Animal Spirits Podcast - Talk Your Book: How Advisors Can Manage 401k Accounts

Episode Date: March 14, 2022

On today's Talk Your Book we spoke with Dave Goldman from Pontera about helping advisors manage held away accounts for clients. Find complete shownotes on our blogs...  Ben Carlson’s A Wealth of Common Sense  Michael Batnick’s The Irrelevant Investor  Like us on Facebook  And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.    Learn more about your ad choices. Visit megaphone.fm/adchoices

Today is brought to you by Pontera. Pontera is formerly known as FI-X, but they changed their name. And as you'll hear in the podcast, it took them 1,100 names to figure this out. Puntera is a service that allows financial advisors to help manage their clients 401k assets, which hasn't been a thing before. They've figured this out. So go to Pantara.com. That's P-O-N.

It's O-N-T-E-R-A. All right? It's important. Point a little detail. Pontera. Pontera. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management.

This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the security. securities discussed in this podcast. All right. You know what we did not get into, Ben, was target date funds. How did we go an entire show about retirement accounts without bringing up target date funds? I think once you get into the realm of financial advisors, target date funds lose their luster a little bit. Target date funds. What do you mean? Oh, I understand. They're a good tool for DIY investors and people who just want to set it and forget it. But when you're getting into the more the realm of financial advisors, there is the idea of asset location and

bucketing and all these different moving parts and different accounts. And so it would be hard to integrate a target date fund into them. Again, as a proponent of them, I still think it makes sense. But for something like this with an advisor, well, I think what you're trying to say is sometimes an advisor might feel inadequate if they recommend the target date fund. Not this guy. I love target date funds. So when advisors show me their 401K, it's the first thing I look for. Is there a target date fund here? Number one. Number two, is it an adequate reasonable target date fund because not all target date funds are created equal. Some of them, believe it or not, are quite expensive. If I see a target date fund that I like, boom, problem solved right there.

Because we can't outrun a target date fund. It's got the glide path. It's got your balance. It's got everything that you need. But there are situations where you have to deconstruct the target date fund and rebuild that thing because I'm not having a client pay up for a target. They found that's blasphemy. Did you know before we had this talk how much money was in 401K accounts? What did he say? Seven trillion, I believe was the number? I probably would have guessed 10.

Yeah, I mean, just trillion, just throw the numbers around. But that is money that in the past, advisors, if they had a client, there's nothing they could really do for them unless they rolled it over into an IRA. If you retire and you're done and you want to roll that money over to the IRA, the advisor can handle that for you. but we have plenty of clients that aren't retired yet. They're still working. They're still putting money into a 401k. If you wanted to manage the money and manage that money in the 401k, the idea is here, especially like the bucketing thing at the asset location, I think is the big thing here.

If you wanted to keep certain assets in a tax deferred account and the rest of your money is taxable, you can now use that 401k to turn that dial up in terms of, okay, all of your tax deferred stuff, we're going to put all your reits in stock market index funds or whatever in that one. And then however you want to slice and dice it. I think that's the, idea here that you can just have more flexibility between these accounts. Let's not step on any of the material, as I say in the business. Let's get straight into it. Here is our conversation with Dave Goldman from Pontera.

We're joined today by Dave Goldman. Dave is the chief business officer at Pontara, formerly known as FIX. Dave, thank you for joining us today. Michael, great to be here. Appreciate the time. All right. So why don't we start with like, I guess maybe 30, second introduction of the business. For people that are not familiar with Pontera, who are you?

Pontara is a fintech platform. We've actually been around for over 10 years at this point, and we enable advisors to manage and trade their clients held away accounts, really focused on optimizing for a better retirement outcome for their end clients. Perfect. What is a held away account for people outside of the industry? So held away accounts are really accounts that a client holds, but for one reason or another, their advisor does not have this on their current custodial platform. So typically accounts that cannot be moved or should not be moved that are currently outside of the advisor's custodian. Like a 401k? Yeah. So typically this would be a 401k or a 403B. Usually it's an employer-sponsored, defined contribution retirement account because these accounts

can't be moved until an employee actually leaves their job or retires. 401Ks have been around since, what, the late 70s? early 80s, I guess. I think, what was it, 1979, they found the tax loophole. So they've been around for four plus decades now. What took so long for this type of solution to get here? Like, what were the hurdles to getting to this point? It's a challenging business, and I think there's a number of different elements here. One, I think people have been dependent on pensions for a long time. When you look at the landscape of Americans, only 16% of Americans have access to pension these days. So the 401K becomes more and more important in prominence as people

are more responsible for their own retirement savings. For us, I mean, we've been around for a decade. Our journey really started with creating a better outcome for the end investor in their retirement. We've been around for 10 years and we've been looking at this space very closely, primarily driven by advisors looking for a solution to help their clients and clients asking their advisors for more help in their retirement accounts. It's just a very complex world. Trying to take something complex and making it simple is certainly an element that takes time. Hey, before we get into the product, and we're certainly going to, why is it that your retirement account has to be held and administered by whoever your employer is?

