Like snow in Westeros, consolidation is coming—soon.
Modeled off market forces in employee benefits and property/casualty, the retirement plan industry is about to take its turn, with pundits and prognosticators predicting massive change in the next five years.
A new firm, Wise Rhino, recently crashed the space to capitalize on the trend.
Decades-long industry alums Dick Darian and Bob Francis, both most recently with BlackRock, joined Adam Sokolic to form a consulting practice to focus “on helping advisors that are making decisions around what to do next.”
“The questions these firms are asking is whether to stay small and have a competitive advantage by performing on a more personal level, or grow to a medium or large business by leveraging affiliation groups like GRPAA, or take capital to create a brand presence and a deeper offering,” Darian explains. “Should they merge, buy or sell in order to do so?”
As veteran advisors who’ve managed record keepers, DCIO firms and platforms with a combined 85 years of experience, they believe they have the answers.
“Historically, the retirement plan industry was very much a lifestyle cottage industry,” Darian adds. “It’s now organizing and turning into a true business. You’ve got larger firms forming that are well-capitalized as well as private equity helping to create large firms. That’s in addition to the dominant regional players already in place.”
So, what will happen moving forward? What will the landscape soon look like and what does it specifically mean for retirement plan advisors?
The three partners sat with 401k Specialist for an insightful discussion about the advantages that consolidation will offer, and what will happen for those left behind.
Q: Why get into something like this, and why now?
A: Competition is compressing margins and plan sponsors are asking firms to do more, so technology and efficiency are becoming more important.
As practices get bigger, they’re more complex and more difficult to run, and not all advisors are destined to run firms. They’re wonderful practitioners, but some don’t have the desire, or they struggle with running businesses. Generally speaking, this type of environment leads to consolidation.
So, for us, jumping in the middle of the space where we have buyers and sellers made a lot of sense, especially since we have such a long history with advisors. We feel that we are incredibly well-positioned to advise them on what to do next.
And we are also in a great position with the buy firms and large aggregators, whether it’s CAPTRUST, NFP, Lockton, etc. to help them figure out their best strategy.
So, that’s the “why” around why we jumped into the space and the “why” around the timing.
Q: Was there a lot of people clamoring for something like this, or is there a significant education about market forces to come?
A: I think it’s a little bit of both. When you have these conversations with practices, the best ones get it. They have been looking, and they understand that what got them here is not going to get them there. It’s a whole different world.
I would say that the firms that are larger and doing business in the mid/large market have a much better understanding of fee compression because they are living it every day.
For them, it’s a no-brainer. The only question is what we do.
The challenge for many of these practices is that they have been able to stay independent and determine their own destiny, but now they have to get bigger and more competitive. The larger firms and regional powers like a Centurion or an RBG, plus some of the larger practices, tend to feel it, and they are all over this. With smaller practices, it hasn’t hit them yet, but will.
Q: Are you the first to do something like this and, as you said, is it a sign of a maturing industry, or are there other shops like yours out there?
A: I think it’s a maturing industry. Starting with property/casualty, there’s been a consolidation of that industry. As P&C matured, so did the firms in that space, and you had significant consolidation. The larger firms all got big by starting out in the property/casualty business where they went out and bought up firms. It then continued to the employee benefits business, and those were the first two legs.
Retirement is now the third leg. Many of those firms have established a significant retirement presence but the acceleration is just happening now. So the employee benefit firms, regional firms, platforms and affiliations, the interest in acquisitions is accelerating both because there’s a need for that to happen. There’s a lot of money in the space and you’ve got many buyers looking for those firms, and on the sell side, it’s forcing outside firms to understand that they might not be able to compete unless they join a larger firm and become larger themselves.
So, we’re the first firm in the retirement space to do this specifically. There are firms that have done it in P&C and benefits.
Q: Wise Rhino? Quite a name. Please explain.
A: With 38 years in the business, I went to Bob a year ago and said, “Hey, let’s do this.” We began to contemplate the name, and I didn’t want to use the word fiduciary, investments or blueprint. All of those are taken. I spent nine years at BlackRock under a compliance thumb, and it’s a great firm, but I wanted something a little bit more interesting. Here are the top 10 reasons for the name Wise Rhino:
- They are known to be sure-footed, agile and independent.
- Rhinos are rare—there are only 25,000 left on earth.
- A group of Rhinos is called a crash. Awesome.
- The Rhino is the second largest land mammal. Wise Elephant just didn’t sound right.
- It’s a jungle out there.
- They are known to be very nurturing.
- They aren’t known to be particularly wise. But this one is!
- Amazingly, it was available.
- Rhinos have been known to charge a tree. Who hasn’t?
- Because it’s our firm and we can.
Q: Now that it’s launched, what kind of growth trajectory are you expecting?
A: We expect there to be massive consolidation in the next five years. There is significant interest in the basics, but not just, “Hey, I want to sell my firm.” The most important thing is that firms need to understand how they should build enterprise value.
As an industry, most firms have never really focused on that because they’ve been able to do well without too much focus on the value of the firm.
One of the first things we do is sit down with them to look at their business and ensure they have a plan so when and if they ever sell or merge the firm, they are maximizing the value. We make sure they have a firm understanding of where the business is going, and what drivers around enterprise value are.
We think it’s both qualitative and quantitative. The easy part is that somebody will pay X for your business. The hard part is matching up with a firm where there is alignment with culture, and that they want to work with that firm for the next 10 years. That’s where we put a lot of emphasis to help them.
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.
