Asset managers turn up the volume

Asset managers turn up the volume

There are two ways to make net profits – maintain a high margin and/or sell more volume at lower operating costs.

Asset managers find themselves in a low margin environment so the tactical and perhaps strategic path forward is to find volume at lower operating costs. The recent buy of Honest Dollar out of Austin, Texas by the Investment Management Division of Goldman Sachs is the continued direction of purchasing volume by buy side asset managers.

Overall asset managers are buying up robo advisors, not because they are overly threatened, but to expand the AMs existing client base. With automation AMs can add new clients at a relatively low operating cost and find an expanded demand side for their collective funds and ETFs. Look behind the scenes on any of the nascent robos and you’ll see all AMs product supply.

So the purchase of Honest Dollar is an early indicator that increased volume is in play. As Goldman stated, over 45 million Americans do not have access to employer-sponsored retirement plans. With targeting small businesses with less than 100 employees, utilizing automation and AM supplied ETFs and other funds a volume growing profit base is viable.

A major play of the automation of investment advice is increasing the total addressable market of investment consumers. The democratization of investing is being made a reality by the ready access to technology, but it must also be said that there is no correlation between democracy and actual wealth accumulation.

Worlds collide as Goldman Sachs buys Honest Dollar

Worlds collide as Goldman Sachs buys Honest Dollar
Earth destroyed in collision - 3D artwork illustration of planetary collision What do Goldman Sachs and a free spirited Texas startup have in common? An interest in automating the small plan retirement business, it turns out. As I’ve pointed out on this blog and in a previous report, employees of small businesses have borne the weight of the high fees charged by 401k plan providers. These fees are embedded within the plans and over the course of a career can amount to tens of thousands of dollars. Millions of American small business workers may earn an honest dollar, but they find it hard to save one. This is the problem Austin based CEO Will Hurley has set out to solve. His platform lets companies offer SEP IRAs (individual retirement accounts that also allow employers to make contributions should they wish) to employees for a modest $10 per month convenience charge. An Alternative to the 401k The user friendly, mobile first Honest Dollar platform fits the needs of creative types and other participants in the gig economy (think Uber), but it also suits employees in more traditional environs, e.g., family businesses. While not a 401k killer (the SEP IRA was designed to serve the self-employed), it is an alternative to the clunky and costly 401k platforms that small company employees have accessed in the past, when indeed they have had access. Most small firms have neither the manpower nor the expertise to operate their own retirement plans. Increasingly, the appeal of Honest Dollar to small employers has centered as much on shielding them from legal risk as on helping employees build savings. Because SEP IRA sponsors take no responsibility for investment selection or oversight, they cannot be held liable for outcomes. Freedom from fiduciary liability has become particularly compelling given recent judgments by the Supreme Court and other levels of the judiciary against plan sponsors, including large firms such as Lockheed and Cigna. Enter the Department of Labor The proposed imposition by the Department of Labor of a uniform fiduciary standard for retirement advice has raised dramatically the stakes for employers. In buying Honest Dollar, Goldman Sachs has decided to get out in front of the changes at hand. These include an increasing reluctance on the part of some advisors (particularly those working on a commission basis) to serve all but the largest retirement accounts, given the associated compliance and legal costs. The Goldman investment in Honest Dollar represents an acceleration of the Wall Street firm’s interest in penetrating the mass affluent market (for example, via its planned launch of a P2P lending platform). The deal should be understood as a low cost, low risk technology play aimed at boosting distribution (in this case, by supplementing the Vanguard ETFs on the platform with Goldman equivalents) and scale, including on a direct to consumer basis. The economics of the small plan retirement business are marginal in the best case. As I note in a recent Wall Street Journal article, it is tough to do deals with thousands of small companies scattered across the country. Insofar as this service can be automated, however, and given the alignment of (low cost and transparent) automated advice with an enhanced fiduciary standard, there appears to be plenty of upside. Look for more acquisitions of automated providers (in both the retirement and taxable investments space) by wealth and asset managers to come.  

