As the defined-contribution practices of financial advisers grow, so do the challenges. But advisers and their staffs are not properly equipped or trained to deal with many of those challenges. They include running a business rather than only a practice, which entails managing people and operations. But a growing component of being a successful and effective retirement plan business involves managing and leveraging technology.
Most plan adviser firms are not tech-savvy and cannot hire the right staff. Yet incorporating technology to manage a retirement business and help plan sponsors and participant clients is not a luxury — it is a necessity. Those who ignore that necessity will be left behind, as will their clients.
There are three areas where technology affects plan advisers and their clients
Huge social experiment
The entire DC industry is a huge social experiment. The concept of retirement is relatively new, having started in earnest after World War II, when people began living long enough after leaving the workplace to care about it.
Retirement initially meant relying mostly on corporate pensions, if the retirees were fortunate enough to have one, and Social Security. DC plans like 401(k)s, which have grown dramatically at smaller firms since the 1990s, shift the liability to individual workers, who are ill-equipped to handle it. Most small to midsize employers have not stepped up, leaving providers and advisers to help.
But of the almost 90 million DC participants, 87 million cannot afford an adviser because they do not have enough assets. Yet DC plans offer a huge opportunity because not only are these 87 million investors aggregated, with data about them readily available, they are now expecting to get their financial needs taken care of at work.
Enter technology-enabled solutions offered by the employer, record keeper, adviser or fintech company. Financial wellness is all the rage and is seeing a great demand from employers, but most solutions have not proven to change behavior. And until someone is willing to pay for it, how can it be considered real?
It's more likely that artificial intelligence, which assigns people solutions based on their needs, will be the answer, just as the auto-plan is improving participation and deferral rates. But AI requires big, clean data, setting up a battle between record keepers and advisers over who owns the data, while potentially opening the door for new entrants like Amazon and Facebook that are able to get data directly from participants or through other sources.
Record keepers and TPAs have done a fairly good job of managing complex ERISA plans with lots of smaller accounts. Gone are the pretenders, with another wave of record-keeper and TPA consolidation about to force out fringe providers. The main issues are antiquated systems that are difficult to manage and update, and unable to spit out relevant, clean participant data.
Advisers need to know which providers will survive and which ones are truly capable of protecting client data from hackers, which is a growing issue for plan sponsors. They also need to know which providers are managing data so that it can be used by AI technology and which ones are willing to share. Finally, 360-degree payroll, in which data from record-keeping systems, such as changes in deferral rates, automatically upload to payroll, may seem mundane, but not all providers can offer it, which is a huge impediment for automatic features.
Research indicates that elite plan advisers are currently focused on improving customer relationship management systems and better leveraging outside tools, especially mobile technology. They also intend to find ways to use technology to measure participant outcomes, which entails, in part, getting access to participant data from record keepers.
Advisers are already leveraging technology for the basics, like investment due diligence, record-keeper fee benchmarking and requests for proposals, as well as for benchmarking their own fees. They appear to be successfully getting plan-level data from record keepers.
Incorporating robo-advisers or creating a client-centric dashboard are not high on their radar. Nor are they likely to use technology to automate compliance or prepare for an audit, or to adopt financial wellness apps or calendaring software.
Advisers realize that they must hire people with complementary skills, such as those who have social media and content marketing experience or who are tech-savvy. Yet until firms get to critical mass, it might not be possible to hire full-time people, which means that they must find credible and dependable third parties to help, which can be hard to find and even harder to manage.
But ignoring technology is not an option for firms that want to stay competitive and keep up with client expectations.
Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University.