The recent news of Ameritas buying Guardian’s DC record keeping division is a reminder of the DC RK consolidation trend, and the consolidation cycle generally. It’s one that RKs, DCIOs and advisors ignore at their peril.
The consolidation curve concept was outlined in a seminal 2002 Harvard Business Review article, “The Consolidation Curve.” The article, penned by three AT Kearney consultants who studied 1,345 large mergers by industry, shows a clear consolidation plot that the authors claim can be predicted with some precision over four stages.
Let’s look at each stage through the lens of advisor sold record keepers or the $1-$250 million DC market.
Stage 1: Opening
Arguably, Fidelity started the advisor sold RK DC business with the introduction of retail mutual funds, shifting costs to participants and, ironically, selling direct. That nascent market included Putnam, American Funds and MFS (maybe AIM) as well as the advisor sold division of Fidelity.
This stage starts with one company dominating, which quickly drops off with three (let’s say up to five) having a 10-30% market share. Competitors quickly arise and big players must aggressively defend their first-mover advantage through scale and barriers to entry (technology) focused on revenue over profits while perfecting acquisition skills.
Stage 2: Scale
The top players market share grows to 15%-45% as they buy up competitors while honing acquisition skills, building a scalable platform.
Stage 3: Focus
At this stage, you must outgrow competition, make mega deals, focus on core competencies and profits, shoring up or jettisoning weak business units, while attacking underperformers and crushing, acquiring or emulating start-ups. Market share is 35%-70%.
Stage 4: Balance and Alliances
Titans reign and market share jumps to 70%-90%, focusing on alliances with peers while defending the castle.
What Lies Ahead?
There have been six deals this year in the DC industry, including Ameritas/Guardian, three for record keepers (with one rebranding and three BDs), and two at least partially attributable to the impact of the DOL fiduciary regulation. None of the record keeper deals have been game changers. Consider that there were seven deals in 2015, six affecting record keepers and four major ones, including Mercer, NYLife, BMO and Ascensus.
Currently, DC RKs look to be at the end of Stage 3 in the consolidation curve, and will soon enter Stage 4.
Here’s a few words of advice and warning from “The Consolidation Curve” authors:
Ultimately, a company’s long-term success depends on how well it rides up the consolidation curve. Speed is everything, and managers’ merger competence is paramount, particularly during the middle stages of consolidation. Companies that evaluate each strategic and operational move according to how it will advance them up through the stages — that capture critical ground early and move up the curve the fastest — will be the most successful. Slower firms eventually become acquisition targets and will likely disappear. Most companies simply won’t survive to the endgame by trying to stay out of the contest, or worse, by ignoring it.
Advisors take heed.
