Ep. 141: The Anatomy of 401(k) Trading with Dave Goldman, Pontera

Come on in, sit back and relax, you’re listening to episode 141 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, founder of Ezra Group Consulting, and this podcast features interviews, news, and analysis on the trends and best practices all around wealth management technology. Our theme for this month is startups, we have some terrific guests including today’s guest, Dave Goldman, Chief Business Officer at Pontera, formerly FeeX, who will be delivering insights and analysis on everything around startups in the wealthtech space.
The way data is delivered and consumed in the wealth management industry has changed dramatically over the years. These changes have made it more difficult for enterprise wealth management firms to maintain their data infrastructures. Over time, they have deteriorated and have been duplicated and made obsolete through multiple acquisitions, until no one in the organization is quite sure how all the data pieces fit together.
That’s why Ezra Group launched our Data Assessment Service to conduct in an depth review of data sources, downstream consumers, data utilization analysis for enterprise wealth management firms and deliver a comprehensive strategy and roadmap to get your data architecture under control. For more information on Ezra Group’s Data Assessment Service go to ezragroupllc.com
Be sure to check out our sponsor, the Invest in Others charitable foundation at InvestinOthers.org.

Companies Mentioned

Topics Covered

  • The Importance of Trading Held Away Assets
  • Avoiding Cybersecurity Risks
  • How 401k Trades Are Sent
  • Data Quality Assurance
  • Support for Private Investments

Episode Transcript

Craig: I’m happy to introduce our guest for this episode is Dave Goldman, Chief Business Officer at Pontera, formerly FeeX. Dave, welcome.

Dave: Thanks, Craig. Great to be here.

Craig: I’m glad you could make it. Always a pleasure to have you on. Where are you calling in from?

Dave: So I’m in our New York City headquarters right in midtown Manhattan, just around the corner from Macy’s.

Craig: Excellent. I’m in New Jersey, so we’re not that far apart. And we’re sharing the same beautiful weather which is nice, here in April.

Dave: Definitely enjoying that.

Craig: Oh man. Absolutely. I would want to know about road run this morning was beautiful. So tell us let’s just jump right in. Give us the 30-second overview of Pontera, formally FeeX.

Dave: So Pantera is an order management system allows advisors to view, trade and manage their clients 401k’s, 403b’s and other held away accounts in a secure and compliant manner without taking custody of these assets. This allows advisors to provide truly comprehensive service on all of their clients assets, knowing that managing an entire portfolio is one, can create significant benefits to their clients in the long run.

Craig: I mean I was really excited when I heard about you guys because this is something I think the industry has needed. So I was kicking myself not thinking that on my own. But clearly you guys had this idea a while ago. The company was founded back in 2012, right?

Dave: Yeah, so I mean, great question and we’ve been around as a company for a decade at this point. We haven’t always offered this order management system though. And a big part of what we did for the preceding six years led us to where we are today enabling trading of these held away accounts. If you really want to give credit for this idea that credit needs to go to the advisors so that we were serving because really listening to them and understanding where their clients felt pain and where they felt the pain is what led us to develop the platform in the way that we did. So we also can’t take full credit for the idea. We really were just listening to the customers.

Craig: data listen to the customers they know best I wanted to also congratulate you on your recent fundraising round $80 million raised, that’s awesome. Expecting lots of big things.

Dave: Yeah, the raise really came on the heels of tremendous growth and success over the last number of years. The business has grown dramatically over the last four years. We’re hiring aggressively in New York. We have a fantastic team here and we’re looking to constantly add really talented people. So if you’re listening here in the New York area and you’re looking for your next opportunity, a lot of that money is going to continue to build out the team to service our advisors. So please drop us a line and we’d be happy to chat.

Craig: We do a lot of promoting here, so feel free to promote.

Dave: I wouldn’t think of it.

The Importance of Trading Held Away Assets

Craig: So I realize why this is important, but for people listening who maybe don’t understand, can explain why this functionality, being able to trade held away assets is so important to advisors?

