WHILE INDUSTRY EXPERTS sit back and try to predict which record keeper will be the next to sell, the result of what many predict will be massive consolidation will not be good for anyone in the 401(k) market other than the surviving providers.  The winners will not only have massive market share and great profit margins but they will have more power to raise prices and less reason to upgrade service.  The losers will leave clients and advisors that recommended them holding the bag.

The mega market (+$250 million) is a case in point.  Though consolidation is not yet over in that market, there are only eight providers left with Fidelity dwarfing all others.  We are beginning to see successful providers require plans to fit their service and investment models and become less concerned that marginal clients will leave.  At some point in the not too distant future, there will be only five providers left as costs to maintain and upgrade infrastructure in larger financial service organizations become more difficult for the parent to justify.  Currently, one of these mega record keepers is considering “strategic options” while the weaker ones, of which there are at least three, have to go or grow to remain viable.

What should an advisor do?  No one wants to move a client to a provider who then turns around and sells their business.  We recently conducted a search eliminating one provider who sold their business three weeks later.  During the process, we asked about sales rumors and were told flat out that they were not true.  Luckily, the provider was eliminated on other reasons.  Currently, we know of at least four record keepers that are being or are rumored to be on the block; meanwhile, almost all major providers in the red zone (they have to go or grow) have gone on record that they want to buy, including those being shopped.  Picking only the safest record keepers like Fidelity, Vanguard, Hancock, Principal or American Funds will only increase the likelihood of more consolidation.  Smaller, regional firms not owned by large financial service organizations are also relatively safe.  But how can advisors afford to place business with providers in the red zone?  Betting on which ones will survive is risky.

Though we would all be better off with more choice, it seems as if there will be fewer options for sponsors and advisors in the not so distant future.  With the help of organizations plugged into the market like a few broker dealers, media and market intel companies, advisors can steer clear of some trouble.  One sign of a potential sale is that mid-level employees, especially wholesalers, leave the company as they know before anyone on the outside if there is trouble.  But the real answer is no one knows for sure who is next, and there’s very little anyone can do about the more limited choices we all will face very soon.

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