The 401(k) plan advisor space may seem kind of dry and unexciting—a place once stalked by record-keepers, bundled fund providers and HR departments—but that bird’s eye view is clouded by the actual huge changes going on and massive amounts of money moving around in this space.

This space has traditionally been ruled by mega consulting firms like Mercer and Aon Hewitt handling the giant companies and broker-dealers cleaning up with the smaller plans. But 10 to 20 years ago, the ground started to shift amid accounting scandals—and a new legal terra firma was created. That world made it safe for RIA Firms like Captrust, in Raleigh, N.C., to evolve and become giants in their own rights.

Captrust was calved from a broker-dealer in 1997 by J. Fielding Miller, who had started building up his DC business in the late 1980s. The firm, which has since planted a flag as 401(k) participant advisor in 37 cities, is now engaging in another kind of homesteading in those cities—acquiring wealth managers to bulk up its high-net-worth business. After an acquisition tear, the firm has built up some $10 billion in AUM to go along with its $270 billion in institutional assets under advisement (including 401(k)s). The company now boasts some 480 employees and 160 advisors spread across the country.

“When we started, there wasn’t really a retirement advisor industry,” Miller says. “We just kind of created in our neck of the woods a kind of cottage industry and there’s other entrepreneurs around the country that were doing the same thing.”

On The Backs of Trucks

Miller got his start at Interstate/Johnson Lane in 1987, hoping to follow his successful brother into the brokerage industry. He made the usual 30 calls a day from his office selling securities including stocks, municipal bonds and funds if he could keep people on the phone for five minutes. His first challenge was the 1987 stock market crash. “I called everybody with recommendations about buying in while things were on the cheap and got a lot of new customers that way.”

On a tip, he cold-called an engineering firm with a $250,000 profit-sharing plan, hoping to steal the business from a bank trust department. This was the advent of the 401(k) age, and retirement plans were the province of the UBSes, Merrill Lynches and Morgan Stanleys of the world, he says. But he heard tales of woe from the plan sponsors—not about the investments but about the service. “It had to do with all the ancillary things that go along with being a plan sponsor.” That included the plan design and documents, the audits and compliance. And, of course, the perennial problem: getting employees to sign up.

Miller saw an opportunity for a small advisor willing to work hard and cover a lot of ground—he and his team spread out across North Carolina trying to sign people up, Music Man style. “It’s hard to do that,” he says. “It’s boots on the ground.”

It meant signing people up at midnight on the backs of trucks. Tipping back a bottle of beer on the floor of a liquor distribution facility. “It could be a third shift textile company where you’re talking to a single mom [with] not a lot of money and you’re trying to get her to set some money aside. … They’re looking at you like you’re a Martian.” These were often people who felt they needed every dollar they made. One participant at a trucking company was so angry about a clerical error made under the previous plan administrator that he threw a sausage biscuit at one of Miller’s team members.

But being a mover and shaker paid off, and Miller wangled business from banks and broker-dealers unwilling to watch the sun come up with truckers. “That’s how I cut my teeth, one plan at a time,” he says.

This new business of advising the actual participants, rather than just glad-handing the C-suite suits, was a new, unformalized cottage industry. A lot of employers were trying to migrate from profit-sharing to 401(k) plans, says John Curry, Captrust’s marketing chief. The move to participant-directed investing was a big deal, he says, and many people, including companies’ top executives, were afraid of it.

Miller’s team spun off from Interstate/Johnson Lane in 1997, entering an RIA affiliate partnership and back-office relationship with the company until it was eventually absorbed by Wachovia and First Union a couple of years later, spinning off various versions of the affiliated “CapTrusts” into the world. (Miller’s group was among those that kept some version of the name, calling itself CAPTRUST.) He took advised institutional retirement business with him—some $400 million in assets juicing some $2.5 million in revenue. At first, he said, his new model was to offer objective financial advice without products for a 1% advisory fee. The hope was that the owners of the plans would also ask him to help with their private wealth management as well. He started with 13 staffers.

