Financial planning and wealth management services are more attractive to recordkeepers, plan advisors, and other DC providers, according to Cerulli Associates.
“Factoring in the expected ancillary revenue from converting DC participants to wealth management clients may allow firms to offer more competitive pricing on the DC side.”
It’s not necessarily a surprise to 401k specialists and advisors, but it further confirms the industry’s movement towards holistic offerings.
The news comes amid intense fee compression in the defined contribution (DC) market, Boston-based Cerulli notes.
It’s all about proximity. According to the research, one-third (34%) of active 401k participants name their 401k provider as their primary source of retirement planning and advice, followed by a financial professional (16%).
“Retirement investors’ financial priorities often shift from immediate saving and debt management concerns to longer-term, financial planning considerations as they progress through their careers and accumulate greater wealth,” Shawn O’Brien, Cerulli associate director, said in a statement.
At a certain point, some participants will benefit from a high-touch, comprehensive wealth management relationship where they gain access to more advanced financial planning services, a broader investment opportunity set, and more flexible distributions.
Ripe opportunity
The opportunity is “ripe” for retirement plan providers, and Cerulli estimates more than $440 billion in DC assets were rolled into individual retirement accounts (IRAs) with the help of an advisor in 2021, illustrating the addressability for sourcing wealth management business from the DC market.
The vast majority (86%) of advisor-intermediated rollover assets are through an existing advisor relationship.
“For wealth managers looking to capture rollovers from DC plans, this data underscores the importance of establishing and nurturing relationships with participants earlier in their careers, years before potential rollover events,” adds O’Brien.
Continuing consolidation
Cerulli anticipates DC recordkeeper and intermediary consolidation, along with ongoing legal and regulatory pressures, to continue to exert downward pressure on fees in the DC market, making financial planning and wealth management services increasingly attractive to providers from a financial standpoint.
The research shows that services are considerably more lucrative than pure-play recordkeeping relationships. This is partly because the wealth management industry has been largely insulated from the intense fee compression experienced in the asset management and recordkeeping industries.
Given the attractive economics of wealth management relative to recordkeeping and plan advisory, Cerulli anticipates more wealth managers and DC plan providers will create synergies between these two business units through mergers and acquisitions and strategic partnerships.
“By harmonizing their DC and wealth businesses, firms can manifest meaningful financial benefits for both franchises,” O’Brien concluded. “Factoring in the expected ancillary revenue from converting DC participants to wealth management clients may allow firms to offer more competitive pricing on the DC side, helping them win additional mandates.”
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.
I like that you talked about people who would like to have a high-touch, comprehensive wealth management relationship which will give them more access to advanced financial planning services. Personally, I want to experience that, because it might help me achieve my dreams before I retire. Also, it’s my dream to retire at 40 years old as well, so I hope that I can do that with the help of experts.
I’ve been having a hard time planning my finances. It makes sense that I would want to work with a wealth management specialist. That seems like a great way to ensure that I manage everything correctly.