Dave: It’s important to advisors because it’s important to their clients. And if you really think about what happens, most of the country today is no longer dependent on defined benefit plans or pensions those have gone away. So the primary means of retirement savings are in clients’ 401k’s and 403b’s and defined contribution plans. Now, because these are held off platform for most advisors, it means that they’re really not a part of the advisors purview in helping their clients. There’s a lot of studies, there’s some that talk specifically about management of 401k’s, there’s a lot to talk about the value of an advisor. They both peg it to about 3% per year net of fees as the benefit that the advisor can provide to a client. When you look at that compounded over 20 years, this can be an additional 75% growth for a client up until retirement.

Dave: What happens unfortunately, is that because advisors oftentimes cannot manage these as part of an overall portfolio, these get defaulted. These accounts get defaulted into a fund or a number of funds when the client signs up for their 401k and doesn’t get regularly reviewed and doesn’t get looked at and doesn’t get managed and doesn’t change with the clients lifestyle and risk tolerance and existing financial situation. So they underperform the market over time. And really what’s important for the advisor and for the client is to make this part of the overall strategy so they can create that benefit for their client and so their client doesn’t have to worry about, am I going to be okay in retirement, knowing that their trusted financial professional has been shepherding this account for them during their regular engagement. So really important for the end client to see the benefit of management of these accounts as part of a strategy. And of course for advisors that are focused on serving their clients that are fiduciary and that are always looking to do the right thing. That’s why it’s so important for them as well.

Craig: Yeah, it is amazing how long we’ve gone. This is not a new number of these 401k’s we have it being the primary means of retirement savings with a large chunk of investors savings stored away in these plans and we really had no way to interact with them except manually where the advisor looks at and goes okay, well I don’t like this holding change that he’s got to trust the client to go login find the way to do that and do the rebalancing themselves.

Dave: Yeah, we actually see advisors taking two approaches on these accounts. So that’s quite a common approach, which is, if you bring me your statement, when it’s convenient, at the end of the year or when we get together next, I can take a look at it and I can give you some recommendations and then my hope is that you’re doing something about it. That’s a very reactive approach from the advisor standpoint. They’re trying to help which is nice, and we can talk about some of the compliance implications on doing that as well. But it’s not a full service solution, it’s a reactive approach.

Dave: There are other advisors and we see this quite a bit, that actually one at a time will take them if they’re taking all of the right steps. If they’re claiming custody and they’re going through surprise custody audits, and they’re securing client credentials. This is a process that we’re seeing very commonly in the industry. The client wants help with the account. They’re they’re basically permissioning their advisor to do this. It becomes a very cumbersome manual process for the advisor. It brings a lot of risk to the advisor from a cybersecurity element because advisors are typically not SOC-2 certified, they typically don’t have chief information security officers to kind of monitor how this works. And they’re not built for this. So although it’s great that they’re doing this to help their clients it creates a lot of direct liability for them. And what we’re finding is that outsourcing the ability to conduct the entire security audits and InfoSec process and secure trading is something that they’d prefer to offload to us versus figuring out and trying to do themselves. But there’s policies, the SEC has policies and procedures in place on if you are going to take credentials and if you are going to trade these accounts. This is what you need to do and here’s how you need to subject yourself to surprise audits and what that looks like as well. So it’s happening today in quite a significant scale.

Avoid Cybersecurity Risks

Craig: And those cyber issues are real. So if the advisor has a whole list of client logins somewhere stored in a list that’s available if his if his local network gets hacked, or if an employee which is often the case, decides to do things on his own and go mess around. Having again, the SOC-2 certification is important, and most advisory firms are not. Big risk there that’s been offloaded to you guys. So that leads me to next question is, how has the technology evolved? So how has things changed on the Pontera aside from the way you used to be doing this to the way you’re doing it now?

