Report: 'Brother-in-law' dabblers are giving 401(k) ground slowly to specialists in $1.3 trillion market

Brooke’s Note: I don’t think anyone does better RIA-specific, larger-data studies than Cerulli. So when its analysts take a hard look at a subject, we pay attention. But we also pay close attention to what RIAs say and four RIA 401(k) specialists spoke to Lisa. Sometimes Cerulli and RIAs see very different things. Tantalizingly and importantly, that is the case here so that we have a half-empty and half-full view regarding the future of RIA 401(k) specialists.

Despite persistent and well-publicized efforts by the Department of Labor, small- and mid-sized employers are still entrusting their workers’ defined contribution assets to dabblers.

More than half of the $1.3 trillion in advisor-sold defined contribution assets are being managed by advisors who are not specialists in the field, according to new data from Boston-based Cerulli Associates Inc.. The report defines “specialist” as an advisor whose practice generates a minimum of 50% of total revenue from retirement plans.

“The needle just hasn’t moved that much,” says Bing Waldert, director of Cerulli. “All of the buzz is about the specialist RIA but it’s not moving as fast as you think.”

But at least one principal of an RIA 401(k) specialist thinks such pessimism is unwarranted.

“We are probably having our best year ever,” says Jim O’Shaughnessy, CEO at Sheridan Road Advisors, a firm outside Chicago specializing in retirement plans.

While conceding that the market “still has a lot of generalists,” he says it’s rare for him to run across a new plan that is being run by a non-specialist.

Problems galore

Bill Hamm: We have advisors that
have to have certain qualifications to
even handle the qualified plan business.

But Waldert emphasizes that new plans are generally rare in the smaller-plan market in which RIAs compete because small business owners are stretched too thin to be studying the nuances of 401(k) plans.

“Employers have so many problems. They’re not going to do an RFP for a specialized advisor. They can go to the guy they trust and just use that person. In the industry, we’re so close to the Department of Labor regulations but these people running these small and mid-sized businesses don’t care and can’t take the time to digest it,” he says. See: The White House puts its best Obamacare minds behind cleaning up the 401(k) business — starting by issuing a withering memo.

By contrast, O’Shaughnessy, whose firm manages about $15 billion in assets, says employers are starting to see the wisdom in choosing specialist firms such as his. Sheridan Road Advisors works with new plans as well as small and midsized 401(k) plans. He is convinced that employers appreciate his firm’s single-minded focus.

The bulk of Sheridan Road’s business is defined contribution accounts and so perfectly fits the definition of a specialist as framed by Cerulli. O’Shaughnessy uses LPL Financial as a custodian and his firm is part of Independent Financial Partners. See: DOL tells employers when they must fire advisors to 401(k) plans

Must-have qualifications

Employers are beginning to demand special qualifications of 401(k) advisors, according to Bill Hamm, CEO at Tampa Fla.-based IFP Insurance Group. “If you’ve got 15 or 20 employees then the program isn’t high on your list of priorities but for those with $20 million or more in their plan, they are seeking advisors with specific qualifications. We have advisors that have to have certain qualifications to even handle the qualified plan business.”

Hamm has about 130 plan advisors who use his firm’s back-office assistance. IFP’s advisors are bringing in 35 to 40 new plans each month with the average size at about $20 million in assets.

“The fiduciary issues have always been important to the midsized and larger plans because of exposure that is there and that is something our advisors really help employers with. I think you’ll see that continue,” Hamm says. See: As President Obama takes the gloves off, pro-broker groups throw up 'sledgehammer’ response.

Son-in-law blues

Troy Hammond, an advisor with Pensionmark Financial Group LLC in Santa Barbara, Calif. who left IFP to join CAPTRUST earlier this year, agrees with the Cerulli analysis. He says generalist advisors will always have a place in the 401(k) arena because of the relationships these advisors have with the plan sponsors. His firm combined with CAPTRUST is managing more than $180 billion in assets.

“If a plan sponsor can make the decision unemotionally and not take into account a relationship, then groups like ours will win, but if they look at the emotions and relationships than other advisors are still getting business,” says Hammond.

Case in point: Pensionmark recently tried to win the account of a small business owner and found himself competing against the man’s son-in-law. Unsurprisingly, the son-in-law, an non-specialist, carried the day.

“A retirement specialist is naive if they think you can sit back and say, 'I’m a specialist the business will come to me.’ You will have an unpleasant surprise,” says Hammond. “Over time, I believe specialists are going to gain market share but it’ll never be 100% and there are always going to be the relationship-business that will win. I do think the specialists are gaining market share.”

