Obstacles Facing Convergence of Wealth and Retirement at Work
While momentum behind the convergence of wealth and retirement at the workplace continues and seems unstoppable, there are still major obstacles that must be faced and overcome.
Convergence has two powerful forces behind it:
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Advisors and record keepers’ plan fees have been and continue to decline—offering wealth services and financial planning to participants is an obvious, if not easy, additional revenue source.
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A growing number of plan sponsors are demanding that their advisors and providers offer holistic financial advice to all employees, not cherry-pick the wealthy.
Also powerful are the hurdles, which include:
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Most employees and participants in defined contribution plans do not have enough assets to attract advisors using traditional methods.
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It’s extremely hard to engage participants—most experienced retirement plan advisors and wealth managers alike do not want to meet with participants.
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Data:
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Some providers do not want to offer participant data preferring to engage with participants themselves
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Data is volatile and must be protected—plan sponsor permission may be required given recent litigation
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There are data needs beyond what is available to adequately provide holistic advice
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There is no standard plan or participant data format
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Though b/ds have become more interested in supporting efforts of their reps to offer wealth services to DC participants, there are still more profitable traditional wealth services as well as leveraging ESOPs to find prospects without having to deal with ERISA.
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Convergence creates potential competition between advisors and record keepers.
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While it’s easier for wealth advisors to offer DC plan level services than retirement plan advisors to offer wealth, ERISA plans are complicated.
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Similarly, it is hard for RPAs that do not have wealth capabilities to learn a new skill-set—partnering with RIAs is difficult as is acquisitions with competition from aggregators.
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360-degree payroll integration is not pervasive and will be needed to facilitate the auto plan as well as convergence.
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Reaching out to a participant when they separate from the plan is too late—a relationship needs to be built beforehand.
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Participants do not proactively use managed accounts—offering them as the QDIA without engagement is not ideal.
That’s a lot of obstacles to overcome for both record keepers and advisors, each with its own unique challenges. Seventy percent of the 11,000 RPA specialists are trying to leverage convergence, according to the NMG research, while the 50,000 to 60,000 hybrid wealth advisors who have a significant DC practice are starting to convert participants into wealth clients. The Focus research indicates that many are successful. Regional firms with some scale that have created an organic integrated DC and wealth practice are thriving.
BDs are focused on convergence but it’s hard, especially for larger ones, to move quickly. Independents have limited power over their reps and wirehouses still seem to focus on supporting the specialists serving mid-larger plans. A very limited number of RPA aggregators have successfully created an integrated firm with a well-oiled machine to leverage convergence, which will surely be discussed at the November 12 to 13 Aggregator and December 10 to 11 Convergence roundtables—just a handful of RIA aggregators are buying RPA firms or leaning into convergence.
Artificial intelligence and the integration of new tech on FIS’s platform as well as some new ones created by fintechs, who are more than willing to share data, promises to provide advice at scale, uncovering opportunities by engaging with employees delivering them to live financial coaches who will be able to serve many more clients. These coaches can refer larger wealth and financial planning opportunities to more experienced advisors critical as it is harder to find millionaires as well as the mass affluent without an advisor.
Retirement income is equally important if we are to convert 401(k) plans from savings to retirement plans, but it lacks urgency and opportunities for advisors and providers.
Who would have ever imagined that 401(k) and 403(b) plans, which began as a supplemental savings plans, would replace defined benefit and even Social Security as the main way for people to prepare for retirement? And now, who could have ever conceived that DC plans are the way to provide holistic advice to tens of millions of people who would otherwise never engage with an advisor?
Convergence is real, front and center and just like it took a lot of work overcoming obstacles for DC to replace DB plans, it will be even harder to fully leverage convergence of wealth and retirement at work. Next is benefits.