Investment advisors collect about $5 billion a year in fees related to target date funds while investment managers earn three times that amount with the majority going to the Big 3 oligopoly of Vanguard, Fidelity and T. Rowe Price. Investment advisors can and should go after a bigger portion of the TDF honeypot.
I’ll start with how advisors earn TDF fees currently and then recommend a couple ways that they can increase their TDF revenues.
Current TDF revenues for advisors
Most of the current revenues are earned from custom TDFs worth $500 billion. That business generates about $3 billion in consulting fees. Custom PDFs are popular with larger plans, and are provided by marquee consulting firms. Advisors use the funds on the platform to populate a “custom” glidepath that is actually not customized for the plan, and is one-size-fits-all. An extension of this idea is more honest and piggybacks on an approach that is being used successfully in smaller plans, as discussed in the following.
An emerging success
Most of the remaining $2 billion is from related 3(38) and 3(21) advisory fees, plus a recent innovation that is emerging among smaller plans. The Retirement Plan Advisory Group (RPAG) has grown over time to thousands of advisors, many of whom sell the group’s “flexible” TDFs. This group has attracted $40 billion in 4 short years and the approach is growing exponentially.
The “flexibility” value-add is a trio of glidepaths with low, medium, and high risk suites of collective investment trusts (CITs), offering plan sponsors a flexible choice for their Qualified Default Investment Alternative (QDIA). I advocate an explicit risk choice in QDIAs.
Additionally, self-directed participants enjoy exceptional flexibility in managing and blending paths, as well as target dates, a feature that aligns with the preferences of approximately one-third of the $3.5 trillion in TDF assets, coming from self-directed participants.
Advisors can get a bigger piece of the TDF honeypot by packaging flexible TDFs for large plans. RPAG proves it. And there’s more that advisors can and should do.
Advisors can earn additional revenues by extending beyond flexible TDFs
Advisors can play a key role in a newer innovation that piggybacks on flexible TDFs. The path from flexible funds to personalized accounts is short, and is being introduced by investment firms like PIMCO, recordkeepers like Empower, and product developers like me.
Personalized target date accounts (PTDAs) blend target date glidepaths with managed accounts. While these accounts share similarities with flexible TDFs, like the provision of multiple glidepaths, they offer specific advantages for advisors who become partners.
Specifically, advisors play a more active role with certain PTDAs where they are responsible for selecting the underlying funds and specifying allocations to them. Advisors get paid for this service that is the ultimate in customization. Importantly, there is a family of risk-based glidepaths, similar to flexible TDFs, so it is not one-size-fits-all as are current customized TDFs.
The underlying funds along the glidepath are on the existing platform so they have been vetted and approved. Participants see their positions as allocations to individual funds rather than as a holding in a CIT.
Importantly, PTDAs are accounts rather than funds. The following table contrasts the two.
Conclusion
The success of flexible TDFs stands as a testament to the wisdom of RPAG advisors, as the industry norm typically leans towards the Big 3 TDF oligopoly. However, these more conventional options can pose significant risks at the target date.
While a plan sponsor could opt for a Big 3-like glidepath by selecting the medium-risk path as the QDIA, our recommendation leans towards the low-risk path for greater security and prudence. The Conservative path protects against Sequence of Return Risk.
PTDAs offer a similar approach to flexible TDFs but with distinct differences as outlined above. Personalization complements flexibility and invites partners. Having choices in the marketplace is always a valuable asset. In this case the asset is a very attractive opportunity for investment advisors to dig deeper into the $20 billion TDF honeypot.
SEE ALSO:
• Why a Crash Like 2008 Would Decimate Boomers in TDFs
Ron Surz is CEO of Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), and author of the book "Baby Boomer Investing in the Perilous Decade of the 2020s." TDS licenses target-date fund usage of Ron’s patented Safe Landing Glide Path® (SLGP) that actually protects beneficiaries as they approach retirement. Individual investors can follow the SLGP at Age Sage, an educational interactive website. The BBIS educates baby boomers on the risks and rewards in contemporary investing, and Ron’s book is a tour of these shows. He can be reached at Ron@TargetDateSolutions.com.