-Written by Brad Svrluga & Dave Sheen
There is a seemingly never-ending list of NYC FinTech leaders disrupting major portions of the financial services market: from early alternative lending leader OnDeck to personal finance innovators LearnVest and Betterment, to new data plays like Quovo and API platforms like RegTech innovator Alloy (a Primary portfolio company). Of particular interest to us are the opportunities generated by increasingly stringent regulatory changes. Few industries are at the mercy of as much regulation, demanding ever greater levels of transparency and diligence. Each new regulation leaves affected parties scrambling to keep apace with the latest compliance paradigms while not compromising their core business processes. Fortunately for the industry - and for interested investors - there is a wave of enterprising entrepreneurs working to smooth out regulatory bumps with new platforms that generate efficiencies in long-ossified markets.
For example, changes to bank capital requirements in the wake of the 2008 financial crisis forced many banks to tighten the risk profiles of their underwriting, which subsequently left large markets underserved by existing players. One of these underserved areas was small business lending, which led to the growth of an entirely new category of online marketplace lenders, including Kabbage and OnDeck, who strive to offer secure, fast and easy platforms for small businesses to obtain a loan.
Changes afoot in the retirement market
We believe the retirement market is about to experience a similar seismic shift with the recent Department of Labor “conflict of interest” rule. Starting in January 2018, all investment advisors who charge fees to clients will be considered fiduciaries, making them legally required to act in the best interest of that account. It may sound like an obvious statement - surely these advisors should already have been acting in their clients’ best interest - but the ruling acknowledges broad abuse of this responsibility, and places the onus on advisors to prove that they are acting in clients’ best interest when it comes to making recommendations on 401(k) plans or IRAs. Gone are the days of blindly steering clients toward high-commission mutual funds and annuities. Employers, too, may be subject to similar fiduciary liability for the plans they offer employees.
Regulation that promises to upend the status quo in an inefficient and technologically challenged industry, combined with a $25 trillion market opportunity, make for fertile ground for innovation. In this case, that innovation is our latest investment, Vestwell: the industry’s only full-fiduciary, white-label defined contribution platform that enables financial advisors to better serve employees and employers. The platform aims to meld the transparency, accountability and modern user experience that users demand, while assuming the burden of compliance from advisors and employers.
High-tech investment platforms disrupt the status quo
Vestwell is far from the first solution to provide a modern user interface for investors. In the wealth management category, platforms like Betterment and Wealthfront provide smart, automated investing offerings that help individuals manage their investments with minimal fee burden. While these “robo-advisors” are attractive for financially savvy investors or for those desiring a completely hands-off approach, we believe that the presence of a trusted, human advisor in the extraordinarily sensitive investment management equation will long remain a priority for large segments of the population. This is particularly evident in the retirement market, where employers are often faced with navigating a plethora of confusing investment options on behalf of employees, who are then left to stumble through a similarly confusing maze of options themselves. It’s not surprising, then, that the vast majority of 401(k) plans are still sold by advisors, despite the recent emergence of a number of 401(k)-focused robo-advisors. Nor is it surprising that a whopping 68% of Americans are not currently saving in an employer-sponsored 401(k) plan.
And therein lies the opportunity that Vestwell founder Aaron Schumm seized upon. Having spent years selling technology into the registered investment advisor (RIA) market via his prior company, FolioDynamix, Aaron has a deep understanding of advisors’ pain points and the technology that suits them best. Well-versed in the regulatory market and accustomed to the complexities of selling into the investment space, Aaron identified an opportune gap in the RIA channel with the new DOL rule. He is guided by a belief that employers and employees will continue to see value in engaging directly with a human being who can provide helpful, informed advice. He built Vestwell to facilitate that human touch, and couched it within a modern, user-friendly platform to broaden transparency and access to data. Whereas robo-advisors set out to disrupt the existing retirement market, Vestwell is an enablement platform that allows independent financial advisors to offer the 21st-century platform customers want, while continuing to provide them with the personal guidance they need.
Time is on Vestwell’s side
But most importantly - and this is why Vestwell is so critical at this precise moment - is that the platform directly addresses the DOL ruling in a way that is highly beneficial to both advisors and employers. It assumes the fiduciary responsibilities that both face as a result of the regulation, ultimately reducing both financial cost and legal liability. The platform also helps to manage available retirement offerings for both advisors and employers, in effect becoming fiduciary administrator. This enables RIAs to collect the same advisor fees, while eliminating the liabilities that would otherwise have kept many of them out of the market.
Reduced fiduciary risk aside, Vestwell provides distinct financial benefits for both advisors and employers. It can open a new line of business for RIAs, many of whom have shied away from selling 401(k) plans due to the liability, expense and inability to scale if it’s not a large retirement plan. Because it’s sold directly to advisors (unlike other platforms that go directly to the end user), Vestwell enables RIAs to effectively compete with the robo-advisors who are after their core wealth management business. On the employer side, Vestwell offers lower fees on investment plans than they would typically receive from traditional investment funds, reduces administrative costs and automatically syncs with other HR systems to provide employees with real-time data on their funds.
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While new ideas and technologies continue to flood the FinTech space, we’re increasingly enthusiastic about those brilliant, out-of-the-box thinkers who are capitalizing on new regulatory changes and creating solutions that ultimately benefit the end consumers of the financial services market. Vestwell has found a unique toehold for itself with the DOL ruling, and it’s responded swiftly with a platform that marries user experience with effective regulatory navigation. We couldn’t be more excited to support Aaron in this venture, alongside FinTech Collective, F-Prime and Commerce Ventures - deeply skilled and networked FinTech investors who share our belief that Vestwell has the potential to make a huge impact in this as-yet untapped segment.