CONTRIBUTORS
Sandy Kaul
Head of Innovation
Franklin Templeton
In the latest research paper from the Franklin Templeton Industry Advisory Services team, “The coming pivot from standardized workplace and retirement offerings to client-centric lifestyle planning,” we went in-depth to explore the increasingly complex landscape of public and private options that has left individuals tasked with managing their own financial future. We found that the vulnerabilities of today’s aging retirement infrastructure are on full display, and disrupters are circling.
Our call to action? The time is now to build a more client-centric approach for plan participants that delivers personalization, innovative investment options, integrated advice and a vastly improved user interface. To meet this challenge, many aspects of the current retirement ecosystem, including the foundational technologies that support today’s capabilities, need to be enhanced and in many instances, replaced.
I encourage you to bookmark the research paper for future reference, and invite you to continue reading below as I dive deeper into the role digital wallets might play in righting the ship.
How did we get here?
The retirement industry stands at a critical inflection point, with rigid and simplistic offerings not meeting the needs of today’s investor. Most individuals have three main accounts in their life: a bank account, an investment or brokerage account and a retirement account. The first two offerings have evolved significantly in recent years, but the rate of innovation in retirement accounts has failed to keep pace and remains comparatively unchanged in terms of its functionality, sophistication and utility.
Increasingly, engagements with your bank and brokerage accounts are mobile, instant, customizable, interactive and simple. This contrasts sharply with their retirement account experience which is typically more “digital last” than “digital first.”
Despite heightened investor expectations, the retirement industry has done little to modernize its architecture, perhaps due to the scale, importance and complexity of the ecosystem and the need to ensure no interruption in services. Yet, even with these challenges, there may be an opportunity to leapfrog out of this quagmire.
The growth of neobrokers
Self-directed financial apps, or “neobrokers,” understand what matters to their younger investors. They allow individuals to import their social media accounts and link with their friends to share their activities. They provide short-form videos from financial influencers to drive trading activity. They offer investing communities to encourage dialogue and engagement. They make it easy for their users to choose and follow other investors’ portfolios on the platform, including portfolios from other individuals like themselves. And so much more.
The ability of these platforms to stay at the forefront of their users’ interests and integrate expertise into their direct-to-consumer experience creates stickiness and deepens the relationship they have with their customers. This gives them a natural pathway to continue to build value with investors and become a one-stop shop for all financial activities.
This ever-expanding extension of services has placed consumer apps, which are also developing retirement and workplace services via state-of-the-art cloud-based technologies, on a direct collision course with traditional retirement providers. For example, neobroker Robinhood offers IRAs with 401(k)-like attributes such as a matching program. Public also offers an IRA program with matching contributions, and Titan provides an actively managed and automated IRA option that includes alternative investments.
One option for legacy retirement providers would be to partner with this growing set of emerging fintech players, bringing to the table decades of regulatory expertise and plan sponsor relationships that could accelerate all parties toward an evolved offering.
But, to truly innovate and prepare the industry for the next 50 years, we might need to look just a bit further down the road. Another new and emerging competitor from the world of web3 is set to disrupt not just traditional retirement providers, but also the world of neobrokers.
Wallets, wallets, wallets
Just as D2C app platforms found success by targeting underserved younger clients, crypto native firms see an opportunity to target a new underserved audience—those who have built wealth in the Web 3.0 environment, outside of traditional account-based financial services. These blockchain-based offerings have one advantage over today’s neobroker and financial apps—they have spent their entire existence operating in a wallet-based environment.
Exhibit 1: Digital Wallets vs. Crypto Wallets
Source: Franklin Templeton Industry Advisory Services. For illustrative purposes only.
Over time, we believe wallets are likely to displace traditional accounts due to their functionality, versatility and cost. An individual’s investment account, retirement account, checking account, savings account, insurance reimbursement account and more are all likely to co-exist as part of their digital wallet. Indeed, a wallet may become as central to an individual’s life as the mobile phone is today: the mechanism through which health, wealth, retirement and benefits can come together.
Today, the retirement ecosystem is built around an individual’s workplace and the plan’s recordkeeper, but in the future this engagement could instead be reoriented around an individual’s wallet. A new unifying point for a network of providers, spanning traditional retirement industry recordkeepers, plan sponsors, employers and asset managers to provide new value and utility to participants.
But as currently architected, the convergence of spending, borrowing, savings and investing poses a significant challenge to the retirement planning industry. The system has not been designed in a manner that allows activities to be coordinated and harmonized, and these capabilities are far beyond what today’s legacy recordkeeper and plan sponsor infrastructure can facilitate.
The positioning of the individual’s wallet as the entry point to their financial life counteracts the entire setup of today’s approach where the workplace is the conduit to services.
Where do we go from here?
Knowing what needs to change is a lot easier than knowing how to change to get there.
The structure and infrastructure of the retirement planning industry today stands as an obstacle in the way of most innovation. Not only do key providers operate in silos, but their roles are fragmented, and the ecosystem continues to rely on outdated technologies that make introducing new models and integrating new service providers difficult.
Despite these challenges, the industry must look to newly available technologies—from AI to blockchain to tokenization and smart contracts—to upgrade the delivery infrastructure and enable a more real-time and automated approach. There must be more focus on improving how *well* the system operates. Exploring cryptographically protected digital wallets that hold assets in tokenized form on a blockchain could be a great first step in the industry’s pursuit of innovation and adaptation.
This journey toward a new industry architecture may end with a radically transformed landscape, but starting an exploration now into a wallet-based retirement planning and benefits infrastructure can provide key learnings that could help shape the industry’s future.
In the full research paper, we lay out the different stages and requirements for building toward this future, and present a broader vision of navigating the changing future of retirement planning. After reading, I invite your feedback here on LinkedIn, or message our team for deeper engagement.
Change is hard. But with disruption at the gate, what choice do we have?
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.
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