The cliché that problems are just opportunities in disguise is rarely true. But sometimes they can be. And sometimes they can solve really big problems. For example, there are tens of millions of defined contribution participants in need of financial guidance and there's a dearth of young professionals becoming financial advisers.
Here's how these two problems can create one big solution.
Arguably, the greatest value of DC plans like 401(k)s are the almost 80 million participants looking for financial solutions at work, who either cannot afford a traditional adviser or don't want one. It's the reason why so many fintechs are targeting DC plans through the myriad financial wellness or management solutions. There's an emerging market of younger investors willing to manage their finances digitally and there are an estimated 80 million baby boomers retiring over the next 20 years, many invested in DC plans.
But where fin meets tech, compliance can often stop everything — not to mention the challenge of navigating the convoluted financial service adviser distribution system made more complicated when DC record keepers are included. And while younger people may be more open to digital solutions, pure tech financial wellness solutions have been largely ineffective as most investors still want to call a human who provides coaching.
On the other hand, the graying of the adviser industry is historic, as younger people are not attracted to jobs where they either have to cold-call stale lists or sell insurance to relatives while making little in an eat-what-you-kill compensation model. Not only is the job and compensation unattractive, especially given historically low unemployment rates, there is no noble purpose. Younger people want a career that helps others, which is often lacking within wirehouses and insurance companies, the traditional training grounds for financial advisers.
Pure tech ineffective
The pure tech financial wellness solution for less affluent participants has been ineffective. And while plan advisers are getting better at providing advice, especially with the push toward wealth management and financial planning, many struggle to hire and train younger advisers to provide one-on-one advice.
On the other hand, wealth managers who have five to 10 DC plans accommodating or protecting a key client are starting to realize that these plans offer a cost-effective way to find wealth management and IRA clients.
So what's the solution?
Why not hire younger people to become financial coaches or mentors helping DC plan participants using a salary plus bonus compensation model? Merrill is using this model for their Edge advisers, which is likely a sign of the times. There's no need for these young financial coaches to cold-call, as their "prospects" are already in the plan. Also, since the plan is overseen by the employer fiduciary who has explicitly endorsed the adviser, that provides a built-in high level of trust.
As more retirement plan advisers move to flat fees for triple-F services (fees, funds and fiduciary) with participant fees dwarfing plan fees, these financial coaches can be paid from a $20-$50-per-life model, assuming a 20% uptake rate, plus the value of fees earned from the additional assets garnered from the participants. As an example, a 1,000-life plan can garner up to $50,000 in fees annually paid either directly by the plan sponsor or out of plan assets supporting a large percentage of the salary of one financial coach — fees on additional assets would supplement compensation. Leveraging technology, one financial coach could easily handle 100-life plans where in-person meetings could be minimized using phone and digital interfaces.
There are two issues with this model.
Baby boomers may not want to have someone half their age providing them financial guidance. One answer could be reaching out to the other end of the employee spectrum. The financial service industry has been letting go of a lot of older professionals either for cost-cutting or right-sizing who may have some degree of financial security but still want to work. Being a financial coach, working from home and occasionally meeting with people at the workplace helping baby boomers while leveraging decades of professional training would be attractive to many.
The second issue is hiring, training and managing financial coaches, not to mention obtaining the required enabling technology. Advisers and broker-dealers are reluctant to use provider call centers, but there are firms emerging like Prime Capital's Financial Fitness for Life that have hired an army of tech-enabled financial coaches whom advisers can leverage for their own plans, increasing revenue while offering enhanced services to clients.
So the problem of providing help to tens of millions of less affluent participants and that of the inability to attract younger financial advisers truly are opportunities when combined. An integrated solution provides plan sponsors with the ability to improve workers' enhanced financial security, reduce stress and increase productivity while offering greater benefits to their employees and, at the same time, helping advisory firms attract younger advisers offering new revenue opportunities.