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Drawing the battle lines on data aggregation

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WASHINGTON — One looming challenge facing wealth management is also one of the biggest opportunities for innovators: Data aggregation.

The ability for consumers to access and share their financial information could transform financial advice and allow advisors to survey all of a client’s information in a single place, Boris Khentov, president of Betterment Securities, said to a packed room of around 100 advisors at FINRA’s annual conference. The information could be used to create a holistic view of a client’s assets, leading to a more suitable and diversified outlook.

As it stands now though, client account information is hard to track and gathering old accounts into one place can be cumbersome, Khentov says. “There is so much friction to bring over these assets and get them managed intelligently in a single account,” he says.

The Dodd-Frank Act stipulates that clients have the right to their financial information. The CFPB even drew up proposals about how the aggregation could work, Khentov says.

But more recently, FINRA weighed in on data aggregation and came to a different conclusion. In a strongly worded letter, the regulator warned investment companies and investors about the dangers of sharing client information. Sharing account data with aggregators so consumers can access third-party services can lead to serious security and privacy risks, FINRA says.

“These include potential vulnerability to cyber fraud, unauthorized transactions and identity theft,” FINRA says in the letter. “A key risk is that the aggregators could be storing all consumer financial information or security credentials in one place, creating a new and heightened security risk for consumers.”

So what role should data aggregation play in wealth management, and what is the state of other fintech disruptors on the horizon? Financial Planning spoke with Khentov on the sidelines of the annual FINRA conference.

FINANCIAL PLANNING: Why does data aggregation matter?

KHENTOV: Peoples’ accounts and financial lives are distributed all over the place. A lot of people come to Betterment with IRAs and 401(k)s, and there is so much friction to bring over these assets and get them managed intelligently in a single account. There is also a behavioral bias that people have assets at different institutions means you are diversified, when in fact, that might be undermining your portfolio. What is needed is a good, robust data aggregation ecosystem, and that is where some interesting battle lines are being drawn.

FINANCIAL PLANNING: What’s the problem?

KHENTOV: The really large incumbents see data with some suspicion from their perspectives because they have a lot more to lose than they have to gain when customers really understand what they’re being charged on all these different accounts. They are making a lot more with people paying extremely high fees, or for mutual funds that are basically closet index funds. They are charging 1.5% for something that is really doing the same thing that a Vanguard 0.05% fund is doing. So how do you shine a light on fees? Incentivize third-party fiduciary investment advisors to tap into these accounts and surface all of these poor investment choices. Incentivize the market to disclose these bad things for you.

FINANCIAL PLANNING: Do we need regulators to step in?

KHENTOV: Ironically, the regulation already exists. There is a section of the Dodd-Frank Act which effectively gives a right to consumers to their own data. So we have an act of Congress which stipulates that consumers have right to their own data. The CPFB drafted some principles on the subjects.

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FINANCIAL PLANNING: If you launched a startup, where would you be?

KHENTOV: The next piece that really needs to snap in to the existing portfolio management automated space is good financial planning and cash flow management and that does start with data management. Where all the kids launching startups these days? There are a lot of things happening in cryptocurrencies. Digital financial planning may not be the most insane $10 billion opportunity in two years like some crazy cryptocurrency, but it’s important to us.

FINANCIAL PLANNING: What’s next for Betterment?

KHENTOV: They say sometimes in the tech world that you need to fall in love with the problem, not the solution. The problem is essentially taking over where the defined benefit pension space has left us. We are all now responsible for our financial destinies. There used to be a time when you were just guaranteed a pension and you knew you could count on that, but not anymore.

That problem is nowhere near close to solved.

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