With the passing of another defined contribution record keeper, the only surprising aspect of Voya’s deal to acquire OneAmerica’s retirement division was the price paid, estimated at one-fifth of what Empower paid for MassMutual’s DC business and one-quarter of that upfront. The pertinent question for advisors is “who’s next?”
When a record keeper exits, it creates a free-for-all, with competitors aggressively going after the exiting providers’ clients, who may be asking their incumbent advisor many uncomfortable questions.
There are objective indicators of whether a record keeper is strong enough to not just survive but win the war of attrition as the industry dances to the consolidation curve tune, which will ultimately result in four to five providers with 80% market share. These attributes include:
- Scale – close to or more than 10 million participants
- Strong distribution
- Cross-selling/proprietary fund capabilities
In the RPA 401(k) market, five have scale, and five others have unique distribution and/or cross-selling and proprietary funds. The king of the hill, Fidelity, has all three—in spades.
But beyond qualitative measurements, advisors can also sense if a record keeper is likely to exit by watching the wholesalers, who are the industry's giraffes.
On the Serengeti, other animals stay close to giraffes at waterholes because giraffes can act as an early warning system, allowing other animals to see danger from a distance because:
- Giraffes are tall and can see danger from far away,
- They spook easily, and
- When a giraffe senses danger, it can quickly alert other animals.
Much like animals in the wild that stay close to giraffes, wholesalers often have early warning systems. Patterns of top wholesalers leaving a provider can signal trouble ahead or even when a wholesaler stops calling or aggressively selling.
A long-tenured OneAmerica wholesaler called me recently. They were nearing the end of their career and being recruited by a record keeper with scale. Though I did not tell them what to do, I laid out the reality of the situation.
Can advisers really afford to do nothing? While putting an entire book of business out to bid might seem impractical, the risks of choosing poorly may outweigh the benefits. But doing nothing may result in advisors scrambling when one of their key record keepers exits, hurting their reputation.
There are now 40 national record keepers. Eliminating fintechs and those like Alight that focus exclusively on the institutional DC market or TIAA working with education 403(b) plans, there are 15 providers that will struggle to compete with scaled competitors or those with unique distribution or able to cross-sell or to sell their high-quality proprietary products.
Driving consolidation is the cost of technology increasing due to cybersecurity concerns, distribution costs and, of course, the convergence of wealth, retirement and benefits at work. With more concentration of power at the home office or aggregators and brokers/dealers, the buyers are savvier and likely to spot issues before an individual advisor can.
Payrolls and fintechs with streamlined processes will be able to leverage the explosion of smaller plans. Neither is well positioned to leverage the convergence while fintechs, which have raised over $1 billion, will struggle to meet the high expectations of their PE firms (one of the biggest fintechs reportedly had a flat round recently) and payrolls struggle to sell outside their payroll base.
Because unlike ERISA investment selection, advisors will not be judged on their process—they will be evaluated based on results. So, as the knight at the end of “Indiana Jones and the Last Crusade” cautioned, “You must choose but choose wisely.”
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.
