Welcome to the second episode of the Fiduciary U™ podcast. My guest today is Aaron Schumm, Founder and CEO of Vestwell, a digital recordkeeping platform that leverages modern technologies to bring a low cost, easy-to-use retirement platform to the large and underserved small and medium-size plan market. Aaron has over 15 years of experience in FinTech, financial services and wealth management for companies like Northern Trust, Citigroup and Fiserv. In 2014, he sold FolioDynamix which was a company he cofounded that provided technology to help wealth management advisors create and manage model portfolios. He founded Vestwell in 2016 to modernise the way 401k plans are offered, partly in response to the challenges he faced when trying to setup and manage a 401k for his employees at FolioDynamix. Vestwell has attracted significant amounts of capital, primarily from the financial services industry, raising over $30 million from companies like Goldman Sachs, F-Prime, Point72 Ventures, Nationwide, Allianz, BNY Mellon, and Franklin Templeton.
On today’s episode, Aaron and I talk about how technology is reshaping the recordkeeping industry. We discuss how most recordkeeping platforms are built on top of legacy technology systems that in many cases are 30-40 years old which limits flexibility and access to data, creates errors and inefficiencies, and drives up costs. How Vestwell leverages modern technologies to avoid many of these issues by automating processes like payroll integration, loan processing, notice delivery, and identifying errors in real-time, especially when integrating payroll data. We discuss how and why Vestwell, after originally building a modern interface on top of a large, legacy recordkeeping system, launched Vestwell 2.0 in January 2020 which replaced this legacy system and built their own recordkeeping system from the ground up. We also talk about cybersecurity and what steps Vestwell takes to protect data. And be sure to listen to the end where Aaron shares his thoughts on where the retirement industry headed over the next 5-10 years and the role of technology as well as his single best piece of advice for making ERISA fiduciaries smarter. And so with that introduction, I hope you enjoy this episode of the Fiduciary U™ podcast with Aaron Schumm.
“What we wanted to do was create a platform that removed the friction across the retirement space.” - Aaron Schumm
“This is not a one-size-fits-all industry.” - Aaron Schumm
“I would argue that the greatest risk for companies is not breaching their fiduciary duties—it’s operational failures that go unnoticed.” - Josh Itzoe
Josh Itzoe: Well, Aaron, thank you so much for being on the Fiduciary U™ podcast. The whole purpose of this podcast is to make ERISA Fiduciary smarter. And I'm really excited about you being a guest and can't wait to hear your insights and your perspectives and hear all about what Vestwell is doing. Welcome, so thanks for being on.
Aaron Schumm: Yeah. Thank you. Happy to be here. Really excited to have the conversation.
Josh Itzoe: Awesome. Awesome. Well, I think it's going to be a far-reaching conversation. Probably talking about a lot of different topics and I think you're going to have great insights about that. So for listeners who may not know who Vestwell is, why don't you give just a quick little intro about who you guys are and what you do and really the vision you have for the company.
Aaron Schumm: Yeah, sure. So we founded Vestwell four years ago. So we're effectively... think of us as a digital record keeper, open architecture, technology and in-services if needed. But really we're working with financial institutions, advisors, banks, broker-dealers, RAs, asset managers, insurance companies, payroll companies too. Really to equip them to power the retirement plan business workplace initiatives at a scale and in a construct that really hasn't been set up to date. Just trying to bring everything to the modern era. It's a 40 plus year old industry that... it's time for it for a revamp, but as to how it works. But staying true to the core and trying to help solve the retirement needs across the country.
Josh Itzoe: Okay. That's great. And you guys are taking some really unique approaches and we'll certainly get into that. It is a bit of an antiquated model, especially on the record keeping side and just from a technology standpoint. So how did you come up with the idea for Vestwell? You have a long background in technology, you had a prior company that you co-founded, I think was it FolioDynamix? Do I have that right?
Aaron Schumm: Yes.
Josh Itzoe: And that really focused more on kind of the retail or private wealth side of the business and ultimately you guys sold that. You decided to get into the record keeping business and the retirement industry. How did that come about?
Aaron Schumm: No idea.
Josh Itzoe: And do you regret your decision in any way, shape or form?
Aaron Schumm: I don't, I don't, I know. I've lost a lot of sleep, but I don't regret the decision. So long story short. So I started in the ERISA side, fell into the tech world, primarily the private wealth side of the business. As you mentioned, co-founded FolioDynamix. I was a product person by trade product development, designing things, thinking through solutions as to how we could deploy platforms to scale financial services. So I have always worked through the lens of financial advisors, right, in equipping advisors to engage with their clients.
So back in 2010, we were offering our own retirement plan to the FolioDynamix employees, right. So we're a few years into the business, had about 30 employees and our employees wanted 401ks. So we're like all right let's do this. We went through the process, but I think one of the sales guys, he had a buddy who was a financial advisor from college, came in, gave us a plan. And we're going through that setup process, right. Design and implementation and fund selection. And it was so challenging, right.
And I'm not a financial expert by any means, right. But no more than probably the average person out across the country. And I was like, "this shouldn't be this hard". And so kind of through my product hat, I was like, "we should design a platform to build the retirement side of the business and married into wealth, right? So you're working with someone from the first workplace touchpoint all the way through any stage of their life. And that's where it spawned the idea. So I was going to try to build this at FolioDynamix actually, before we sold the business, but our investors wanted to stay focused on wealth.
So fast forward, we sold that business. It's now owned by Envestnet and I kind of worked out a deal to quietly slide out the back door to try to fix the problems that I lived and experienced. And do so through a recognition and an appreciation for how the industry got to this point. By thinking through, "okay, what can we actually do better?" Right. It doesn't need to function the way it was initially designed. It was designed in an era that needed that at that time. But the world's changed. So let's create something to reshape this and go after it. So really what we want to do is create a platform that removed the friction across the retirement space, right? Give any business, regardless of size, we focus on small midsize businesses, right? And then I'll define that by saying, "less than 50 million plan assets".
We have clients that are more than that, but less than 50. And typically it ends up being probably less than 10, right? And that's 98% of the market by volume. So we wanted to create a platform that could engage, that advisors could take out to their clients and say, "here's what we're going to do for you". And do it in a manner that gives people comfort and confidence and making the right decisions for their employees and then managing all the way through, right? Get employees engaged, get the businesses engaged, get all the thought processes that have to go behind this and make it feel really fluid and easy, yet manage the complex stuff behind the scenes. So we do the stuff people don't want to deal with, right, behind the scenes and try to build the technology to automate those. But do so, then make sure that it's open architecture, that we're doing the right thing for the folks that we're working with because we're not going to clients directly and knocking on doors. It's all through the lens of financial services and or payroll. Obviously there's a lot of overlap between them.
Josh Itzoe: And what was the impetus, because you have some competitors who are trying to go more of a direct approach. What was the strategy or the rationale behind why to go to market through call it the kind of advisory channel or through payroll companies?
