In a seminal podcast, Wise Rhino Group founder and longtime 401(k) executive Dick Darian explores the opportunities for RIAs in the defined contribution industry and the risks they face if they ignore them.
Though the wealth management advisory business is more profitable than the DC industry with almost 10 times more professionals and addressable market opportunities, the almost 25,000 retirement plan advisor specialists defined by those with at least 50% of their revenue from DC plans have a more evolved business model out of necessity with perhaps greater growth potential.
RPAs need to create staff and internal processes to service plan sponsors and their workforce. Their fees have declined as their core services (fees, fines and fiduciary) continue to be commoditized. RPAs must deal with the Internal Revenue Service, Department of Labor and Securities and Exchange Commission making compliance onerous and liability high especially with increased litigation. The commoditization of their core services and evolution of their fees from commissions to fee-based to flat fee declining at an alarming rate have forced RPAs to create real businesses or sell to larger aggregators.
As a result, RPAs are leaner and have greater internal resources than their RIA counterparts making them formidable competition if they go after wealth management clients, rollovers and retirement income in the plans they manage.
Opportunities within DC plans are increasing. Most RPA aggregators realize their large employee client base is a great way to mine for traditional wealth clients led by Captrust with over 7 million participants. Similarly, record-keepers are building IRA rollover machines and other services to capture wealth management clients led by Fidelity, Schwab and Vanguard. There’s a tremendous focus on retirement income, which is best started within a DC plan. Government mandates could increase the number of plans exponentially.
Meanwhile, the pending DOL fiduciary rule with enforcement scheduled for June 2022 could inhibit RIAs’ ability to capture rollovers as they will have to determine if a rollover is in the client’s best interest.
So while most RIAs eschew DC plans due to relatively low fees and high liability, the opportunity to mine for wealth management clients, protect clients in the plans they manage and get rollovers might make this market more attractive. Which is maybe why Creative Planning bought Lockton’s $110 billion and 1 million participant DC business and why Dan Seivert at Echelon predicts that more RIAs will buy into the DC market to cross-sell wealth management and financial planning.
The risk for RIAs that manage clients that have significant assets in DC plans and rely on IRA rollovers and retirement income services is that RPAs who have access to and the trust of employees in plans they manage will take business from RIAs.
None of which means that RIAs must or should become RPA specialists. Larger firms like Creative Planning might buy RPA firms in locations where they have offices just as RPAs are buying geographically compatible RIAs. Smaller RIAs might partner with RPAs, most of whom do not have or want to offer wealth management capabilities.
But to ignore the DC market and the growing trend to offer financial services at work as both RPAs and record-keepers look to capture rollovers, wealth management and retirement income opportunities while building relationships with HENRYs (high earners not rich yet) just as the DOL is making it harder for RIAs to do rollovers seems a bit shortsighted and perhaps even foolish.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.