The Sarbanes-Oxley Boom

The retirement industry went through a cataclysm after the scandals that engulfed Enron and WorldCom. After Arthur Andersen went down in flames and the dot-com bubble burst, financial reporting and fiduciary responsibility came under Congress’s microscope. Plans were suddenly getting sued a lot for not looking out for their participants as fiduciaries ought to under the 1974 ERISA law.

The resulting Sarbanes-Oxley Act of 2002 drew a bright line for plan sponsors, Miller says, telling them that if they weren’t fiduciaries, they had better hire one and be arm’s length from it. Plan sponsors at companies didn’t want that job, and the Captrusts of the world were there to mop up the business.

This change led to a cleansing in the industry, as traditional brokerages retreated, trying to create buffers through RIA partnerships. “The brokerage firms kind of got left behind,” Miller says, “because they do have conflicts, they’re not objective and wouldn’t be a fiduciary. So what you ended up with were a lot of independent RIA firms that started winning the business.”

The result: The demand for companies offering niche retirement plan advice rose while the supply of providers sank.

“We had an average plan size of I think it was less than $4 million” before that, says Miller. “And we got pulled way up market because there weren’t that many people doing what we were doing. This kind of cemented the industry. I think the industry was really born coming out of Sarbanes-Oxley. … Now our average plan size is over $100 million.”

Dick Darian, a veteran DC plan consultant and now CEO with the Wise Rhino Group, says that the 401(k) space is a crowded vertical with different kinds of companies trying to compete. The companies like Mercer and Aon Hewitt have traditionally served the top half of the $8 trillion DC universe—i.e., Fortune 500 companies—while a cottage industry has served everyone else in the bottom half. But there are also still insurance/employee benefit firms around like NFP, Gallagher and Lockton and some record-keepers in the mix as well—all of them at war to own the 401(k) participant experience. The Mercers of the world, meanwhile, are coming down market while the Captrusts of the world are moving uptown, Darian says.

Miller says his competition is mainly regional variations of his own firm: He names SageView Advisory Group in Irvine, Calif.; Fiduciary Investment Advisors in Windsor, Conn.; Sheridan Road in Chicago; the Lockton Group in Kansas; and Morgan Stanley’s Graystone Consulting. And whenever there’s an RFP, “there’s always a local shop in the running,” Miller says. He doesn’t see tech platforms like Financial Engines as a direct competitor, but a firm in the managed account 401(k) space that it might recommend.

Whaddaya Charge?

In the beginning, Miller says Captrust “would charge maybe 50 annual basis points on a $5 million plan, which would be about $25,000.” Today the fees are less asset-based relationships. “They are more fixed fee. So instead of saying you’re going to get 25 basis points or 10 basis points on a certain pool of assets, they may say we’re going to pay you a $60,000 annual retainer fee.”

“We charge from $25,000 to pushing a million depending on what we’re doing and who we’re doing it for,” Miller adds. Most of the plans are under $1 billion, he says.

“Our recommendation is to have between 15 and 18 different funds [from a record-keeper like Fidelity] that all have different risk/return; they’re not duplicate,” he says. “And we also, if the participant wants to go into a brokerage account and do their own thing, we offer a window for that.”

The firm vets the funds and monitors them to make sure they remain competitive. “When we’re working with the plan sponsor, we’re developing the menu of options. And then when we work with the participant, we say … you’re 55 years old, you’re going to work 10 more years, you want to have this much money in retirement. This is how much Social Security you’re going to get, here’s your outside assets, based on all this and your risk tolerance, we want you to put 25% of your money in Fund A and 12% of your money in Fund D and so forth.”

The space has become fairly complex and less accommodating to smaller firms like his was 20 years ago, says Miller. Compliance and litigation have made plan sponsors bright targets for lawsuits—large companies like Fujitsu Technology and Philips North America have grabbed unwanted headlines settling lawsuits for fiduciary breach obligations (settlements in the $15 million area) because their plans were accused of having excessively high fees or so-so performance. That’s frightened the ghost out of smaller companies. “The more litigation that you see out there, it plays to the strongest hands, the retirement advisors that have the biggest businesses,” Miller says. (The Department of Labor’s 2011 rules on participant-level fee disclosures also changed the landscape.)

