Recordkeeping Market Evolution Marches On

Anyone working in the retirement planning marketplace will have heard about recordkeeping margins being pushed to the floor—so why are some firms confidently doubling down?

During a recent conversation with PLANADVISER, Raghav Nandagopal, executive vice president of corporate development and mergers/acquisitions at Ascensus, took some time to explain the firm’s strategic vision for the near- and mid-term future.

Suffice it to say, Ascensus is charging full steam ahead on the goal of rapidly building scale, partly through organic growth but also through rapidly paced mergers and acquisitions. Not only would the firm like to grow, Nandagopal explains, frankly it must grow to ensure it can continue to reinvest in its serving offerings and new technologies.

Beyond the three acquisitions the firm announced in the last quarter alone, Nandagopal projects his firm will close anywhere from eight to 10 new acquisitions, on average, per year, for the foreseeable future.  

“Our bread and butter is the $3 million to $10 million space, but we are also considering larger targets up to $20 or $30 million,” he explains.

Nandagopal believes most of the M&A action will center on “the good number of regional banks, regional insurance companies and other entities in financial services realm who have captive, legacy retirement businesses.” Many of these providers are somewhat reluctantly serving this business as a non-core part of their identity and their value proposition, and it can be a struggle to meet service agreements with their limited infrastructure, he explains.

“As the margins for recordkeepers are squeezed more and more, this group will increasingly come to the conclusion that they do not want to be participating in the back-office functions of retirement plan recordkeeping and administration,” Nandagopal says. “Some of them are asking fundamental questions about whether they want to be or need to be in the retirement business at all.”

And so Ascensus is practicing what Nandagopal calls “the lift-and-shift strategy.”

“We come into these businesses and we tell them, ‘Look, this is a non-core part of your business and it is weighing you down and it is not sustainable long-term,’” he says. “We can help take it out of your hands and monetize it, in partnership with trusted asset managers.” This represents a win-win in that the selling firms are refocusing and extracting value from non-core parts of their business, while Ascensus rapidly expands its client footprint.

NEXT: Impact of consolidation on advisers and clients 

“The end goal of the lift-and-shift strategy is obviously to really grow the business and then have it be in a place where the firm can be healthily profitable amid squeezing margins,” Nandagopal says. “It's not easy to get there, and so you have to have a very well-defined set of criteria for the businesses you are thinking about acquiring, from a strategic, financial and cultural perspective.”  

Ascensus is also looking for companies “where there has been an entrepreneurial spirit baked in … This helps us believe that we will be able to continue to grow these businesses after we acquire them.”

Retirement advisers will understand this sentiment—the idea of culture being important to future development.

“There is a real passion in our industry about putting the best culture forward and making sure folks inside the business really want to treat clients well, not just be successful,” Nandagopal says. “In this space these two things should go together—if you’re treating clients well you should be successful. It’s maybe a little idealistic, but it is important.”

Nandagopal says Ascensus, and indeed other recordkeepers, can grow successfully and sustainably through M&A activity “only if we are effectively protecting the very strong relationships these businesses have with their adviser networks and their end clients on the ground—the last thing we want to do is have a detrimental impact on that.”

“We have absolutely passed on companies that we first considered, but realized they would not be the right fit for us, be it the way they implemented certain pricing models or the service deliveries,” he adds. “Knowing when to pass over an opportunity is just as important as knowing what business to acquire.”

Nandagopal concludes that part of what will determine the strategy moving forward—although this is harder to feel confident about given the machinations and persistent political uncertainty—is the regulatory landscape: “Obviously this is having a major impact on the broader retirement industry, so we have to be providing solutions that will help clients manage this challenge. Clearly a focus will be to ask, how can we leverage the tremendous amount of data and information we have to better enable advisers to make better decisions?”