Watching Wholesalers to Predict Consolidation and Business Health

Most experts are predicting massive consolidation among DC record keepers, with the big push just about to begin — especially with four national record keepers representing more than 100,000 DC plans likely to change ownership in the next few months. The businesses of many large national record keepers are not sustainable, especially with low plan turnover and deflationary price pressure driven by new disclosure regulations and the proliferation of cheap and easy-to-use fee benchmarking software. The factors in favor of consolidation are mounting. The parent corporations of many of these providers are under extreme pressure to raise cash, and DC businesses are still highly regarded (which is what happened with The Hartford). Even without consolidation, some providers will falter, unable to reinvest aggressively in their products, services, distribution and support of advisors. So how can you identify which providers are likely to sell their businesses or will not be able to remain viable? While we can all do the math and look at the number of participants and assets under management, there may be other factors that make the equation a bit more complicated. Certainly having a plan sponsor (if not participant) brand helps, as does a large and skilled sales force. And robust and current technology surrounded by good processes allows record keepers to continue to lower costs. Looking at the tenure, experience and talent level of senior management is even more insightful. If senior managers are coming and going on a regular basis, there is almost no chance to develop and sustain a viable business model, never mind a highly functional team. The most naive thing you can do is to ask a record keeper if it is committed and expect an honest answer. At watering holes in Africa, all the animals stay near the giraffes when they are drinking because they have the best view of when trouble is coming and are easily spooked. One way to determine whether a record keeper is committed or even going in the right direction is to watch the wholesalers, who are like giraffes at a watering hole. Wholesalers arguably have to best perspective because they are in the field speaking to advisors and sponsors, and also have an insiders’ view of the home office. If something is going bad — whether sales, products, investments, service, politics or even finances — wholesalers will know it quickly, especially the good ones. Their greatest asset is their network of advisors so, if something is going wrong with their current employer, the wholesaler gets less aggressive until they are able to find a new home. Even though the wholesaler may not be able to be totally honest, they will give you signs. When one or two goods ones move, it’s not necessarily an indication; but when the good wholesalers move en masse, it’s a sure sign of trouble. On the other hand, when a provider is hiring really good wholesalers, it’s a sign of their commitment and the health of their business. So stay close to your wholesaler to avoid being in the position of having plans with an exiting record keeper being picked off by your predatory competitors. Remember — it’s a jungle out there!