The distinction between defined contribution firms that identify themselves as advisors or institutional investment consultants has been blurring for the past 20 years. It had been and continues to be based to some extent on the size of plans served. The recent T Rowe Price Sixth Annual Defined Contribution Consultant Study now includes 12 traditional advisory firms of the 36 surveyed. Though not broken out by firm type, there were some hints at the differences.
There are three 401(k) and 403(b) markets which include:
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Institutional (+$500 million)
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Smid-large ($3 million-$500 million with sub-markets)
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Micro (<$3 million)
Few, if any, firms sell to and service all markets well, which used to be the case with 401(k) record keepers. Morgan Stanley might be the exception—maybe UBS. Of the current roster of 40 national record keepers, seven can effectively serve all markets in some reasonable fashion, with five at scale and the other two significant.
Rather than plan size, perhaps the distinction should be based on which firms actively engage participants, traditionally the bailiwick of advisors in the smid-large market, most of whom come from wealth management and financial planning firms. Like with record keepers, advisory plan fees are plummeting, forcing both to find other sources of revenue.
“Convergence is blurring lines between advisors and consultants,” stated Jessica Sclafani, retirement strategist leader at T Rowe Price. “Each have different trends, challenges and opportunities.”
Sclafani pointed to M&A activity such as Hightower acquiring NEPC, Mariner buying Andco, Cerity merging with Verus, and Aon acquiring NFP as further signs of the blurring of the lines, although Aon almost immediately sold the retirement, wealth and Fiducient businesses into what is now called Wealthspire. Morgan Stanley has bought a few consulting firms, such as Hyas and Cook Street, while Creative Planning just announced its deal to buy $4.3 trillion RVK.
Will IICs be able to service smaller plans through PEPs? Can AI provide advice at scale through financial wellness tools? Most have moved to the OCIO model, just as RPAs have transitioned to 3(38), to get additional revenue, with some, like Aon, creating proprietary investment products, which can get complicated.
On the other hand, RPAs have effectively moved upmarket with cheap, easy access to services such as institutional-grade investment analysis and plan design.
T Rowe’s study highlighted some of those trends.
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AI: Just 14% of the RPAs and IICs now think it is too early to adopt AI, down from 44% last year, with very few using it for plan design or advice. Firms with a formal policy have a 50% higher usage rate.
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Wellness: Most use record keepers or third-party tools, with just 24% offering proprietary services.
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There is no strong usage or endorsement for retirement income, with most preferring simple systematic withdrawal; very few want to use managed accounts as the QDIA; and there is growing interest, if not usage, in alts
Convergence is the key driver. “Plan sponsors did not want providers [and consultants] to cross-sell other services to participants,” noted Sclafani. “Now they expect them to provide participants with access to wellness tools.” Recent larger plan lawsuits may make this trend difficult.
“Our plan sponsors study shows that 76% with +$1 billion want to retain participant assets,” stated Sclafani, key for retirement income, which she characterized as currently “stuck”. Entirely different story for the smid and micro markets.
Will any advisory firm other than Morgan Stanley and UBS be able to serve all DC markets? RPA aggregators, even those owned by benefit firms that serve the micro market, struggle to serve and make money with smaller plans, even through PEPs. Can larger independents like LPL move up market?
Unlike with record keepers, does it even matter whether an advisory or consultant group can serve all markets?
Though convergence of wealth and retirement is a key initiative for all aggregators and most broker/dealers, as well as a growing number of wealth advisors, it is still early days with access to data and effective usage of tech and AI still big barriers. When convergence heats up, and it will, advisory firms and consultants that can serve all markets, like a handful of record keepers, will be best positioned.
Henry Ford once quipped, “Sell to the classes, eat with the masses. Sell to the masses, eat with the classes.” The race is on to leverage the $15 trillion in assets and 100 million DC participants, most of whom do not or will never have a personal financial advisor.