Profitable plans

The Cerulli report examines plans of $50 million or less sold by advisors. Some of this advisor-sold market includes 403(b) and 457 plans. The report impacts RIAs because advisors typically dominate the 401(k) arena with plans that are $50 million in assets or less, whereas giant consulting firms control the larger employer space with plans totaling $50 million or more in assets. See: In red-hot 403(b) market, TIAA-CREF hires hundreds of advisors after RIAs, and Fidelity, pose new threats.

“We know some advisors occasionally win plans over $50 million but it is rare,” says Waldert, who declined to offer more specific data. Cerulli doesn’t have data showing specialists’ ownership of the market and how it has changed over time.

Jim O’Shaughnessy: We want to grow
nationally and we want to work
with larger plans where we can
have a local geographic presence.

Smaller employers may be overlooking RIA specialists in the retirement plan field, but that avoidance goes both ways. It’s costly for RIA specialists to persuade smaller business owners to choose them and, even if they do succeed, the plans may be too small to be a profitable exercise for the specialist, says Louis Harvey, of Dalbar Inc., a firm focused on retirement education in Boston.

Harvey points out that according to Dalbar’s research there are six million small businesses and the majority wouldn’t be profitable for specialist RIAs to take on, but there are 5,000 midsized 401(k) plans that would be attractive to specialists.

“Compensation through basis points make small businesses a losing proposition. Specialists focus only on ERISA plans but small business owners use after-tax accounts, IRAs, their own businesses, real estate and annuities for their retirement funds. The effect is that specialists miss large swaths of the market.” See: CAPTRUST wakes up the 401(k) industry by buying $1-billion advisor/recordkeeper that adds the 'magic’ to its arsenal.

A June report from Cogent Reports (a Cambridge, Mass.-based division of Livonia, Mich.-based Market Strategies International) confirms that a large chunk of advisors working with a small number of plans are still eating up most of the retirement business. The report shows about 64% of advisors that include some defined contribution business in their overall AUM. That’s up from 60% in 2014. See: One down, two to go: Trio of important DOL regs reshapes 401(k) advice business.

The report goes on to show that a large number of advisors are selling a small number of plans. For instance, for the 50% of RIAs that sell defined contribution plans, those plans only make up 10% of the RIA’s business.

Still the gatekeepers

Still, O’Shaughnessy sees plenty of opportunity up for grabs.

“The RIA marketplace is going through this huge maturation. These firms are asked to be bigger and gain more scale. It’s not that much different on our end. We’ve got to gain scale and efficiency. We want to grow nationally and we want to work with larger plans where we can have a local geographic presence.” See: With plan sponsors 'running blind’ on 401k plans, an RIA jumps from $12 billion to $32 billion of AUA and adds a former J.P. Morgan chief.

The existing statistics — which are on the thin side — certainly show growth. In 2011, Cerulli estimated retail advisors controlled $1 trillion of defined contribution assets. They now control $1.3 trillion of the estimated $5 trillion defined contribution market. See: Cerulli report: Specialized RIAs likely to win middle-market 401(k) plan battle.

In its most recent analysis, Cerulli did not break down specialists by RIAs, wirehouses or bankers, but a study the firm completed in 2012 showed RIAs were winning more assets away from legacy providers while wirehouses and banks were losing 401(k) assets. See: Cerulli: RIAs and hybrid RIAs make giant advances on banks and wirehouses in the 401(k) race.

Employer anxiety

RIAs have a huge opportunity to win big in this arena over the long term, says Rick Meigs, founder of the 401khelpcenter.com in Portland, Ore.

“Pensions consultants and RIAs have always been the gatekeeper to these plans,” he says. “That is nothing new.”

But what is new, Meigs says, is that plan sponsors are depending more on advisors given the cascade of 401(k) rule changes from the Department of Labor that create new potential land mines for plan sponsors. See: Phyllis Borzi tightens the noose on 401(k) providers that flout DOL disclosure, not without critics.

But Waldert remains skeptical for now.

“Inertia is the most powerful force in our industry,” says Waldert. “That makes a poor headline but it’s a big problem. A CPA told me a year or two ago that a small business owner takes a risk turning on the lights every day. Even if they’re aware of what’s going on with the DOL, it’s a fact of life they could be sued tomorrow. As much as we think employers need these specialized advisors, the employer doesn’t care about 401(k) as much as we think they do. They’ve got too many problems.” See: What a wave of 401(k) lawsuits tell us about what RIAs really need to worry about.