Even as the retirement savings market comes increasingly in the sights of ambitious digital providers this year, not all want to disrupt the asset management industry. One firm's collaborative approach has in fact helped it to gain clients and financial support from the industry's largest firms.
Chicago-based NextCapital announced a $16 million funding deal in mid-December that includes support from Manulife and AllianceBernstein. It had already found investors in 2014 from Russell Investments and Transamerica Ventures Fund.
What's attracted these industry players to NextCapital, says its co-founder Rob Foregger, is the firm's goal to provide an enterprise platform that operates inside and outside the 401(k) market.
A key selling point, Foregger says, is NextCapital's fully configurable platform, allowing for tailored solutions across multiple channels.
"We have to be able to work with their existing brand and existing distribution, rather than having them fit us," he says.
The firm's industry financial backers have been effusive in their praise.
"Increasingly, asset management firms such as Transamerica want to be in a strong position to manage the assets of customers who have accumulated retirement savings through products offered by their other lines of business," stated Georg Schwegler, CEO of Transamerica Ventures Fund. "NextCapital's investor dashboard - coupled with its in-plan managed accounts - will enhance Transamerica's ability to roll customers' 401(k) plan assets into a reliable income stream throughout an increasingly longer retirement."
"Our investment in NextCapital aligns with Manulife's strategy of investing in innovative technologies that enable us to effectively meet a broader range of customer needs, and ensure that we are a leader of the financial services industry of the future," said Tim Ramza, chief innovation officer for Manulife and John Hancock Financial Services.
NextCapital is one of several digital providers that have entered the 401(k) space in recent years. Others include Betterment for Business (launching this month), Blooom and Captain401. They all claim they can move workers into better investments and they say they can do it more cheaply than managed account services offered by traditional record-keepers.
Firms are moving quickly. Financial Engines, considered the pioneer among digital providers, inked a November agreement to acquire the Mutual Fund Store from Warburg Pincus for $560 million, giving the digital RIA 129 storefronts across the country and a complement of human advisors with whom investors can meet face-to-face.
DOL PROPOSAL PUSH
NextCapital has already established relationships with several firms, Foregger says, who are responding to the inevitable demands that the DoL fiduciary proposal will place on the retirement savings industry.
More plans are changing their 401(k) fee structure, moving away from asset-based fees and revenue-sharing to a flat per-head fee, driven by regulatory pressures and a fiduciary duty to ensure that plan fees are reasonable.
"We see retirement as a big place, and there is going to be incredible disruption and industry change before our eyes, with the fiduciary standard driving that," Foregger says. "The DoL is requiring the industry to provide non-conflicted best interest advice. The way to do that is through scalable tech-based advice."
The new funding will allow the Chicago-based firm to make a number of investments, Foregger says, including expanding its current staff of 38 by half.
"Our objective at the macro level is to lock up the enterprise digital market," he says. "We believe we're going to be a survivor."
Other digital players will follow the trail to the 401(k) space to sustain themselves, says Alois Pirker, research director for Aite Group's Wealth Management practice.
Noting the recent announcement that the market's third-largest independent digital advice provider, Personal Capital, was seeking funding or a potential buyer, Pirker says the need to differentiate is critical now for digital-first firms to survive.
"The pendulum is somewhat swinging from the startup space to the large firms starting to roll out their digital versions," Pirker says.
"Look who's in the driving seat - firms with custody, asset management service, big scale shops. When you have a business model built on scale, clearly the firms with tremendous scale will dominate the space.
"So coming from a startup perspective without scale, assuming you will reach scale on your own is a tall order."
Foregger says NextCapital is in agreement with such analysis.
"The market understands digital advice is going to be a big market. There's no question the smart money inside the industry knows the active management industry is going digital over the next decade," he says. "But even if you can be a great standalone company, the lion's share of digital assets are going to be won by incumbents."
Betterment, which launched in 2010, announced last September it would be pursuing the 401(k) market. The retail side of the business has $3 billion in assets under management and 115,000 customer accounts. (The firm has brought on Upside co-founder Tom Kimberly to be general manager of Betterment Institutional.)
Under Betterment's model, the company acts as the plan's record-keeper and investment adviser. The firm is an SEC registered investment adviser. Betterment's 401(k) service will default participants into a managed account of stocks and bonds through ETFs.
Captain401 is a 401(k) record-keeper and an RIA. Its fee structure is based on assets under management and averages 60 bps, which includes custodian fees, investment fund fees and record-keeping fees. Blooom, another robo advisory firm, analyzes a plan participant's 401(k) investment options and recommends a portfolio based on the investments that are already in the plan.