Dave: I think we can take a step back and start in 2012 when we actually launched the company as FeeX. The original name of the company was FeeX, which was Fee X-ray, and it started out as an analysis platform so analysis only for accounts that end clients needed more transparency and detail into. The focus of the company was to help the end investor retire wealthier. Our path to do that, at the time was looking for different ways to improve outcomes for the individual investor.

Dave: So understanding the fees they paid in their retirement accounts and understanding what else was happening in these accounts, and trying to find ways to help them improve these outcomes by providing this additional information to them. So that started in 2012, and as we continue to evolve our technology and improve our technology, we moved closer to realizing the vision and of having an accurate and fast and secure way to understand these accounts. We started seeing demand from an unexpected industry participant instead of the individual. We started hearing from financial advisors, which is, these analyses and this information is so critical for my clients success in retirement, what else can I do with this information?

Dave: Then we started getting calls from advisors telling us that they were logging in and going through this process to trade their clients accounts. And we got more and more of these calls. And they said, Listen, I’m trying to do everything I can to help my clients but this is really cumbersome for me and I’m taking on a lot of risk. So the company has evolved quite a bit starting as a fee analysis platform serving directly the consumer, shifting to a full service advisor platform where we actually serve the consumer through the advisor now and then layered on the ability for the advisors to securely manage and trade these accounts for their clients, really because of advisor demand from their clients demand. So there’s a long arc in our journey which couldn’t have happened without the preceding six years of really being able to deeply understand these accounts and what goes into them and how they operate.

How 401k Trades Are Sent

Craig: Let’s talk about how the trades get sent. So you’ve got connectivity directly to these 401k providers. So you avoid, you’re not logging in manually with with credentials, you’ve got connectivity to them. So how do those trades get sent at a high level to the 401k providers?

Dave: So the nice thing about our platform is that we’re provider agnostic, we’ve built our platform to work across providers. And this is important because advisors have clients all across the country, and different plans with different providers. So everything that happens on our platform happens securely, creating a barrier between the advisor and actual clients account, rather than the advisor going in and logging into the account one at a time, they’re just logging into Pontera as a secure intermediary. And then, when an advisor is in our platform, they’re using us as basically a communication layer between themselves and the clients account on behalf of the client. So clients go and actually authenticate directly into our platform, the end client, the person who actually has the account. And then when the advisor is in our platform, they can’t do anything else. So the advisor cannot do anything that would trigger custody. They can’t request distributions from the account. They can’t update beneficiaries that can’t change client’s address. The whole purpose of the platform was to create a secure environment where advisors can communicate orders and trade, but not do other things that basically they shouldn’t need to do and can create compliance complexities. So we sit basically as a layer on top of the financial institutions website and we communicate orders when the received by the advisor directly to the financial institution on their behalf.

Craig: Nice. And how is the data sent? So going on the other side, how is the data sent from your system to a advisors portfolio management and reporting tools?

Dave: That’s a great question. And it’s actually a very important part of our overall solution to advisors. So, advisors spend a lot of time every day in their portfolio management systems, some of our partners, Orion, Morningstar Office, Black Diamond, Panoramix, we also work with Capitec and Advyzon, and when advisors are working within these systems, they want to see the entire picture for their client. So one of the services that we provide as part of our offering, is we actually send data from our platform to all of these portfolio management, performance reporting and billing platforms, which comes over as basically the same as they’re receiving and ingesting custodial feeds. What this does for the advisor, is it allows them to see all of their clients assets in one place. It allows them to household and allows them to plan holistically and then it allows them to report it and bill on these assets as a household as well.

Dave: It’s a huge value to the advisor because this is how they run their day to day. So of course we want to integrate everywhere where advisors work. We want to make sure that we’re providing, you know, great service to our advisors. We also go through a full QA process on the data before we send it to our partners. You know better than most advisors complain about data quality and data integrity day to day in their experiences and we spend a tremendous amount of time and resources making sure that data goes through make sure that it comes over clean and make sure that it’s normalized before it hits the advisors platform so they can use it effectively in their day to day. This also leads the clients to be able to see their accounts in one place. A lot of these firms offer client portals. And clients want to be able to log in and see all their accounts and how they’re performing. So the data also informs and helps feed those systems as well.

