Expect more fintech M&A in 2019
BlackRock’s recent $122.8 million purchase of a 5 percent stake in Envestnet is just the tip of the fintech iceberg.
The Labor Department’s fiduciary rule may have been pulled from the books in 2018, but automated investment platforms are still expected to play a growing role in the asset management and financial advisory industries in 2019, according to Rob Foregger, co-founder of Chicago-based NextCapital.
“Our belief in the need for the merger of fintech and the investment management industry will continue to grow in importance in 2019 and beyond,” said Foregger.
NextCapital, a fintech “enabler,” provides bespoke automated investment platforms for asset managers for the purpose of delivering personalized fiduciary advice to 401(k) and retail investors.
So-called robo-advisories were strong backers of Labor’s fiduciary rule. The regulation would have required a fiduciary standard of care for all advice on qualified retirement accounts. Demand for robo-advisors was expected to spike under the rule.
Demand for automated investment services continues
But even though the fiduciary rule was vacated by the U.S. Court of Appeals for the Fifth Circuit, demand for automated investment services continues, as evidenced by more traditional investment managers integrating technology platforms through advisory channels, says Foregger.
“You can see the demand based on the flurry of continued deals between fin tech and traditional retirement players and more merger and acquisition activity,” he said, citing BlackRock’s recent $122.8 million purchase of a 5 percent stake in Envestnet.
NextCapital has existing relationships with State Street Global Advisors, Russell Investments, and John Hancock, among other asset managers.
“Our pipeline of new partners has never been larger—we expect it to continue to grow,” said Foregger.
From investment product manufacturing to advice manufacturing
Asset managers are evolving from their traditional role as manufacturers of investment products toward advice manufacturing, a transition being driven by the need for more personalized fiduciary investment advice nationwide, thinks Foregger.
“The BlackRock deal is consistent with what we’ve seen—one of the largest product manufacturers partnering with a tech player to improve shelf space, but also to utilize technology to help personalize their solutions and add more capability around their products,” he explained.
“Industry is moving toward scalable personalization and personalized solutions. This is exciting for industry and it needs to happen. The change won’t be overnight but the writing is on the wall that asset managers need to move forward from the status quo,” he added.
Even without Labor’s fiduciary rule, traditional brokerage models of product distribution will evolve to a fiduciary standard of comprehensive advice distribution.
“That progression is already happening—we’re already in the fourth of fifth inning, maybe a third or halfway there,” said Foregger. “The consumer needs it, regulators want it, the states want it, and technology is helping enable industry move to a fiduciary advice, tech based framework.”
The next five years will drive the transition from the brokerage model to the fiduciary model, with the ultimate outcome of the Security and Exchange Commission’s proposed Regulation Best Interest rule expected to be a catalyst, predicts Foregger. If that rule, which is expected to be finalized in 2019, is perceived as too weak on consumer protections, Foregger expects more state regulators will build on the experiences of Nevada and New York and implement stricter fiduciary standards of care within their jurisdictions.
“If you believe the wheels are in motion to a fiduciary future, the states may be the ultimate arbiters of moving industry to the fiduciary standard. It already feels like that is happening,” he said.
Defined contribution 2.0
The transition from defined benefit retirement plans to defined contribution plans in the workplace is poised for the next stage of growth, as industry continues to recognize the limitations of a “do-it-yourself” model of retirement investing.
“Regulators would like to see industry move to defined contribution 2.0—where we’ll see delegated professional management delivered to each plan participant to help address the really difficult process of retirement investing. There’s no question that’s the direction industry is going,” added Foregger.
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