers and their workers—have forced RPAs to adapt and become better business managers. More staff is required as are provider partnerships. Though few have been able to leverage and serve the wealth and benefit needs of DC participants, most are eagerly trying, either pushed by their private equity owners or internal pressures.

And while few RPAs provide benefit consulting themselves, many are owned by benefit firms like Hub, Marsh McLennan, OneDigital, NFP, Gallagher, Alera and Pensionmark, just to name a few providing opportunities to bundle and cross-sell. Many independent RPAs partner with benefits firms.

So while RPAs may appear as the weaker sister in a low margin, niche industry with far few players, they may actually be better positioned than wealth advisors and benefits brokers.

Most of the benefits firms that own RPAs serve smaller clients, so cross-selling to larger DC plan sponsors can be an amazing windfall while, at the same time, it can be challenging for RPAs to service smaller employers.

Wealth advisors, whose margins have remained steady feasting on the high net worth clients and even the mass affluent, are challenged to prospect for new opportunities with the exception of big firms like Fisher Investments and Creative Planning. It’s why so many rely on Fidelity and Schwab for leads and why SmartAsset is valued at over $1 billion. Most RIA aggregators may be able to streamline back-office operations, but few can help with lead generation.

The 80 million participants in DC plans offer the most amazing wealth opportunities currently available, a fact that Fidelity, Schwab, TIAA, Empower and Vanguard plus many other record-keepers realize, especially as baby boomers retire representing the largest wealth transfer in history. “Most wealth is not advised,” stated Kawal. “And the average wealth client is about $1 million.”

RPAs are more interested in wealth management than wealth advisors or benefit brokers are interested in DC plans. RIAs are just starting to wake up, especially as more RPA aggregators buy RIAs, but few, other than Creative Planning and Fisher (no coincidence), are acting even if encouraged by their PE owners.

Why change when margins are high, current clients are mostly happy with their services and the expertise to sell and manage DC plans is lacking with margins dramatically lower especially for smaller DC plans where wealth advisors may be able to compete? It is the classic innovator’s dilemma perfectly outlined by Harvard Professor Clayton Christensen. It’s why mainframe computer manufacturers could not transition to client servers, who did not offer desktop computers, who missed the notebook, tablet and smartphone industries.

Which RIA, RPA and benefits firms will cross the chasm, bridging wealth, retirement and benefits and be able to profitably serve small plans while showing that in-plan retirement income may be better than IRA rollovers or annuities? The RPAs will likely lead, especially those owned by benefits firms that are buying not just wealth advisors but industry leaders as aggregators become integrators streamlining back-office operations, providing a steady stream of wealth and benefits opportunities from DC plans to uncover hidden treasure and leverage the greatest transfer of wealth in history.

Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.

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