Data Quality Assurance

Craig: So we do a data assessment service for a lot of broker dealers to help them understand their data, optimize it, understand upstream downstream sources in order to prepare them to have a better organization or to structure their data to make it easier to implement enterprise systems. So when you said you do data QA, I get interested in that. You say you’re normalizing the data. Can you talk a little bit more about how you’re doing that and why?

Craig: Yeah, I find that really interesting. Especially around the private funds and the other securities that are available, because normally in held away accounts, you can see what is in the 401k which is easy, but you don’t know what else is available, what other securities and funds the clients have. So you want to rebalance, you got to tell the client go to the account, go to the screen, print it out, so I can see what mutual funds you have available. Whereas with your system it just shows up right away as part of the system so they can easily rebalance. That seems to be a huge benefit for advisors.

Dave: Yeah, that’s right. In the past they were usually looking at current holdings and the balances of holding but they weren’t looking at the entire picture. It’s actually interesting, Jason Roberts, the ERISA attorney, who was recently quoted in RIAbiz and what he said was, if you have a problem like Pontera, you can actually lower the practical risks that most firms have in the space. What he was talking about is that clients are asking for help with these accounts and advisors are basically doing everything they can do to help, which includes giving recommendations on statements or screen sharing, and trading together or logging in and trading for their clients that we discussed before. And all of these actions without the ability to have a clean and detailed information on the client’s account without having supervision in place creates a tremendous amount of additional risk. So broker dealers historically did not allow for advice on held away accounts because they didn’t have a system in place to surveil the advisors and to actually collect the data. What you learn, and what Jason was explaining is that when you put a system in place, because advisors are doing this anyway because they’re trying to help their clients in every way they can, putting a system in place like Pontera being able to actually supervise these activities and understand the totality of a client’s account instead of guessing at what’s available can actually help reduce compliance burden for them while offering a positive benefit to their clients and to the firm overall.

Craig: And broker dealers are really strict about this stuff they don’t like advisers doing anything that’s going to raise compliance flags, and broker deals also like revenue, so even though they’re there, they see that they can be charging like 50 basis points for held away accounts advice, they won’t do it if they think it’s going to raise compliance flags. So having your software there as that, I like how you said it, a secure intermediary, a communications layer between the adviser and these in these accounts.

Dave: Yeah, and that’s on the advisor side. There’s a whole separate component here of us sending the data downstream like we discussed whether that’s to the portfolio management systems, or actually to some of the compliance supervision systems that some of the larger broker dealers used so they can actually supervise and monitor this and what’s a bit ironic is that to Jason’s point, these broker dealers historically were creating more compliance liabilities for themselves because advisors were just doing it with an absence of a solution. They were just trying to figure out ways to help their clients with these accounts, and that process and that in lacking detail and lacking supervision created more compliance challenges for them.

Dave: You also mentioned something that I think is important to touch on from a fee perspective for advisors. Most advisors charge their standard management fee in managing these assets for their clients. And this is important for two reasons. One, the benefit is still there to the client. The 3% studies talk about value of an advisor, that’s a net of fees and the average fee is around 1%. And that’s a big part of this is creating additional value for the end client. The second part of that is mitigating conflict and in a lot of instances, if you look historically, advisors had a significant incentive to recommend the rollovers of these accounts, so they can manage them and so they can fee on them properly.

