As the defined contribution industry begins in earnest to help and serve participants, driven in part by the need of both advisors and record keepers to seek revenue beyond declining plan-level fees, it puts parties that collaborate to sell and service the plan in conflict. Though there is no right answer for all providers and advisory groups, the middle path or partnership will not only work better for most, but it should result in better outcomes.
The recent Cerulli end-user study, outlined in a recent Wealth Management column, which explores what participants want and how they act, clearly points to the benefits of partnership. Though some providers have or are developing end-to-end solutions like Fidelity, Empower, Vanguard, Schwab and TIAA, there are gaps that an advisor can fill. As Fidelity’s Alison Caron stated at the recent RPA Record Keeper Roundtable, “The advisor will win if they have a relationship.”
Advisors and providers have strengths and weaknesses, which when successfully partnering with each other, can lead to better outcomes.
According to the Cerulli report, participants value a human touch because they get personalized advice, detailed documented plans, questions answered quickly and confirmation they are on the right track. Asset allocation is no longer valued. An engaged advisor willing and able to work with participants providing education, personalized advice and, when needed, the ability to implement that advice, is vital. Even more importantly, unlike most providers, advisors are willing to act as a fiduciary, which has won the day with plan sponsors in the past.
Providers have call centers, technology, tools and direct access and brand recognition with participants, most of whom do not know who their plan advisor is. They have marketing and communications resources that few advisory firms have and can target participants not just based on their profiles and demographics but also on events like separation of service.
It has never been clear how to make money creating financial plans for the masses at scale but it is a way to engage participants—68% with a plan have high levels of confidence that they can maintain their lifestyle in retirement, according to Cerulli, yet just 30% have one, which seems high. Though providers have tools, very few participants use them, which is a great way for advisors to engage.
The ideal way for the DC industry to serve plans and participants starts with a new breed of financial coaches not selling anything who are connected to participants through data and technology that directs them on what issues to focus on, but also implement the advice more efficiently through tech and artificial intelligence. This model not only becomes the breeding ground for the next generation of advisors who are aging out, but it also uncovers hidden assets.
Along with $1 trillion rolling out of DC plans annually and the ability to leverage managed accounts to provide advice at scale for which firms can and should charge, for every dollar in a DC account, there is $3 outside of the plan, according to Empower. Wealth advisors are running out of prospects—most investors with $1 million or more have an advisor, yet 50% of all wealth is advised. No better place to find additional clients than the workplace as the recent Fuse Research highlighted.
Though home offices at broker/dealers and some aggregators want all accounts, most advisors have a much higher minimum with providers ready, willing and able to serve all size accounts.
There are four advisory firm business models including the 10,000 RPAs:
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Purist RPA: 30% Triple F advisors
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Hybrid Wealth: 60,000 with 15% to 49% of revenue from DC
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Purist Wealth: 200,000 <15% DC revenue
There are three provider business models:
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Soloists: Prefer to serve participants themselves
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Purists: Do not have the capacity or interest to serve participants
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Partners: Can serve participants but prefer to partner with advisors
There are many more Purist and Partner providers—hybrid RPA and wealth firms are the prime audience for all record keepers. Can these groups partner to augment each other’s strengths and overcome their weaknesses while sharing resources, revenue and data?
There’s a reason few if any advisory firms offer record keeping services to plan sponsors and why, according to Fidelity Investment research, over 90% of plans above the micro and below the institutional markets work an advisor. Not only do plan sponsors prefer it but it leverages the strengths of both parties. They seem to be able to partner splitting up duties and revenue. Why can’t they do that with participant services?
