Given the growing competitiveness and margin pressure facing the advisory business, it's no wonder that many retirement plan advisers and “retail” wealth managers are eyeing each other's turf. Having broader and more balanced sources of revenue is inherently appealing, as the businesses seem not so different as to be unbridgeable and the synergies of offering both specialties are attractive.
Many RPAs view the addition of a full-service wealth management business as a way to serve affluent top-level plan participants, including owners, C-suite executives and top management. They also see the opportunity in being able to attract the rollover business of rank-and-file employee plan participants, who in many cases have accumulated sizable nest eggs over the years.
For conventional wealth managers, serving the plans of businesses owned by affluent clients is a way to cement ties and build goodwill, in addition to increasing assets under management. And similar to RPAs who want to retain the rollover business of plan participants, conventional wealth managers see retirement plans as a stable generator of additional rollover business.
As conceptually appealing a move into each other's businesses may be, in practice the crossover can be difficult.
Individual wealth managers will find that plan sponsors increasingly are seeking advisers who specialize in the area, and RPAs will discover that attracting affluent clients from outside the plans they manage is becoming more difficult as aging baby boomers draw down their assets and millennials explore nonconventional adviser relationships.
Specialists on a roll
Kevin Mahoney, senior vice president of the Mahoney Group of Raymond James in West Nyack, N.Y., explains the reality of his business, which is about 70% private wealth and 30% institutional.
“My partners focus primarily on wealth management and my time is spent almost exclusively on institutional business, which is primarily retirement with some endowment, foundation and corporate work,” he said. “It would be difficult to properly serve a truly institutional business while managing a wealth management practice. And the DB space is even harder — it's challenging even for advisers who focus on retirement plans.”
Wealth advisers who have strong relationships with business owners probably can operate successfully in the 401(k) market, Mr. Mahoney said, if they have home office or vendor partners to support their efforts. But to go beyond serving a handful of plans, he and others suggest that partnering may be the best way to branch out.
“Many of our wholesalers and others do a lot of informal matchmaking and partnership arranging,” said Glenn Dial, a vice president and senior retirement strategist at American Century Investments. “Wealth managers who do a lot of rollover IRA business could see that drying up unless they partner with plan advisers. Sometimes it doesn't have to be a formal partnership, but simply a referral arrangement. Either way, that's easier than starting a retirement plan advice business from scratch.”
For plan advisers considering the addition of individual wealth management clients, the movement is a natural evolution, Mr. Dial said. But even then, partnering with a wealth management firm or perhaps acquiring one is probably more efficient and less time-consuming than creating one. He said that plan advisers are finding demand for personal wealth management among plan participants they already serve, so any acquisition or partnership arrangement is likely to be rewarding quickly.
While partnering can make a lot of sense, Mr. Mahoney observes that the relationship must benefit everyone, including first and foremost the plan sponsor and the plan participants.
“If the partnership is good for sponsors and participants, and if the specialist and nonspecialist advisers can figure out a way to profitably work together, a partnership can be great,” he said. “But there have to be clear roles and responsibilities with clear guidelines on how to unwind the partnership if it is not working.”
The complexity and legal requirements of serving retirement plans are key reasons why wealth advisers looking into the plan market should probably consider seeking a partner or perhaps acquiring a specialist team or firm.
Litigation adds difficulty
Matt Cosgriff, wealth management group leader at BerganKDV Wealth Management in Minneapolis, oversees his firm's wealth management and retirement plan businesses. He said his firm started as a wealth management firm with strong CPA roots and acquired a business about eight years ago that specialized in retirement plan advice.
“Ten or 15 years ago, it was a lot easier for a wealth adviser to serve plans as well as individuals,” he said. “The focus then was primarily on investments and due diligence, but with the rise of litigation over 401(k) accounts, it's now a lot more challenging to play on both sides of the aisle. Advisers who serve individuals often don't truly grasp the complexity of the ERISA world. Today, they have to really know ERISA requirements and understand plan design in order to serve the retirement plan market — it's a completely different language from saving for college or tax planning.”
The stumbling block for retirement plan advisers wishing to enter the retail market is not regulation, but having the capacity to meet the holistic and often sophisticated needs of affluent executives for whom they currently provide only narrow, plan-related advice as well as a possible flood of perhaps less-profitable business coming from less-affluent plan members seeking advice.
One plan adviser seeking to enter the private wealth business, and wishing to remain anonymous because the venture is being beta-tested, said that he believes he will succeed because he does not have outsized margin expectations.
“Since we already administer billions of dollars in assets for plans that have tens of thousands of participants, we don't have to generate the margins of a big retail firm,” he said.
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