Robo advisors’ efforts have been aimed largely at the retail investor market, but given the estimated $7 trillion held in defined contribution plans, it’s not surprising that robo vendors are also looking to serve plans and plan consultants. My previous column on robos discussed Betterment for Business’ offering; other vendors are also targeting the market with different twists to their automated services.
Eye on the Goal
Unified Trust Co. in Lexington, Kentucky, has offered plan participants digital advice since 2009, according to founder and CEO Gregory Kasten, M.D., CFP. Several goals drove the service’s development. The first was a search for a scalable platform that would allow advisors to effectively and efficiently serve large numbers of plan participants. Kasten cites the example of a plan consultant serving five plans with 100 participants each. “When you work it down per person, the advisor basically has about 15 or 20 minutes a year to spend with each participant,” he says. “So, it’s almost an impossible job to try to figure out what their goal is, how much their retirement is going to cost, are they on track, what things need to be done differently.”
The second objective was to incorporate an income replacement approach versus the prevalent focus on participants’ portfolio allocations. The goal is to “replace 70 percent of their income as near as possible to their Social Security normal retirement age,” Kasten explains. Working back from that goal, the analysis considers retirement plan savings rates, anticipated savings rate escalations and investment allocation to determine whether the participant is on track for fully funding the goal. This approach directly addresses the likelihood of adequate retirement income sources, something other methods overlook. Kasten maintains, “[If you] just build the portfolio in the absence of a goal, in the absence of the proper savings rates, in the absence of the asset-liability funded ratio, quite frankly, it’s pretty useless.” Plan advisors and consultants currently account for 80 to 90 percent of Unified Trust’s new business, he estimates.
Aaron Schumm, CEO of New York City-based Vestwell, believes retirement plans are an underserved market from a fintech perspective. He describes his company’s mission as “breaking down the friction points” that can develop in advisors’ work with plan sponsors. Those friction points include legal liabilities, costs and the cumbersome nature of designing and monitoring a plan, he says.
Besides working with 401(K)s and 403(b)s, advisors using Vestwell’s platform can propose, implement and manage custom cash balance plans and custom profit-sharing. Plan proposals start with advisors inputting details they’ve received from the plan sponsor, including the plan adoption agreement, employee census and other information from the sponsor’s Form 5500. The goal is to “design a plan that ensures all protected plan provisions are covered on their behalf, and will incorporate the services that will either meet or exceed what’s being offered today,” Schumm explains. The proposal includes a side-by-side comparison of the current and proposed plans; advisors can send the proposal through Vestwell’s platform and use online conferencing to discuss it. Vestwell’s target market is small- to medium-sized plans, says Schumm, although that audience could expand to the $25 million-plus plan size market as the firm adds features and functions to its service.
Brief advisor-participant interactions can lead to portfolio mismatches because the participants don’t understand, or haven’t tried to understand, how to align their investment choices with their personal circumstances, says Aaron Klein, CEO of Sacramento, California-based Riskalyze Inc.
Klein says Riskalyze addresses the misalignment and meeting-time constraint with its proprietary Risk Number analysis. In this process, the advisor builds a set of portfolios that are spread across the risk spectrum from the plan’s available fund menu. The advisor then uses the participant’s Risk Number to identify the suitable portfolio, which is a more scalable method when dealing with multiple participants. “When the plan participant goes through their Risk Number process, they’re going to get matched with the model closest to their risk model,” Klein explains. This approach also benefits plan sponsors, Klein believes, because it allows them to demonstrate that participants’ investment choices aligned with their risk tolerance.
CLS Autopilot, from Omaha, Neb.-based CLS Investments, is an automated account opening tool for advisors that combines Riskalyze’s Risk Number with CLS’s asset management offering. The goal in using automation is to create efficiencies in servicing clients, says Sean Hollingshead, Director of Investment Advisor Division with CLS. “From a consultant’s standpoint, you’d have the ability to quantify the risk of each of the participants very efficiently,” he says. “So, instead of going back to a standard, hard copy risk questionnaire or whatever they’re using to quantify the risk, digitally and visually I think you’re going to be able to provide something much easier and efficient to that group of participants.”