Aaron Schumm: Yeah. There's a few reasons. One, whether people want to admit it or not, and maybe this is an East coast versus West coast philosophy, but I spent the majority of my life on the East coast. Advisors run this business, right? And advisers are front and center in doing this. If you look at Fidelity's last study I think last August, 92% of plans have an advisor attached to them. Which is up from 68% back in 2008, if I remember the number correctly. So advisors are here and they're staying, right? And this idea that advisors aren't needed in this space, I think there's a naivety behind that. I think there's opportunities for that, right? And there are people who maybe don't. But this, it's complex, right? In designing the right plan and creating a solution that can grow with a business and grow with the employees. There's conversations that have to be involved.
So we look at it and say, "listen, let's equip financial advisors to do what they do best and asset managers and insurance companies, but give them the ability to scale it. So people aren't stepping away or saying, "Hey, I'm not going to service these small clients because I'm just not going to make money". It's like, "Well, you know you actually can. You can make you make money. You can create a really sticky relationship that allows you to grow". And on the other side, from our business just purely economically, the cost of acquisition to go direct to businesses is huge, right? It's 100 times what it costs to equip advisors and do that. And if you think about fee compression and across the industry being cognizant of that, like it's happening, right. We're not going to ignore it. So let's make sure that we're set up for the future, that we can build a profitable, scalable business on its own, purely through technology and not worry about anything else that could be perceived as conflicts or stepping on toes of the folks that we're equipping to engage with their clients.
Josh Itzoe: Yeah. It's interesting from a fee compression perspective and on more of call it the robo side in betterment. I remember a couple of years ago, I think I had read that at the time and this is maybe two years ago, that their cost of acquisition was like $800 per client. And their average revenue per client was like $80 a year. And so that's not a great economic... When you're heavily funded and you don't have to be profitable. You're trying to kind of grow and scale from that perspective. But you don't need your own oxygen if you will, because it's being supplied externally.
That's a little bit easier to do. And that's one of the challenges I think that we've certainly seen. I actually write about this quite a bit in my latest book, the Fiduciary Formula. The record keeping business used to be a goldmine for a lot of these large asset managers. Because they could give away the record keeping because they knew they were going to have their proprietary funds or proprietary product where it was really high margin product.
And that was... You could give away the record keeping. I think what we've seen over the past decade or so, and I would say this corresponds for few different reasons. One, I just think the focus on fees and a lot of that was driven by the litigation from Jerry Schlichter and from his team at Schlichter, Bogard & Denton. So you had that litigation piece. I think to your point, over the past call it 10, 12 years, this rise of this independent fiduciary advisor stepping in as a advocate or intermediary between the traditional record keeping industry, where a lot of companies went direct, a lot of plan sponsors went direct to keepers. And now you've had these kind of professional fiduciaries. Firms like mine at Greenspring Advisors that have stepped in as the... I would say in a lot of ways, maybe most trusted service providers to a lot of these plan sponsors.
And also I think just the rise of passive low cost investing, which is going away from proprietary product, going away from active management, going away from revenue sharing. And so you've seen record keeping in general become a lot less profitable for these traditional record keepers. And we've seen kind of an impact, certainly on the advisory side from that low margin business. You're getting more and more record keepers who are...their response rates are falling, the level of seeing your people is declining, that they're assigning the relationships. It's much more self service because I think it's an indirect approach to say, "Hey, if you want to beat us up on fees, you're going to kind of get what you pay for".
And so you talk about automation, maybe spend a little bit of time... how do you do that? Because you're competing in a space in record keeping that historically has not been... Well, maybe not historically, but more recently, not that profitable. Like how do you fight that battle? And how do you kind of have success where some of these legacy, large record keepers have struggled? Is it all technology?
Aaron Schumm: Yeah. So we're paperless, right? Unless someone legally says, "I need paper". So we look at where are the areas of heavy lift, right? And where do humans get involved in non-value add. And to try to solve that because that's where things become expensive and exclusionary from the sense that people don't want to go down market or go to a certain type of client because they know it's going to involve a lot of people to get their hands in there. And so when I say that, there's things we think about like payroll, right? Processing payroll, capturing the payroll data, normalizing that data, capturing the census information and calculating eligibility without errors, right? That's a huge lift. And usually it involves people grabbing data, pushing it, looking for errors, pulling out, scrubbing data, going back into the system.
So we think about how do we get that to go through in one fell swoop without anyone touching it. Because if that happens right, then you eliminate all the downstream impacts, right? Where you missed eligibility. Now you're going to do lost gained colleagues. Now all of these things that become people intensive, that drive the cost to serve up, which makes it uneconomical for most businesses to play in a space or most record keepers to be in this space.
So we look at how do we automate that stuff as much as possible and get things through clean, right? So one of our initiatives as a business... So we have a goal, kind of an OKR that we said, "we want 95% of payroll to go straight through without anyone touching it". Right? We're at 92% right now, right? Which is still pretty dang good relative to the industry. Right? And far above anyone out there.
So that's one piece, right? But other things like sending notices and whatnot. That often involves people, right? Even if it's grabbing PDFs and pushing them somewhere. So we automate all that. Looks at the plan design, looks at the timing of it, looks at who it needs to go to and when. And the system will automatically send that stuff out, right?
So what we're doing in this is you spend the money upfront to build and engineer this process, but you can recoup that quite quickly when it's automated. Now you don't need to hire people in house to start writing up notices. So those are a lot of the things that we do, loan processing, same sort of thing. How do you do 316? And we try to automate most of it. It's not fully automated, but most of the full 316 services down to signing are automated at this point. Right? So again, just driving the cost down to serve, which allows us to run a profitable business at a fraction of the price. Point back out to the unplanned sponsors and in part-
Josh Itzoe: And so what is your competitive advantage? Like why can you do it at a lower cost? Like is it legacy systems for these large record keepers? Is it kind of how their technology stack is designed? Like why is it so tough for a legacy record-keeper to do what you're doing?
Aaron Schumm: Yeah. So it's a good question. So most record-keepers, and I'll be specific. So when people say record keeper, oftentimes they think of a large financial institution services organization that offers retirement plans. Let's use, I don't know, let's say MassMutual, right? Or whoever pick a name. They're not really record-keepers right? They've effectively either licensed or acquired a piece of technology and then surrounded it with a bunch of people to try to service it, right? And we look at it... That core technology is where the flaw lies, right? And we've learned over the lifecycle of Vestwell, right. Where we worked with legacy providers and so-
Josh Itzoe: That's where you started right? That basically was your launching. Did kind of the same thing.
Aaron Schumm: Yeah. When we are launching, because we knew we couldn't build a record keeper out of the gates, too expensive and we'd be out of business, right? Because it's a big ship you have to build. So we worked with Relias and whatnot, and other partners to optimize the interaction. But at its core, it's still flawed. There's only so far you can take that, right? And because you're still riding on batch process, you're beholden to the internal workings of those systems. Which were built oftentimes pre-internet, right? And so there's only so far you can take it. Like if you asked for some of these companies, they're like, "yeah, we'll give you your APIs". And not to get too technical, but those APIs are not real time processes. So APIs are descended message to kick off a batch process that runs overnight. Right? And that's not helping anyone. Right?
Josh Itzoe: And just so listeners know, an API is what an app application programming interface. Essentially kind of the hooks within the system that allows it to easily communicate or integrate with other systems without some of the legacy coding that had been done 10, 15, 20 years ago.
