As registered investment advisor aggregator firms continue to acquire smaller players in the DC space, their size and scale has brought greater influence in the DC market, according to a new report from Cerulli.
This is particularly true in the $25 million to $500 million market segment, the firm notes in its latest report, “U.S. Defined Contribution Distribution 2021: Uncovering Investment-Only Distribution Opportunities.”
As a result of this concentration, defined contribution investment-only (DCIO) managers must tailor their distribution strategies to the needs and objectives of RIA aggregators and other key DC plan intermediaries, the firm suggests.
Consider also that the DC market is highly intermediated, the report observes. More than 80% of corporate DC assets are advisor- or consultant-intermediated and there is considerable diversity among DC plan intermediaries, ranging from broker/dealer-based advisors in the micro plan market to institutional investment consulting firms in the larger end of the market.
“More than ever, DCIO asset managers must hold a keen understanding of these various intermediary types, the needs of their plan sponsor clientele and how to best engage with them,” explains Shawn O’Brien, Senior Analyst at Cerulli.
Investment Decisions
Managers apparently are aware of the growing influence RIA aggregators have in deciding DC plan investments. According to the research, 66% of managers believe that aggregators have become a primary influencer in deciding DC plan investments in the $25 million to $250 million segment. And for plans in the $250 million to $500 million range, this rises to 68%, Cerulli notes.
“There’s no question that there’s been a shift in distribution dynamics. Given the rising control aggregators have over plan assets, managers will need to recalibrate their distribution resources, identifying key points of influence in the investment decision-making process,” says O’Brien.
Meanwhile, many aggregator firms have taken an institutional approach to their investment decision-making process, centralizing the due diligence and investment analysis at the home-office level, the report further observes. By doing so, Cerulli notes, they have taken much of the investment research and analysis responsibilities out of the hands of the firm’s field advisors, enabling them to spend more time helping plan sponsors on their plan design, participant education and communications, and recordkeeper oversight.
In addition to centralizing the investment research function, some RIA aggregator firms are leveraging their scale and investment expertise to create their own 3(38) open-architecture, white-label investment products and solutions, the report notes.
For DCIO managers seeking entrance or expansion into the aggregator channel, Cerulli recommends they focus distribution efforts primarily on the home-office teams of these firms and secondarily on the large field advisor teams employed by them.
Additionally, DCIO asset managers should familiarize themselves with advisor/consultant white-labeled investment products and periodically assess product development efforts, the report advises. “Managers that understand the investment decision-making process, advisor concerns and potential platform changes on the horizon will be well poised to capture plan assets controlled by RIA aggregators,” emphasizes O’Brien.
