401(k) Aggregators – What You Need to Know

Today’s advisors must meet the ever-changing demands of regulations and technology, while facing growing competition from traditional firms and start-ups.

But in recent years, a new breed of 401(k) “aggregators” have emerged in the retirement space, attracting 401(k) plan advisors to partner up, refer, or sell their entire book of business.

Known for their expertise, aggregators primarily offer economies of scale to small-to medium-sized registered investment advisor (RIA) firms. However, if you’ve been curious about, or considered working with such entities, consider the the pros and cons of doing so.

What is a 401(k) Aggregator?

Aggregator firms work one of two ways: They either purchase RIA firms outright, or offer an affiliation model where they compensate firms with referral fees or equity in the holding company. Acquisition typically occurs for firms with more than $1 million in revenues, while those with less than $1 million tend to become affiliates.

Partnership has its Perks

For solo advisors and small- to medium-sized firms, there are benefits  to working with aggregators:

Credibility

You may enjoy the credibility and brand recognition that come with partnering with a larger or well-known entity.

Resources

As aggregator firms grow and gather assets, they may offer expertise that small RIA firms perhaps couldn’t access or afford to develop in-house. For example, most aggregators offer support in the form of lead generation, practice management, technology, client onboarding, marketing, and other areas that are perhaps beyond the scope of a small advisory firm’s capabilities.

Competitive Edge

Aggregators may allow advisors to offer more competitive pricing and a greater menu of plan funds to prospective plan sponsor clients. These advantages are often due to not only an aggregator’s larger asset base, but also from distribution deals they are often able to negotiate with asset managers. Additionally, you may be able to expand your product and service offerings.

Before You Hand Over the Reins

Before joining forces with an aggregator, consider that your firm’s smaller size may actually be to your benefit. After all, partnering with an aggregator means that you will likely be held to their rules and approach to 401(k) plan management. It’s important to assess your firm’s  strengths and weaknesses,. If you go the aggregator route, make sure the sum is greater than its parts for you and your partners.  

Structure

If part of your motivation for becoming an RIA was entrepreneurial drive and the freedom to manage your clientele and plans your way, this may not work well within the bounds of the aggregator’s rules and procedures. However, this isn’t to say that your talents and drive won’t fit with an aggregator environment; some aggregators want RIAs who will continue to diligently oversee and build their book.

Identity

Consider your branding and investment philosophies and whether you’re willing to compromise, especially if you will soon be identified as being part of, or belonging to, the aggregator firm.

Also, understand that by allowing aggregators to control your book, you are contributing to the “institutionalization” of the industry, where a home office takes the lead role in determining what investments 401(k) advisors can use.

Technology

Firms may be able to address many of the reasons to sell or partner up with aggregators by embracing a robust 401(k) technology plan management platform.  Today, 401(k) platforms exist that enable firms to scale more adeptly when it comes to everything from lead management to 401(k) plan management.

If you decide to go the aggregator route, do your homework. As in any business arrangement, consider the best route: selling your firm outright, accepting an affiliate arrangement, or continue growing the business that you’ve already built.