Scare tactics in the run up to the DoL fiduciary standard roll out

Scare tactics in the run up to the DoL fiduciary standard roll out
DoL monsterOne of the apocalyptic scenarios floated by antagonists to the proposed DoL fiduciary standard is the emergence of an “advice deficit,” whereby reliable investments counsel becomes available only to the most affluent investors. This argument assumes that investors have nowhere to go for advice but to a real life advisor. For more than a decade, however, tech savvy investors have had access to online tools that basically walk them through the creation of a personalized portfolio. For example, eTrade’s Build-Your-Own-Portfolio uses a questionnaire to recommend an asset allocation, which a customer then executes on his own. Competitor Ameritrade launched a like-minded Amerivest portfolio asset allocation tool back in 2004. The robo advisor represents an advanced form of this technology, in that it extends the asset allocation process to the construction of the portfolio itself. This ease of execution makes what had been a solution for self-directed (and as mentioned, tech savvy) investors into a viable option for any investor able to log on to a website. Sure, not all investors will be comfortable taking investment advice online. But to say these investors have no options is a scare tactic. Its deployment underscores the degree to which commission based brokerage will fight to protect its own interests, even when they come at the expense of the investor. I’ll have more thoughts as we approach the roll out of the DoL standard this spring.

The answer is more automation, not less

The answer is more automation, not less
The online retirement advice giant Financial Engines just published a report called The Human Touch highlighting the role of the real-life advisor in delivering client counsel. Among other things, the report found that 54% of self-guided 401(k) investors have an interest in working with an advisor. While I won’t gainsay this figure, I’m loath to extrapolate stated interest into willingness to pay. Indeed, the report acknowledges cost concerns as the primary obstacle to investor engagement. That said, it’s hard to argue with success, and Financial Engines has accrued more than $100B in assets by combining automated portfolio construction with access to a (remote but real life) advisor. Other firms, like Personal Capital, also have done well by this model. Today it’s a rare voice that will argue the appeal of the hybrid “robo-human” platform. The model speaks to the needs of contemporary investors, who are tech friendly but want to get their advice in person. The rub for firms like Financial Engine and Personal Capital is that real life advisors cost money. The advice they deliver, moreover, is not easy to scale. That’s a problem for firms whose core service—automated portfolio construction—is under increasing price pressure. To avoid commoditization, Financial Engines and other hybrid firms will need to move out the advice value chain and automate decision making around complex areas like de-accumulation and wealth transfer. A human being can still filter or tweak the advice, but automation will be the way to drive scale.

Rocking the retirement game

Rocking the retirement game
Jon Stein of Betterment is right when he notes the “poor user experiences, high costs, and a clear lack of advice” that characterize the 401(k) plan business today. These failings are particularly noticeable in the small company plan arena, as I noted in a recent blog post. Stein also is spot on that these shortcomings weigh on plan sponsors insofar as they expose these employers to fiduciary liability and weaken their attractiveness to potential new hires. The Betterment platform is a solution to a real problem, in short. That’s good news for fans of the NY-based automated advisor, which is running neck and neck in the AUM game with West Coast rival Wealthfront. The rub is that the small plan retirement space, while underserved and highly fragmented, is hardly virgin terrain. Over the last five years, a host of digital-first plan providers such as Employee Fiduciary, Capital One Investing (formerly Sharebuilder 401k) and DreamForward Financial have launched low cost, user friendly 401(k) platforms targeting small businesses. According to spokesman Joe Ziemer, the Betterment platform is well, better. That’s largely because it can deliver a full range of integrated plan services (e.g. recordkeeping) that have been developed in-house, resulting in a more seamless user experience. Unlike bolt-on retirement advice services such as managed accounts provider Financial Engines, the Betterment platform offers personalized advice (at the asset allocation level) within the plan framework. Neither the technological capabilities nor the ERISA knowledge required to build and maintain such an end-to-end platform come free, of course, and Betterment has been on a hiring binge. Leading the charge to 401(k) Valhalla has been recent addition and established ERISA consultant Amy Ouelette. The human and technical resources involved in building what Betterment terms a “full stack” platform means it is unlikely that other automated advisors will follow suit. Of the pure play robos, only Wealthfront could conceivably afford to make this kind of investment, and they’ve shown zero interest in deviating from the direct to consumer approach they’ve followed since day one. For Betterment, of course, the launch of a platform targeting small business only underscores the degree to which the firm has pivoted from B2C to the B2B game.

