Online Advisors to Extend Reach into DC Market

By Cyril Tuohy

The number of defined contribution plan-focused online advisory firms is expected to double over the next five years as pay-as-you-go becomes the preferred method of saving for retirement, a consultant said.

The rise in the number of online advisories serving the 401(k) market mirrors asset growth projections for that market.

The Department of Labor’s fiduciary rule will mean more online advisory offerings inside 401(k) plans as well, said Chip Roame, managing partner of Tiburon Strategic Advisors.

“We do expect more entrants into the defined contribution market,” Roame said in a client presentation last week.

The fiduciary rule begins taking effect on Friday.

Online advisory firms, or roboadvisors, bypass traditional flesh-and-blood advisors and use computer algorithms for financial planning decisions. The number of DC online advisories is expected to grow from 9 to 18 in five years, Roame said.

Roboadvisors are less expensive than traditional advisors and often better suited to younger employees with lower salaries and simpler investment needs.

Assets under management, or AUM, in the 401(k) market, already in the trillions of dollars, are only expected to rise as consumers take advantage of company-sponsored plans to fund their retirement.

Market Contrasts

Defined contribution plan-focused online firms like Financial Engines, Morningstar’s Retirement Advice and Guided Choice are in a good spot as advice within the 401(k) market “should be a solid business for a while,” Roame said.

The rise in the number of online advisory firms serving the defined contribution plan market stands in contrast to the projected decline in the number of pure-play online advisors serving the business-to-consumer, or B-to-C market.

In the B-to-C segment, mergers will thin the ranks of the online-only financial advisors fighting for survival, Roame said.

AUM gathered by online advice firms in all markets – B-to-C, defined contribution and wholesale roboadvisor technology firms – will soar to $2 trillion by 2022, from $260 billion at the end of 2016, Tiburon said.

Online advisories affiliated with traditional discount brokerages and giant retail mutual funds, which have gather billions of assets in a relatively short time, are expected to be the big gainers in the race to deliver online advice.

DC Plans’ Relative Share to Decline

More than $7 trillion in retirement assets were contained in defined contribution plans at the end of last year, according to mutual fund data tracked by the Investment Company Institute, a mutual fund trade group.

Defined contribution plan-focused online advice firms will have gathered about $621 billion in AUM by 2022, about triple the $207 billion in assets these firms controlled at the end of last year, Roame said.

By 2022, the $621 billion collected by defined contribution plan-focused advisors will represent one-third of the $2 trillion in AUM collected by all online advice firms.

The other two-thirds — $1.4 trillion — will have been gathered by B-to-C online advisors.

In five years, the relative share of AUM held by defined contribution plan-focused online advisors will have declined relative to AUM held by all online advisors.

“It will still have positive growth but its relative share will decline,” he said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].