Roll over, don’t play dead

Roll over, don’t play dead
In my most recent report, Wings of a Butterfly: Regulation, Rollovers and a Wave of Optimization Software, I discuss the challenges the DoL conflict of interest rule poses to the $7 trillion IRA rollover business. These challenges center on the need for advisors to break down 401k plan costs and make apples-to-apples comparisons of proposed rollover solutions.   Why focus on the rollover? First, the rollover decision serves as a touchstone in the relationship between client and advisor. Trust sits at the center of recommendation to roll over, and seldom are the vulnerabilities of the client so exposed. The importance of the  rollover decision is further magnified by timing. It often takes place at the apex of client wealth, where the consequences of missteps for the investor can be severe. For the advisor, the rollover offers a unique opportunity to capture assets, or at least advise on their disposition, as well as present a coherent strategy for drawdown.   The implications of the decision to roll over extend beyond the client advisor relationship to firm strategy, of course. They are particularly relevant to product development and distribution. I’ll discuss these implications in a later post.

Wells Fargo rides herd on DoL

Wells Fargo rides herd on DoL

It’s no coincidence that Merrill Lynch launched its new robo platform the same week it decided to exclude commission based product from IRAs. Likewise, the decision by Wells Fargo to announce a robo partnership with SigFig suggests that despite the pronouncements of pundits and industry lobbyists, DOL is hardly DOA.

It takes a brave man to guess how the Trump administration will balance populist tendencies with free market rhetoric. In this case, as I note in a previous post, the inauguration of the new president precedes DoL implementation by less than three months. The regulatory ship has left port, and in any event, it's not clear that President Trump will want to spend valuable political capital undoing DoL.

I’ll discuss Wells Fargo’s motivations in a later post. For now, I’ll note the degree to which a robo offer aligns well with the principles of transparency, low cost and accessibility at the heart of DoL. At the same time, I caution the reader to consider the challenges that any bank faces in rolling out a robo platform, a few of which I underscore in this column by Financial Planning’s Suleman Din.

DOL or DOA? The Election and the Conflict of Interest Rule

DOL or DOA?  The Election and the Conflict of Interest Rule

It’s one of those watershed moments. Clinton wins, and the Department of Labor (DoL) conflict of interest rule takes hold and likely gets extended beyond retirement products to all types of investments. Trump wins, and DoL gets slowed down and perhaps even rolled back.

Assuming Clinton wins (which appears likely) firms will need to gear up on three fronts:

  • Platform: DoL makes paramount the ability to deliver consistent advice across digital and face to face channels. Such consistency requires a clear view of client assets held in house, which in turn implies eliminating legacy product stacks and their underlying technology silos, as I note in a recent report.
  • Product: Offering only proprietary products only is a non-starter under DoL. But too much product choice can be as bad as too little. Firms must demonstrate why programs and portfolios offered are the best for each particular client.
  • Proposition: In a best interest world, the client proposition must extend beyond price. Client education, transparent performance reporting and fee structures, as well as an easy to use digital experience, will distinguish stand outs from the broadly compliant pack.

None of the pain points above lend themselves to easy solutions. As such, the banks and brokerages most affected by DoL are struggling to develop processes that go beyond exemption compliance. I’ll discuss more comprehensive approaches in the All Hands on Deck: Technology's Role in the Scramble to Comply with the DOL Fiduciary Rule  webinar I’m co-hosting this November 14.

I hope you will join me for the webinar, and in the meantime, you will share your thoughts and comments on this post.

How can wealth management firms use LinkedIn to attract retirement assets?

How can wealth management firms use LinkedIn to attract retirement assets?

I recently switched jobs and called my financial institution to inquire about moving over the 401(k) I had with my old employer.  This experience led me to consider, “Could wealth managers comb LinkedIn or other sites for indications that a client has recently switched jobs?”  While it is definitely not efficient to study LinkedIn for an hour each day, a computer program or app could be developed to track this information.

A wealth management firm could build a computer program to track current clients’ career moves. The wealth management company would need a LinkedIn page, which most companies already have, and permission from clients to access their data.  A computer program could be designed to store clients’ current job information and alert the wealth management firm of job changes.  While some customers may be reluctant to give permission (opt-out), other customers may appreciate the fact that their financial institution will proactively reach out to them to touch-base after a career move (opt-in).  Many clients are too busy to contact their financial advisor in a timely manner. 

When dealing with client’s financials, it is best if advisors tread cautiously so as not to be viewed as “creepy”.  When reaching out to clients, the advisor should initiate conversation with a more generic offer or say they are simply “checking in”, rather than call with an obvious goal of moving over retirement assets.

