In Practice December 14, 2021

2021 M&A Lessons Learned, and What Comes Next

Many firms that have acquired established retirement plan advisory practices primarily focus on wealth management or insurance, underscoring their interest in more diversified service models and in accessing the shops’ sizable client bases.

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Wise Rhino Group, a consulting firm that helps retirement plan advisory practices execute merger and acquisition (M&A) deals, has published its year-end analysis of industry dealmaking for 2021.

In opening its analysis, the firm notes it is approaching its fourth anniversary in operation, taking lessons learned from some 65 sell-side and buy-side advisory transactions in that time period, as well as from the professional backgrounds of its own staffers, who have worked across retirement industry verticals. In its experience, Wise Rhino Group says the deal process and the negotiation of terms and price are extremely important when it comes to retirement industry M&As, and there are many advisory firms that do a great job telling their story and preparing their organization for an ownership transition.  

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One clear trend that has emerged in this time, Wise Rhino Group says, is that many firms that have engaged in acquisition or merger activity have historically focused on the wealth advisory or insurance benefits advisory verticals. Many have had to learn the basics of the retirement plan advisory industry during the M&A process, gaining an appreciation for the day-to-day job of retirement advisers and the challenges they face today.  

That lack of experience in the retirement advisory vertical has by no means hampered the pace of deals. Indeed, for the fifth consecutive year, retirement advisory firm M&As reached new record highs, with this trend having no end in sight. Just this year, Wise Rhino Group has tracked 62 closed transactions, and the firm projects that there will be more than 70 transactions completed by the end of 2021.

Context for these high numbers can be found in a recently published Fidelity Investments analysis that looks more broadly at registered investment adviser (RIA) M&A activity—i.e., including firms that do not have a large retirement plan advisory practice. According to Fidelity, RIA deals during the month of November totaled $42 billion in assets under management (AUM) and, year-to-date, there have been 182 RIA transactions, totaling $304 billion. These figures are up 61% and 78%, respectively, compared with the RIA deal year-to-date figure for November 2020.

As Fidelity’s analysis shows, large deals are driving much of the activity, with 75 deals registering more than $1 billion in AUM so far in 2021. This is nearly double the number of deals of this size or greater reached in all of 2020.

According to Wise Rhino Group, there are still more than 700 scaled and independent retirement advisory firms, along with another 5,250 smaller, unscaled firms and practices that focus primarily on retirement advisory services. As such, it says there is no shortage of factors driving the record M&A activity, including solid secular trends, such as growing competitive pressures and an increase in succession planning activity. Other factors that may drive another record-setting year in 2022 include significant interest from outside capital, mostly from private equity firms seeking to acquire advisory shops that can complement their existing lines of business in insurance and health care.

The retirement advisory firm buyer composition continues to be dominated by strategic RIA and insurance brokerage firms, most of which are backed by private equity. Overall, there have been 16 distinct buyers of retirement advisory firms in 2021, led by Hub International, OneDigital and CAPTRUST. These firms have made 13, 11 and 10 acquisitions so far this year, respectively. After being acquired by Aquiline Capital Partners in December 2020, SageView has completed four retirement and wealth acquisitions to date in 2021.

The Wise Rhino Group research also points to the recently announced Creative Planning and Lockton Retirement integration as an important deal to track moving forward. The analysis suggests this new retirement/wealth firm combination could very well join the retirement M&A competition. With more players continuing to enter the market, the firm concludes that evermore intense competition for high-quality targets will escalate.

The analysis also points to a related but distinct M&A trend that is impacting the third-party administrator (TPA) industry. As in the retirement plan adviser space, there are myriad buying organizations seeking to scale up their TPA businesses through inorganic means. As Wise Rhino Group explains, TPA owners are also experiencing the competitive pressures, record multiples and career opportunities seen in the advisory world.

Compliance December 14, 2021

Groups Suggest DOL Take Certain Language Out of Proposed ESG Rule

While expressing support for the rule, they say removing specific references to ESG factors will help fiduciaries understand they are not required to consider them in their investment selection.

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Among the 256 comments—received as of today, with more to come—the Department of Labor (DOL) received about its proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” it might not be surprising, given the political divisions in the country, that a large share came from individuals who expressed opposition for the rule, saying it is pushing the new administration’s political agenda.

However, some individual commenters expressed support for the rule, saying they agree that environmental, social and governance (ESG) factors should be considered in retirement plan investment selection and that the rule makes clear that retirement plan fiduciaries should consider all factors in an objective analysis of investments.

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On the side opposing the proposal, a group of four Republican senators and the American Securities Association (ASA) issued letters urging the DOL to withdraw its proposed rule. One of their concerns was that the language of the proposal seems to instruct fiduciaries to incorporate more ESG criteria into their decisionmaking and could be viewed as a mandate to do so.

However, other groups support the DOL moving forward with its proposal, while suggesting some updates on “neutrality” and clarifications that address the concern the senators and the ASA expressed.

In its comment letter, the American Retirement Association (ARA) suggests the DOL adopt an approach that reflects the Employee Retirement Income Security Act (ERISA)’s principle of neutrality in the application of the duties of loyalty and prudence regarding the factors for an investment analysis. They suggest the DOL do this by:

  • eliminating the proposal’s inclusion of climate change and other ESG factors as required considerations under the prudence safe harbor; and
  • eliminating the examples of discretionary ESG considerations under the prudence safe harbor and reformulating them as preamble discussion.

The ARA also suggests in its letter that the DOL allow ESG investments in participant investment alternatives and as qualified default investment alternatives (QDIAs), as proposed, and modify the “tiebreaker” provision to reflect the principle of neutrality “and to permit selection of investments based on non-economic criteria and not based on the untenable standard of equally serving the plan’s financial interests.”

The ERISA Industry Committee (ERIC)’s comment letter supports the proposed rule, but says that to avoid misleading plan fiduciaries, the text of the final regulation should not highlight specific examples of risk-return factors.

“Many factors affect risk and return, and it would be impossible for the department to codify every single potentially relevant factor,” says Andy Banducci, senior vice president of retirement and compensation policy at ERIC, in the letter. “ERIC is very concerned that by going to such length, especially in the operative text, to emphasize climate change and certain other social and governance factors, the department is inadvertently setting up a new ‘over and above’ standard beyond the generally applicable duty of prudence. Due to this emphasis, some plan fiduciaries may believe that they are required to consider these factors in a way that could override normal and proportionate consideration of these factors, contrary to ERISA’s general fiduciary duties. Moreover, the formulations of these factors in the text are, in some cases, ill-defined and open-ended. If they are retained, much more definition is required to provide meaningful guidance to fiduciaries.”

Further support for the proposed rule was expressed in a letter by a coalition of Democratic state attorneys general. They encouraged the DOL to adopt the proposed rule, saying “the current regulation is likely to have a chilling effect on ERISA fiduciaries’ consideration of ESG factors in their investment decisionmaking.” The attorneys general say they endorse the DOL’s proposed removal of the terms “pecuniary” and “nonpecuniary,” adding that the amended language allows ERISA fiduciaries to consider “any” factor that would be material to the risk-return analysis.

“The proposed rule is a balanced approach, addressing the current rule’s flaws while still ensuring that the focus of ERISA fiduciaries remains the financial benefit to plan beneficiaries and participants,” the letter states.

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