“Recordkeeping is broken.”
Why that is and what to do about it was the subject of a recent webinar hosted Aaron Schumm, CEO of digital DC plan provider Vestwell.
Never one to shy from straight talk and direct comments, Schumm delivered a candid assessment of where the recordkeeping industry currently finds itself, where it’s headed and what it can—and should—do better.
“Over the last 10 to 15 years, there has been a lot of consolidation in the industry,” Schumm began. “You see these larger recordkeepers and TPAs out there, swallowing some of these smaller, local TPAs and recordkeepers. Some of the big players are merging with other big players; think of a Principal and a Wells Fargo.”
[WATCH THE FULL WEBINAR HERE]Ultimately, however, even though there’s consolidation and “people are trying to reach that level of scale, there’s an opportunity to look at the technology that sits underneath recordkeeping and really take it to an entirely new level,” Schumm added. “Things are evolving, we’re excited to see it and we’re trying to take it further.”
Commenting on his opening argument, that the model is broken and failing to effectively serve its customers, “It’s what gives us a job, right?” he said with a laugh.
Claiming no one other than industry players “cares about recordkeeping,” he noted that its core technology was created before the Internet existed.
“You’re always tied to a backbone that you can never stray from. You can pretty-up the outside and make it look better, but at its core, it won’t function the way you want it to. It can take days, sometimes weeks, to run processes that should take milliseconds.”
No one has tried to address the problem at its root cause (legacy technology), so that’s what Schumm and his team are trying to do.
He mentioned Ascensus, DST, and SunGard (owned by FIS with Omni and Relius), as the engines driving much of the business now. New “tech-forward” entrants include Guideline and Human Interest that are addressing the major pain points.
Importantly, however, from a service and experience standpoint, advisors and their clients deserve better.
“A five-person dry cleaner is very different than a five-person legal practice and then extrapolate that up to whatever size company you’re running,” Schumm explained. “Those businesses have very different needs. How do we create flexibility around the underlying architecture, make it configurable, and then really extenuate the core focus of the businesses we’re partnering with.”
Doing so means getting rid of traditional recordkeeping, building the new technology he referenced (with flexibility in mind), and making accounts “portable” for participants that can be combined with their other investments, similar to unified managed households and trust accounts.
Plan sponsor/participant benefits
For plan sponsors, it eliminates bottlenecks and increases accuracy, meaning plan setup, conversions, payroll processing, loans, distributions, investment changes, etc. are all done faster.
Or more specifically:
- Plan setup and conversions: Instantaneous setup between the recordkeeping and custody systems removes manual processes and blackout periods
- Payroll processing: Real-time connectivity between recordkeeping and custody reduces errors and reconciliations
- Loans and other participant transactions: Real-time connectivity reduces the time between the request and approval and disbursement of money
- Investment lineup changes: Changes can occur instantly behind the scenes, removing the need to enforce long wait times for advisors changing lineups
“Plan sponsors and participants in small businesses will have access to high-quality plans that can grow with their company,” Schumm said. “Also, portability sets individuals up for better asset allocation through ‘next best dollar’ systems, in terms of a taxable versus non-taxable account, etc.”
Plan advisor benefits
This new tech-based recordkeeping paradigm will allow advisors to reduce errors and increase efficiency, but it will also allow for greater access to participant information.
“Advisors need access to participant and plan information to serve their clients, and a lot of recordkeepers can’t or won’t give it to them,” he noted. “Recordkeepers can’t give advisors the info they need in a lot of cases because recordkeeping systems simply weren’t built to do that. In other cases, recordkeepers are withholding information from advisors, since they’re competing on the back end for wealth clients.”
Potential conflicts of interest will also be reduced.
“Working with a tech provider rather than an asset manager means an advisor is free to select fund lineups that are unconflicted. Because the recordkeeping is built to be profitable as a standalone, it doesn’t rely on kickbacks.”
Lastly, there’s control over branding, something Schumm argued advisors really want.
“Our tech is built to allow your brand up to be front,” Schumm concluded, “while legacy technologies don’t support white labeling and their brands are already established.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
