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Practice Management March 1, 2023
Recordkeeper Consolidation: Good or Bad News for Small Managed Accounts?
Industry participants are mixed on whether recordkeeper consolidation will help or hinder business opportunities for managed accounts.
Reported by Ed McCarthy
The recordkeeping industry’s ongoing consolidation is occurring at the same time interest is growing in offering managed accounts in 401(k) plans, either as the default option or as part of a plan’s investment lineup. The convergence of these trends raises an interesting question: Will recordkeeper consolidation prove to be a boon or a hindrance for smaller managed accounts?
Some industry members say the shrinking recordkeeper marketplace will not reduce business opportunities for managed accounts. Ronnie Cox, senior vice president, investments with Pensionmark Financial Group in Santa Barbara, California, says recordkeeper consolidation and managed account options are not correlated. “Through our experience with managed accounts and adviser managed accounts, we have not lost choice through recordkeeper consolidation,” he says. “I have seen more managed account providers and methodologies gain prominence as managed accounts have gained more traction in the industry.”
Other observers are less optimistic for smaller managers’ prospects. Audrey Wheat, leader of the vendor analysis team with CAPTRUST in Raleigh, North Carolina, thinks consolidation is more of a hindrance than a help. As an example, she cites a case from several years ago of a smaller managed account provider that worked with two recordkeepers, both of which were acquired by a larger firm. Post-merger, the managed account’s assets were transferred to the acquiring recordkeeper’s existing provider—a common development unless the plan sponsor can make an alternate election, she says. “So, typically the smaller managed account providers are on the wrong end of that transaction,” Wheat says.
Limited Lineups
One challenge is a cap—formal or informal—on the number of managed account providers on the recordkeeper’s platform. That limit can lead to a recordkeeper’s proprietary account receiving greater emphasis. Wheat notes that a few larger recordkeepers offer their own proprietary managed account, with perhaps one alternate off-the-shelf-solution. “However, because they offer a proprietary solution, they incentivize clients to go with that solution through basically pricing it lower than the off-the-shelf version,” Wheat says. “So, that way they can say they have another option, but its usage is typically very low.”
Smaller account managers face practical problems when seeking a lineup slot with recordkeepers. Integration is absolutely key with the recordkeeper, and smaller managers will find it difficult to connect to post-consolidation recordkeepers in a meaningful way, says Steve McCoy, CEO of iJoin in Scottsdale, Arizona. “As recordkeepers get larger, their development road maps are jampacked,” he says. “There’s just not the bandwidth available to connect to smaller or upstart managed account providers.”
Todd Lacey, chief revenue officer at Stadion Money Management in Watkinsville, Georgia, shares McCoy’s view that adding managed accounts to a recordkeeping platform is “a pretty substantial technology build” that requires resources the recordkeeper might prefer to use elsewhere. “At the end of the day, you’ve got tech integration, potential websites, user-experience builds, agreements that have to be drafted, marketing materials—there are a lot of pieces to it,” Lacey explains. The combined effect of those requirements can impose a limitation on managed account expansion, he says.
Cox compares the current environment to the early days of target-date funds. Most recordkeepers initially offered one proprietary fund option, but, over time, they expanded their lineups, particularly as plan advisers demanded more choice. He says he believes the industry will see a similar path evolve for managed accounts. The diversity of methodologies, costs and other features developing in the managed account industry, coupled with advisers’ demand for multiple providers, will spur the availability of multiple accounts on recordkeeping platforms, he maintains.
Getting On Board
Adviser demand might not lead to significant expansion opportunities in the short term, though. For example, Vestwell partners with Franklin Templeton to offer a proprietary adviser managed account feature based on the belief, says Joshua Forstater, senior vice president of sales for New York-based Vestwell, that “the next generation of managed account experiences needs to live natively in the recordkeeping platform in order to be effective.” While Vestwell is open to adding managed account partners, the company wants to maintain its “ability to have an adviser-friendly, frictionless experience,” Forstater emphasizes.
If a recordkeeper receives sufficient expressions of interest from advisers and plan sponsors in a particular account manager, the recordkeeper will be motivated to find more efficient ways to onboard managed accounts to accommodate that interest, says Lacey. “Some recordkeepers have already gone down this path, and I think they are putting themselves in a strong position to be leading managed account recordkeepers, as industry trends play out.”
But recordkeepers need an incentive to prioritize an integration request, says Shawn O’Brien, associate director, retirement at Cerulli Associates in Boston. He cites the hypothetical example of an influential adviser or consultant or a large plan sponsor asking for the implementation. Cases that bring substantial assets to the recordkeeper can also receive higher priority. “There needs to be a proper incentivization for the recordkeeper to say, ‘We’ll make time for this—we’ll allocate resources integrating the solution,’” O’Brien says. “Otherwise, it’s not really worth their time.”
Getting on a recordkeeper’s platform remains a daunting task, though, according to Cox. He says it can be extremely challenging, if not impossible, particularly for small adviser firms or managers. “If you’re a smaller adviser or managed account service provider that can’t make the business case to the recordkeeper, it may be a while before your preferred service becomes available, if at all,” he says.
Looking Ahead
Sources varied on whether recordkeeper consolidation will benefit or hinder small managed accounts in the short term. O’Brien doesn’t see it as a boon or hindrance, he says.
Lacey observes that most recordkeepers now offer managed accounts, and these have become a more important part of their business, a development he views positively. “I think there’s a lot of tailwind leading to the growth of managed accounts, and I think consolidation would probably do nothing but enhance that,” he says.
According to Cox, it’s too early to tell how the trends will interact. Recordkeeper consolidation may provide additional scale to managed account providers in order to drive costs down, he speculates. But consolidation might give recordkeepers increased pricing power or, with decreased competition, the ability to build their own in-house managed account services, he adds. Those services could serve as a wide moat to other managed account providers trying to integrate to those recordkeepers’ platforms. “In either case, I believe it is too early to tell how consolidation will [affect] managed accounts,” he concludes.
