Wealth Managers Beware: Emerging Fintechs Are Coming For Retirement Planning Next

The wealth management industry is under siege by a new crop of “robo-retirement” fintech startups disrupting retirement savings. At stake is roughly $27.25T held in US retirement assets as of September 2017 (including IRAs, 401(k)s, pensions, etc).

Though 401(k)s only account for $5.28T of assets (nearly 20% of total retirement savings in 2017), they have grown dramatically, up from 2% of total retirement savings in 2007.

That said, these retirement vehicles are still vastly underutilized by employees due to high fees, poor user experience, and lack of education. Now, startups have zeroed in on the opportunity to create retirement offerings that cut down on fees and deliver a better user experience, following the playbook fintechs used with robo-advisors.

While 4 out of 5 workers are employed by companies that offer a 401(k) plan, only 41% of workers actually contribute. A number of factors can contribute to this — lack of education on the benefits of contributing, difficulty accessing and navigating 401(k) plans, or an income that just covers expenses, thus making it difficult to save.

In addition to the challenge of getting more employees to invest in 401(k)s when they’re available, smaller companies also struggle to provide these plans to their workers. This can be the result of high costs and administrative challenges.

Recognizing this gap, startups — including Forusall, Blooom, Vault, Human Interest, FeeX, and Guideline — are raising private market funding to scale cheaper and easier-to-use retirement savings products.

These “robo-retirement” platforms streamline access for employers, lower the costs to administer plans, and provide transparent pricing. Meanwhile, incumbent wealth managers’ suite of products and services remain static – and vulnerable to disruptors.

Sound familiar?

The same trends that are helping robo-retirement companies gain traction are the same ones that enabled the rise of the first robo-advisors nearly a decade ago. If incumbents want stay relevant as these startups gain traction, they will need to be proactive to address products gaps, or suffer a similar fate.

Using the CB Insights platform and SEC filings, we analyzed how these startups stack up, and highlighted a few operating metrics like assets under management (AUM), client accounts, and financing.

We define this group of fintech startups as “robo-retirement.” Our robo-retirement category includes automated wealth management platforms that specifically target retirement savings accounts including 401(k), 403(b), and pensions. Our robo-retirement category is tracked as part of the broader wealth tech collection on the CB Insights platform.

Investors see new opportunities in retirement savings startups

Retirement savings startups have already seen 2 deals in 2018, despite the broader pullback in early-stage fintech in the US that occurred last year.

Following a $21M Series B investment in ForUsAll, Nick Shalek, General Partner at Ribbit Capital noted there are 2 brokers for every 1 fund they manage, creating an opportunity for software to increase broker efficiency. This is in part why Ribbit Capital, among other investors, are jumping in early.

 “The (retirement) industry is in desperate need of improvement. Around 300,000 brokers manage 650,000 small and mid-sized business 401(k)s. Since the average broker only handles two 401(k)s, they simply do not have the ability to invest deeply in delivering modern, personalized investment solutions to companies and their employees.

Just as the travel agent market was uprooted by technology, we believe ForUsAll is disrupting the 401(k) broker market by using technology to deliver a smarter, more effective, and less expensive solution.”

-Nick Shalek, General Partner at Ribbit Capital

Human Interest is the latest to raise, completing a $11M investment from Wing Venture Capital that also included angel investor Adam Nash. Adam Nash is experienced in scaling and advising robo-advisor startups. He is a current board member at Acorns, and the former CEO and president of Wealthfront.

A few of the other private startups focused on retirement include Blooom, Guideline, and FeeX. Many of these startups are using a range of strategies that vary by distribution channel and perceived addressable gap, which we analyze below. The majority are leveraging a B2B strategy targeting small- and medium-sized employers because they are largely underserved.

Robo-Retirement fintechs are already growing aum, client accounts

Blooom has grown the fastest in terms of assets under management (AUM) and client accounts. As of January 2018, Blooom has quietly collected approximately $2B in AUM across 17,746 client accounts.

Blooom is a B2C and select B2B portfolio management software provider for Employer-Sponsored Retirement Accounts (ESRA). B2B partners include Fidelity, the startup’s custodian, which holds nearly half of the startup’s reported AUM in separately managed accounts.

Forusall is the second largest with a reported $500M of AUM for an undisclosed amount of accounts as of a press release in January 2018. AUM is up nearly 5x in less than a year. In March 2017, Forusall reported the company managed $104M of AUM across 5,685 client accounts.

Guideline came in third with a reported $158M in AUM across 2,000 client accounts as of October 2017.

Also pictured are Human Interest and  Vault. Though these companies manage less money, Human Interest is still keeping up with Guideline and Forusall in the race for client accounts. Portland-based Vault, a 401(k) provider for SMBs, was acquired by micro-investing startup Acorns in Q4’17. The firm has grown assets to $1.1M across 507 client accounts.

While AUM is modest compared to top robo-advisors like Betterment (which leads with $11.8B in AUM) and Wealthfront ($10B in AUM; both as of January 2018), both of which have 401(k) services, they’ve been building their market for a decade and faced little competition from incumbents in their early years.

Similarly, this cohort of robo-retirement startups were able to grow largely unchallenged by incumbents in the early days. To stay ahead of challengers in 2018, these startups will need to focus on customer acquisition and scaling.

these are the investors placing robo-retirement bets

We used the CB Insights Business Social Graph to highlight the investors that are diversifying their bets in fintech with retirement savings startups.

Please click to enlarge. Each green line indicates one investment.

• Collectively, this group has raised $97M and are all in the early- to mid-stages. The most well-funded is Forusall, mentioned above.
• Forward-thinking strategic investors are early backers of robo-retirement startups. Insurance companies Allianz Life Ventures and Nationwide Ventures both co-invested in Blooom. While Blooom is currently focused on retirement savings, extending into insurance could be on the product roadmap and a partnership with insurers would not be surprising.
• Investors are spreading out their bets. Horizons Ventures has made 2 investments in this space, investing in Feex, a B2C subscription service that reduces 401(k) management fees, as well as Forusall. SV Angel on the other hand invested in Human Interest and Guideline.
• Looking at investors’ portfolios, we can see a few notable overlapping portfolios with some of the largest robo-advisors. Great Oak Ventures is an investor in Human Interest and in micro-investing platform Acorns. Ribbit Ventures is an investor in Forusall and in Wealthfront.
• Retirement savings startups have already seen 1 acquisition. Vault, mentioned above, was acquired by Acorns in Q4’17. Acorns will leverage Vault to launch a retirement product called Acorns Later in 2018. We dug into Acorn’s acquisition strategy as part of strategy teardown on Acorns.

Closing thoughts

Employer-sponsored retirement programs are still a largely untapped and growing portion of the retirement savings market. Early movers have a head start but can’t compete with incumbent’s resources. Timing in this market is essential and startups are well positioned to grow if they focus on acquiring customers while the economy remains strong (despite a potential correction).

What will be interesting to watch, however, is when (and how) incumbents will respond to this new wave of insurgents. Looking to get ahead, incumbents with a “buy” strategy might look to get into the retirement savings market. When the first robo-advisors entered the market, many incumbent firms seemed unfazed (while others funded a few). Today, every initial skeptic has a robo-advisor strategy.

If history repeats itself, by the time incumbents take notice, it could be too late to stop them.