A small group of intensely specialized independent RIAs are emerging as key players as fee-only, fiduciary advisors begin what’s likely to be a decades-long takeover of the retirement market, a new Cerulli Associates study shows.

Cerulli contends in new research that RIAs’ fee-only structure and fiduciary skills position them to grow as new Department of Labor rules make it increasingly difficult for stockbrokers with conflicts of interest to manage retirement plan assets. Cerulli’s research adds a gold-standard seal of approval to earlier reports that showed RIAs gaining in the retirement market. See: Why the DOL’s proposed 401(k) rules could ding brokers and leave the spoils to RIAs

All RIAs not created equal

“The idea of the fiduciary duty is becoming very important,” says Bing Waldert, a consultant with Cerulli Associates. “It’s something we believe will become more and more in demand.”

See: Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’.

Of the $4.6 trillion defined contribution arena, retail advisors control about $1 trillion of those assets.

But all RIAs are not created equal when it comes to going after retirement assets. Boston-based Cerulli identified 911 RIA specialists in the retirement market. See: What Cogent’s new study says about where RIAs stand in the 401(k) business.

They make up just 3% of all defined contribution specialists in general – other defined contribution specialists include brokers. But, of the $1 trillion controlled by advisors, this small group controls about 12% of that trillion, Waldert says.

Despite their small numbers, these 911 advisors control 12% of all defined contribution assets. Between 2007 and 2009, the assets controlled by these RIAs experienced a 13% compound annual growth rate.

RIAs stand out

A number of forces are at work to push retirement assets into the hands of advisors who offer transparent and straightforward fees. Employers are scrutinizing their 401(k) plan statements to ferret out fees, aided by new regulations that require providers to offer the information. A slew of participant lawsuits remain in litigation, alleging that participants were fleeced by excessive fees.

In addition, the Department of Labor is looking at tightening requirements for advisors who serve the retirement market, including by raising the definition of fiduciary. See: How 10 top groups define 'fiduciary’

Cerulli says in its study that commission compensation still prevails in the small market space, but the fee-only compensation has become the norm among savvier mid-market employers willing to pay advisors for their expertise on plans.

“And RIAs are benefiting from this,” says the report, which was crafted by Cerulli analyst Tom Modestino. A key component that separates retail advisors from retirement specialist advisors is fiduciary duty to clients.

Several TAMPs have emerged recently to offer the most cost-effective ways for RIAs to serve the small plan market. See: Buckingham expedites turnkey 401(k) strategy by buying a fellow DFA TAMP and Head-to-head: How one advisor went up against a giant of the retirement plan world and won.

Who are these specialists?

Cerulli says that just 10% of all advisors from all channels concentrate on retirement plans, meaning that 40% or more of their income comes from defined contribution plans.

The advisors who are emerging in the defined contribution space are advisors who specialize in this arena, Waldert says. He points out many handle mid-sized plans with employers whose assets range from $25 to $50 million in assets. See: How BrightScope is using technology to create order in a messy 401(k) market.

The smaller plans are still mostly commission-based, and the larger plans are overseen by major consulting firms, but Waldert says RIAs will continue to gain market share in the mid-market arena.

“It’s going to be increasingly difficult for the guy who has two or three plans to compete in this space,” Waldert says.

Making it work

There’s no question the RIA model is emerging in the defined contribution space, says Stace Hilbrant, a managing partner with 401k Advisors LLC in Wilmette, Ill. He’s spent the last 3 years transitioning away from his commission-based plans and says currently less than 10% of the firm’s $1 billion in assets are in commission.

“This is absolutely the future,” he says. “The legacy commission broker who just charges commission that no one knows about is going away. The only people who will still be doing commissions are brokers who don’t care that the world has changed.”

See: A Q&A with Phyllis Borzi, the DoL powerbroker aiming to remake the retirement market.

Hilbrant works with a number of employers and his average client is an employer with a 401(k) plan worth about $25 million in assets.

Advisors in the 401(k) space who charge fees say the fees vary dramatically based on how much attention their providing to the plan. For instance, fees commonly rise when advisors are providing educational services.

Hilbrant says technology has also helped the fee-only model emerge in the 401(k) arena because now the fee is rolled into the assets and is taken directly out and employers don’t need to physically send a check to the advisors.

“Technology has really helped,” he says. “RIAs have flourished because I don’t have to send client a bill. Employers hated having to write another check.

Jim O’Shaughnessy, advisor with Sheridan Road Financial LLC in Northbrook, Ill., says his company has been transitioning to a fee-based business since December 2006. Right now, 80% of his firm’s $2 billion in retirement assets is fee-based business. In three years, he envisions his entire business will become fee-based.

His firm has been growing and says they now have clients in 22 states and opened an office in Milwaukee at the start of the year. By summer, he’s planning to open a new office in Indianapolis and hopes to open a new location in Tampa by the end of the year.

The firm has been growing in large part because of investments it made in technology, he says.

“We’ve reinvested a lot in technology and people and have been able to build additional capacity and scale through this difficult period.”

A challenging place

Even though savvy advisors often are clamoring to get into the retirement arena, it’s not easy for advisors to break into this area.

In addition to the cumbersome regulations, the heavy recordkeeping involved is often a major obstacle for advisors, industry leaders say.

Many advisors simply don’t know how to set up their business model to be able to effectively service 401(k) plans, says James Carney, CEO of ByAllAccounts, a firm that provides technology solutions for about 800 RIAs. The company offers services to make it easier for advisors who oversee 401(k) plans.

In fact, he says just 10% of those RIAs are in the 401(k) space managing and servicing 401(k) plans for small businesses.

“There’s a lot of interest, but people aren’t sure what they have to do. To make it work, you can’t just sell one plan. You just can’t go into it casually. There’s a lot of interest, but I don’t think it’s for everyone.”