Aaron Schumm: Yeah. It's having conversations with technology back and forth in real time. And creating a process behind it. So when we did that, we realized, well there's only so far we can do this, so we can take this. So we started pulling things out of the record keeper inherently reside there. So when I say that, I mean, processing payroll. So you're using some payroll company, you're pulling down the data of your employees, you're adjusting that to kick off the contributions and the investments for the employees. So that process takes a long time, takes multiple days. And oftentimes if there's an error and then it kicks out a file, or that says, "Hey, there's an error in row 42 here in this field". Right? And then you're going through trying to decide what that error is.
So were like, okay, that's not helping anyone. So how do we optimize that? How do we normalize the data? How do we capture it? How do we clean it up front? So it happens instantaneously and then goes through. So in doing that, we kept going through a bunch of iterations of different think processes, right? That happened and then we realized, "Hey, we've kind of built a record keeper". And then we started asking the question, "well, why this, why this", we just asked why until we're blue in the face. And then started rethinking how it actually works front to back.
So to get back to specifically answer your question. So we're no longer hamstrung by anything legacy. So we've built the front to back service technology to run retirement plans. But without a legacy record keeping in there and a completely new architecture that resets the bar for the industry and how people think about their financial investment accounts. And allowing it to behave more closely to what you do in your personal life, have that also behave in that manner to the workplace.
But obviously payroll connectivity is key to that and making sure that you can have payroll deducted contributions into the right field. So when we do that, it allows us to drive down the cost, create an experience that people expect in today's on demand world, and then gives us a lot of white space to build on an infrastructure and an architecture that's designed for today's world. And we're not hamstrung and dragging along some legacy piece of technology. That's not going to get you what you need. You can create something a little better, but at some point you just... you throw the old car, the gas guzzler, in the trash, and you're like, "I'm going to get a Tesla because that's where the world's going to go". Right. So that's a little bit of the mentality that we have as we approach this.
Josh Itzoe: To be fair, you guys had originally, I think was Relias who you had kind of built on top of.
Aaron Schumm: Yup.
Josh Itzoe: And you built this... a lot of hype about you guys and you guys have definitely made noise in the industry. I think you guys have raised probably North of maybe $40 million or so.
Aaron Schumm: Yeah.
Josh Itzoe: I think most recently, Goldman Sachs put about $30 million in?
Aaron Schumm: Yup.
Josh Itzoe: You guys led kind of your—and obviously Goldman with their purchase of United Capital, I think last year. Or certainly they're using their balance sheet to make some noise in the RIA industry and now the retirement industry as well. And so you started with a really slick kind of modern interface, but it was built right on top of Relias. And earlier this year, I think you kind of created this full kind of front to back, if you will. Unplugging Relias and the plan is to migrate away from them and really have your own kind of front to back digital platform from soup to nuts. Correct?
Aaron Schumm: Correct. Yeah. So we call it Vestwell 2.0. So we rolled it out in January, the first plans. It was starter plans, right? New plans we put on there more to control the variables. Right? The majority of our business is actually conversions of clients, but we started small and have put that in place. All new plan business has been going on to that platform since the beginning of the year. And we start conversions of plans... Actually, September 1st is the first batch that start coming on. And then all plans will start to flow onto the new structure. So we started with the Relias. Yeah. And then we got to that point where we're like, "we can only take this so far". We've also worked with clients. They're large players in the space and one of them uses AMI. Right? And they're like-
Josh Itzoe: Which is like a competitor to Relias as another kind of record keeping platform.
Aaron Schumm: Yeah. They're both owned by FIS and the old SunGard. And so they're like, "listen, we can't rip that out right now". So we're like, "sure, we can put it on there. We can help. It'll be better than what it is today without us". But over time, the idea is they start to bring and use the full stack. Where you really get the level of scale that people are looking for. So it's been an evolution, right? Because you can't build all this stuff overnight, unfortunately as much as you would love to. And it's expensive to build, like I said. You're building a lot of complexity upfront, but if you do it right, you do it thoughtfully, it keeps clients there for a long, long time. All right. Then you get 10 years or so. The average life expectancy of retirement.
Josh Itzoe: Retirement plans are hard to win. It's a long sales cycle. Mainly because very few companies would... I always say that the 401k plan isn't a priority until something happens and it becomes a priority. But it's hard to win business. But because of that inertia, once you go through it, you want to focus on running your business. It's hard to lose business too, because it's not like a company wants to make a change every single year because it's not mission critical in terms of kind of running their business. So I think that's a good point. The stickiness factors from what I've seen generally speaking, seven to 10 years is the average life cycle that a service provider will keep a relationship even doing kind of a mediocre job.
Aaron Schumm: Yeah. And we all lose plans over time and I hate it. I take it personal every time we've lost a plan. Even if there's nothing we can do about it. Right. Someone gets acquired or whatever, and it's like a kick to the stomach every time. Right.
Josh Itzoe: Right.
Aaron Schumm: Because you're just like, man you work so hard for these relationships. Right? Then too add more pain to our world, we do a lot of very large institutional enterprise deals. Household global brands in the financial services and what not are leveraging Vestwell behind the scenes, and those cycles are years.
Josh Itzoe: What do you mean by that? Where they're kind of white labeling Vestwell as their 401k platform that they're going to offer to their clients?
Aaron Schumm: Yeah. So 95% of the business on our platform is always white label. Some people know it's us, some people don't. It's their brand, it's their client, and we step in as far as someone wants. In that world ... we work primarily ... Most of them are all advisor led, but maybe think of the relationship, you have advisors that are affiliated with either their own RA or a broker dealer or something, and then there's larger networks with these folks like the RA aggregator-type players. Then to go upstream a little bit more than you have the wirehouse broker dealer kind of structure. We're working with all of that, right? That entire gamut of provider out there, we call preferred provider and enterprise.
The enterprise, oftentimes they have their own legacy in-house solution, or they have 10 solutions on the shelf that they're using. People are kind of waking up, like I have to own the stack now as a provider because otherwise someone's going to walk my business off the back door. They're not capturing rollover business that's being placed with someone that's kind of ultimately a competitor on that side. You're saying hey, we have to bring this into our ecosystem. It has to be our experience, and we're servicing the clients versus putting it on the shelf somewhere else and hoping we're able to pluck people over to their advisory world over time. There's been this consolidation or collapsing of the stack that we're seeing, and so a lot of our larger deals are all kind of in that vein.
Josh Itzoe: It's interesting just as I'm parsing through kind of what you're saying is, and this is one of the things we've seen over the past five to 10 years, and it's just accelerating is this, I think, this delineation of what I call recreational 401k advisors, primarily well-focused advisors that have some clients that are business owners and maybe the advisor on the 401k plan because they have a relationship versus really dedicated specialist advisors. What you've seen is, and the point you alluded to is that, the small market is, historically, has been hard to make money in. That's a niche where ... or a space that a lot of specialist firms, in order to generate the fees that they need to, they play more upmarket.
Now we're starting to see that begin to come down, but what you were just talking about with maybe some of these enterprise deals where you have these firms that are really looking at the 401k more as a way to kind of generate opportunity for their private client side of the business, their advisors on an individual level, not necessarily to be super specialist around the retirement side.