Singing the 401(k) blues

Singing the 401(k) blues
As if Amazon.com didn’t have enough PR problems already, Bloomberg.com just published an article slamming the Seattle-based company’s 401(k) plan. It noted that many of Amazon’s lower-paid employees were not participating in the plan, to the extent that the company had to pay back the government upwards of $5 million for the plan to retain its privileged tax status. The article does not explain why lower-paid employees are not participating. It’s fair to assume that many (particularly if they are seasonal employees) lack the income to sock away money for their Golden Years. Others may not be receiving helpful plan information. Or perhaps the reason is more prosaic: Bloomberg ranked Amazon’s 401(k) plan last among the top 50 public companies. Wow. One wouldn’t expect a billion dollar global behemoth to be called on the carpet for its lousy 401(k) plan. Traditionally, it is employees at the smallest firms (those with less than 100 employees) that have gotten the short end of the retirement stick. These plan participants tend to pay twice as much in fees as much as their counterparts at larger firms; they lack access to robust investment products; and they receive less investor education and support. Needless to say, these shortfalls tend to translate into negative outcomes. This is something of a national scandal, particularly given the adulation to which Americans accord small business. Indeed, the Federal government, fearing a doomsday scenario in which older Americans start outliving their savings, has become increasingly active in trying to right the retirement ship. At the same time, a new crop of 401(k) plan providers is offering smaller companies access to low cost, digitally focused platforms, as I discuss in a recent report. The reach of these upstart providers in a highly fragmented market is limited, however, and the response of the largest plan providers to the needs of small business has underwhelmed. I have to wonder, given the emotions around retirement and the centrality of the 401(k) plan to the lifetime earnings picture, how long it will be before Bernie Sanders takes on this topic.

The Small Company Retirement Plan Opportunity

The Small Company Retirement Plan Opportunity
In my latest report, Big Rewards Come in Tiny Packages: Why Small Retirement Plans Offer a Huge Opportunity for Plan Providers, Sponsors, and Advisors, I explore a rich but underserved corner of the defined contributions business, the market for small company retirement plans. Defined here as plans with less than 500 participants, the small plan market is a unique laboratory for exploring the contradictions and inefficiencies that characterize the 401(k) business in general. Small company 401(k) plans, where they exist at all, are expensive, burdensome to operate, and skewed toward cost-inefficient investments, even more so than their large plan counterparts. Disruption is in the air, however, and the opportunity for new plan providers offering low-cost, technology-driven platforms is great. While in the broader retail investments business, innovation has been tech-driven, in the DC space, regulation (and its cousin, litigation) has been the engine of change. The industry is on the march to a uniform fiduciary standard, and it is no coincidence that so many of the plan providers mentioned in this report, firms such as ForUsAll and Employee Fiduciary, have emerged within the last two years.  

De-accumulation: why automated advice delivery makes sense

De-accumulation: why automated advice delivery makes sense
In my last post, I rap the DoL and other regulatory bodies for focusing on accumulation at the expense of the payout function. The result of this imbalance has been to help blind retirement savers to the risks of running out of money. But it’s not just regulators at fault. Part of the “payout problem” revolves around how the advisor gets paid. Namely, what advisor wants to help draw down client assets when his fee is based on AUM? Some advisors are getting around this conflict or disincentive by working on retainer. But automated delivery of advice (whether via “robo advice” or a hybrid model) represents a cleaner (and ultimately more equitable) solution, in that it allows for low cost, transparent and scalable client servicing. What’s more, the efficiencies inherent to the automated advice model are amplified by actuarial considerations. Today, the post retirement period can last 40 years, in many cases longer than a career. With a three or four decade service runway, the advisor can earn good money (even at reduced fee levels) while building relationships with successive generations. It’s an arrangement that works for all sides.

