Investment Only to Grow in the Future

Market dynamics bear promise for investment-only firms in the defined contribution space.
However, in order to succeed in the marketplace, each firm will have to firmly evaluate the opportunities available to them.

Firms in the retirement plan space are looking to grow their defined contribution assets, as a result of the reduced opportunity in the defined benefit arena, a recent Cerulli survey showed.


What exactly is investment-only? According to Cerulli, precisely defining industry monikers, such as investment-only, is critical to helping firms accurately identify specific opportunities and define strategies moving forward.

The term investment-only originated as a way to differentiate between DC business in which the asset manager also served as the recordkeeper and those cases in which the manager only acted in an investment capacity. However, Cerulli asserts, the term is a misnomer because such firms that operate in the defined contribution market often do much more than just manage the investment piece.

According to Cerulli’s research, financial services firms are split between those who are opposed to the use of the term “investment-only” as the umbrella term to describe retail assets that flow through some sort of gatekeeper, as there are firms that support the adoption of IO as the overarching moniker to describe professional buyer-intermediated retail assets.


Investment-only opportunities in the defined contribution marketplace represents a meaningful opportunity, the Cerulli report says; although there will be a difference between managers who already manage a significant amount of DC IO assets and are looking to foster continued growth, and those managers just beginning to gather DC IO assets. According to Cerulli, all managers will have to determine whether they are interested in managing simply the investment components of participant products, or if they want to manage the end product as well.

Further, there are two approaches to DC IO opportunities, Cerulli says; pure-play firms that offer only investment solutions, and hybrid firms that offer full-service bundled DC programs, as well as unbundled investment offerings that are available on a stand-alone basis on other investment platforms.

The total investment-only market in 2005 was $2.87 trillion dollars, most of which ($1.1 trillion) was in the defined contribution investment only market. In addition to expected growth in the defined contribution marketplace, IO opportunities will also be driven by what Cerulli describes as “the slow by steady decline of proprietary fund use and the demand for open architecture’ in the defined contribution marketplace.

In order to best capture these opportunities moving forward, firms must “tailor their marketing techniques to ensure that they are providing the right type and amount of information to a broad range of gatekeepers.’ Further, Cerulli said, asset managers should evaluate the investment-only prospects in the defined contribution marketplace as part of their firm’s overall professional buyer-intermediated relationships and the marketplace opportunity for their firm.

In fact, almost 67% of firms are turning their focus to increasing clients through defined contribution programs, and Cerulli says that investment-only (IO) opportunities will make up a significant percentage of opportunities available to these firms. Fifty-six percent of firms plan to increase their work with investment consultants, 50% say they are looking at other institutional segments and one-third are looking at retail segments.