Retirement Plan Advisor M&A Activity Continued at a Rapid Pace in 2022
Several investment advisors providing services to retirement plans, wire house brokerage firms, wealth management firms and insurance brokerages have focused on acquiring retirement plan advisory practices in recent years, activity that continued in 2022. In some cases, the acquisitions are backed by private equity funding, and the multiples paid for the firms being acquired are reported to be a at record levels.
With the purchase price on these deals being at astonishing amounts, it raises questions about how the acquiring firms will generate sufficient revenue to justify the large acquisition investments they have made. Most retirement plan advisory firms charge either a flat or asset-based (percentage) fee to provide fiduciary investment advice, often including retirement plan design and consulting support at the plan level. However, it appears that most of these acquiring firms will attempt to monetize the retirement plan advisory firms’ relationships with participants, most likely achieved with one or multiple proprietary offerings.
Several firms have reported employing a concerted effort to turn retirement plan participants from retirement plan clients into wealth management clients, which tend to be far more lucrative. The advisory firm may encourage retired or terminated participants to move their money out of the plan to an IRA managed by the investment advisory firm. These newly established wealth management clients then pay investment management fees, typically to the mutual funds recommended by the advisor, along with an advisory fee that is generally an asset-based fee.
Another developing trend among retirement plan advisors is proprietary “advisor-managed account” (AMA) services. These are much like traditional managed account services offered by most retirement plan recordkeeping providers. Participants typically pay an asset-based fee for investment advice delivered through a computer algorithm that considers time horizon and risk tolerance along with other criteria. Some services also allow participants to add investments held outside of their employer-sponsored retirement plan to create a more holistic approach to investment advice, though we have observed that most participants utilizing a managed account service do not add outside investments and the advice is limited to their employer-sponsored retirement plan.
AMAs combine traditional managed account technology with the investment advisor, creating and maintaining plan level portfolios for the managed account service. Participants pay investment management fees to mutual funds or other investments options recommended by the managed account service, along with an additional fee for the AMA service itself. This fee is allocated among the managed account technology provider, the recordkeeper, and the advisor, which allows the advisor to monetize the relationship with the plan participants, thereby generating additional revenue for the advisory firm.
Yet another developing trend to monetize an advisor’s relationship with the plan is the proprietary investment option. Some fiduciary retirement plan advisors (consultants) have created proprietary investment offerings and then recommended them to their retirement plan clients to be offered to participants in the plan. Under this arrangement, the advisor typically selects and manages a group of sub-advisors that each manage a portion of the investment pool. Participants pay an investment management fee that is allocated among the sub-advisors and the consulting firm, which allows the retirement plan advisor to monetize the plan participants.
For fiduciary advisors, all recommendations must be conflict-free and in the best interest of plan participants. That advisors are seeking to generate additional revenue through wealth management, AMA, or proprietary investment options raises questions about conflicts of interest and the appropriateness of these products and services.
There are also many questions regarding a plan sponsor’s duties related to selecting and monitoring the same. If the plan’s advisor is soliciting wealth management services to participants, does the plan sponsor have a duty to conduct due diligence on the wealth management service? Likewise, if the advisor recommends its own AMA and receives compensation from the same, wouldn’t the plan sponsor need to conduct due diligence on the AMA? Would the plan need to hire another consultant to conduct due diligence on the AMA or do they simply rely on the advisor providing the AMA to conduct due diligence on themselves? If an advisor recommends its own proprietary investment option(s), does the plan sponsor expect the advisor to ever terminate its own investment due to poor performance, style drift, or other criteria?
While these practices may be incredibly effective in generating additional revenue for the retirement plan advisor, Innovest believes that there are many potential conflicts associated with the same. We believe creating and recommending proprietary investment products and managed account services is a clear conflict of interest, and we will not subject our clients to such activity. We’ve declined offers from advisory aggregators and Wall Street firms seeking to acquire our business only to monetize participant assets. We remain one of the few fiduciary advisory firms in the U.S. that adheres to an objective, transparent, and conflict-free approach to retirement plan and investment consulting.