Retirement plan adviser M&A market poised to explode
The mergers and acquisitions boom in the plan adviser market is only just beginning
Looking back, the recent One Digital purchase of Resources Investment Advisors and 13 affiliated practices will be viewed as a watershed moment. That deal, which came on the heels of the Hub International transaction with GRP Financial and related firms, hints at much more to come in the retirement plan advisory business.
The volume of deals will accelerate in 2020, kicking off the evolution of what has been mostly a cottage industry. Driving that are changes in demographics and the need for scale and integrated technology.
“The next 30 deals will determine the future of the retirement advisory business,” said Rick Shoff, managing director at Captrust.
The confluence of retirement, wealth management and benefits, combined with capital that firms are anxious to deploy, has created the perfect storm.
Retirement plan specialists and dabblers alike will be forced to take a hard look at their defined-contribution practices. Not acting is no longer an option; those who wait too long will either miss out on high valuations or lose clients. The middle ground is eroding fast.
The numbers are telling.
Wise Rhino Group, an advisory firm for mergers and acquisitions, estimates that valuations have skyrocketed from 7.73 times earnings before interest, taxes, depreciation and amortization in 2016 to 10.44 times in 2019, with a maximum earnout of 14.05. And valuations of platform businesses like GRP and Resources are even higher.
Wealth management M&A firm Echelon Partners reported that there were 203 RIA deals in 2019, an increase of 12.2% over 2018. It was the seventh straight record year, with average annual growth of 15.4% over that time frame. In 2019, there were an additional 655 wirehouse breakaway deals.
In the DC business, scale matters more than ever. Smaller firms will have trouble keeping up with the required investments in technology and will struggle with client and talent acquisition.
“In 2006, we were able to invest $2 million back into the business,” Mr. Shoff said. “In 2020, our investment will be $20 million.”
RPAs affiliated with platforms can provide vastly superior service at substantially lower prices. In a highly competitive and regulated market, that makes it nearly impossible for dabblers to compete.
“The DC business is harder to dabble [in]. It is not a lifestyle business,” said Carolyn Armitage, managing director at Echelon. “We encourage our clients to be all in, or get out.”
Not only do affiliated practices have greater access to tools and services, they enjoy pricing efficiencies with record keepers and money managers, in part because collective trusts are now available to smaller DC plans.
Further, RPAs owned by platforms have an even greater advantage in their ability to cross-sell.
“Our retirement practices have access to capital as well as warm leads,” said Craig Reid, national practice leader of wealth and retirement at Marsh & McLennan, the largest publicly traded benefits firm, which recently purchased Centurion Group. “Our firms can close the door on the competition by offering multiple services.”
And of course, money matters.
“PE firms are borrowing at low interest rates, providing significant leverage,” said Randy Long, managing principal at Sageview Advisory Group. But he also warned, “They are not always patient.”
Demographics also matter. The aging adviser population is well-documented, as firms struggle to attract and train younger advisers. Larger firms like NFP, which is owned by a PE firm, can hire and train younger workers, eschewing the traditional “eat what you kill” model. They can also create a culture that smaller firms struggle to duplicate.
More advisers also are trying to get into the retirement market, given the money in motion with baby boomers retiring and assets in DC plans and IRAs continuing to grow. But serving small DC accounts and millennials who demand a richer digital experience requires technology, smart data and a new breed of adviser. And capturing IRA rollovers and leveraging wealth management opportunities takes time, capital and business acumen — all of which are in short supply for most smaller firms.
Uncertainty is driving advisers to market, said Dave Reich, president of Hub International’s retirement division. “The elections, historic bull market and new laws like the SECURE Act will accelerate the flight to safety. It will become harder to grow organically [for smaller firms].”
Open multiple-employer plans or pooled-employer plans that can be sponsored by financial service companies will become an option starting in 2021, courtesy of the SECURE Act. But sponsoring a PEP takes scale, capital and technology, as well as deep partnerships with providers.
The corporate retirement plan market is a complicated food chain. At the top are plans of at least $500 million, which are served mostly by institutional investment consultants. At the other end are more than 100,000 RIAs serving plans with under $3 million, based primarily on relationships.
In-between are 2,500 plan consultants with either $500 million in DC assets or $500,000 in revenue, focused on midmarket plans whose assets range from $25 million to $500 million. There are another 25,000 RPAs with 10 or more DC plans serving the $3 million to $25 million DC market. Each segment has its own challenges to grow efficiently and profitably.
M&A fueled by easy access to capital will accelerate the consolidation, with each group looking to gobble up the next smaller fish. Firms like Captrust are focused on the top 30 RPAs and plan consultants with more than $2 million in DC revenue. Platform providers will attract or acquire higher-end plan consultants with other specialists, looking to secure the five to 15 DC plans managed by dabblers.
“If you want to be a specialist, you need to take a hard look at the affiliate or acquisition model,” Mr. Shoff said. “Wealth managers who dabble in retirement will lose eventually that business.”
Regardless of where they are in the food chain, advisers who manage DC plans should start preparing immediately. As Bob Dylan once wrote, “He not busy being born is busy dying.”
[More: Why retirement plan advisers should act as 3(38) investment fiduciaries]
Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ Retirement Plan Adviser newsletter.
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