Like, why can't I just bring that over to my Fidelity or TD account, for example? Ben, I don't know if you have insights into this, but I think the way that the tax code is written in the country was that it's an employer-sponsored account. So the employer is the person who's responsible for the account. and then you as an employee of the company are at the discretion of where the employer set up your account. I don't know if it's more nuanced than that. There's probably something in the tax code that gets more specific. Yeah, unfortunately, I think as an employee, you're kind of beholden to whatever your employer has to offer. The general idea here for advisors would be you have a

client come to you and they say, listen, we have a million dollars in taxable money. We want you to manage that for us, but we also have $500,000 in a 401k. And I want you to have my comprehensive of financial plan together and manage all my investments in one place. And before you couldn't really do anything to my 401k, but tell me what to do. Now you guys have made it easier to manage that money kind of all in one big bucket. That's the idea? I mean, that's exactly it. And you see financial advisors moving away from transactions and towards holistic, comprehensive wealth management. So there's studies that talk about the benefit of having everything managed together. A number of studies point to about a three to four percent annual benefit to the end client net of

fees. If you look at a 20-year compounded return, that's over 75% more wealth to the end client for having these assets managed. How could that be? I mean, I guess the only way that's possible is that people tend to hold too much cash in their 401k or are too conservative in their 401k because it's not like advisors are like trading and adding alpha that way. It's got to be just putting the money to work in a better asset allocation, getting more out of cash, less bonds. Is that basically what the study finds? There's a lot of actually different elements that go into the study. If you think about today's market, dows down almost 600 points today. You think about what investors are doing when they look at their retirement accounts on a day-to-day basis. There's a lot of panic

that sets in. There's a lot of frustration. So people make emotional decisions on very important assets. Advisors are trained to try to take the emotion out of the investment decision. So that's part of it. It's just staying invested in the market. A lot of the studies actually attribute 1% alpha to tax location and asset location strategy, which now is the advisor, if you have the ability to locate assets based on where they're best kept from a tax perspective, and you have the ability to manage between qualified and non-qualified accounts, a lot of studies point to an additional 1% alpha just in tax location strategy. So there's another big benefit there.

Most clients do not regularly review or rebalance their 401Ks. So to your point, they're sitting. in an old target date fund or they're sitting in a fund that's underweight equities and overweight fixed income, and that's also not appropriate aligned with the rest of their strategy. So there's alpha that can be created in regularly rebalancing and reviewing opportunities and objectives with your clients as well. Do you have any sense for how much money is held in 401Ks? The last report that I read was about $7 trillion across 401Ks. So when you think about America's retirement assets and how important this is, as people,

people get to maturity and start to get into retirement. I mean, today you're $7 trillion. I think the market's expected to double over the next decade. So really a tremendous amount of assets flowing into 401Ks, which highlights the importance of making sure that somebody's fiduciary advisor can manage these for them. All right. So the bottom line is clients want advisors to manage their entire household wealth, not just a piece of it.

By streamlining this, you have a much better sense of where you're clients were actually allocated, you could ostensibly pipe this over to your financial planning software, jump in there. Can you do that? Yeah. So I mean, let's take a step back and think about what happened prior to Pontera and prior to enabling this opportunity for some advisors. There's actually a longstanding practice happening on both sides of the aisle where we basically took existing protocols and practices and systematize this to make it easier and efficient for advisors to manage these accounts. Basically, two paths that advisors used to take. The first path for advisors is they'd kind of struggle through what we call the manual

