As Betterment for Business passes 300 401(k) clients, it raises the question for advisors of whether these robos are friends, foes or even for real.
Those of us in the industry in the late 1990s will remember the trio of online record keepers that threatened to overtake the business models of established providers, just like Amazon destroyed traditional book sellers. Well, that didn’t happen – not even close. Two of them went bust and the other morphed into a micro DC provider focused on solo 401(k)s sold to Ascensus.
So will the current crop of robo record keepers who are starting to get attention, with new ones popping up every almost month, be real disruptors?
It’s interesting to note that some of the founders of these robos are successful entrepreneurs who had a difficult and even troubling experience when they had tried to start a 401(k) plan for their previous companies, leading to the idea that there must be a better way. Isn’t that what often leads to great new companies and marketplace “disruption”?
Only one that I know of has a background in financial services focused around advisors and retail distribution. Not coincidentally, that company, Vestwell, is the only one that has hardwired the role of advisors. The others struggle to incorporate traditional advisors, focused on low-cost investments and online advice, trying to separate themselves from what they see as conflicted business models.
So is there a market for robo record keepers? If there is, how should advisors react? In theory, robos sound really attractive, especially with today’s renewed focus on fees and fiduciary. But who will sell the plans? Smaller companies don’t care enough to shop and take a risk on a new retirement plan model. They also need a lot more support – maybe more than a website and anonymous call center. Larger companies may not see the return in taking a risk with a new model. Are robos destined to be relegated to companies run by Millennial entrepreneurs discouraged about current options?
There may be an opportunity for plan advisors that have moved up market, where the margins are getting thinner at an alarming rate, to private-label robo record keepers for smaller plans. But when you look behind the curtain at the technology that drives record keeping for most robos, behind the slick front end there’s usually a small regional record keeping TPA. Is that sustainable as they get more and more plans? And is there anything that robo record keepers offer that traditional providers won’t be able to replicate — just like they did in the early 2000s, when the Internet seemed to threaten their business model?
It’s too early to dismiss robo record keepers — but, with all due respect to Betterment’s 300 plans, it’s also too early to declare them to be a success or real threat. The question is whether robos offer advisors an opportunity.
Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.