The approach of retirement age for many advisers and the need to meet regulatory and technological demands are driving small-plan advisers to sell to larger specialized firms. But massive consolidation that would create an industry of just a few big players is still many years away. That was the consensus of participants in a roundtable discussion at the recent Retirement Plan Advice Think Tank in New York, in which the specialist-adviser aggregators discussed the future of their business.
Fred Barstein, executive director of The Retirement Advisor University and discussion moderator, noted the consolidation that has already occurred among plan record keepers, driven largely by the need for scale, and asked aggregator participants what they see as factors leading to consolidation in their businesses.
Four stages of growth
"Growth, and the challenges of growth, will be the drivers when consolidation really starts to kick in," said David Hinderstein, president of the
Strategic Retirement Group.
Outlining a four-stage model published in the Harvard Business Review, Mr. Barstein noted that consolidation in most industries starts with the opening phase in which one firm is a pioneer and dominates. Next is a scale phase, when an initial series of mergers and acquisitions takes place as other established players seize the advantages of size. That is where record keepers are now, he noted.
Next comes the focus phase of "mega-deals" among large players, and finally the "titan" phase, in which "three to five firms have 70% to 90% market share," Mr. Barstein said.
Roundtable participants generally agreed that those latter stages of consolidation are a bit far off for aggregators, which are estimated to number about 10 to 15 nationally. Currently, consolidation consists largely of aggregators acquiring books of plan business from non-specialist advisers.
"In the adviser part of the business, we are getting toward the end of Stage 1 because all of us are still trying to perfect processes, which means incorporating technology," said Jeffrey Cullen, managing partner and managing director at
Strategic Retirement Partners.
"Putting advisers together with technology is sometimes like mixing oil and water — it's not always easy," he said, noting that some of the larger players in the business have managed to combine the two effectively, but smaller firms are still grappling with the issue.
One factor impeding consolidation among aggregators is sizable differences of opinion about business valuation, said Gary Josephs, a principal of the
Retirement Benefits Group.
"Nobody knows what the right multiples are," he said, noting that unlike the advisory sector generally, in which multiples for most types of practices are agreed upon, valuations in the retirement plan business are still unsettled.
"If you ask 10 different people for a multiple, you get 10 different answers," Mr. Josephs said. "That tells me we don't know where we are yet and that we're still early in the consolidation movement."
Jeffrey Levy, a managing partner at
Cammack Retirement Group, observed that the wide variations in multiples probably are due to the enormous variability that currently exists among aggregators.
"There are many models in the business," he said. "Not only do firms serve different industries, they have different infrastructures that each potential acquirer would value differently."
Although large-scale consolidation may not yet be taking place, acquisitions of small practices continue apace, advisers said, due largely to regulation and the aging of the adviser population as a whole.
"The DOL rule encouraged many advisers with, say, two, five or maybe 10 or 15 plans to think about their future and sell their plan business," said Tony Franchimone, a principal of the Retirement Benefits Group. "The other factor is that many people are getting closer to wanting to be out of the business entirely, so the smart ones are thinking that this might be the time to offload their plan liability and take a check."
Aging advisers
It is the aging of the adviser force, in fact, that is likely to increase the current wave of consolidation, said J. Fielding Miller, CEO of
Captrust Financial Advisors.
"The average age of the RIA owner is around 60, and many advisers in their mid- to late-50s are starting to realize that they need to pick a dance partner soon," he said. "If they wait another five years, they won't be as valuable. Firms like ours are looking to buy the future, and if you're selling the past, your stock goes down."
As a buyer, Mr. Miller said he wants to know that the principal of the business he is acquiring will stay with it for some time and help build it.
Additional pressure for small practitioners to sell comes from the field's high barrier to entry, in the form of necessary expertise, and its low profit margins.
"There aren't a lot of people jumping in to take the place of those who are retiring," said Troy Hammond, president and CEO of
Pensionmark Financial Group.
Evan Cooper is a freelance writer.