path. They would ask their clients to collect statements, and they'd provide statements back to the clients, and they would review them, and they would try to make recommendations on the specific account. But they're doing it in a vacuum. They're doing it with old data. If they're part of a larger firm, there's no supervision protocols in place. Oftentimes, they don't even have the level of detail on the funds and on the plan themselves. So they're going through a very rigorous, tedious client process. The client is very much involved. And effectively, at the end of the day, they're giving their client a ton of homework to try to rebalance their own 401k. Dave, that's what we did. I would have advisors send me a PDF of their choices. Some were okay. Others were deplorable,

but whatever. And so I would look at them and send a spreadsheet back. The advisor would tell me what target portfolio they're in, how old they are, show me the options that I would send them a spreadsheet screenshot back. And then they would have to take that information, go and implement it. Not exactly ideal. Exactly. And I mean, you probably experience this yourself, but it's not the best practice to give clients homework at the end of the day. They hire you, they pay you. They're trying to offload this because you're the professional and they're nervous about their large accounts. And they just want somebody that they trust. That's a fiduciary that they hired to do it for them. So it's really a huge step function in how you provide services when you can offload this from your

client's plate and back onto yours. That's kind of the core practice we saw a lot of firms taking. And this has really enabled them to provide that higher level of service and the fully fiduciary, full picture that their clients asked for. The other thing that we've seen is the logging in process. And in addition to the way advisors were helping through the manual process, we saw hundreds, if not thousands of advisors out there going through the fully managed process. The process here was the advisor would actually ask the client for their username and password for their 401k or their 403B. They would keep them, they would usually write them down on a Post-it note or keep them in an Excel spreadsheet. Oh boy. And they would log in whenever they

needed to and they would try to trade the client's account. And the advisors were doing this through oftentimes a process that was not only cumbersome. Not compliant. But oftentimes because they weren't following the appropriate policies and procedures, they were breaking compliance. They didn't have the appropriate cybersecurity processes in place. They didn't have supervision in place. They didn't have tracking and audit trails and some of these other really important elements that would otherwise be necessary to run an operation like this. So they were taking on a tremendous amount of risk.

Now, it's important to understand advisors are able to do this for their clients with the client's permission if they're following all the processes and procedures. but you're an advisory firm, you're not a technology company, and you're certainly not a cybersecurity company. So trying to go that path is extraordinarily risky for advisors and still creates a lot of operational and cybersecurity headaches and risks for the firm. How did you solve this? What does the process look like now for advisors going through you that have clients of the 401K? So we basically built a secure barrier between the advisor and the account. And this is where our expertise as a technology company with a security background comes in.

which is we want to limit the advisor's access to the account, but give them the ability to trade and to manage and to really help the client with the only things that they need to do, which is reviewing the account and rebalancing the account. So we created a secure layer in between the advisor and the client that allows the advisor to do just enough to help, but not enough to get themselves in trouble. One other thing that maybe we'll get to,

when we get a menu of options, oftentimes these funds are unfamiliar to me. I'll start with what's familiar index funds, but if those are not an option, now I have to go and find out, all right, this is an active fund, what's going on, what's the expense ratio, what are they actually doing there? And so you guys have a piece of software that actually allows advisors to sort of quickly see what's under the hood, like all right there in the interface for them. This is back to that manual challenge we were talking about before.

Advisors are taking in this data and they're trying to figure out what's in each plan. Every client has a different plan. So they'll spend hours and hours of time trying to understand private funds and collective investment trusts and funds without tickers, and there's no publicly available data. So now you're back to your client asking them for statements, asking them for prospectuses and disclosures, and trying to create an understanding of what funds are actually available in their plan. Because of the technology we developed over the last decade, we're prompting that information to the advisor right within the platform. So instead of you guys spending hours to go research, you have the data available. to you and you can make an informed decision to help your client. How does this look from the client's perspective? So what happens from there?

And if they say, all right, I have this 401. Okay, I want my advisor to have access to it. Like, what do they have to sign off on? The client's permissioning the advisor to provide help on this account, just like they do when they work through their regular accounts. And our platform is really an advisor experience. So the client isn't interacting with our platform. One of the things we've done is we've actually built integrations to a number of portfolio management providers, like at Orion and Advison and Black Diamond and a number of others. So the data actually integrates into the advisor's existing tech stack. And oftentimes this data flows through to the clients.

