While some people still believe that convergence is a fad, based on a recent LinkedIn poll, they are in the minority. A more valid question is which firms are executing on the convergence of wealth, retirement and benefits at work and how it is changing the advisor M&A market.
Briefly coming out of hibernation, in a recent 401k Café session, Dick Darian, otherwise known as the Wise Rhino, discussed how RPA M&A seemingly took off overnight, why it happened and how convergence is playing a key role.
Darian noted there was a perfect storm in 2017-18 following what happened with Institutional Investment Consultants, which experienced consolidation but also pivoted from consulting to OCIO due to margin pressure. Some RPA firms had reached scale, aggregator firms were forming buoyed by PE money, and advisor demographics led to a surge. The poster child was Sheridan Road’s sale to Hub in late 2017, reaching valuations higher than most could have imagined.
While still in the early stages of the consolidation curve outlined in the Harvard Business Review compared to record keepers and IICs, the RPA market is maturing interested but struggling to serve and leverage the millions of participants in plans they manage. It is the promise of participant engagement that has not only led to higher valuations but has enticed some RIA firms like Creative Planning, Mariner and Carson to become interested in DC plans.
And though convergence may not be a fad that quickly disappears like ESG investing, Darian noted it is hard to hard to execute on with only a few like Captrust successful. “It’s easy to buy firms,” said Darian. “Can firms integrate and execute on convergence?” He said the few firms that do will pressure others, especially smaller independent firms, as they lower plan-level fees. Fielding Millier, as early as 2018, stated at the RPA Aggregator Roundtable, “Our participant fees dwarf our plan fees.”
Along with pricing pressure and increased valuations, convergence has prompted more RPA aggregators to buy wealth firms following the Captrust model, with a few RIA aggregators buying RPA practices.
The existential question is which type of firm is better positioned to profitably serve DC participants, whether an RPA is better off joining an RIA aggregator with better wealth tools and understanding as well as referral opportunities, and whether an RIA should join an RPA aggregator with millions of participants.
DC plan sponsors are clamoring for financial wellness, most not knowing what it means. Ultimately, they want to help the 97% of participants without access to a personal advisor. Darian noted how difficult it can be for advisors to make money on financial wellness and less affluent participants. While RIAs may be more skilled at working with individuals, they have not been able to scale that advice.
So when an RIA or RPA begins thinking about succession planning either because they can see the finish line, take money off the table or want to be more competitive, they have three decisions:
- Should they sell and when?
- Who to sell to?
- What advisor or banker should they hire?
Just like plan sponsors who spend little or no time searching for an advisor, arguably their most important decision, advisors make the same mistake. There are a few bankers that focus on RPAs, and there are many more focused on RIAs. Which banker they select may be their most critical decision.
As RPA and RIA M&A convergence changes and heats, advisors need to act, if only to investigate and perhaps decide the time is not right. As TPSU has done with plan sponsors helping them conduct RPA due diligence and RFPs, TRAU is now engaged with advisors to help guide them through the process on what could be the most important business decision they will ever make.
