With fee compression and other market pressures in the defined contribution space, financial planning and wealth management opportunities are becoming more attractive offerings to recordkeepers, plan advisors and other DC providers.
In fact, several DC plan providers are harmonizing their DC and wealth management businesses to foster deeper, more comprehensive relationships with retirement investors that extend beyond their DC plan, according to "The Cerulli Report—U.S. Retirement End-Investor 2022: Fostering Comprehensive Relationships."
According to the firm’s research, roughly a third (34%) of active 401(k) participants name their 401(k) provider as their primary source of retirement planning and advice, followed by a financial professional (16%). Many participants will stand to benefit from a high-touch, comprehensive wealth management relationship where they gain access to more advanced financial planning services, a broader investment opportunity set and more flexible distributions, the study observes.
“Retirement investors’ financial priorities often shift from immediate saving and debt management concerns to longer-term, financial planning considerations as they progress through their careers and accumulate greater wealth,” notes Shawn O’Brien, Associate Director at Cerulli.
For participants who work with advisors, the most important services advisors provide are investment selection (68%), decumulation planning (61%) and retirement accumulation (58%), highlighting the demand for comprehensive service that guides participants through each stage of their life, the study notes.
As for whom they trust to provide advice, Cerulli found that advisors are the most trusted source of investment advice for the 33% of participants who work with one, with 53% saying their advisor is “very trustworthy.” Participants who do not work with an advisor most trust investment advice provided by their bank/credit union and 401(k) provider. “Firms that establish and expand relationships with participants during their working years offer a simple, seamless transition from DC-focused asset accumulation to a more holistic, financial planning and advisory experience as they approach retirement,” says O’Brien.
Rollover Market
As such, the opportunity is ripe for retirement plan providers, the report suggests. Cerulli estimates that more than $440 billion in DC assets were rolled into IRAs with the help of an advisor in 2021, exemplifying the potential for sourcing wealth management business from the DC market. Moreover, the vast majority (86%) of advisor-intermediated rollover assets are through an existing advisor relationship, as opposed to new advisor relationships, the research shows. “For wealth managers looking to capture rollovers from DC plans, this data underscores the importance of establishing and nurturing relationships with participants earlier in their careers, years prior to potential rollover events,” emphasizes O’Brien.
Cerulli anticipates DC recordkeeper and intermediary consolidation—along with ongoing legal and regulatory pressures—to continue to exert downward pressure on fees in the DC market, making financial planning and wealth management services increasingly attractive to providers from a financial standpoint. According to the research, the services are considerably more lucrative than pure-play recordkeeping relationships, in part because the wealth management industry has been largely insulated from the intense fee compression experienced in the asset management and recordkeeping industries.
Given the attractive economics of wealth management relative to recordkeeping and plan advisory practices, Cerulli anticipates that more wealth managers and DC plan providers will create synergies between these two business units through strategic partnerships and mergers and acquisitions.
By harmonizing their DC and wealth businesses, firms can achieve meaningful financial benefits for both franchises, O’Brien observes. “Factoring in the expected ancillary revenue from converting DC participants to wealth management clients may allow firms to offer more competitive pricing on the DC side, helping them win additional mandates,” he notes, noting that greater “coopetition” between recordkeepers and plan advisors could arise as the two parties work to serve the plan but at the same time compete for participant rollovers.
On those points, a recent Wise Rhino report, Retirement & Wealth Advisory Q2 2022 Spotlight, observes that interest in retirement and wealth advisory M&A remains high and competition is strong for acquisition targets. The report notes that many of the retirement and wealth advisory firm acquisitions over the past five years have been executed by CAPTRUST, HUB, OneDigital, NFP, Marsh McLennan Agency, Sageview and most recently World Insurance with its PensionMark pickup.
“Each of these Firms strategically have focused first on establishing multi-disciplinary office hubs within each of the major regions, and then filling their advisory talent within each of the U.S. major markets,” the report explains.
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