Commonwealth Financial Network Integrates with Pontera

As of December 31, 2022, a total of $37.8 trillion was held in U.S. retirement plans and accounts, of which $26.3 trillion (70%) was in employer-sponsored accounts.

These accounts, including 401(k)s, 403(b)s and 457s, were once part of the last frontier of assets that advisors could not reach since the SEC decided that regulatory AUM can only include securities portfolios for which the advisor provides continuous and regular supervisory or management services.  Because these retirement accounts were held away and custodied with the client’s employer, there was no way for the advisor to directly access them.

Some advisors would give instructions to their clients to make trades in these accounts on their own, but this doesn’t meet the requirement for continuous supervision.

Now, advisors haven’t been left in the dust when it comes to giving advice on accounts where they aren’t directly handling the trading. They could still offer their wisdom and charge for it as Assets Under Advisement (AUA). 

But let’s be real, there’s always been a bit of a gap between what advisors would charge for managing everything directly (AUM) versus just offering advice (AUA). This gap highlights the extra effort that goes into hands-on management of assets compared to just giving remote direction.

The AUA approach has become more popular as software tools make it easier to monitor and bill on held away assets, but it hasn’t been all smooth sailing. Shifting towards a “Buy and Hold and Monitor” strategy means fewer trades and less hands-on action needed. 

However, advisors face some bumps in the road with different fee structures and the need to clearly communicate what trades to make and when. Despite these hurdles, AUA opens doors to offer guidance on more assets and reach new clients who might not fit the traditional AUM mold.

Enter Pontera (which was known as FeeX before their rebrand in 2022), which has built a game-changing platform for managing accounts not directly under the advisor’s control. Originally aimed at helping investors understand fees in their retirement accounts, Pontera shifted gears to equip advisors with the tools to make direct trades in clients’ employer-sponsored retirement accounts. 

This pivot allowed advisors to manage held away assets just like they would assets under their direct control, offering consistent service and enabling charging the same fees across the board, all while ditching the headache of having to nudge clients to make trades themselves.

Pontera’s been making waves, having recently bagged $60 million in venture capital, part of a series of investments since it shifted focus to handling those hard-to-reach assets. With nearly $160 million in total funding since its start in 2012, and a whopping $130 million of that since 2021, it’s clear that they have the backing to build out their team and scale their platform. This financial support targets a growing eagerness among advisors to broaden their horizons and include other assets in their AUM, not just the easy-to-access ones.

The firm developed a secure communications layer that connects to each of the major 401(k) plan providers so they can extract individual positions and prices and then send them advisor trades for execution.

Pontera’s technology enables advisors to securely manage commonly held-away retirement accounts. The software gives clients control of permissions and allows advisors to manage held-away assets without obtaining credentials or accessing the accounts directly. By putting 401(k)s within advisors’ reach, platforms can greatly increase their AUM without adding a single new client. 

It all sounds fantastic– but what does it actually look like when a wealth management firm integrates Pontera into their ecosystem and advisor workflows? 

Commonwealth Financial Network recently announced a partnership with Pontera, making them the vendor’s largest publicly-announced client with over 2,200 advisors and $300 billion in assets. Last year, Commonwealth transformed from an independent broker-dealer structure (IBD) into a national RIA that also has a broker-dealer platform.

To get the details, we sat down with Karen McColl, Senior Vice President of Wealth Management at Commonwealth Financial Network, to dig into the realities of implementing Pontera’s solution across a large advisory firm. 

The Value of Partnership

A large portion of most Americans’ wealth is held in their employer’s retirement plan, McColl explained. And with over $10 trillion in assets in these and other other defined-contribution plans, almost a third of all retirement assets are off limits. But with Pontera Commonwealth advisors will be able to directly manage these accounts and bill on them which will deliver a huge boost in revenue. 

The ability to advise on held away retirement assets will also benefit advisor recruiting, McColl noted, since most competitive firms do not have this capability yet. Advisors are always looking for ways to increase their fees while still maintaining scale, as Pontera promises to do. 

Commonwealth is focused on holistic financial planning, but advisors had a blind spot when it came to clients’ retirement savings, McColl reported. The details of what securities they are holding, what options are available, and what type of investment strategy was being utilized were all indiscernible from inside the black box of employers’ retirement platforms, she said. 

While there were some rudimentary solutions implemented to help fill the gap, most of those options relied on having conversations with clients about what they should do for a specific type of account, and then hoping they were able to go into that account and implement those changes properly. The results were not always what the advisor expected. 

This clunky management will no longer be the modus operandi once the Pontera platform is implemented, and McColl predicts that in five years over half of their advisors will be active users of the system. Commonwealth will be using Pontera to trade as well as manage client accounts. Advisors will be building their own models, applying the model against the held away retirement assets, executing trades to implement the model and then performing ongoing monitoring. 

Onboarding Details

Conversations with Pontera began a few years ago, but it took time to get all interested parties comfortable and on the same page. Implementation of the Pontera platform for Commonwealth advisors is scheduled for June of 2024, according to McColl. 

Use of the platform is optional for advisors, though most seem interested in the capabilities offered. McColl emphasized that Commonwealth will be carefully monitoring how many advisors are onboarded, making sure that all participants have a positive experience. They’ll also be keeping operational teams in mind by making sure they’re fully staffed and ready to support the increasing volume of users. 

The conservative rollout will be starting with a set of early adopters that Commonwealth has already identified, those advisors that are the most excited and have already been providing feedback and support for the integration. For the first year, they’ll be bringing in a handful of advisors each month to understand their capacity model before taking a wider view in 9-12 months to see if there are any other major resources or changes they need.

Regulatory Concerns

Some broker dealers have avoided Pontera despite its wide-reaching benefits due to concerns around regulatory issues. The vendor recently faced a challenge from regulators in the state of Washington who made a unusual claim that the use of Pontera may constitute a breach of the state’s administrative code by directing clients to provide their 401(k) plan login information to the platform (even though that information isn’t shared with the advisors themselves), as well as whether the client’s providing login information to a third-party is a violation of their 401(k) plans’ terms of service.

However, Commonwealth went through a comprehensive internal review and analysis of the process and felt comfortable with how the system was structured after checking that all the correct disclosures were in place. 

They’ve also implemented a robust training process for advisors, making sure that they’re properly informing clients exactly how everything works. While there’s always the possibility that things could change, McColl emphasized that the investor is the owner of their assets and they have the right to elect a professional to help them manage those funds, no matter where they are held.

Fee Calculations

Commonwealth will be charging clients a lower management fee for assets accessed through Pontera.  This is similar to many other Pontera clients who differentiate between assets they custody and those held away.. 

“Unlike in other areas where advisors are looking at a limitless investment universe, they’re now looking at a captive investment menu and deciding on asset allocation from that– but there is still substantial work involved,” McColl delineated. The advisor needs to understand the details of those investment options and how they fit together, as well as stay up to date on any changes or performance issues. 

Case Closed?

Though Commonwealth is still at the beginning of their partnership with Pontera, there are many valuable lessons to be gleaned from the process. A well-organized and consistently managed roll-out, in-depth research and legal legwork, and a drive to make the best tech experience possible for their advisors will set them apart from their competitors. 

A revolution in direct management of retirement assets is upon us — how will your firm respond?

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ABOUT ME

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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