Small advisors still smell opportunity here—after all, 401(k) money comes in every month, and there’s nothing like a constant money drip of basis points you can count on. TD Ameritrade said last year that advisors on its platform were still excited about its 401(k) program. But the consolidation in this business is going to make it harder for small RIAs, or “Two-Plan Tonys,” to serve this market unless the plans are really small. And if a plan tips over $5 million or more in assets, the bigger players will smell blood and come after, Miller says. “The barrier to entry has been going up pretty substantially easily in the last 10 years. It’s getting harder and harder every year to hang your shingle and do this.”

A wave of lawsuits has also caused many plans to focus more on plain vanilla, passive funds and no exotic instruments, and that’s put pressure on fees. But Miller says his problem is not fee compression so much as it is the margin compression—costs have gone up as institutional clients require more services. For every dollar of revenue, he says, 65 cents goes to compensation and benefits for employees, 20 cents is profit, and 15 cents is everything else—technology, rent, marketing, etc. Captrust spent $1.5 million last year upgrading its CRM. “A small company can’t do that,” he says. The firm has also built a tablet technology it uses in the field with participants during educational conferences at offices and plants.

One of the things you have to do for compliance, he says, is document everything, so that you can prove you’ve done things if you’re dragged into court. The firms that get into trouble are those that do the work but don’t document it and have no paper trail.

“If I make a bad investment recommendation that doesn’t work out … I’m not really at risk for being sued if I followed a documented process for how I arrived at that decision to select the investment and if I monitored it effectively afterwards.” For compliance, Captrust has fashioned its CRM with custom add-ons for documentation.

Pairing Practices

Captrust decided to go national in 2006. It was always part of the plan to move into the high-net-worth wealth management space, says Miller, but the firm needed a way to capture a brand presence in all its cities, and DC plans offered the easy remedy. It’s harder to differentiate yourself from other wealth management advisors after all, and he had the hardware to distinguish himself and his company in the 401(k) space. But now that it’s done that, the firm wants to use its presence to take on more wealthy clients and serve all their needs, not just their 401(k) plans.

Captrust bought seven firms in 2017, and had pinched three others in 2018 by November with letters of intent for two more. The 2018 firms include Morton Wealth Management in Greensboro, N.C., which brought in some $450 million in assets; the $1.4 billion firm FCE Group on Long Island; and Catawba Capital Management in Roanoke, Va., a $1 billion firm with a 21-state footprint).

“Now we’re going back into the same markets and trying to buy wealth management firms in the same cities and pairing them up,” Miller says. The hope is that the retirement advisor with 40 clients is able to introduce the wealth management teams to those clients and then they bring their personal business over.

Margins do have something to do with this business strategy. They are simply better in wealth management, Miller says.

“Realistically, [401(k)s are] about 20% margin business,” Miller says, “and I think wealth management is about 25% to 30% margin business. That’s the crux of the difference.”

That means the slowly growing latter business has become a much bigger part of the firm’s revenue, Miller says. It’s currently a third, and should be half of Captrust’s revenue within a few years. That’s because institutional retirement revenue is about 5 basis points and wealth management revenue is about 70 basis points.

“We need a minimum of a million dollars [for wealth clients], so we’re not out there looking for $200,000 rollovers. There are very few million-dollar accounts [in the 401(k) space]. But often somebody with a half million dollars in the plan may have a million dollars outside the plan, and that becomes a good client.” Those accounts under $500,000 are better suited to asset managers, he says, and perhaps even robot sites, and he recommends people leave their money in the plans.

Wilson Hoyle has been with Miller’s team for 23 years since the Interstate/Johnson Lane days and is now a managing principal at the firm. He says the advisors who partner with Captrust now are looking for vision and scale. “We want to take the best of the consulting world and what made that effective and take the best of the brokerage world … and combine them to make this hybrid firm, and if we did that it would be this first step to create that fast track for advisors to run on.”