PLANADVISER - May/June 2020 - 14

cover story / 2020 PLANADVISER DCIO Survey
The trend has been toward open architecture for about two
decades, he says, with recordkeepers' proprietary funds
down to 39% market share by year-end 2019.
But the overall trends now are rough for DCIOs, says
Brown, and he points to two major developments. " Everything
I've been told suggests that two-thirds to three-quarters
of new contribution flows are going into QDIAs, " and
recordkeepers' target-date fund offerings often are not
truly open architecture, he says. A recordkeeper may have
DCIOs' TDFs on its platform but require sponsors to utilize its
proprietary target-date funds to get the lowest fee on recordkeeping
services-the recordkeeper will miss out on the TDF
investment management fees if those assets go into another
part, asset managers like the move toward zero revenue
share. That way, they know what it's going to cost them each
year to get access to a recordkeeper's platform, as opposed
to it varying, based on assets. "
Has the move toward specialist advisers and aggregaAs
the advisory business consolidation
has happened, Brown says, larger
specialist advisers have also begun
flexing their muscles with DCIOs.
manager's funds. " The [second] challenge is that, with so
much focus on fees, such a large percentage of assets are
flowing to lower-cost, passive investments, " he says.
According to Brown, there are about 60 asset managers
with dedicated DCIO sales and marketing staff; out of that
60, BlackRock, Vanguard and State Street Global Advisors
(SSGA) manage roughly 90% or more of passive DCIO assets
under management (AUM). " Passive management is built on
scale, which allows managers to lower their fees: The firm
with the lowest fees typically wins the battle for passive
assets. The advantage held by these three firms is practically
insurmountable. "
The dynamics of distribution have also changed for
DCIOs, as both recordkeepers and advisory firms consolidate,
he says.
The large recordkeepers, now with major market share,
" are flexing their muscles with DCIOs more than ever before,
and they're also cutting back on the funds on their platform, "
Brown says. As revenue sharing diminishes, it has
become common for a recordkeeper to offer a DCIO different
tiers of access to its platform, with each tier carrying a
different price tag. Paying more to be in a higher tier could
mean a DCIO's funds become eligible for inclusion in key
products such as custom target-date funds and a preapproved
fund list for 3(38) fiduciary investment management.
" This is very much 'inside baseball' stuff, " he adds. " It's one
of those things, like revenue-sharing, that is known but not
discussed much in public.
" Instead of taking the money out of the investmentmanagement
fees with revenue sharing, recordkeepers are
essentially asking DCIOs to cut a check to cover those fees, "
Brown says. " So the DCIOs are still paying. But, for the most
tors changed how DCIOs work with advisers? " My take is
that the qualifications for these [DCIO team] roles have been
elevated, " Brown says. " Aside from the research teams, who
are data-driven, there's little room for staff whose expertise
lies mostly in product. " What this means, he says, is that
sales staff must understand the advisory business and the
marketplace in the territory they cover: They must be business
consultants and be able to offer insight into what other
advisers in that area are doing to
improve their businesses, plus
know which DC plans in the area
might be soliciting requests for
proposals (RFPs).
" DCIO leadership and key
account staff must be attuned to
the enterprise goals and needs of
the advisory firm at the homeoffice
level, " he continues. " They
need to understand what senior
management is planning and look
for ways to support this-even if there's no immediate
product sales opportunity. They must be good partners at
all levels. "
As the advisory business consolidation has happened,
Brown says, larger specialist advisers have also begun
flexing their muscles with DCIOs. " They want some valueadded
services, but what they really want is access to
lower-priced [investment] products, " he says. " The aggregators
are saying to DCIOs, 'Across our plans, we have got
several billion dollars invested in this product, and we want
to use our scale as a retirement specialist. We don't want to
continue to use the R6 [revenue-free] shares everyone else
has; we want a lower-cost product than our competitors'.
We want you to create a collective investment trust [CIT]
for us that has the same investments, but for 5 or 10 basis
points [bps] less.' "
Not surprisingly, DCIOs have amped up their value-added
services for plan advisers, with increased focus on substantive
enhancements and away from sales pitches about
product, Brown says. " The more specialized the business gets,
the less interest plan advisers have in talking about products.
But they will talk to someone who can talk about something
substantive to help that adviser run his business. "
That does not mean the DCIOs are ignoring the retail
investor market. " What's happening is that some of the
largest specialist advisory firms-such as CAPTRUST,
SageView and NFP-are seeking to broaden their asset
base via a greater focus on individual wealth, " Brown says.
" This is being done as a means to elevate firm valuations,
as a considerable number of senior managers[-i.e., partners-]are
approaching retirement age. " DCIOs increasingly
help these specialist advisory firms build their individual
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PLANADVISER - May/June 2020

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