Aaron Schumm: Yeah. Let me start this way. Most of the advisors on our platform are specialists like yourself, and you guys are tough cookies to satisfy because you have a very specific way that you want to run your business and rightfully so. But-
Josh Itzoe: We're totally high maintenance.
Aaron Schumm:... working with advisors my whole life. There's a lot to build. There's a lot to put in place. We don't have it all. We're always tirelessly working on enhancing that. The analogy I often give is you, like as a specialist ... Who do I want driving in my car? Do I want the race car driver, or do I want the person who's never been behind the wheel? I'd rather give the keys to the race car driver to go whip around the track, but that car has got to work. It's got to be souped up and ready to fly. That's the analogy that I always use like what we're building and how we're building it, but then you can tailor it down for the advisor that is primarily focused on well and says I want to help a few high profile clients out with their 401K.
It's a bit of a different process, but most of our ... Our mindset is always the lens of the specialist. How do we equip a specialist to do this? Because then we can ... you can quickly pick up rollover business and wealth business without being a heavy lift, and that just can run and be this really just this wheel of clients that are being run on there. We kind of err on that side versus targeting the advisor or who's never really been in the 401K space.
Josh Itzoe: You know, it's interesting. As I've been ... I come across folks at times, or I'll read articles, and there's this, in one sense, ERISA is really complex. A lot of the things when people think of an advisor to a 401k plan, they automatically default towards investments, and that's the purpose of the fiduciary formula is that investments is one of six essential elements. The investment piece is really become commoditized over the, I would say, the last five to 10 years. That what's interesting is what drives outcomes for plans. You have a lot of advisors, and I would say the non specialists are the ones who want to compete around investments. Let's talk about fund selection, or we'll build models or whatnot. Not to say that's unimportant, but what really moves the needle for plans.
It's things like plan design. It's around governance and making sure that there's the right structure in place and that it's getting implemented on a consistent basis. Honestly, one of the things you talked about is operational failures, and we see this all the time and spend a lot of our time helping clients, even clients that have plans that are really well run. These plans are complex, and you've got these different systems interacting. It's funny, the, the industry, especially the advisory industry, likes to fear monger and scare companies around things like fiduciary liability and you're going to get sued. The reality is they totally overstate the probability of what those risks look like. It's more of like a fear-driven approach.
I would argue that the greatest risk for companies is not breaching their fiduciary duties. It's operational failures that go unnoticed, that you had a group of employees that became eligible, and they weren't given the opportunity to join the plan. Then you have to go back and that lasts for three or four years, and then you have to go back, and you have to do gain and losses calcs, and then you got to go through epicures. Those types of ... We helped a company recently that they had miscalculated their true up for a decade. It was a six-figure check that they had to write to kind of fix the plan and that wasn't a fiduciary issue and this is a very well run company.
How are you guys trying to help ... I guess, a couple of things. One, how do you help advisors and plan sponsors around things like, let's say, plan design? Because at the end of the day you can't invest your way out of a savings deficit. Plan design is by far the biggest driver of outcomes. Number one.
Then also, and you talked a little bit about automation. Just how are you guys ... What's the service ... Now, one of the cases I make, or arguments I make in the fiduciary formula, is that the most important thing, like technology is critical for record keepers, but one of the most important things is actually that you have a really good knowledgeable service team. Because when issues come up, you need a team that you could call on that are going to help resolve issues. How do you guys approach that? Asking you a number of different questions now.
In a minute, let's get into maybe some of the tools you provide for kind of plan design and helping plans optimize getting people in and saving at meaningful levels. What, in terms of maybe structure the business, like how big are you guys? How many plants are we talking about? What's your service team look like? Obviously, there's a lot of technology and probably developers, but how are you guys kind of supporting? What's that experience that to support a plan sponsor and also the advisor community? What does that look like?
Aaron Schumm: Yeah. A lot of questions here. Let me start with a plan design piece. When we started this business, and I think a lot of this comes from the team. If we look at our team, most of us have been in this space either in FinTech or retirement or wealth, and bring all those heads together and think about how things are run, again, with an understanding of how the industry got here. When we started the business, we said hey, okay. This is not a one-size-fits-all industry. It's just not. If people tell you that, they're lying to you. It's just like us as humans. We're not all the same. We're all humans, but we have different needs. How do you make sure that you can adhere to that? That comes with flexible plan design.
We started wide. There was a lot we had to learn. We do a lot of business with some large institutions that do a lot of corporate spin-outs and things like that. Those plans could get complex really quickly, and you have to respond immediately. Trial by fire with a lot of this stuff and get thrown into the mix and have to do it, but we have the team that heads do it.
As we've done that over the years, we've learned a lot around where the risk. Ultimately, you want to do what's right by the business and the employees. That's what ERISA there. You make sure that you have that, but then you start unpacking some of the things. Like people have wonky eligibility requirements that they're not adding any value. Someone sold them that so for some reason, way back when, and they think hey, we have that now. You have that conversation. Do you really need this? And why? Because here's where you're opening yourself up to risk. We think of those things in the plan design. Ultimately, it's a decision of the advisor and the plan sponsor what they want to do, but we try to mitigate the risk in those things.
Josh Itzoe: It's interesting you bring that up. Just this a quick little aside is a lot of times those are driven by industry, if you've got a lot of turnover in your industry or ... You may set historically ... obviously today, the most common is companies are doing the right thing and I think making ... most companies we see or that we work with, we recommend like make eligibility immediate. Get people in, and get them in the plan as quickly as possible. Now, there are some caveats where maybe it is a high turnover business and maybe you set eligibility at three months because you lose a lot of people in the first three months, and it's just kind of administrative.
I'm always amazed at how many plans we come across, and you start to ask about things like the plan provisions. Well, why is it this way? Well, I don't know. That's the way we did it ... we've done it forever like that 10 years ago. Okay. You have a six-month eligibility. Well, how many people are still with you after six months? I don't know, 95%. Okay. Well, if that's the case then-
Aaron Schumm: Then why?
Josh Itzoe: Right, exactly. A lot of times what happens is this kind of collective knowledge, it's just the way it's always done, and nobody's asking the questions of well, why are you doing it that way? Is there a better way? Does it still make sense? And so I think to your point asking those questions are important.
Aaron Schumm: Asking why is important.
Josh Itzoe: Yeah.
Aaron Schumm: And not just yeah, we'll do it right. It's why. Not saying we can't do it, but let's really unpack why.
Josh Itzoe: Yeah.
Aaron Schumm: We do that in a plan design side, but we're flexible. We have plans that span the gamut, but, again, we try to eliminate the high-risk things that we know will just create those operational failures.
Josh Itzoe: Right.
Aaron Schumm: Which comes down to the servicing side. Then how do you serve it? We're unbundled. When we started the business, it was fully bundled because we had to control the variables again. As we've continued to build out the platform, we unbundle those services. We have TPAs now running their books on our platform, and they're the servicing arm around it. In house, we have a service team. We're adding more. Actually, we're posting two jobs around it today, two job recs, because just volume and things coming in and clients coming on. We have to scale that way.
