The traditional wholesale model remains a force in DCIO sales, but new groups are growing in influence, including third-party fiduciaries, distributor 3(38) modelers and investment scorecard providers.
Aggregators, named for the way they share a common strategy of growth through acquisition or affiliation, have also become a primary focus of many DCIO sales and marketing units, according to a new report from Sway Research.
“With each new acquisition, these firms grow in scale and importance and are now beginning to raise demands on DCIOs for custom investment vehicles to lower DC plan costs and increase their competitive advantage,” Sway notes. “Not only are defined contribution assets consolidating with aggregator firms, but leading recordkeeping platforms are also expanding market share and beginning to demand more of DCIO managers for access to their staff and placement within their 3(38) models and select lists.”
Sway estimates that DCIO assets will total $4.1 trillion at the end of 2018, up from $3.8 trillion a year prior.
At the end of this year, it predicts DCIO assets will make up approximately 50 percent of assets in the defined contribution market, versus a 40 percent share for proprietary assets (i.e., those managed by an affiliate of the plan administrator).
The remaining 10 percent is invested in company stock and via brokerage and mutual fund windows.
There are 15 firms in the aggregator universe, and they managed roughly $640 billion of DC assets at the end of 2017, it adds.
This equates to about 8 percent of the overall DC market, but these firms “tend to focus efforts in the small (less than $10 million) and mid-size plan ($10 million to $50 million) segments, though they are gradually moving upmarket to large ($50 million to $250 million) and even mega plans (more than $250 million).”
The $640 billion of AUM is equivalent to a 32 percent market share of small and mid-size DC plans, and with each new acquisition or affiliation deal, aggregator market share and influence on plan menus grows. Sway believes aggregators will control a trillion or more dollars of DC assets in the next five years.
More than half of DCIO executives surveyed for this report indicate that 20 percent or more of DCIO sales at their firm are now coming from aggregators, and that it’s getting more difficult to access investment personnel at these key partners, because every DCIO is knocking on their doors seeking access.
Sensing opportunity, “several aggregators have asked DCIOs for custom collective trust-based portfolios with lower fees for sale through their platforms,” and DCIOs are saying yes.
Approximately three in five DCIOs surveyed have already created such products or expect to by the end of 2018.
For their part, four of six aggregators surveyed indicated that “collective pricing,” which this tactic has been dubbed, is very/extremely important to the future of their firm.
Looking ahead, Sway Research expects DCIOs to focus even more efforts on the aggregators, which can deliver assets in return, but will also likely increase their demands, and thus the costs of servicing them.
Leading recordkeepers are also gaining market share and asking for more from DCIOs. One example of this is the new Select program from Empower Retirement through which the third largest recordkeeper of DC assets is asking for sizable payments from DCIOs.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
