As a history major, I learned the benefits of looking back to better understand the present and see more clearly into the future. At the risk of doing things backward, I am looking ahead first, and then will try to make sense of what happened last year — although with the fiscal cliff and threats to DC tax incentives, last month already seems like a year ago. So here are a few things that might happen in 2013, and a rundown of forces affecting the retirement industry at large and the DC or corporate participant directed advisor-sold industry specifically.
If you didn’t notice, it seemed that the advisor-sold DC industry matured almost overnight — like a boy who went to sleep as a pre-adolescent and woke up with the beginnings of whiskers, a deeper voice and an awkward self-awareness. NAPA, and its almost instant success, is either a driver or a bellwether of that change, depending on how you look at it.
As a maturing adult, the advisor-sold DC industry now has to face its responsibilities like an awkward teenager: It has to show that it is worth all the coddling and money invested. Advisors, record keepers, DCIOs, broker dealers and TPAs, along with everyone else in the DC food chain, has to show that the money and time invested is paying dividends — compared not to the worst examples in the industry, but to the Thrift Savings Plan, which charges 2 bps all in. Though that plan is subsidized and offers minimal service and choice, it all comes down to which system provides better retirement benefits.
Following are a few things that can be expected to shape our industry in 2013.
Center of Attention
Courtesy of the media, government scrutiny and fee disclosure, there has been an inordinate amount of scrutiny and attention on our industry, which seems like a niche with very few people involved but actually affects more than 70 million workers (and even more if you consider their families). The system should only grow as fewer people are covered under DB or state-run retirement plans. With all this in mind, expect more attention and focus and attention by:
• Government — The DOL has a big agenda, including the definition of a fiduciary advisor and refining the fee disclosure regs. And retirement tax incentives will be front and center as Congress struggles to reduce the debt.
• Broker Dealers — Don’t expect more resources dedicated to the DC market (with some exceptions) as BDs struggle with fundamentals — that is, more advisors are going independent or pure RIA. BDs will try to restrict their “blind squirrels” from doing plan business, especially for larger plans, because of the liability compared with the return. More BDs will create and support specialty groups for a very few advisors devoted to the business.
• Advisors – Though more advisors will flock to the DC business based on demand and the attraction of recurring business and ancillary revenue, look for advisors groups, whether within broker dealers or totally independent like SageView, to attract the newbies, who need the support, marketing and branding.
• Plan Sponsors – Basically, plan sponsors want nothing – no cost, no liability and no work. With more scrutiny on retirement plans by the government and the plaintiffs’ bar, sponsors will either hire better professional advisors or just give up if plans become too burdensome or risky.
• Participants — Though fee disclosure was met with a big yawn, more participants, especially younger ones, are aware that they need to save for retirement, that they are on their own, and that fees do matter.
• DCIOs — The DCIO business is beginning to mature, and smarter ones are wondering whether throwing more money and value-add will result in more assets. As TDFs and other allocation products take more market share, how will the DCIOs on the outside looking in gather assets? Stay tuned — this segment is attracting the best minds in the industry.
• Record Keepers — Acquisitions — going either way — will be on the minds of most majors. While providers who had proprietary assets on their platforms had been valued most highly, pure technology plays (like Ascensus, for example) who can make money at record keeping are now being valued more highly. Record keepers who can make money at record keeping — what a novel idea! — are better positioned to buy others.
What Will Drive the Market?
What will the major players that drive the DC market be focused on in 2013?
• Profits — Advisory businesses are not, by definition, scalable, so look for groups to get bigger to leverage back office support, marketing and branding. Record keeping, which is scalable, is clearly a commodity, so which ones can maintain quality while lowering costs? Fewer record keepers are fooling themselves that they can lose money at record keeping to get rollovers or retirement income assets.
• Revenue Sharing — Every time money moves, it diminishes. When the buyer is not the payer, bad deals are made. Fee disclosure and transparency will move to a more efficient market where everyone gets paid for what they do, not hiding costs within expense ratios and making the DCIOs paymasters.
• Fiduciaries — Litigation, risk and liability will drive a lot of discussions and decisions by plan sponsors, advisors and broker dealers. As the risk of retirement security decreased in DC plans from DB plans for plan sponsors, their potential legal liability increased. This makes fiduciary advisors so much more important, as everyone seems to be waking up to a system that needs overhauling.
• Outcomes — Behavioral finance is now being used to cure cancer and reduce the U.S. debt (just kidding). But it does seem like befi has become the panacea that will cure the industry’s major issue: improving participant outcomes. But how can you improve what you can’t measure?
• Advice — Forget education and guidance; people want face to face advice advice. Who can delivery it, and how can they do so at a reasonable cost? Will the industry wake up and finally leverage social media and the apps generation?
• Investments — Though we all know packaged products are the future, will we go beyond TDFs and survey-driven, risk-based funds? Many people are not willing to take risk to get returns, so capital preservation products should gain favor — as will LDI, which is based on need, not just age or emotion. Where will healthy returns come from?
Agree/disagree? What are your thoughts on what might happen in 2013?