How we think about it is, so we have a service team that focuses on the advisor relationships and their planned sponsors, and then we have service team focused on participants because the participant is usually ... We have this theme in house that we manage towards. It's called where's my money? If you think about most questions around where's my money? Did the contribution goes through? Did the distribution get posted? Whatever it is, my loan processing, right? You start to segment those things. Then what we try to do is build videos and tutorials, we have them actually in the platform, to help people through that and then create notifications around that.
We try to have it be what I'll call it a self-service first, but you have to make that easy to self service. Because if someone wants a loan or a hardship out of their 401K, they're not in a good spot right now financially. They're already under stress. How do you help alleviate that and give them what they need up front and hope it doesn't turn into operationally a phone call because then it becomes a different level of service that you have to provide.
We're at, right now, 92% of our business is serviced online. There's not ... it's my son.
Josh Itzoe: Special guest.
Aaron Schumm: Yeah.
So 92% of the business is serviced online.
Josh Itzoe: As someone with four kids, I love it.
Aaron Schumm: The joys of working from home.
In that, we have 92% of the business is serviced online. We have then 8% turns into a phone call. Then we look at the errors and where can we automate things?
Hey buddy, go find Mommy real quick because I'm on the phone right now. I think she's downstairs.
Josh Itzoe: I love it.
Aaron Schumm: The real life. Right?
Speaker 1:Hey, that's the pandemic life right there.
Aaron Schumm: Yeah. So we think about those things in building out and then scaling. Then we also have folks where they're stepping in and doing it. We separate the services. Say Vestwell's doing the adviser and sponsor servicing, but the participants being serviced through whoever our partner is. So we have that. There's also equations where we're just really completely headless, and we're not touching it. Where is it again? Just the engine.
We kind of look at okay, where do you want to step in? What do you want to do? Let's offer that solution, and then we can augment things and then look for ways to add notifications or whatever it may be in the platform.
Josh Itzoe: How big are you guys now? I mean, how many employees do you guys have roughly? How many plans are you guys currently servicing?
Aaron Schumm: Yeah. So we have a-
Josh Itzoe: How many participants across the platform?
Aaron Schumm: We have 65 employees. I believe, I'll have to look at the numbers, give or take 5,000 plans. Participants, I think it's a couple hundred thousand. It's kind of interesting. I can't always state specifically because sometimes we don't see it. We're one piece of the puzzle, and then we're sending data or providing services on other pieces because we are really an engine at its core. We look at the business, we're growing, we just signed a couple of contracts with some enterprises. I don't know. We'll probably bring on ... a couple of these deals are probably would be 10-12,000 plans a year through them. It's a high-velocity-type business. Then we have other spectrums of smaller advisors or RAs that maybe do five plans a year.
We're non-discriminatory in that factor. We're like where do you do? Where do you play? And we'll equip you to do that in the best manner possible.
Josh Itzoe: You said that all new plans are going on to the 2.0 platform, and then it sounds like later this year, early next year, you're going to migrate away from the Relias. What's that conversion experience look like for plans?
Aaron Schumm: It's funny. It's more just the when do we have the timing to do it, to replace it? It's just like a conversion. It's doing block. We do block conversions all the time. It's just about okay, we look at it like ourselves like okay, it's just another block we have to convert and do that.
The plan docs already ... the paper already is built for it so we don't have to re-paper anything.
Josh Itzoe: Okay.
Aaron Schumm: Most people, frankly, won't notice. It's just hey, we're going to swap it out the back end. It's almost like a vendor technology swap in the backend. Their experience really won't change other than things will be faster.
Josh Itzoe: Who do you guys use from a custody stand? Like who actually holds the assets custody wise?
Aaron Schumm: So 1.0 was Broadridge Matrix. 2.0 is actually Foley Financial, Foley Institutional, which coincidentally was just acquired by Goldman.
Josh Itzoe: There's a theme. There's a theme here. There's a theme.
Aaron Schumm: It's funny. I don't think they acquired it f- ... definitely didn't acquire it for us. They have their own initiatives that they're running internally.
Josh Itzoe: Right. One of the biggest challenges in general, and we're seeing it play out, and you and I have chatted about this before. When we think about FinTech, the private client kind of wealth management, retail side of the business, where you started, right, with FolioDynamix, is so far advanced when it comes to technology and platforms and decision support tools, then the retirement industry.
Probably part of that, I think and a big part, is just access to data, to power, those platforms. We have a large private client practice as well. I sit around jealous and frankly pissed off at some of the tools they get to play with that they get to use from a planning standpoint, a portfolio management standpoint, with our private clients. On the retirement side, sometimes it feels like we're in a cave just having invented fire. That's like how far behind we are technology wise. You've been on both sides of the business. What do you think is ... Why do you think FinTech and the investment so far in FinTech has shied away from the ERISA side, the corporate retirement side, and has really flowed into the private client side?
Aaron Schumm: It’s a great question. I think there's a lot of reasons, and I asked the same question of myself, which has things like giving me a job. Having been through the building tech for the wealth side of the business, there's these pockets of money that I think advisors naturally gravitated towards which created the need for technology to service folks. At its core, the biggest things on that side are you have planning, you have modeling, trading, rebalancing, and which incorporates tax.
Josh Itzoe: Tax. Right. Yep.
Aaron Schumm: That’s kind of it. Conceptually, they're all ... it's pretty easy. It's hard, I've built out UMA platforms and my background is really building unified managed households, unified managed accounts, and when it all comes down to tax, how do you swap tax lots and do those things. Then when you get to the retirement side, you have that, but then you have this ERISA layer that I think people in another level of the IRS, the DOL you have to deal with, that, I think, scares people off.
It's complex. It's stuff that's been around 40 years. Hasn't really been touched much and repaid, but I deal with folks on Capitol Hill semi frequently, and one of my initiatives and one of the folks we're working with part of the banking, finance, and tech committee, I was like, I want to rewrite ERISA. I'm like, I'll do it. We'll put it on our shoulders. We're going to come down, and we're going to throw you a bunch of red lines in what just doesn't apply anymore.
Josh Itzoe: Fiduciary U™ listeners heard it first that you are going to rewrite ERISA.
Aaron Schumm: Yeah, my lawyers are going to be—
Josh Itzoe: All right. All right.
Aaron Schumm: General counsel is a rockstar, and she's been in the ERISA space for over 20 years. She's amazing. We talk about this stuff all the time.
So it's kept people away. Now, here's the other piece. When you look at people building things and servicing these industries, they've usually only been on one side of the aisle for their entire careers. There's very few people that cross that bridge, and I don't know why. I see it all the time when I talk to people. They're like well, I know wealth, but I don't know retirement really. I'm like, that's actually the same in many ways at its core. I think of it through the tech platforms. At its core, it's the same. Record keeping is like trust account at its core.
If you look at the trust system, that's how ... your P&I or in a brokerage world, your margin and your cash, those are actually quite similar to your vested and unvested in loan buckets, forfeitures whatever that's sitting in a plan. We look at it through that lens, and that's what's given us ... that's what 2.0 was conceived over a lot of beers and whiteboards in our conference room. We just kept asking why? The gentleman who runs ops and tech ops on our team, he was with me for eight years at Folio. We just started drawing stuff up, and we started dissecting it. We're like why does ERISA ask for this? Then we started carving it out.
