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Participant Rollovers Could Increase ‘Coopetition’ Among RKs, Advisors

Business Growth Strategies

As larger DC advisory firms and recordkeepers continue to prioritize their wealth management initiatives, a new report by Cerulli suggests that “coopetition” between the two groups will increase in the coming years.

According to The Cerulli Edge―U.S. Asset and Wealth Management Edition, September 2022 Issue, this occurrence will surface as recordkeepers and plan advisors work together to serve the plan but simultaneously compete for participant rollovers. 

The firm estimates that more than $440 billion in DC assets were rolled into individual retirement accounts (IRAs) with the help of an advisor in 2021, illustrating the sizeable market for sourcing wealth management business from the DC market. Of advisor-intermediated rollover assets, 86% take place through an existing advisor relationship.

However, inertia plays an important role when it comes to advisor selection, the report advises. Typically, participants choose to work with an advisor or firm that they, or someone close to them, have previously vetted or with whom participants already have established relationships. Cerulli’s 2022 401(k) Participant Survey finds that of those who work with a financial advisor, just 23% actively sought out that advisor. Conversely, 66% met their financial advisor through a family member, friend or their 401(k) provider/advisor.

“For wealth managers looking to capture rollovers from DC plans, this data underscores the importance of establishing and nurturing relationships with participants earlier in their careers, years before potential rollover events,” says Shawn O’Brien, Associate Director at Cerulli.

Creating Synergies

Given the “attractive economics” of wealth management relative to recordkeeping and plan advisory services (on a per-head basis), Cerulli anticipates more wealth managers and DC plan providers will create synergies between wealth management and DC through mergers and acquisitions and strategic partnerships, the report notes.

Moreover, retirement specialist advisors—financial advisors who generate at least 50% of their revenue from their DC plan business—also have a stake in the convergence of wealth management and DC. Of retirement specialist advisors, 80% say DC plan clients often ask them about IRA rollover decisions, and 56% of retirement specialist advisors indicate IRA rollovers from DC plans support their wealth management business, Cerulli notes.

Consequently, the ancillary revenue generated from converting participants to wealth management relationships may allow recordkeepers and plan advisors to charge more competitive plan-level fees to expand the breadth of their DC business, the report suggests.

In fact, some top retirement aggregator firms are seeking to expand their wealth management operations and capabilities by acquiring smaller, regional wealth management firms.

“Aggregators are widely viewed as the key plan-level decision makers in the DC mid-market,” says O’Brien. “Through acquisition and organic growth, they have captured a substantial share of DC-intermediated assets,” he adds.

According to the research, the top-10 retirement aggregator firms collectively advise on more than $1 trillion in DC assets. “This poses a potential threat to recordkeepers that offer wealth management services,” O’Brien further emphasizes.  

Striking a Balance

The challenge for recordkeepers is to determine how to navigate relationships with aggregators when working with higher-balance participants and capture rollovers, the report suggests. Recordkeepers will need to “play defense,” striking a balance between satisfying plan advisors to retain DC mandates while maintaining relationships with aggregators, because of the influence they have in helping plan sponsors monitor and select their recordkeeper, the report further notes.  

However, sacrificing rollover opportunities to placate the plan advisor and maintain the plan may not yield desirable financial outcomes, the report further observes, adding that―in many cases―a middle ground between the two providers will exist.

“Initiating direct, constructive conversations with plan advisors to address their respective approaches to capturing rollovers will help recordkeepers find a middle ground,” states O’Brien.

The research also suggests that recordkeepers consider employing a tiered wealth management service model (based on investor household investable assets) to serve mass-affluent and middle-market rollover clients who fall a tick below the plan advisor’s purview.

“There is an opportunity for recordkeepers to leverage digital solutions that offer scale to serve less affluent participants or those unwilling to pay the higher fees associated with a traditional wealth management relationship,” he concludes.