Top retirement advisers to get bigger – or die out

For CAPTRUST Financial Advisors, SageView Advisory Group LLC, NFP Corp. and other big-name retirement plan advisers serving mid- to large-size plans, the frenzied acquisitions they've been making over the past several years to bulk up and gain dominance is the easy part. The hard part comes as they take what they've bought and build it into a business, merger and acquisitions experts say.

"Many are not going to succeed," said Dick Darian, partner at M&A advisory firm Wise Rhino Group in Charleston, S.C., referring to the 15 to 20 retirement plan advisers that dominate the market. Mr. Darian predicts that less than half are "going to be long-term, resilient, viable firms," with ultimately "maybe 10" surviving over the next five years.

The current "aggregators" voraciously gobbling up smaller firms will start acquiring other aggregators in a race to build even greater scale, he said.

For the 15 to 20 firms, the future rests in large part on the extent to which they can woo retirement plan participants and entice them to hire the firms as their wealth management adviser, according to experts.

"That's the holy grail," Mr. Darian said, referring to a firm's ability to build a bridge between its retirement plan business and its wealth management services.

For smart, forward-thinking RPAs, the winning strategy entails engaging individual participants through the participant advisory services that more employers and their employees are now seeking — all with an eye to one day capturing the individual who says "Hey, I've got $2 million over at Merrill Lynch. Can you help me there?" Mr. Darian said.

Dave Kennedy, senior analyst at Cerulli Associates in Boston, agreed, saying the strategy helps explain why many aggregators have been buying wealth management practices in addition to retirement plan businesses.

"As they're acquiring more and more retirement plan business and working with more participants, they also need to have a more robust wealth management presence as well in order to be able to service the participants that want the wealth management," Mr. Kennedy said.

Mr. Kennedy added that in servicing retirement plans, RPAs can see who's accumulating wealth and who could potentially benefit from a wealth management or financial advising relationship down the road.

"You can begin to build a relationship with that participant fairly early on so that when they do ultimately either leave that employer or retire, they're much more likely to engage with you for a wealth management and personal financial advising relationship," Mr. Kennedy said.

Mr. Kennedy explained that such wealth management relationships are much more profitable than helping participants with their workplace retirement plans. "If you're talking to a 401(k) participant, you might only be managing their 401(k) assets, but if they come on board to a wealth management relationship, now you can be managing their IRA assets, their non-retirement assets and their spouse's assets," he said.

Regardless of how soon the aggregators will start acquiring one another, consolidation will continue, with the upshot for plan sponsors and participants being generally positive, according to industry observers.

Consolidation allows firms to lower plan fees and offer other, more-cost effective investment vehicles, such as collective investment trusts, Mr. Kennedy said.

"As they collect more plans, more participants, more AUM, they do have a lot more negotiating power with record-keeper firms as well as asset managers that they work with," Mr. Kennedy said.

Mr. Kennedy has also seen the greatest increase in the use of CITs among RPA aggregator firms. Instead of being offered plan to plan, CITs are now being offered more to aggregator firms, which can be used by the multiple plan sponsors that the firms represent, he said.

The one potential negative impact is that consolidation could result in fewer investment choices in plan menus. Many RPAs use preferred lists of funds, and if there are fewer firms, there will be fewer fund offerings, Mr. Kennedy said.

However, Mr. Kennedy added, while participants might see slightly less variety of investment options, their investment choices are already highly concentrated.

"There's a limit to how much more limited plan investment options can get when the top 10 target-date series are capturing 60% of all participant contributions right now," he said.

One retirement plan adviser that is clearly focused on building a bridge to future wealth management business is CAPTRUST, by far the largest RPA with $651 billion in institutional retirement and wealth advisory assets.

The firm has built a suite of participant services, which it sees as the linchpin to what it calls the "bridge strategy," code for the transition of retirement plan business to wealth management business as participant needs evolve over time.

"It's a very important part of our vision and strategy, and it has been for quite some time," said Rick Shoff, managing director of CAPTRUST's adviser group in Doylestown, Pa., referring to the firm's wellness and advice offering, which it launched in 2014.

The offering provides participants with a suite of services ranging from simple retirement plan investment advice to more complex services, such as how participants can use stock options in the event their employer gets acquired.

"It is a very scaled and meaningful business as far as the number of people who are delivering it and the number of our clients that have adopted it," Mr. Shoff said. About 1 in 3 plan sponsors use the service, with the surprising adoption of increasingly larger plans over time, he said.

CAPTRUST charges a flat fee per participant for the offering, which is paid by either the plan sponsor, the participants or both.

Mr. Shoff sees CAPTRUST's wellness and advice offering as having an edge on rival RPAs because the firm has been providing the services longer.

"We have hundreds of clients that are already using us to do this and are great references," Mr. Shoff said.

Still, despite its strength in providing advisory services to participants and its dominance among RPAs, CAPTRUST does not immediately see itself or other aggregators buying other aggregators.

"I think we are poised to be able to do that if that opportunity ever presented itself, but I don't think it's going to happen," he said, explaining that there are many more smaller acquisitions to be done.

When aggregators can't go out to continue to buy firms to get bigger, opportunities could present themselves, but "I just don't think we're there yet," Mr. Shoff said.

That's not to say that it won't happen in a year or two or five, he said, his thoughts trailing off in a sudden reversal as he considered Lockton Cos., the insurance brokerage and employee benefits firm that had built a scaled retirement plan business and decided to sell it to RIA firm Creative Planning LLC in 2021.

"Nobody was more agog in building a retirement business inside a benefits business than they were," Mr. Shoff said, referring to Lockton, which ultimately decided that the retirement business wasn't a core business anymore.

"If what happened at Lockton could play out at these other firms, then I do think that creates opportunities for us to acquire one of the acquirers," he said.

Mr. Shoff also considered the current high-interest-rate environment, which has increased the cost of capital for acquisitive RPAs.

"That's an added pressure on aggregators, and that could be an accelerant," he said, explaining that higher costs make it harder to buy firms.

"If the current environment continues, that could be an impetus for some of these aggregators to say 'Good try, it didn't work. Let's sell this thing to CAPTRUST,'" he said.

Other aggregators see future interaggregator deals as likely, including NFP Corp., an insurance broker with $415 billion in retirement plan and wealth advisory assets, and Hub International Ltd., an insurance broker with more than $148 billion in combined retirement and wealth assets.

"Although this activity is not currently occurring, it is a reasonable prediction that this could happen over the next five years," said Joe DeNoyior, the McLean, Va.-based president of Hub's retirement and private wealth business.

Carl Nelson, executive vice president and head of mergers and acquisitions at NFP in New York, also sees a future world where aggregators will be snagging other aggregators. "It's a consistent approach for firms wanting to build scale by adding quality businesses that expand their services and resources across geographies," he said.

Randy Long, the Irvine, Calif.-based CEO of SageView Advisory Group, a registered investment adviser firm with more than $168 billion in retirement and wealth management assets, echoed similar views. "We continue to see consolidation in the industry and that will include aggregator firms," he said. "The synergies to be had by bringing together great firms allow for the delivery of best-in-class products and services to clients. The scale and efficiencies to be realized will truly result in one plus one equals three."

When asked whether they aspired to acquire other aggregators, some firms declined to respond but others opened a window into their thinking.

"If we identify an aggregator who is culturally aligned, as growth-oriented as we are, and as obsessed as we are in delivering an exceptional experience for our clients, then that would be an ideal opportunity," SageView's Mr. Long said.