In the midst of what many call the second industrial revolution, and in the wake of public demand for retirement plans at work driven by state auto-IRA initiatives, it's little wonder that robo-record keepers are being painted as the winners for small market DC plans.
Except that reality sometimes gets in the way of logic. It’s possible that smart, well-organized and well-funded advisory firms will fill the void and need for smaller companies.
Robo-advisors claim that legacy providers are stuck in old world business practices and have not taken advantage of recent breakthroughs in technology. Plus the fact that many companies, like John Oliver’s production company, are disenchanted with fees that they see as high and hard to understand. Add on robo-advice using ETFs and you have a recipe for success, right?
One big issue that robo-record keepers selling direct to businesses will face and, for the moment, anyway, seem to be ignoring is that in the small plan market DC plans are sold, not bought. Most companies do not conduct thorough, independent searches for record keepers. They respond to an advisor calling on them – just like John Oliver, although he complained bitterly about his advisor as well.
But state mandates will force companies to offer some sort of retirement plan, so the distribution issue is solved, right? Unless the robo is selected by the state as the default (which means pricing will be low), they will have to fight for the business like everyone else.
Which leaves us with the obvious alternative – advisors. Partnering with third party administrator/record keepers, perhaps even some of these robos, advisors who know how to sell and market can offer relatively low-cost services, leveraging index funds and ETFs within professional managed collective investment trusts (CITs) while providing the hand holding and personal service that smaller companies need. Even if not part of a multiple employer plan (MEP), they can leverage similar plan documents, investments and service models using one or very few record keepers.
So which advisors are likely to emerge? The logical choice is elite advisors with hundreds of millions or even billions of assets with larger groups. But again, reality gets in the way of logic. It’s hard to have one service model for larger clients with higher revenue and another model for smaller plans within one organization. Look for well-run and well-funded groups touching but not steeped in the DC business to emerge. They won’t capture the attention of VCs running over themselves to invest in robos, but they might actually win some business. And make money.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.