Most of these reporting platforms and portfolio management platforms have their own client portal. And this helps the clients see their entire household in one place. So you can see what your advisor is managing as part of the comprehensive strategy. Can we talk about the fees involved? How does Pontara get paid? How are the advisors compensated for their work? What does that all look like? Pontera charges advisors an AUM-based fee, and this aligns us well with the way most of our advisors price. On these accounts, on the held-away accounts, advisors typically charge their standard management fee. When you think about the overall value, as we said, over 3% annually net of fees, and you think about the work that's involved, advisors are typically charging their standard

management fee because the value they're creating is the same across accounts. They're just able to do it in a more holistic fashion at this point. So really, everyone aligns incentives. It's one of the rare value propositions where the client is truly the one benefiting from day one, Pontera benefits by enabling the opportunity and the advisor benefits because they're not only creating kind of a stickier solution for their clients, but also more wealth and more opportunity for their clients in the long run. How have you guys managed to stay under the radar all this time?

said you've been around for 10 years. This is not a small business. At this point, you guys have had a lot of success. How have you managed to stay so quiet? It's a matter of focus, honestly. So we haven't always needed to be out there publicly to deliver the solution. We typically are spreading through word of mouth through advisors. And the team has really been focused on building the best possible solution and supporting our growing client base. So for us, we weren't out there actively marketing and actively engaging because we've been super busy just organically growing the business and focused on serving the best possible solution to our customers. So heads down, strong focus, and I think that's why we've been under the radar. Also, something to touch on

there, when you think about the 10-year history, we launched this particular solution in 2018. So this solution of managing held-away accounts started in 2018. We had a six-year run prior to that, where we were kind of learning the space. We were connecting to and analyzing 401Ks, again, to help with the same mission of creating a more comfortable retirement for the end investor, but we were doing it with different products and more of kind of a transparency approach. What happened after six years is we realized that transparency only took the end client so far. They needed somebody that they trusted to take action and to truly help them with these accounts.

So that's when we transitioned the business, and we realize that the best path to get people to a more comfortable retirement was actually enabling their trusted fiduciary advisor to manage these assets for them and to take it to the next level. What is the feedback you've gotten from advisors? And then I guess my question is like how much more work is involved for advisors since I've never used the platform? Are they going straight through a platform that you guys have all created?

Is it technically still through the 401K platform that we're working on? Like, how does that work? I think the feedback from advisors so far has been extraordinarily, positive, I mean, from both groups of advisors, the advisors that are logging in and trading these accounts one at a time find this as a more secure, more efficient solution than from what they were doing. And advisors that weren't managing these accounts before, see, this is a huge way to help their clients manage these accounts and kind of take this off their client's plate. So huge benefits on both sides and the feedback from the advisory market has been quite positive

and quite strong. In terms of the platform itself, the advisors are operating through our platform. So the advisors log into our platform, and as I said, we're basically a secure interface. So we prevent them from actually accessing the client's accounts. They don't actually go and access the client's accounts. They're doing everything through one standard interface for all their clients' accounts, which is through our platform. So it makes the workflow quite simple for the advisor. So speaking of that, what is the learning curve like for a team of advisors to get up to speed on the product?

Is this something where you work with the operations team? then the company's head trader, or are the advisors themselves the ones that are pushing the buttons? Like, what does the workflow look like from start to finish? You guys know this from being in the space for a long time, but every firm set up a bit differently. We have firms that have centralized trading and they're doing everything through a centralized team. We have firms that advisors are their portfolio managers and responsible for their clients' portfolios one-on-one. And we support all the various models. I think the nice thing to the advisor feedback is advisors tell us The platform is extremely intuitive.

There's not a lot of buttons. There's not a lot of nuance to it. It's basically organizing the data for the client's accounts, feeding it into existing portfolio management solutions, and giving the advisor the ability to rebalance and to trade their client's accounts through a single interface. So training can take as little as 30 minutes, and then advisors are basically reviewing clients' accounts

and making sure that they have the information on the client's overall portfolio to make decisions for them. When are you going to allow us to look into OpenC? I want to make sure my clients pudgy penguins are accounted for. It's funny. I don't know how we would ever support NFTs, but we've definitely looked into crypto. It's not something that's on the immediate radar. We're heads down focused on the retirement space, but we definitely get that question a few times a month. So you guys just raised quite a bit of money. So congratulations on that. What is the plan? Because you guys are a successful business already. I assume your cash flow positive and all that good stuff, but what are you guys doing

with all this money? I mean, the money's being used to continue to help people, help advisors, help their clients retire more comfortably. Nothing fundamentally changes for us. We've been heads down since day one narrowly focused on serving this market because we think this is really where you can make an impact to the American population and to the advisor community. It allows us to do more the same. It allows us to continue invest in hiring and tech and to continue to enhance our solutions. And so you're not going to see anything totally out of the normal for us. It's going to be business as usual, but it allows us to continue execution, continue to scale. We are planning on hiring pretty aggressively this year.

