If January is a harbinger of industry consolidation for the rest of the year, then 2014 will be very active. The week of Jan. 20, DailyAccess was sold to Verisight, which was bought last year by Connecticut private equity firm Stone Point. Cetera and a smaller BD were bought by Nicholas Schorsch’s RSC REIT firm, forming almost instantly a new 9,000-rep independent BD powerhouse with eyes on the DC market — and a viable competitor to LPL. Money managers, especially those in the DC market, are facing real pressure, with fees dropping and more money moving into passive strategies and TDFs as the cost of distribution rises.
So what should we expect for the rest of the year? I’m often asked which record keeper is for sale. If I knew, would I be able to tell? The better question is which provider is not for sale, which is why I created the concept of “401kHeaven.” Those in “Heaven” may not be safe; for example, Hartford seemed to be well situated but circumstances led to the parent’s decision to divest. While consolidation of broker dealers and money managers may continue, the implications of record keeper change are more significant for plan advisors.
Record keepers in Heaven have significant assets and participants. The number of plans is less important. They provide high-quality service. They are able to make money either from proprietary investments, especially managed investments or stable value, or from record keeping, which is rarer. Along with the 43 national firms, there are hundreds of record keeping TPAs, but just 50 or so have over $1 billion in AUM. This market is bound to consolidate as technology and distribution costs increase in a mature market where larger firms are eager to buy assets to leverage fixed costs.
So here are two simple ways to determine if a record keeper is well situated to withstand consolidation above and beyond profitability (which is hard to determine and even harder to uncover). First, watch where the really good wholesalers are moving to and from. Wholesalers are the giraffes of the industry — with a better view of what’s coming than the rest of the animals.
Second, does a provider well-entrenched in the small (<$10 million) DC market have a viable mid market ($10-$100 million) option and visa versa? If not, smaller providers will continue to lose plans as they grow and mid market record keepers will not be able to either service plan advisors across markets or enjoy the richer margins of the small market.
With capital available and the DC market dynamics shifting, 2014 should be a banner year for record keeper consolidation.