We redid the architecture and said let's just think of record keeping ... No one cares about record keeping. Everyone gets scared of record keeping, but no one cares. So why are we afraid of it? Let's just dissect it and ask why until we can't drink any more beer. That's basically what we did, and that was how we came up with this. When you actually just remove that fear factor, you have to be cognizant of what needs to happen. Then like record keeping can be modernized.
I think at its core, that's a lot of how this industry has just been stagnant in many ways. We're just trying to fix it. When we think of architecture, when you look at our business, we stripped out record keeping and said okay, it doesn't exist. You have custody, and you have a platform on top. That platform on top needs to adhere to ERISA, but record keeping doesn't need to exist the way it exists.
Then we started segmenting account types. We started looking at vested and unvested and forfeitures and loans and all of that as sleeves, like you would look in a unified managed household or unified managed account and started backing into that and then using payroll as the ability to direct which buckets things go into. We came up with this kind of structure that allows us to think about future state of where does the next best dollar for every individual go?
I don't care if it's in your workplace retirement plan, but it could be in something else that makes more sense for you and that individual and then going back to the data level and making sure we have the data to give people the best direction possible without them having to be experts or scared about am I doing the right thing? Or arduous and operational, I got to direct money here for one payroll, and then I got direct money here for my next one. Let's just have it all happen in one fluid motion, in one seamless architecture and give that information back to the advisors. So now they know where the touch points lie and when they need to have more pertinent conversations for that specific individual.
That's kind of what we think about it and maybe it's just naivety. We just walked in, and this is kind of how I got into the wealth world and how I ended up building unified managed accounts because I didn't know anything, and I just asked why. Then they gave me a couple of developers. This is a check-free five serve way back when, and they're like oh, that's a good idea. Here's a couple of developers. Go figure it out. That was how UMA came to be in this industry and what we were doing.
Josh Itzoe: It’s funny you say that because I came the same way into the retirement side. When we started Greenspring, we were pure 100% private client wealth management, and we kind of stumbled. This is going back 15 years, I kind of stumbled into some 401k plans, and I brought ... because I hadn't grown up in it. I would come across things like fees, which took me a while to figure out. But once I did, I was like, "Well, this is dumb. Why is it done this way?" And it was naivety, right? You look and you say, well, sometimes it's easy to kind of get into your echo chamber and you can't get out of it.
One of the things you talked about, which is interesting and is a real challenge, is just democratizing data and having access to data. It's interesting. I'll just use Fidelity or Schwab, if you will, probably the two largest RIA custodians. Those RIA custodians have historically provided data to RIAs and I think that's what has helped and been very open about providing access to that data, which I think has fostered technology companies to be able to kind of build platforms, the MoneyGuidePro or an eMoney or what Aaron Klein's doing over, let's say Riskalyze or Envestnet.
And because you've got that data now you build these tools and then some of the power is integrations between systems and whatnot. And Fidelity and Schwab will do that, let's say on their RIA custody business. But then on the retirement side, it's firewalled off. And I think a lot of the big providers that's been one of the challenges and maybe it's because that data's been residing in legacy systems that are just not built for the modern era. And so, kind of from a development standpoint in extracting data is really, really hard. I also think there's some potential conflicts that are in there, right? And we're starting to see that in terms of these record keepers.
We saw Empower just bought Personal Capital, and you're starting to see that these providers are moving away in some ways, not all of them, but some ways away from kind of proprietary asset management or funds. And they're moving around wanting to kind of control the participant experience. They want to keep assets on book, right? When somebody retires or leaves that they're not rolling their money out into an RIA at some other custodian that they can kind of capture that. And actually these record keepers in many ways are very competitive to the kind of the advisory industry. So, you guys have kind of made a conscious choice not to engage in some of those conflicts and not have kind of what I would call kind of "coopetition" with advisors or TPAs. What was the impetus behind that?
Aaron Schumm: So, I think it comes back to doing the right thing for people, right? Everyone has their own opinion and I'm not faulting people that want to go direct to plan sponsors or services participants, that's fine. But I think, maybe this is my old school mentality, I think advisers add a lot of value and there's a lot of great advisors there. And how do we equip advisors to do that? And to do that, you have to build a business as Vestwell that run on its own without needing to rely on conflict, or not needing to rely on some additional asset management revenue stream or whatever it is, right?
So, we look at our business and say, okay, we want every plan to be run at a gross margin that looks like a SAS business, an 80% gross margin, but do so at a price point that is far less than the competition and that's it. And that's just pure tech, right? So, if we do that, we have a fantastic business that runs on its own. So, I don't need to go chase rollover business or try to pull that direct, like Empower or Fidelity or someone out there, and Fidelity's a big backroom.
Josh Itzoe: And not to knock, we have really good relationships with those large record keepers. And like I said, just come from generally speaking, do a really, really good job for mutual clients, but it is this inability to get data, that's one of the big challenges. And maybe you can talk about with kind of Vestwell. One of the things I talk about in the fiduciary formula is that... The last chapter is kind of the future of fiduciary. And so, I just kind of vision cast five or 10 years how things potentially could change. Not that I have a crystal ball, but I've got a whole section about automation that I think that is the way to drive scale over time, but then also kind of big data and decision support tools.
One of the challenges is data accuracy, data integrity, getting access to it. But then in a lot of cases, sitting with a committee, the data we do have, it might be a quarter, it might be two quarters old. And so, it's not real time. And so, you're trying to make decisions without either the decision support tools or the data you need that's up to date to kind of make strategic decisions moving forward. And so, how are you guys trying to kind of tackle that issue and is this, let's call it modern kind of digital platform that wasn't a retrofitted legacy system but really kind of built from the modern era up, are there ways that that can help enable plan sponsors and advisors to make better kind of real time decisions using the data?
Aaron Schumm: Yes. So, we're kind of barely scratching the surface of this stuff right now. And because there's a lot of things we want to do that we're focused on, but okay. So, the data, we have a mountain of data that we get, right? So, this comes back, we can talk about security and infrastructure because that's absolutely critical. We have a lot of very sensitive data, but when the data comes in everything is sanitized and scrubbed and whatnot. And there's kind of this... Our CTO says this all the time, he's like, "It doesn't help us to get bad data faster," right? So, how do you get data faster, but have it be clean? And that's a huge undertaking. And we see it all the time, right? Birth dates and social security numbers are the top two things, we monitor these trends every week, right? Of what's new.
Last week was birth dates and social security numbers were the anomalies that we kept seeing in data, because someone fat finger something, whatever, right? And so, you have to catch the data, sanitize it and then start to look for trends, right? And it's all trend analysis and pattern recognition, right? I don't want to go so far to say it's AI, that's overreaching. But we look for patterns and we look for things and then we can start bouncing it off of industry and payroll provider and plan design, and then start giving better analysis back to advisors and sponsors and participants and say, here's what you should be thinking about. We're not going to tell you what to do. We're not going to force it down your throat, but here's some information that could be valuable to you. And saying, hey, if you're a restaurant chain, right, and your eligibility could look like this, which is going to streamline your participation and your overall processing, which is going to minimize a lot of the loan, whatever it is, right? You can start to layer in all these things and then create notifications backup.
