So, Fred, you've observed technology weaving its way through the TPA landscape like few others. Could you share your thoughts on how technology is reshaping the TPA industry, particularly in terms of appealing to potential partners or buyers?

The main thing I really see is that with some of the larger firms, they're very concerned about scaling the business. Obviously, investing in technology is the number one tool for scaling. It enables them to empower their staff to embrace growth and handle it more efficiently. Managing this without sacrificing the quality of their service is crucial. From that standpoint, technology as a scaling tool is huge. When you have a scaled business, it becomes more attractive to buyers because the earnings can be higher due to greater efficiencies. Each administrator can handle more cases, thereby requiring less headcount. You never want to say they're looking to get rid of people, especially in this job market, but it's certainly something that when a buyer looks at the number of employees and the output of work, they do the math backward and think, 'Well, if they have eight administrators and each handles 150 cases, can we load them up more?' This efficiency is a big consideration.

Backwards math.


Looking ahead, though recalling your time in the trenches, have you observed specific innovations that prompt TPAs to consider selling or, conversely, to invest further in their growth?

Actually, motivations for selling most of the time come down to what I'll call the maturation process or stage of many of these TPA firms. You often run into these long-in-the-tooth old-timers who've been around forever. They're not necessarily adapting to change as their employees are, and they suddenly realize they're behind, they're not enjoying it, and they want to get out. That's one of the biggest motivators for them selling at this mature stage.

For me, when you look at these TPAs, I remember it well because I was once one of them. I started a firm from the ground up, built it up to 26 employees and 1700 plans. It was a decent-sized little shop. So, from that perspective, at a certain point in time, I realized I was tired: I wasn't the same person as when I started the business. I loved being out there, being one of the "politicians" kissing babies, shaking hands, meeting new advisors, and new clients, doing the sales. That was great. But eventually, all I was dealing with was regulatory BS, employee problems, and nonstop issues, and I wasn't enjoying it anymore. So, I think if I can sell and get out from under that, pass the issues onto a new buyer, I can get back to just relaxing; and that's my motivation to get out and move to a different role.

Many of the shops I’ve encountered are doing just that: articulating that they feel burnt out, they're itching to get out, to live their lives—go fishing, spend time with their grandkids.

That's right. There are also folks who are trying to pass the shop they've built onto family members, sons and daughters, to keep it going. And we're seeing that those young folks just have no interest in running a TPA shop, but they're taking it on anyway…

So, they're becoming entrepreneurial by default—or against their will.

At times. It’s like this: There are two kinds of buyers. There are internal buyers—family and employees—that bear the greatest degree of risk to the seller because, typically, the business owner was the rainmaker. When they withdraw from that role, who's going to pick up the mantle? If the firm is built up to a two-million-dollar EBITDA or even a three-million-dollar top-line revenue, who's going to maintain that? Can they sustain the business and keep the cash flow going because they don't have the reserves? The TPA owner is prepared to pay a lump sum of two million bucks. And therefore, they bear that risk for the next eight-plus years. So, you find some shops, when they realize that, start to back off and say, yeah, we'd rather sell to a buyer that can come in and pay cash, get me out completely in two years, and now I don't maintain the risk for the business continuing without me. So internal sales are becoming less attractive, even though, in theory, the owners start by saying that they’d prefer to pass it on to their kids.

The shop owners look at the economics of it and make the best call.

And these kids, a lot of times, have no interest in running mom or dad’s business. So, there’s no handing it down—and they look to merge with a partner with deeper pockets to consolidate.

And this blends pretty seamlessly into my next question, which is, with the TPA world experiencing considerable consolidation, what impact do you see this having on the industry's competitive spirit, quality of service, and innovation?

From the standpoint of innovation, let's preface by noting that you have some older TPA owners that say, despite everything, ‘I want to stay in the business. I know I want to grow this business. Therefore, I know I need to expand my technology.’ Others say, ‘I'm tired of racing to keep up. I always feel like I'm behind in technology. Therefore, I'd rather have somebody else bear that mantle.’ So that is one of the motivations to get out, but there are those that want to stay in. You have to dichotomize between the old-timers that want to go fishing or play with the grandkids, and the younger folks coming in. Unfortunately, there are fewer and fewer younger ones coming in. But the ones that do, bring with them the spirit of competitors, the spirit of technology, and therefore those are the ones that really need to invest.

Then there are the smaller TPAs: they're cheap, and they are, at times, unwilling to invest in CapEx. They're reluctant to adapt to change. They all know that technology is changing everything. They know how critical it is, but do they want to spend on it right now to take the money out of their own pocket? So, therefore, that cheapness sometimes comes through and clouds their own thinking.

