While merger and acquisition activity has slowed considerably in the last few years, strategic partnerships in the money management industry are on the rise.
For example, Putnam Investments Inc., Boston, and Mercer Human Resource Consulting, New York, have joined forces to launch a total retirement outsourcing plan. Last August, Fidelity Investments Inc., Boston, and International Business Machines Corp. Stamford, Conn., merged retirement outsourcing operations. Towers Perrin also has been active on this front, teaming up with Frank Russell Cos., Tacoma, Wash., and J.P. Morgan/American Century Investments Inc., Kansas City, Mo., within the past year for bundled retirement plan offerings in the United States and United Kingdom.
Consultants say the trend is long overdue. "You definitely see more partnerships in the industry," said Kevin Quirk, partner at Casey Quirk & Acito, Darien, Conn., a money management consultant. "All the old silos are breaking down," he said, as firms look to leverage core competencies to generate additional revenue and create marketing opportunities with other firms. "I'm surprised there hasn't been more of it."
The industry is seeing more now because the bear market exposed inefficiencies in the market. As the industry has matured and cash flows have leveled off, companies are forced to run more efficiently.
While partnerships traditionally have formed by hiring subadvisers, the relationships now are going beyond investment management.
Warren Cormier, president of Boston Research Group, Woburn, Mass., said money managers need revenue and they aren't getting it from asset management. As a result, firms are looking to other areas to generate fees, such as benefits outsourcing. They also are looking for efficiencies by forming partnerships. "This is a reaction to a market situation," said Mr. Cormier. He said it makes sense for firms to generate revenue off existing infrastructure and administrative services.
In developing bundled benefit services, firms are responding to a market need, consultants said "Plan sponsors like the ease of one-stop shopping," said Mr. Quirk.
Currently, about 26% of plan sponsors use the same provider for their defined benefit and defined contribution plans. About 10% more would be interested in using the same provider for both plans in the future, added Mr. Cormier. "There's still some growth in that market."
Of sponsors that have the same defined benefit and defined contribution provider, 67% are satisfied with their service. Of plan sponsors that have the same provider for retirement, health and welfare, just 29% are satisfied, added Mr. Cormier.
Fidelity Investments, which took over the administration of IBM's health and welfare plans in August, has seen its total benefits outsourcing program grow by an average of about 20% a year, said Peter Smail, president of Fidelity Employer Services Co., Boston. This year alone, interest in bundled services has increased even more, added Mr. Smail. About 60% of the requests for proposals that have come through the door at Fidelity this year are for administration of the defined benefit and defined contribution plans, he said.
As part of Fidelity's agreement with IBM, the two firms formed a relationship to market Fidelity's human resources and benefits outsourcing services to other companies. Fidelity will provide human resources and benefits administration while IBM Global Services, the firms technology consulting division, will provide information technology consulting to Fidelity for other clients.
"This is a time when companies are really examining what their core businesses are, and what they are not," said Mr. Smail. IBM reduces costs and focuses on its global consulting service while Fidelity expands its growing benefits outsourcing business, he added.
Never worked together
The Putnam-Mercer collaboration, announced in October, was formed to launch a total retirement outsourcing program. Mercer Human Resource Consulting will provide the defined benefit plan administration, actuarial services, and investment consulting excluding manager selection. Putnam will provide the defined contribution plan administration and investment management.
Mercer and Putnam, affiliates of Marsh & McLennan Inc., New York, never worked together on such a project even though their paths have crossed before as consultant and money manager.
Ted Goldman, retirement consultant at Mercer, said the marriage made sense because it was driven by increased market demand for bundled services and a more cost-conscious business climate.