Despite the industry antagonism that can surface around robo advice announcements, there is in fact a quiet, steady approach to building a digital advice firm.
Within the shuffle of recent developments was enterprise digital platform firm NextCapital's announcement that it raised $30 million.
The Chicago-based firm has maintained focus on a particular niche — defined contributions — working to automate and digitize 401(k) plans and rollovers. It’s earned them deals with John Hancock, Russell Investments, Transamerica and State Street, and over $50 million in three rounds of funding to date.
It’s a strategy that digital advice firms need to adopt to be sustainable, says Alois Pirker, research director for Aite Group's wealth management practice.
“The robo space has gotten crowded, but NextCapital is in a unique spot,” Pirker says. “The retirement space is ripe for modernization. They have a good chance of capitalizing on that trend.”
Not that there aren’t digital-first firms looking to expand into the DC market; a new crop of platforms want to bring retirement-age Americans onto platforms that specialize in drawdown strategies. And there are existing platform providers, including Envestnet, Morningstar and Financial Engines. But keeping a focus on serving enterprises has been instrumental, says NextCapital cofounder Rob Foregger.
“Our center of gravity is in the retirement space, and our beachhead has been defined contributions,” Foregger says. “For so many large financial institutions, the core problem they come to us to solve is retirement. There are so many assets in retirement.”
Matt Streisfeld, principal at venture capital firm Oak HC/FT, which led NextCapital’s latest round, says there is a “seismic shift” in the retirement space.
“Every plan participant wants to receive personalized savings advice, and all of that needs to be integrated, appropriately aggregated and fed into advisor tools in a modern, digitally interactive way,” he says.
NextCapital “leveraged customers’ client bases rather than going after their clients,” he added. “We’re starting to see more of the incumbents wanting to be prepared for those trying to steal market share from their business models. Custodians increasingly need more tools and capabilities to compete with startups and Silicon Valley players targeting these markets.”
Another development feeding that trend is how modern wealth management clients want to seamlessly interact with their retirement assets online or on mobile apps, Pirker adds.
“The client doesn’t differentiate between DC assets and other retirement savings, it’s all assets to them,” he says. “They might be under different tax codes, but really for consumers it’s their assets, and ultimately one set of goals governs that set of assets.”
The big opportunity for platform providers like NextCapital, he says, are working with firms to develop a goals-based system where they can put all those assets together and stick with a client through their investing life, from accumulation, rolling over to winding down.
“Nearly everyone has a 401(k),” Pirker says. “That’s a large chunk of the assets space, and the participant is starting to get an experience not dissimilar to goals-based wealth management. It’s an interesting dynamic. We’re asking ourselves, how will that play out? What will resonate with clients most, and what will they gravitate toward as an anchor platform?”
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