That's interesting because we've experienced quite a few TPAs who have, straightforwardly, admitted to being cheap, yet are committed to finding low-cost ways of navigating SECURE 2.0. Are you hearing things of that nature? As in, ways that they're getting more creative in terms of how they're running their businesses?

It starts with the TPA's distribution model because, let's say, they are a high-quality boutique shop. In that case, they purport themselves to be really high service, high tech, high touch, and the fees are going to be a little bit more expensive. Those shops deal with advisors they've been around a long time; long-term relationships. They feel less risk in raising their fees in creative ways that offset investments in the latest tech.

But let's say you have a firm that deals a lot with Merrill Lynch, for example. From that standpoint, Merrill reconfigured their entire FOFA process. So, the corner office folks have the relationships, and all the newbies coming in are given the smaller plans and told to go and sell. The "corner offices" say, ‘I’m keeping my clients that I’ve had for 30 years—because I handle their retirement planning. I do their benefits and annuities.’ But for the newer advisors coming in—the dabblers—they rarely understand the industry. They don't come into this industry with background knowledge. And therefore, it's easier for them to sell low fees versus high quality. They think, ‘ABC TPA Company is charging $5,000, and I have another TPA they can do it for $2,500. And they sell that. Therefore, the quality of service drops, because you get exactly what you pay for. Regardless, these newbies are now a new threat to the TPAs that are really the high quality, older TPAs. So the distribution models can also influence how they spend and whether they need to invest in bettering their product or they need to invest and make themselves more scalable with lower fees so that’s the two-pronged driver behind their rationale.

But again, it gets back to your point that the vast majority of them are economical in their approach—to all things. This makes the investment in technology, as a means of gaining a competitive edge or sustainable model, a real pain point… because they are cheap.

They are. And it's even worse when they are actuaries.

I can only imagine.

When you have a business owner that’s been on the sales side of things, they understand that you have to invest to sell. But the highly technical shops: those are the ones that are super reluctant. They'll dig their heels in terms of spending any CapEx.

That said, technological advancements are, in fact, rapidly changing the game. How do these technologies influence the decisions of TPAs regarding mergers and acquisitions, and their overall strategic direction? It doesn't sound like much at all, but what are your thoughts there?

I think the ones that realize, all of a sudden, it’s better to spend some now than as opposed to more later. Maybe if I open myself up to a sale, a buyer comes in with energy, and they’ll experience new growth. But there are constraints. PE shops aren’t necessarily looking for larger TPAs; PE shops all want to buy growth. But certain TPAs know they can use the new infusion of money and resources and then reinvest where needed: so, they take what they need and move things around.

In such cases, how many buyer options do you give them?

Every team we work with is given three or four different buyer options. Some buyers are interested in more than just a cash transaction—they're willing to invest further. They'll say, 'We'll give you the capital you need if you, as the owner, choose to stay on.' This means we're not just selling; we're investing in you so you can purchase all the technology you want and build your business for the future. We’re closing a deal like this right now, and one of their main motivations was the substantial investment they could make in technology.

That’s always a smart play. To that end, navigating the complexities of mergers and acquisitions can obviously be challenging. How do you match TPA owners with the right buyers, and how does technology play a role in those decisions?

We consider technology in various ways. For one, it's about the platforms that companies already use. We aim to match TPA owners with buyers who can either maintain or enhance these platforms, thereby avoiding transition risks like service interruptions. Smooth transitions are critical. For example, if you have a company whose administrators have been working on ASC for 20 years, and suddenly you're moving them to a system like Relius, it can cause real disruption. That's why it's important to ensure that transitions are as seamless as possible.

Moreover, from a strategic perspective, technology can determine how attractive a TPA is to a buyer. Buyers look at whether a TPA can scale, and technology is key here. It's like, they don't need to know how the sausage is made; they just need to see that they can eat the sausage and it tastes good. This approach helps us find the right fit for both parties, ensuring the ongoing success of the business post-acquisition.

So, the technological infrastructure and expertise in a TPA can really make or break a deal?

Exactly. It's a critical component. Buyers aren't just buying a business; they're investing in its future potential, and technology is a big part of that potential. It's about using other people's money wisely to make strategic improvements and ensure the TPA not only survives but thrives.

And having tensions of competing or just kind of being washed out by lower-cost or lower-priced alternatives, right?

God, no. It's more than just price competition. Listen, I think you guys can do a great service for me. You see, AI is like this mysterious thing for non-tech people—they can’t even program their VCRs, and that’s scary stuff to them.

I get that.

It’s such a nebula; just a term that’s out there, up in the cloud. They don’t understand it. So, the more you can bring it down and make it tangible to them, the better. For example, if they get a demo of what AI can actually do, what Stax•ai can do, how it works into their operations, it helps a lot. They don't need to know how the sausage is made. They just need to eat the sausage and see the benefits.