We can all argue whether zero retirement plan fees for advisors and record keepers will or will not happen and whether that would be bad for the industry, but there’s little argument that fees have declined and will likely continue to do so, further fueling the convergence of wealth, retirement and benefits at work.
At the same time, wealth advisory fees have consistently remained at 1% with little or no pressure, just as asset management fees have declined, partly in the flight to passive investing.
Why?
Services and products viewed as commodities that can be replaced will decline. Some of the Triple F functions, like fund evaluation, can be accomplished through services like RPAG and fi360, while outsourced fiduciary services from Morningstar and Envestnet cost 3% and are declining. In addition, target date funds have usurped many new contributions, making menu construction less important.
Advisors who focused on lowering record keeping fees through RFPs, replacing more expensive active funds with index investments to maintain their price point, have seen that strategy backfire as other advisors try to undercut them.
There is no doubt that ERISA and the tsunami of lawsuits have also contributed to the reduction in plan fees, putting pressure on the buyer, who is not the user, to be more mindful of costs—but that is not the whole story. Consolidation sometimes leads to higher, not lower, costs as buyers have fewer options, which obviously has not occurred with DC plans.
Consumers or buyers are willing to pay if the service or product is considered valuable and not easily replaced. While the DC industry has focused on participant outcomes over the past decade enabled by auto-plan features, a shift has occurred to income replacement. And while increased participation, better-performing funds, lower costs and increased contributions are steps along the path to the final goal, working with and helping participants with their entire financial life is infinitely more valuable and harder to accomplish, as is retirement income, which needs to personalization.
Meanwhile, wealth advisors have morphed from stock pickers to financial planners to coaches and psychologists incorporating behavioral finance techniques. Realizing their investment selection will not always be right, and every financial plan is wrong from the start as markets and the client’s personal and family situation change, smart advisors have evolved. They also offer ancillary services like estate planning and tax consulting, not charging for everything they do. As assets increase, so do the level and types of the services provided, enabling fees to remain steady, with many wealth advisors becoming pseudo-family offices leveraging outsourced third parties.
Some of the new, additional DC plan services like student loans, emergency savings and HSAs have become more popular with Vestwell’s recently released annual study reporting, for example, that the ability of 93% of workers with student loan debt to save has been affected while 74% are more likely to stay with their employer if they get help. Yet many RPAs complain that these services are loss leaders, leaning into managed accounts realizing an additional 5-10 basis points.
In the late 2000s, robo advisors like Betterment, Wealthfront, LearnVest and Personal Capital went direct to consumers with significantly reduced fees. And while a few survived, the results were unexpected and did not pressure traditional advisors to lower costs. The mantra was that if these robos could replace advisors, then they were not adding real value.
Some products and services can be replaced by technology and now AI and some cannot, with some viewed as a commodity. RPAs and record keepers are struggling to find the right mix of what clients value most and are willing to pay a premium for, and which are not even important.
Lessons from the wealth advisory market, which has evolved while maintaining their price points, are paragons for the DC industry, which is why many RPA aggregators are buying wealth firms, why many record keepers are offering wealth services and why RIA aggregators see an opportunity to compete with RPAs within DC plans for wealth opportunities, all of which is fueling convergence.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.
