Industry Insight from Fred Barstein
Musing About 2010 and Reflecting on 2009

The past 18 months have raised more questions than answers.  Regardless of the serious issues facing the financial services industry, specifically in the mutual fund business, more than ever it’s good to be in the Defined Contribution market.  Here are some observations about what to expect for the coming year and beyond:

SPONSORS:

With unemployment and cost cutting expected to continue, do not look for sponsors to splurge on benefits - especially retirement plans.  Sponsors want nothing:  no cost, no work, and no liability.  As administrative staffs diminish and companies stay focused on their core businesses, do not expect record keeper change to rise above 4%, as it will more likely stay below 3%.  Of course, advisors who deliver “nothing”, especially less risk of fiduciary liability with participant lawsuits looming, will be in hot demand, more so if they can also help better prepare participants for retirement.  Will sponsors wake up to the hidden costs in DC plans?  Will they care?

ADVISORS:

It has never been so good to be a “Master” or “PhD” retirement advisor (those with more than 25 plans or $100 million under management), but it has never been as challenging.  While most experienced advisors have doubled their books over the last 24 months, advisors not necessarily savvy in business management have had to struggle with lower revenue, higher costs, increased staff, little or no access to capital, and evaporating exit strategies.  Those advisors that have weathered the storm and have learned the hard lessons will be that much stronger.  Those that figure out how to capture rollovers and secure other benefit and executive comp mandates will rise to the top.  Will the expected influx of new advisors looking to tap the systematic increasing flow of money in DC plans challenge the old guard?

BROKER DEALERS:

Look for the specialty groups like 401(k)Advisors/RPAG, CapTrust, NRP, and SageView to thrive as the Master and PhD advisors want more supportive homes.  While the demise of the wire-houses has been greatly exaggerated, their advantages are diminishing as is their focus.  The independents allow retirement advisors to do their business with little meddling or support.  The move to pure RIA status will grow and would be even greater if any of the major platforms had a clue about how to support retirement advisors.  The elusive holy grail of rollovers and gaining access to the mass affluent in DC plans will generate interest from the large indies and wire-houses, but will it garner resources and focus?

RECORD KEEPERS:

The battle for the very large and very small market is over unless fee disclosure causes mass exodus from insurance companies in the smaller markets.  Large market providers are being bled to death on costs while big name small market record keepers have to move up market to maintain asset growth as the plan change rate grinds to a halt.  Providers with mature TRO businesses are more secure than pure DC record keepers.  Consolidation will only happen if acquirers are willing to over-pay.  Everyone is worried about the “Great West” factor, or whether someone has truly figured out how to do things cheaper or if they are just buying market share.  Open architecture providers like CPI, Newport, Daily Access, RSM McGladrey, BPA, plus hundreds of smaller ones will continue to grow, but most are too small to matter with the exception of Ascensus.  Can the industry sustain the current cost of wholesaling as price pressure only gets worse?

DEFINED CONTRIBUTION INVESTMENT ONLY

Those with platform placement, significant assets, the right share classes, good performance, and distribution had a very Merry Christmas.  DB managers, hedge funds, and mutual funds late to the dance have their noses up against the window, but all they are doing is fogging up the glass.  Getting platform placement is harder than ever unless the right retirement advisors are advocating, which is even harder.  A new wholesaling force focused on DC advisors is not in many budgets and getting data to properly compensate retail wholesalers is still close to impossible.  Target date and asset allocation funds account for over 50% of flow, but the days of proprietary models are numbered.  Will ETF’s become significant and will collective trusts move down market?

TPA’S

Look for significant consolidation in the TPA market, especially for record keeping administrators who struggle with distribution and have less ability than ever to get capital to grow or invest in technology.  Is anyone brave enough to try another roll-up?  NIM is buying compliance-only TPA’s, but capital is scarce and margins are thin.  The unbundled TPA service model in the small and micro markets will continue to gain market share, but there is room for newer national record keepers to take share as incumbents struggle with re-pricing.  Will the TPA unbundled, group annuity model play up market?

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