In an article earlier this year, I reviewed what the small plan (<$3 million) market might look like in the future. But will Elite Advisors that have moved up-market be able to take advantage?
Let’s review what the future might look like for smaller DC plans and trends that might affect this market:
- MEPs or pseudo-MEPs by big advisory groups
- Convergence of benefits
- DOL conflict-of-interest rule
- State initiatives
Not to mention the greater use of technology like robo-record keepers or some version of it.
As margins continue to get squeezed in the mid and larger market, where competition is fierce and only getting more intense, advisors seem to have a few options to increase revenue and margins:
- Custom CITs
- Leveraging lower-cost funds to keep costs down while maintaining their margins
- Sale of other benefits and investments
- Improvement of outcomes
- Move down-market
Not only is the competition less fierce and margins are higher down-market, the DOL fiduciary regulation is promising to create more orphan plans as advisors and their BDs become less interested in serving as a fiduciary.
Sounds great in theory, right? But there are challenges. Smaller companies often care less about their retirement plan, so getting them to pay attention is harder, whether it’s the overworked, underpaid HR person (if they have one) or the busy CEO who probably has bigger fish to fry. Though pricing might be more attractive, the cost-of-sale is still steep and the revenue per plan is not.
So let’s get into the all-important profit margin. Smaller plans are less price sensitive, no doubt, than larger plans. But can larger, Elite advisory groups create a repeatable, low-cost solution for smaller plans — something other than the same level of service or customization they offer larger plans? That takes marketing, technology and business discipline — areas of competency that are in short supply for even larger, relatively sophisticated advisor groups. Record keepers have been unable to do so, which has led to industry consolidation.
The thought is that while robo-advisors will have a hard time surviving on their own as the cost of acquisition is unsustainable, they could thrive as part of a larger organization that has clients and brand supporting their efforts to serve smaller accounts efficiently. Can robo-record keepers, which incorporate robo-advice, slick front ends and relatively sophisticated marketing methods, do the same for Elite advisors looking to move down market?
Regardless, the small DC market is beckoning. Is it the Siren’s call or a real opportunity?
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
