Morningstar Magazine - February/March 2018 - 16
Dispatches
How Regulators Can
Unleash Fintech
to Improve Retirement
Security Giving
advisors reliable
data-aggregation capabilities is a start.
POLICY
Aron Szapiro
There has never been a better time to be an
individual investor. Investors today have access
to advice from highly sophisticated financial
models on how to make the most of their savings.
And yet things could be even better for investors
if regulators made a few changes to help
technology reach its full potential. In particular,
financial technology companies have the
ability to help ordinary investors understand their
financial situation and the steps they need
to take to achieve a secure retirement. Fintech
applications can also help financial advisors
get a holistic picture of their clients' finances to
make the best recommendations.
Often, when policymakers hear about ways
they can adjust regulation to help investors, they
tune out or downplay ideas because they
assume investing is just for the rich. But delivering
high-quality investment advice is critical for
millions of ordinary workers who will rely on that
advice to save effectively for retirement and turn
these savings into lifetime income. Policies
that support getting the best advice possible to
millions of workers are critical for Americans'
retirement security.
Reliable Data Aggregation
Perhaps the most important thing for the 57 million
U.S. households investing for retirement
is the ability to easily aggregate their retirement
16
Morningstar February/March 2018
investment accounts. Aggregation technology
provides a low-cost way to collect the
investment account data advisors need to help
workers form a good plan for achieving
success in retirement. These tools monitor multiple
accounts and ensure workers' financial plans
match their financial reality.
Using data aggregation to develop advice offers
three key advantages.
First, automating data collection from a variety
of accounts allows an advisor to base
recommendations on a holistic view of an
investor's finances. For example, data
aggregators provide the fundamental data for
recommendations on preparing investors
for emergencies and other expenses, preserving
people's retirement savings for their intended
purpose-retirement. Such holistic advice
can boost utility-equivalent retirement income
by 23%, according to our research. Further,
automating data collection solves the problem in
the United States of retirement assets being
spread across many different accounts. Most U.S.
savers have at least two retirement accounts,
according to our analysis of the Federal
Reserve's Survey of Consumer Finances. This
fragmentation means it is critical for advisors to
look across all accounts to gain the fullest
picture of workers' total retirement savings to be
able to recommend the right asset-allocation
strategy and appropriate contribution levels.
Second, automating data collection is dramatically
cheaper than manually collecting, entering,
and updating data from various accounts every
quarter. True, some advisors and clients are
willing to do the time-consuming work, but by and
large, this time could be better spent doing
something more productive for clients.
Finally, data aggregation can help clients
preserve their privacy and security. By having a
single piece of software with best-in-class security
monitoring accounts, clients do not have to
regularly log-in to multiple accounts, which can
create opportunities for malware to log passwords.
Further, data aggregators can alert users
to unusual activity. There are easy ways to make
data aggregators even more secure by setting
up standard read-only application programming
interfaces for data aggregators to gain access
to financial data.
Deliver Best-Interest Advice
Data aggregation can also help financial advisors
deliver best-interest advice, which they have
been required to do for retirement accounts since
June 9, 2016, when the U.S. Department
of Labor's fiduciary rule partially went into effect.
By getting a complete picture of clients'
accounts, financial advisors can better design
customized plans.
Further, financial advisors are now required
to ensure that if they recommend a client
roll over his or her assets to an IRA, it is in
the client's best interest. Aggregation technology
can help advisors compare the cost and
quality of different investment options.
(Another approach to this, which we will also
support, is strengthening the public disclosures
of 401(k) plans.)
Finally, data aggregation opens new ways
for financial advisors to serve their clients. They
could move to an assets-under-advisement
model by virtually consolidating assets rather than
requiring clients to roll money over. This
could be beneficial for advisors who work with
clients who have money in low-cost definedcontribution plans but need more advice
and day-to-day help managing their money. They
would be best served by working with a
financial advisor who can see all their assets
in one place without needing them to
move money out of institutionally priced
investment accounts.
The Lifeblood of Fintech
Despite the innovation and promise we see
in delivering financial advice to the masses, it all
relies on access to data, and this access is
often restricted or, if it is available, under threat.
These threats come from financial institutions
that are opposed to individuals owning their
personal financial data and sharing it with others
to improve the advice they get. Even if financial
institutions allow sharing with third-party
aggregators, they often supply uncomprehensive
data. Further, financial institutions sometimes
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