In the fiduciary fight, key players are biting off as much as they can chew

In the fiduciary fight, key players are biting off as much as they can chew
In my last post, I note the acceleration of Department of Labor (DoL) efforts to bring greater transparency to the DC business. The latest guidance from DoL attempts to boost clarity around sponsor obligations pursuant to the sale of annuities. This guidance is important because to date, regulatory attention has fallen disproportionately on the accumulation side of the DC business. Helping participants to successfully manage the payout function is a noble and (as I discuss in my recent report on de-accumulation) challenging goal. Time is of the essence if the US is to forestall a doomsday scenario of retirees outliving their savings. At the same time, it is important to keep in mind that economics are not the only consideration driving the DoL push. Rather, the newfound urgency underscores the Department’s desire to put its imprimatur on an issue that is being tackled by multiple actors (e.g. Treasury; the SEC, which announced last month its compliance-focused ReTIRE Initiative; and lobbying groups such as SIFMA and NAIFA) and from multiple standpoints. In particular, a torrent of litigation (the capstone of which was the Tibble vs. Edison verdict) appears to be shifting decision power to the courts. Legal actions are also shining a spotlight on fees. This presents a cart-before-the-horse problem for DoL, in that excessive fees are an issue that a uniform fiduciary standard is supposed to address. Having assumed the mantle of defined contribution crusader, the DoL risks falling behind events.  The pressure on DoL will only become more acute as we enter the twilight of the Obama administration. The upshot? Look for a wave of bulletins and other forms of guidance from the DoL, particularly in the wake of the upcoming August hearings. While the fiduciary debate to date has gotten less attention than it deserves, it will rise to the top of the political agenda this fall, despite resistance from industry lobbyists. Indeed, given the weight of the government and private sector entities (among them the AARP) behind reform efforts , the end result may actually have teeth.

At the height of summer, the defined contributions wars heat up

At the height of summer, the defined contributions wars heat up
Amidst the summer lull, the Department of Labor (DoL) has issued Field Assistance Bulletin 2015-02, a clarifying document that aims to open the door to the broader use of annuities within defined contribution (DC) plans.   While annuities have been allowed within DC plans for some years, a lack of guidance as to fiduciary obligations post sale has tempered sponsor enthusiasm. The bulletin explains that while sponsors are considered under fiduciary obligation at the time of annuity selection and at each periodic review, they will not be held to this standard in the case of specific purchases by a participant or beneficiary.   This distinction is important in that it grants significant protection to sponsors, but the DoL leaves significant wiggle room as to the frequency of required reviews. Clearly, published reports of the pending insolvency on an issuing insurer would trigger the need for a review. Otherwise, the degree of diligence that must be exercised by the sponsor post-selection will need to be evaluated on a case by case basis:  first by the plan sponsor, presumably, and then by the DoL.   This may be a best effort solution to an irreconcilable problem, but such a measured response by the DoL is unlikely to eliminate what it describes as “disincentives for plan sponsors to offer their employees an annuity as a lifetime income distribution.” Plan sponsors have little incentive, in any case, to assume the risks of offering annuities when these are readily available for purchase outside the pre-tax space, and so the DoL will need to aim higher.   What is noteworthy here is not so much the narrow scope of the little noticed bulletin, or its limited reach, but the degree to which it signals an acceleration of DoL efforts to clean up the DC business.  To a large degree, this acceleration reflects a heightened jockeying for position among regulators and other industry actors with an interest in guiding reform. The recent Supreme Court case of Tibble vs. Edison International, which affirmed the nature of the fiduciary responsibility of plan sponsors to participants on an ongoing basis, appears to have brought issues of power and control to a head.   I’ll talk about this in my next post.