So this will definitely go towards continuing that process. Here's an important question for you. How long did it take to come up with a new name for the company? Because that's got to be very tough these days to come up with something that's not been taken. How long did that take? And how many consultants were involved? Too many consultants and too long is kind of a simple answer. answer. I would advise anybody who's naming a company to pick the first name first and not change it.

But it was quite a process. It's actually interesting. We had no intention of changing the name, but we are a extraordinarily client-centric, client-obsessed company. The feedback from our advisors was that the FIX name no longer reflected the service we provided to advisors and their clients. That was a name from a time past. That was the first six years of our existence. And after reviewing 1100 names through a long process and being client obsessed, we decided that if our advisors and our customers were not happy with the name, that we'll take the arduous task of going and going through the process of changing it. So 1100 names reviewed. I'm very happy with the name that we landed on and the feedback from our partners and advisors is similarly positive.

Pont is Latin for bridge. And so our platform aspires to be the bridge to a better retirement for the end investor. I'm happy with where we land on the name, but it was definitely a process, and I would advise anybody to just pick the right name first. Oh, man, 1100 days. All right, so, Dave, if there are people out there that might be interested in working for this exciting company, what sort of roles are you looking to add? I mean, across the company, we're always looking for people to work with our advisors. So in the account management and the business development side, we're looking for customer support teams. We're looking for people in marketing. We're looking across roles. So really anything in the business development org, anything on the tech side,

people who are excellent with technology, excellent with security, we're always looking to hire across those teams. And we have an alias careers at pontera.com that anyone can email and we'd be happy to chat about openings. I'm curious if this is also a way, either now or in the future, for people with money in a 401k to find an advisor. Or do you think it's easier for you all to go through advisors or then have clients with 401ks? Like, how does it? that interplay work? The primary use case is, as you outlined earlier, I have a financial advisor, I have X dollars with them, they're managing it for me. I also have Y dollars in my 401k, and I trust this person, I hire them, they're my fiduciary, they're helping me with everything else.

There's no reason, fundamentally, that they shouldn't have been helping me with these assets from day one. It's been a missing part of my overall solution. So I'm going to let my advisor manage the rest of them because now he has a solution to do so. There's always an opportunity to think about different ways that advisors and clients can be connected. So there's opportunities there. I mean, we have firms that are big plan advisors looking at this from the plan side of the business as well in how they can offer broader services to their existing plan participants, which really is a sponsor-driven offering. How can a sponsor help enable better services for all of their employees? So I think there's going to be two-sided marketplaces eventually here,

but the core business, the way that the business operates today is really focusing on the advisors and their clients and letting them be really comprehensive in their current offerings. So one thing that we've discovered in our business is that we get more prospects reaching out when volatility spikes and you're going to a bear market or a correction. Is that something similar that you all see when, especially 401K investors, start things go a little hairy and go crazy? Is that a time where they're looking out and they want their advisors to maybe have their hands in the steering wheel and take control of that account? How does that work? You just nailed it. This is kind of the common behavioral.

theme that we see across clients and their advisors. You see markets start to get volatile. It definitely creates some fear in investors, especially when you're talking about their long-term retirement assets. So we see advisors working with new clients, working with more of their clients' existing assets, using our platform more during volatile markets, mainly to make sure that clients are balanced properly, taking advantages of dips and spikes and making sure they're balanced across their entire portfolio. We also see increases in rebalancing during these times to make sure that the clients are getting the benefits of movement in the market. So I think we see the trends that you guys are seeing as well, which is not just more clients

looking for advisors for help, but also more activity from the advisor side of the market. If advisors listening want to learn more, how do they find you? So the website is pontera.com, and that's a great start. There's also partnerships at pontera.com email address that will get somebody to reach out to schedule some time. So two easy ways to get in touch with us. And my team would be happy to chat with anybody interested. All right. We will obviously link to all of this in the show notes. Dave, this was fantastic. Thank you for your time. Yeah. Thank you guys. Appreciate everything. Great to be here. Thanks, Dave. Remember Pontera.com, formerly Feex, and send us an email

Animal Spearspot at gmail.com. Thank you.