Another option to attract clients and prospects would be to create an app with utility or appeal (think Yahoo finance or a competitive portfolio management simulation app) and then require LinkedIn data to join.  Then wealth management firms could get career data on prospective clients too.  The company would have information on anyone who used the app.  In that case, maybe the wealth management firm should focus on a gaming app targeted toward people likely to be in high salary industries?

From a compliance perspective, the above solutions entail monitoring the activity inside an app or the activity of the wealth management firm’s LinkedIn page, which are both easier to track than if individual advisors were to attempt prospecting on LinkedIn. And, while some financial advisors at a wealth management firm may have close connections with some of their clients, it is probable that not every client of every FA informs or consults their FA about retiring or switching jobs. In that case, wealth management firms could explore one of the two options to ensure they do not miss the opportunity to attract the retirement assets of a client that spent a decade receiving a consistently high salary at their prior employer. Both solutions are a way for wealth management firms to get a larger share of the 4.7trillion 401(k) market.

Keeping up with the Canadians

Keeping up with the Canadians

In my last blog post I described the challenge posed by robo-advisors to the bank dominated wealth management industry in Canada. Here I share observations from my recent report, Thawing Market, The Growth of Robo Advice in Canada, while exploring the implications for other markets as well.

The robo advisory business in Canada lags several years behind its US counterpart, but in terms of learnings and understanding, it is catching up fast. This trajectory reflects the natural development of the robo learning curve as well as economic, regulatory and demographic factors common to Canada and other developed markets. These include a low interest rate environment; a graying population and regulator umbrage towards practices that long have defined the wealth management business.

The Regulators Are Talking to Each Other

Let’s start with the regulators, who are clearly are speaking to each other across borders. In the English speaking world alone, the UK and Australia have banned commissions, while Canada and the US have essentially gelded them.

Directives aimed at conflicts of interest and revenue sharing represent a worldwide tailwind for passive instruments (such as ETFs) and the robo advisors that offer them. In Canada, the high fees charged by active mutual funds have battered those older and affluent investors least able to afford them.

The interest rate starved Canadian banking sector, which accounts for a large part of mutual fund sales, can no longer count on the willingness of consumers to pay 200 plus basis points for a fund. Like the citizens of the defunct East Germany, they’ve looked over the proverbial Wall and seen a better way.   

Small but Mighty

In dollar terms, the robo advisory business in Canada is miniscule. But the modest scale of the business belies a complexity of outlooks and approach.

Canadian regulation presumes portfolio oversight by a real life human being. In practice, this means communication from a dedicated advisor to confirm the suitability of the client portfolio, and to ensure the client understands the risks. While communication can be as basic as an email, it appears that advisors will soon be required to pick up the phone and call their clients, or at least those populations (such as the 65+) in need of more tactile support.

All It Takes Is a Phone Call

This requirement represents an alternative to the binary lens through which US automated advisors have played the market. Their worldview has been black and white (i.e., the advisor-assisted “hybrid” model versus “digital only”) and their messaging shrill if not patronizing (“investors need the guidance of an advisor”). Pure play robos have also become more dogmatic. Remember when Wealthfront used to talk about its brainy investment committee led by Burton Malkiel? This message has since been subordinated to talk of APIs and algos.                                                

Instead of using the concept of human engagement (or lack thereof) as a litmus test, or as a cudgel to bash other models, maybe US automated advisor could acknowledge the robo shades in between black and white? The Canadians, in their temperate and accommodating way, appear to be doing just that.

Big bucks for Betterment

Big bucks for Betterment
how to invest in a business: elements to create added values and profits for the investors

The $100 million investment by Swedish VC firm Kinnevik in NYC based Betterment doubled in one swoop the amount the automated advisor has raised to date. This latest capital raise translates into a valuation of more than $700 million and follows a $60 million round that the firm completed last year.

Since that time, Betterment has increased assets under management from just over $1 billion to nearly $4 billion in assets. Betterment would not provide a breakout of AUM, but direct to consumer sales account for the bulk of holdings to date, spokesman Joe Ziemer told me. This makes intuitive sense: while Betterment Institutional has emerged as a strong driver of growth, the firm’s retirement platform has not been around long enough to make a difference. That said, the pending imposition of a uniform fiduciary standard for retirement advisors by the Department of Labor should provide a significant tailwind for that leg of Betterment’s business. Indeed, investment by Kinnevik, coming in the wake of the proposed standard, signals a validation for the robo advisory model in its pure play form. This model has come under stress in the face of competition from incumbents like Charles Schwab and Vanguard, and more recently, asset managers BlackRock and Invesco. A closer look at the Kinnevik portfolio reveals financial services to be a small part of the firm’s overall holdings. Clearly the firm sees a huge opportunity in this arena, with the automation of retail wealth management an inflection point. I have more thoughts on this deal that I’ll share in a follow up post. If you can’t wait, email me directly at wtrout@celent.com to discuss. I’d love to hear your thoughts as well.

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.  

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.