A Dramatic Transformation of RPAs Is Just Beginning

V.I. Lenin once said, “There are decades where nothing happens; and there are weeks where decades happen.” The perception of time passing can be subjective, and sometimes life feels uneventful, while other times, it feels like many significant events occur in a short span. All of this is an apt description of the retirement plan advisor business now, which is about to experience a dramatic transformation.

Many factors are forcing this transformation now, but let’s review the relatively brief history of RPAs first.

Defined contribution, especially 401(k) plans, began to explode in the mid to small markets in the 1990s led by Fidelity, which used proprietary mutual funds and 12(b)(1) fees to offset plan sponsor costs along with insurance providers, which used annuity wrappers to subsidize plan costs and pay brokers without restraint or transparency. All of this opened the door for annuity salespeople, benefit brokers and eventually wealth advisors to sell 401(k) plans with advisor-friendly mutual fund companies like Putnam, MFS and American Funds entering the 401(k) market.

The budding RPA industry, which started in the 1990s, grew pretty much unnoticed by most broker/dealers and insurance firms. The 2000s saw enlightened brokers acting and signing on as co-fiduciaries providing investment due diligence with some promising to lower record keeper fees, which had been unscrutinized in part because they were hidden.

The Triple F advisors (funds, fees and fiduciary) at the time were a revelation, with most brokers and brokerage firms unable to adopt. It was a dramatic transformation that has run its course over the past 20-plus years. Like all transformations, laggards or late adopters eventually catch up or go out of business. The Triple F RPAs have been commoditized because:

1. Fund due diligence has become table stakes as firms like Fi360 and RPAG spit out reports in seconds, enabling blind squirrels to appear sighted and causing a mass exodus to index and target funds.
2. Investment fiduciary services can be outsourced to firms like Morningstar and Mesirow for a few basis points.
3. Fees remain important to plan sponsors, resulting in less experienced advisors willing to charge less by outsourcing fiduciary and fund services—record keeper fees have been squeezed close to their limit courtesy of experienced RPAs and lawsuits.

The dramatic transformation of the RPA business highlighted by the shift of focus to participant rather than plan fees is being driven by:

1. Convergence of wealth, retirement and benefits at the workplace
2. Consolidation of record keepers and RPA and RIA advisory firms
3. Greater government attention on DC plans:
   1. Features like HSAs, student loans and emergency savings accounts not directly related to retirement plans
   2. State mandates
   3. Tax credits
4. The re-emergence of wealth advisors due to:
   1. Explosion of small plans
   2. Opportunities to develop and find new wealth clients
   3. Need to serve clients who manage or own a business
5. Lawsuits
6. Demand for personalization
7. AI beyond streamlining processes, enabling advisors to serve infinitely more clients, bringing advice at scale to the masses and financial planning as a benefit at relatively low costs
8. Private equity money demands results and better business leaders who can deliver those results
9. Plan sponsors awakening going from unconsciously incompetent five years ago to consciously incompetent on the road to consciously competent resulting in:
   1. DC plans as a strategic vs. tactical benefit used to recruit and retain
   2. Uncovering conflicts of interest with their co-fiduciary advisors
   3. Retirement income
   4. More RPA due diligence and RFPs

Few firms are ready, willing and able to make this transformation, and even fewer are executing it now. Though aggregators are well positioned, many are still focused on integration and building culture, which will be required before they can execute.

And just like the Triple F advisors who ran roughshod over brokers, making them appear obsolete and conflicted, the new breed of RPAs will test Triple F advisors, resulting in accelerated consolidation and the exodus of firms unable or unwilling to evolve.

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