Robo-Revolution
by Peter Kelley
Mr. Kelley is managing editor for Advisor Magazine. Connect with him by email: pkelley@lifehealth.comSean McDermott is a Senior Analyst with Corporate Insight, a consultancy and research firm focused on developing technological and digital solutions across the financial services domain.
His company advances research that examines how financial services companies connect with prospective and current customers via digital and traditional channels: websites, mobile platforms and social media properties; as well as mail and phone-based systems.
McDermott leads Corporate Insight’s research on financial technology (fintech) companies, monitoring dozens of investment- and personal finance-related startups. He was the primary author of the firm’s most recent study on this topic, Next-Generation Investing 2015: Digital Advice Matures.
He spoke with Advisor Magazine about the emergence of Robo-Advisors in the retirement-income channel, and examined the implications it might suggest about the viability of human-directed advice to investors and the best-posible-scenario for its incorporation into the culture of financial, retirement and estate planning. Moving forward, a meeting of the minds, so to speak, appears a likely scenario.
AdvMag: How do you explain the emergence of ‘Robo-Advice’ and how will it influence or change the retirement-income industry?
SM: No industry is safe from fintech. Retirement and insurance are next in line, and there are digital advice providers that are targeting the wealth management industry. In addition to offering sponsors cheaper plan options, they also provide participants access to digital advice services.
Additionally, a number of technology-based startups have also taken aim at the traditional methods of distributing and marketing life insurance products. Firms like Haven Life and ValoraLife have completely digitalized the term life insurance purchasing experience and target their products to traditionally underserved demographics.
So, what we’re witnessing is, in the span of only a few years, digital advice – or “robo” advice – has almost become a table-stakes offering in the brokerage industry. While much of the attention paid to digital advice focuses on the wealth management industry, fintech firms can be found throughout the financial services ecosystem, including services that aim to disrupt banking, payments and loans. Until recently, defined contribution retirement plan providers had largely evaded disruption, but that has changed in the last year.
AdvMag: How so?
SM: Firms like Betterment, Dream Forward Financial and Honest Dollar offer low-cost alternatives to traditional employer-sponsored retirement plan providers. In addition to offering sponsors cheaper plan options, they also provide participants access to digital advice services.
Along with the firms mentioned above, Corporate Insight identified and evaluated the services provided by several new firms targeting DC plan sponsors and participants in our newest syndicated report, Next-Generation Investing: The Incumbents Arrive. However, at the time of publication in November 2016, few firms had actually made concrete advances in their attempts to win over plan sponsors.
The biggest success story was perhaps Honest Dollar, which was acquired by Goldman Sachs in March 2016 and reached $147 million in AUM by October. Goldman Sachs’ interest in the firm caught the attention of many industry observers, but Honest Dollar’s AUM figure hardly represents disruption in the trillion-dollar retirement space.
AdvMag: How is the retirement-income industry countering the influence of Robo-Advice… or are they co-opting it?
SM: It is no surprise that the retirement industry – with entrenched players and complex arrangements between multiple vendors for services like fund lineups, administration and record-keeping – is proving difficult to disrupt. Recent announcements, however, hint that these alternative retirement plan providers may be gaining traction. Betterment and Dream Forward both made headlines recently that indicate they are gaining a foothold in the industry.
For example, Betterment announced that over 300 businesses have now enrolled in its Betterment for Business DC retirement plan service. This is a significant development considering the service has only been available for approximately 10 months.
To date, most of the plans Betterment has converted are for small companies, but the firm made a point to emphasize that it recently won a $25 million plan that previously worked with a traditional 401(k) provider. With the potential implementation of the DOL looming, we expect to see Betterment, which operates as a conflict-free fiduciary, continue to grow Betterment for Business in the coming year.
AdvMag: Where does Robo-Advice find its true competitive edge?
SM: Dream Forward has made recent headlines with AI. Founded by Corporate Insight alumnus Grant Easterbrook, Dream Forward provides a similar service as Betterment for Business, offering low-cost DC retirement plans, but with a twist. They have unveiled an artificial intelligence (AI) component to its retirement platform – a feature they believe represents the next evolution in the Robo-Advice phenomenon.
According to Easterbrook, Dream Forward built its AI not to beat the market or optimize portfolio allocation, but to augment human advisors’ responsibilities by “replicating the hand-holding and coaching that financial advisors give clients to keep them on track to achieve their retirement savings goals.”
AdvMag: So, it appears that Robos and Humans may be looking at, possibly, a peaceful coexistence?
SM: As far as Easterbrook and Dream Forward are concerned, a marriage of digital and human advice represents the future of the industry, one where technology can serve as the first line of defense and intervene when it observes participants making emotional investing decisions (e.g., decreasing contribution amounts in response to market fluctuations) or when they are confused with administrative questions.
This in turn will allow advisors to focus on more value-add services and help participants find solutions for their specific problems. To that end, Dream Forward also announced a major partnership with a traditional advisor firm, Barnum Financial Group, which serves roughly 250,000 clients. The partnership will provide Dream Forward’s clients access to Barnum’s 300 FAs, while Dream Forward’s service will enable the advisors to have more fruitful conversations with participants and engage in more targeted outreach.
So do these announcements spell the end for traditional DC retirement plan providers? Of course not. But just as we saw with the evolution of robo advice in the brokerage space, incumbent retirement plan providers would be wise to pay close attention to these new services. At the very least, traditional retirement plan providers could stand to learn from these startups’ new innovations as they seek to create a more engaging and financially rewarding experience for participants. ◊
