Consolidation is king in the current market.
Registered investment advisor (RIA) aggregator firms continue to acquire smaller players in the defined contribution (DC) space, and their size and scale mean greater influence in the defined contribution market, according to Cerulli Associates. It’s particularly in the $25 million to $500 million segment.
The Boston-based research and consulting firm found that as a result of this market concentration, defined contribution investment-only (DCIO) managers must tailor their distribution strategies to the needs and objectives of RIA aggregators and other key DC plan intermediaries.
According to Cerulli’s latest report, U.S. Defined Contribution Distribution 2021: Uncovering Investment-Only Distribution Opportunities, the DC market is highly intermediated. More than 80% of corporate DC assets are advisor- or consultant-intermediated and there is considerable diversity among DC plan intermediaries, ranging from broker/dealer-based advisors in the micro plan market to institutional investment consulting firms in the larger end of the market.
According to the research, 66% of managers believe that aggregators have become a primary influencer in deciding DC plan investments.
“More than ever, DCIO asset managers must hold a keen understanding of these various intermediary types, the needs of their plan sponsor clientele, and how to best engage with them,” Shawn O’Brien, Cerulli Senior Analyst, said in a statement.
Managers are focused on the growing influence RIA aggregators have in deciding DC plan investments. According to the research, 66% of managers believe that aggregators have become a primary influencer in deciding DC plan investments in the $25 million to $250 million segment. For plans in the $250 million to $500 million range, this rises to 68%.
“There’s no question that there’s been a shift in distribution dynamics, O’Brien added. “Given the rising control aggregators have over plan assets, managers will need to recalibrate their distribution resources, identifying key points of influence in the investment decision-making process.”
Institutional approach
Many aggregator firms have taken an institutional approach to their investment decision-making process, centralizing the due diligence and investment analysis at the home-office level.
By doing so, they have taken much of the investment research and analysis responsibilities out of the hands of the firm’s field advisors, enabling them to spend more time helping plan sponsors on their plan design, participant education and communications, and recordkeeper oversight.
In addition to centralizing the investment research function, some RIA aggregator firms are leveraging their scale and investment expertise to create their own 3(38) open-architecture, white-label investment products and solutions.
For DCIO managers seeking entrance or expansion into the aggregator channel, Cerulli recommends they focus distribution efforts primarily on the home-office teams of these firms and secondarily on the large field advisor teams employed by them.
DCIO asset managers should also familiarize themselves with advisor/consultant white-labeled investment products and periodically assess product development efforts.
“Managers that understand the investment decision-making process, advisor concerns, and potential platform changes on the horizon will be well poised to capture plan assets controlled by RIA aggregators,” O’Brien concluded.