We have all been witnessing the convergence of wealth, retirement and, to a lesser extent, benefits at work. Though the promise to service the over 80 million defined contribution participants is obvious as is the potential to elevate advisors and providers who can, like most changes, progress can be slow. There are certain events that create quantum leaps almost overnight which might characterize the acquisition of NEPC by Hightower adding a fourth and overarching dimension to convergence of retail and institutional.
The pivotal moment of the convergence of wealth and retirement started with Captrust acquiring more wealth than retirement advisors, marrying them to leverage participants to boost their wealth practice. Most RIA aggregators have been more focused exclusively on growing and acquiring wealth firms until Creative Planning shocked the industry by acquiring Lockton’s over $100 billion DC practice for a reported $500 million.
The NEPC/Hightower combination could instantly become the dominate wealth and retirement firm by combining high level “retail” individual investment capabilities with institutional investment and DC practices. Combined, the new firm will have $1.81 trillion under advisement and $258 billion under management with $156 billion from Hightower managed by 642 advisors.
Both Hightower and NEPC are giants in their respective markets with a rich client base and long history critical to move markets. Hightower advisors will get unique access to institutional investment capabilities in private markets at a price that none of their wealth competitors can match. They also can serve the retirement plan needs of their 50,000 wealth clients, most of whom oversee or have influence over their organizations’ DC plans from the very smallest to the largest, providing the best of both worlds – high-level funds, fees and fiduciary services combined with world-class investment management and financial planning.
“Four years ago, we started looking at our level of interest in the OCIO space to bring more institutional capabilities to retail wealth. It was hard to find the right fit.” Stated Hightower CEO Bob Oros. “Lots of folks we were talking to were too small to match us well and create a transformational outcome. We engaged a third party to understand the market and met NEPC one- and-one-half years ago. It was a very natural process.”
According to the NEPC’s managing partner, Mike Manning, “The RIA space was really attractive to deliver our research, but we were cautious about distribution and did not want to engage with a bunch of RIAs.”
The retail and institutional worlds have been moving closer over the years as RPAs continually move up the market and institutional investment consultants have been trying to move down the market through PEPs. Manning noted, “The move to fee-based financial planning brings the retail market closer to the institution market aligning incentives.”
Each market excels at certain services, with institutional consultants proficient at investment analysis and portfolio construction, bringing pension investment practices to the DC world, as well as the highest level of fiduciary and fee services. RPAs, especially the larger firms, may be able to hold their own on Triple F services as well as help but they lack access to alternatives and do not have the same investment analytic resources.
RIAs like Hightower do well with investments but their most valuable assets is the relationships and trust with clients serving their many needs while outsourcing portfolio construction.
The Hightower/NEPC combination could elevate them above not only institutional competitors but also immediately makes them a force in the DC retail market that few if any firms can match.
The NFP/AON deal could be significant but not transformational. NFP has a budding wealth practice in Wealthspire but is one-fifth the size of Hightower. And while AON may be competitive in the institutional DC space, NFP’s main business is benefits and P&C which will require most of the integration attention and energy.
The RPA, RIA and IIC worlds have been consolidating mostly as a scale play which has resulted in good but not transformational results. Not only do Hightower advisors get access to institutional investment analysis, including alternative investments at a lower price than competitors because of NEPC’s scale, as well as the ability to service the retirement plan needs of their wealth clients’ organizations overnight, they also get access to the millions of participants in plans managed by NEPC.
Though NEPC may not have strong relationships or brand awareness with their participants, they not only enjoy the trust of the plan sponsors, but they also have leverage with record keepers to get and use participant data safely, which is the holy grail.
NEPC now has an army of well-heeled wealth advisors that none of their competitors can match as the DC industry looks to move beyond the declining plan level fees towards participant services.
Oros stated, “Within the first two weeks of announcing the deal, a $1 billion DC plan came in from one of our advisors – we were never going to win that plan. Now, we have brought in NEPC, and we can win that plan. A $20 million DC plan that came into NEPC that would be too small for them to bid on and was pushed it over to us. There was a $2.5 million wealth client that NEPC is not going to serve, which is our bread and butter.”
What could go wrong? Mergers and acquisitions fail not because of flawed logic but due to poor execution. Can Hightower and NEPC manage the vast cultural gap between institutional and retail advisors which come from and exist in different universes.
Though Hightower can serve wealthy participants, no one has figured out how to deliver advice to the masses at scale. Though likely not a top priority during the integration process which takes between 18-36 months, plan sponsors want to help all employees and will favor firms that do.
“Cost synergies is not a priority,” stated Oros, but there is a lot of low-hanging fruit like overlapping investment analysts as well as, ultimately, the question of which firm takes the strategic lead, which is not always the acquirer with overlapping C-suite professionals.
Regardless, the momentum behind this dynamic Hightower/NEPC combination riding the wave of the convergence of wealth, retirement and benefits at the workplace while adding a fourth dimension of retail and institutional will be a force to be reckoned with, as well as the potential to help plan sponsors and improve participants outcome. Will we see copycat moves from other RIAs as we saw with Mariner buying Andco, or will institutional consultants look to buy RIA or RPA aggregators? Maybe, but first movers generally have the advantage if, of course, the execution is done well.
