During the first internet boom in the late 1990s and early 2000s, the buzz was that tech providers like Amazon would replace all traditional brick and mortars as well as disrupt many industries. Three tech oriented defined contribution record-keepers, Emplanet, ExpertPlan and GoldK, emerged, disparaging traditional models and their inefficiencies only to flame out or severely underperform.
A similar result occurred recently with so-called “insuretechs,” with seven companies raising $1.2 billion to sell life insurance directly through slick websites, data analytics and internet marketing. Five of the seven now work with life insurance agents and Prudential’s $2.3 billion purchase of Assurance IQ has mostly been written off, proving that life insurance is sold not bought.
Which sets up an interesting debate for the DC system, which is experiencing growing pains to serve the potential onslaught of small/startup plans due to state mandate and SECURE 2.0 as well as the 97% of DC participants without a traditional financial advisor as wealth, retirement and benefits converge at the workplace. Who can profitably serve the potentially millions of new plans with RPAs busy selling and servicing larger plans and wealth advisors not interested in the DC market? And who will serve the tens of millions of participants without enough assets to make traditional financial advice viable?
Which may naturally lead some to say that fintechs, which raised $210 billion in 2021 alone, will step in, which the life insurance market realized was not viable because policies are sold, not bought, just like DC plans. Embedding financial apps in other services is a growing trend but yet to be proven.
Is the “sold not bought” adage still true with some version of state plans either in effect or pending in all but four states and some municipalities?
It is important to distinguish the difference between selling a plan to an employer and servicing participants. Empower, with its $1 billion purchase of Personal Capital, is betting that underserved participants will use its robo advisor, which is different than Prudential hoping that Assurance IQ could bring new customers. Empower has the relationships, data and access to participants already.
The startup, small plan market is dominated by payroll companies—even fintechs like Guideline and Human Interest rely on them for sales. Most do not have an advisor attached.
RPAs that are part of benefit firms like Hub, OneDigital and Marsh McLennan may have to serve plans referred by benefit brokers that tend to work with smaller employers probably through PEPs or GOPs, while some broker/dealers like UBS are starting to crack the code on getting their wealth advisors to at least refer clients with a 401(k) plan even if they do not want to work the plan directly.
So while payrolls working with fintechs who will act as 3(21) or 3(38) advisors may replace traditional advisors until of course, the plan matures, the bigger question is whether robo advisors can serve DC participants.
And while many advisors are upset Empower is targeting potential clients in plans they brought to the provider, something Fidelity, Vanguard and Schwab have been doing for decades, most do not have the capabilities to serve the wealth needs of any participants never mind the low balance accounts.
Meet Beagle in its second year of existence has helped over 800,000 individuals consolidate DC plans strictly through B-to-C internet marketing. But that is a transaction not an ongoing service. Robos have had relatively little success overall but especially penetrating the morass of regulations, distribution systems and technology inherent to the DC system.
But just like insuretechs, robos teamed with providers and advisors that have relationships that have a better chance to succeed. And what better “app” for fintechs to be embedded in than worksite savings plans?
Fintech record-keepers are not having success yet going directly to plan sponsors even with state mandates that could turn the “sold not bought axiom” on its head. They are partnering with payrolls and others, like Vestwell, are leveraging advisors, broker/dealers and even traditional record-keepers looking to streamline processes and upgrade technology.
So, no, tech will not replace in-person advisors, but those that do not adopt and incorporate the coming wave of AI and fintech apps soon to be embedded in worksite savings and benefits platforms may find themselves wondering why competitors can charge so little for plan services or are able to work with smaller plans. Until it is too late.
Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.