I'll give you one example that we think about, and we haven't built this yet, but the infrastructure is there to do this and the underlying architecture. But when a business comes on board, we can ask the question of, do you have a high deductible insurance plan? And if they say yes, the next question is, do you want to offer a health savings account to your employees? And if they say yes, great, that's all we need, right? And then we know the payroll connection. We know where the health savings account field is and the payroll data, right? And then when a participant comes in and they become eligible, we look at who they are, all the information we have on the census, we measure, we say, hey do you want a health savings account? And if they say yes, we can issue a card out of the bank custodian that we're working with that goes to that person.
The system will automatically spin up that HSA account to your need, so you have your 401(k), you have your HSA. Then for your data aggregation, we could look at that and say, hey, do you have these other roll over accounts sitting out there, right? We could pull those in, right? Now you have, essentially, kind of three account types lined up. And then you can start looking at where the next best dollar for that individual, based on how much they get paid and how they get paid and how frequently they get paid, hourly and salary and so on, where does that dollar go? Right? Those are your 401(k), you don't just hop back and you go to your HSA and then back to your 401(k) or IRA, right?
Josh Itzoe: Right.
Aaron Schumm: So, you're making these decisions or helping people make these decisions without having to think about, right? I'll use my wife as an example, right? She works for a large biotech consulting practice, right? And they have an HSA, but that is totally a side card from a separate system from their 401(k), right? So, now you have to consciously say, well, what should I do next? Right?
Josh Itzoe: Right.
Aaron Schumm: And that's not going to happen. People are tied up, or they just don't have time, or they're confused by it. So, how do you make those decision points easier? And you do that through data.
Josh Itzoe: And maybe this is something kind of the direction you're going, because obviously HSA is triple tax free. I mean, it is the best retirement savings vehicle for people. I would argue even better than a 401(k) plan. Let's say I enroll in the plan. Let's say I'm automatically enrolled, hopefully, up to the point to kind of get the full match. Once I hit kind of the full match, do you envision automation where, okay, now I also have this HSA, I'm going to go in and fill up the HSA. Once that's filled up, then automatically my contributions are going to go back into the 401(k) plan, as opposed to your point.
People don't have a knowledge gap, for the most part, they have a behavior gap. If they have to say, okay, I'm going to save up to this amount in the 401(k) plan and then I'm going to turn that off, and then I'm going to go in and I'm going to turn on the HSA and fill that up to this amount and I'm going to turn that off and I'm going to go back to the 401(k). It ain't happening. People forget, they get busy. So, do you envision ways to potentially automate that approach down the road?
Aaron Schumm: Yeah, no, absolutely. Yeah. That's near and dear to kind of overarching what we want to do, right? Our goal as a business, right, is close the retirement savings gap in the country, right? And we can't control social security, right? But this is one thing we can control. We can have a direct impact. To your point, behavior is key, right? How do you change behaviors and allow people to do this, but do it in a fluid way? Another way to do this is kind of like you think about peer analysis, right? What are other people in my industry doing? Right? And if you could surface that information in a fluid way, right? That's like, Oh, maybe I should be contributing 12% instead of just my 3% or whatever.
Josh Itzoe: Right. Yeah. The power in curse of comparison and gamification in a lot of ways, right? Of the one thing I do say about the curse of comparison is, and we see this all the time in fee benchmarking, right? You could have a plan that has really crappy high fees. And if you benchmark them against another plan of comparable size that has really crappy high fees, they're going to feel good because they're like, hey, I'm better than this plan over here. But at the end of the day, you both have crappy high fees. But the point being is, I think, and you've seen that with, obviously, a lot of technology platforms, having that data, the power of that, that now you can start to do comparisons and you can start to see and help people kind of see where they are.
It's funny, we built, a number of years ago, maybe six or seven years ago, I built a proprietary tool that we use called the clarity quotient. And it has 40 key performance indicators about high performance plans. It breaks it down between kind of governance and plan design and fees and expenses and kind of participant engagement. And there's a score between zero and a hundred called the KQ score. The plan design, for example, I had had clients that I had been talking to around, "Hey, you need to implement automatic enrollment. You need to do it at 6%, you need to escalate up to 15%, 1% a year," and had gotten pushback. And then once they saw their KQ score and saw that they were suboptimal compared to... Because we had benchmarking data, and they're like, what do I need to do to go from a 78 to a 90?
And it's like, well, you've got to do that. And they're like, okay, I'm done, let's do it. And it just is interesting, the desire that people want to be better than the guy or gal sitting next to them. So, it's an interesting point. What do you think about one of the things that came out of the secure act is, and I don't want to miss the opportunity to talk about this, but especially being in, call it that under $10 million space, but the idea of MEPs and PEPs and multiple employer plans and pooled employer plans, which we're just starting to scratch the surface and to see how, I'm still not totally sold on that market though, I'm open minded about it. But how do you guys think about that world? Do you think it's much ado about nothing? Do you think the future is really bright for it? Are you guys able to support MEPs or PEPs at this point? Or is it on the kind of the roadmap?
Aaron Schumm: So, this is, personally, my own opinion, right? For the little that it's worth. So, I think MEPs are fine, PEPs are fine. I don't think they are this holy grail that everyone thinks are, this magic potion. And two, I think for the players that are going really out there pushing it, I think because if you look under the hood, right? That engine is pretty archaic. So, from their standpoint, it's a way to help them scale. I would argue that's probably not in the best interest of the business that's going to be using it. So, we built our platform through the lens of, we can offer a custom plan for a business cheaper than any MEP that's out there, right? Or that will be out there. And so, I think that still holds true.
Now that being said, there are people who they want MEPs and they want PEPs, so we actually have a couple of MEPs coming on right now that are being converted onto the platform. And we can do that. And when the rules get finalized, we'll launch PEPs for folks, and that's fine. But we're not going to tell people what they need, how to run their business if they want to focus that, and that's going to be their differentiating factor. Fine. There are a number of states, we just want a state plan, right? The state mandated IRA plan for one of the recent states, that will be the engine behind that.
And one of the conversations we're having is, do you want to stay off on MEP, right? Or a 401(k) versus just these kind of payroll deducted IRAs for the employees, because that's where I think you're going to end up moving the needle in those businesses. So, I do think there are... And in those situations, I think they're a good fit. We'll see those happen and we're going to offer it, we're going to service it, we'll be an engine providing it, but we're not going to make the claim that everyone needs a MEP or a PEP. I think we'll leave that to folks out there that actually want to engage with that.
Josh Itzoe: Yeah. It's interesting, at least the value prop that I have seen, is a lot less expensive, right? There's less risk associated with it. I think it's a bit of a false narrative. Just because you're a small plan doesn't mean you can't have really, really competitive fees. And a lot of cases, I mean, I look at clients that we have in certain industries where there are MEPs and are all in costs are going to be less or less than what, by a meaningful amount, less than what these MEPs are. So, I do think that's a bit of a false narrative. It'll be interesting to see... Most 401(k) plans are sold, they're not bought. And so, it'll be interesting, at least in my opinion, it'd be interesting to see kind of how that plays out.
