How Regulators Can Unleash Fintech to Improve Retirement Security
Giving advisors reliable data-aggregation capabilities is a start.
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 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 abruptly cut data feeds, leaving consumers who rely on fintech applications in the dark about their finances.
Financial institutions argue that there are privacy concerns with allowing third parties to have access to their clients’ data. We believe that investors own their data, including information about their investment options, and should be able to choose to share it with third parties as they wish.
Of course, there are legitimate liability and security concerns, as well as the need for common standards for data aggregation, which is why we think regulators need to act to set up a system that works for everyone.
To correct this state of affairs, we need to update our vague and outdated laws and regulations on financial data transparency and data ownership.
Deeply Fragmented Regulatory Landscape
Right now, seven major federal regulators in the United States have authority over the broad world of data aggregation and fintech. These regulators have authority over different kinds of financial institutions, and they also view the challenges with data aggregation very differently, leading to a fragmented regulatory environment.
The Consumer Financial Protection Bureau has authority from the Dodd-Frank Wall Street Reform and Consumer Protection Act to issue regulations to help consumers share their financial data with aggregators, but to date, the bureau has only released a nonbinding, high-level principles document that encourages the financial institutions under its jurisdiction to allow customers to share access to their financial data. This document is a step in the right direction, but it is not a final regulation that would compel financial institutions to ensure ordinary people have an unfettered access to their own data. Further, the CFPB does not have any authority over noncovered financial institutions, which include many financial institutions that manage retirement accounts.
Other major bank regulators—the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve System—have generally focused on examining cybersecurity practices at financial institutions and third-party aggregators rather than promoting a common standard to make it easier for fintech to operate. In October 2016, they began the regulatory process of enhancing those standards but have not taken further action. Some of their proposals actually might lead to a reduction in data aggregation and, thus, fintech innovation.
Finally, the Department of Labor and the U.S. Treasury have the authority to regulate the recordkeepers that run retirement plans. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, they could voluntarily cede authority to the CFPB if they chose to, but agencies are loath to give up their turf. Still, the Department of Labor has broad authority to compel recordkeepers to disclose information, including in electronic form, and could probably require recordkeepers to allow retirement savers to share their data. However, the department has taken no steps to do so. Unfortunately, American workers’ largest asset (outside of housing) is retirement accounts, and workers have no choice of the recordkeeper for their 401(k) because their employer sets up the plan. For those reasons, it is critical that the Department of Labor affirm that retirement savers own their financial data and can share it with third parties.
Interagency Coordination Is Needed
Ensuring that individual investors can make full use of all that fintech has to offer will require federal regulators to coordinate with each other and with the industry. Other countries such as the United Kingdom have already adopted common standards for sharing data, common security protocols, and clear rules for dividing up liability. Although this sounds like an esoteric issue, we believe it is critical for helping ordinary people—faced the burden of saving and investing for retirement—make sense of their assets, giving them the best chance to enjoy a successful retirement.
This article originally appeared in the February/March 2018 issue of Morningstar magazine. To learn more about Morningstar magazine, please visit our corporate website.