Dave: Now, when you think about an advisor charging a level fee across all of the accounts that are managing, it actually helps reduce or eliminate any rollover conflict that the advisor has. So when they’re making the decisions now moving forward, where’s my client better served, they can take themselves out of the equation and think about where’s my client better off? Is it better off with their assets in their 401k where they get additional creditor protection or other benefits potentially for being in the plan? Or are we better off rolling them over to an IRA managing the assets there, which sometimes is the is the right outcome. In either scenario, the advisor can take themselves out of it and say, I’m going to manage the accounts regardless I’m going to do what’s best for you. So let’s just talk about that and let’s not talk about anything else and it helps eliminate that which is definitely a big benefit from the compliance side and for the advisor and the client.

Craig: It removes a big conflict of interest.

Dave: Yeah, it’s where the DOL has been pretty heavily focused the SEC best interest rule the DOL fiduciary rule. Both have a lot of focus on this particular subset of advice. And this is definitely a helpful measure in eliminating that conflict.

Support for Private Investments

Craig: One other thing you mentioned that I didn’t realize was the proliferation of these collective investment trusts and other private funds in defined contribution plans, 401k plans, 403b plans that are not publicly available. What is the deal there and how are you guys handling those types of funds?

Dave: It’s actually something that we talk to advisors about quite a bit. Oftentimes, it’s hard to understand that a fund with a similar name as a retail fund is not the same fund. And in 401k’s and 403b’s, these have historically been popular, and from recent research, actually it looks like they’re becoming increasingly popular. Oftentimes, they’re actually lower cost to the public version of the funds and they’re negotiated by the plan to get discounted pricing oftentimes to the benefit of the client, sometimes they’re more expensive.

Dave: So because of the level of depth we go into when we analyze these accounts, we actually show the details for these collective investment trusts. These funds do not have tickers or CUSIPs. So when advisors are out there googling names of funds to try to figure out what a client holds, oftentimes they’re pulling up a different fund than what’s actually in the plan. Again, creating compliance risk when they’re making a recommendation. And our platform shows the actual fund in the plan so the advisor can make an informed decision. But we wouldn’t really have that capability if we didn’t have the previous six years of experience analyzing 401k’s and 403b’s.

Craig: It all adds up, you have all that experience and then it all comes out in the end. And something that’s good.

Dave: Absolutely.

Craig: I want to congratulate you as well, you just made some a couple of announcements about new partners. So you’re now integrating with Morningstar Office and Advyzon, and you mentioned this other list, Orion, Black Diamond, Capitec, Panoramix, GeoWealth. Can you talk a bit about these new integrations, why you did them? What’s going to happen? How are advisors going to use them? Give us a rundown.

Dave: We’re very client centric as a company. So we want to build the features that our clients want and that they’re asking for. The number one ask in terms of integrations is we want the data feeding into our portfolio management reporting solutions. And the partners you mentioned are the ones that continue to get requested by our clients as to what they’re using and what they care about. So Morningstar Office and Black Diamond are two on the list that we had a long list of advisors asking us for, and we’re happy to be able to deliver that data through them so advisors can have the entire ecosystem of data and the data they need to serve their clients at their fingertips. So those are two of the more recent ones that we’ve built them and and have announced.

Craig: You’re covering a lot of the market, it’s almost a vast majority is only a couple you’re missing of the of the major RIA platforms.

Dave: Yeah, and a lot of these are working not only in the RIA space, but in the broker dealer space as well. And, like I said, important for the advisors to have the solutions they need and I’ll give credit to our partners as well because they’re listening to the market and they’re realizing how important this is for the advisors business for the growth of the advisors business and for their clients at the end of the day. So the partnership of course is always a two way street. So credit given to our partners as well for listening to the advisors in the market and understanding the importance here.

Craig: Dave Goldman, we are out of time, man, you did great. Can you please tell everyone where they can find out more information about Pontera?

Dave: You can go to Pontera.com. Our new website our new name and logo, formerly FeeX, and we have a career section we have an Information section and we’d be happy to speak with you with any further questions. Craig, really great to be on the show. I really appreciate your time.

Craig: I appreciate it as well, thanks a lot Dave.

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The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com

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