But it sounds like you guys have kind of an architecture and a platform to provide choice, if you will, if that's something that, call it an advisor, wants to be able to launch that you guys can support. But I like the point that you said, is that most businesses, like you said, are not a one size fits all. Once you get over a certain size, typically you're going to want to, just to compete, you have custom needs for your business that may not be able to fit in a nice, neat box.
Aaron Schumm: Right. Exactly. So, yeah. And then there's other players that are going after large businesses with PEPs and MEPs, and I'm not at the table, right? In making those decisions for them. But in my mind, I'm like, well, you're that size and scale, you should be doing what you need to do for your employees, right? Don't buy something you don't need to buy.
Josh Itzoe: Yeah. Use your size and your scale, right, to negotiate economies of scale that you can kind of do it yourself. One of the things you talked about was just cyber security. And that is, obviously, that's a huge issue within the industry. I think personally, the next battleground for a risk litigation. Historically it's been really fees, not even so much fund. That's a misnomer. A lot of plans sponsor thinks that the biggest litigation risk, fiduciary wise, is around poor investments. That's not what we've seen in the past 12, 15 years. It's been around excessive fees. I suspect, and you're starting to see this with some recent cases is, two things, I think one, cybersecurity, right? And so, protecting personally identifiable information, protecting participant data from that perspective.
And I think the other aspect of that is data as a plan asset, right? Who can record-keepers or advisors can service providers use confidential data in order to market and kind of cross sell additional services. I think those are the two, protecting data and then utilization of data. And if it turns out that data is actually a plan asset that creates, that's going to throw a wrench in the works of a lot of people in the industry. What's your take on kind of those two areas? And how do you guys address, specifically, being kind of a digital first platform? How do you guys address cyber security?
Aaron Schumm: So, this goes all the way back, right? To when it was a couple of us in a room just designing what this business was going to be. Since day zero, one of the guys on the team, he was head of Cloud infrastructure at SunGard way back when, and I got a lot of flack from our venture backers. Where is your capital? Why do you need this person out of the gate, right? And I was like, "We have to build this the right way." There's a lot there, right? I always say we are touching the second most sensitive thing in people's lives, right? You have your family and then you have their money, right? And you have to treat it that way, right? And so, we built, sometimes probably, overly secure structure. So, it's all Cloud AWS, East coast, West coast.
And then we housed it in Docker containers, and not to get too techie. And then think about it, we wrap it with a bunch of layers that monitor for Knox, right? And everything's encrypted. When it's in restful state, as well as when it's moving, and nothing is in a table, everything is scattered about in different containers all over the place. And then there's keys that are scattered about to unlock the data. So, even if you break in and you get through the 20 layers of security, the data's nothing, there's nothing you can do with it. And we do pen testing and all that where we basically give keys to people and they try to hack the system. And so, we go through that every, I think it's every six months we do pen tests in the system with third parties that do that, and all the SOC too, regulatory stuff we do, and this is all expensive stuff to do, right?
But you have to do it because it's so critical because if you screw that up, right? You know how hard it is to regain trust, right?
Josh Itzoe: Reputational risk, right?
Aaron Schumm: So, we built it that way from the beginning. And in my career, right? I've architected things incorrectly, right? And you learn from those mistakes and never had, thankfully, security breach in that regard. But we build it that way. So, one of the cool things you do, so these things are all virtual, right? They're housed all over. And when we sense knocking, we have these things that look for threats, and they're always monitored, very constant monitoring. We get, millions of times a day, these threats come, right? People across the globe try to hack or whatever, but what the system does that's kind of cool, and I'm proud of the team, when we sense a knock, everything disintegrates, it disappears. And then it goes, it spins up somewhere else.
So, it's like this perpetual chasing and tag that you can't ever catch because the second a knock is sensed, everything disappears, and it's all virtualized, right? And then it comes back together somewhere else. So, that's how the system is designed. So, it's core. And we have a whole architecture review because we deal with very large financial institutions and some of these are the biggest in the world, right? And we've been told when they've gone in and done their procurement and security audits that oftentimes we're more secure than they are in how we build this stuff.
Josh Itzoe: So how does your approach, would you say, differ from kind of the legacy record keeping approach?
Aaron Schumm: Legacy stuff is often there, it's housed somewhere in a server, somewhere. It's not necessarily virtualized. They may surface it virtually somewhere else, but at its core, it's still housed in a cage somewhere, right? In a server farm. Ours is a hundred percent virtualized, right? So, it's just spread across and disperse. So, in that sense, it's virtualized. And also the way we store data, we have the luxury of separating it because we don't have to map it back to a COBOL system that looks at data in one specific way, right? We can look at data the way that we think is fast. And some of the initial guys on the team, right? They came out of a security Texan, right? So, now you think through the lens of how tokens are created and all that stuff, right?
So, the legacy guys don't have the luxury of doing that because you can layer it on top, but at its core you still have this flaw because it's there. So, if someone gets through to that core, you're done. And then you have the little things like multifactor authentication or people calling and trying to get loans for accounts that aren't there, that's a whole 'nother level of security and policy that you have to put in place. We have risk committees, both from the legal process side, as well as from the tech side that are constantly doing this stuff, that's all they do, right?
This is kind of like the dev ops mentality, right? And then when you get to the data that we're servicing back to people, right? So, your kind of second question, that is sensitive, right? So, we'll only give data for a particular individual if it's their data, right? But then you can take broad market data, just like industry studies, and you can do it based on the data that you're capturing and kind of look at it that way. We're not-
Josh Itzoe: But it's not personally identifiable in that case, right?
Aaron Schumm: Unless it's for that individual and that individual has requested the terms and conditions like, do I want this? Yes or no. And everyone are going to have their own opinion. So, prior to the acquisition on visa... So, I was on the advisory board at Quovo, right? And Nico in that team, since the very beginning of the…
Josh Itzoe: And Quovo being an aggregation technology, right?
Aaron Schumm:…information, credit card, whatever it is, and analyzing it. Given that they-
Josh Itzoe: Were they acquired by Visa or?
Aaron Schumm: They were acquired by Plaid, Plaid was acquired by Visa.
Josh Itzoe: There you go. Okay, yep.
Aaron Schumm: And we have these conversations, one of this is kind of an interesting one. We were having lunch one day with one of the commissioners of the SEC, Lola, myself, John Stein. And we started talking about data, right? Who owns the data? Right? Who is it? Right? Because they dealt with this all the time. Who owns this data? What can I give back to someone or a finance institution? And so, we got into this discussion around your bank account, right? And who owns your bank account number. Do you own it? Do I own my Chase account number, Wells number, whatever, wherever you bank? Or just the bank on that? And then why can't I own it? And then why can't I take that somewhere else and have it be portable with me, because who cares? It's just-
Josh Itzoe: Like my cell phone number in some ways. If I go to a new—
Aaron Schumm: You want to—that's you, it's part of your identity at this point. So you know, we started thinking about that and having these discussions with the commissioner and it got pretty deep, pretty fast. And nothing was solved, but then it just opened the door for conversation around what is actually yours versus what can be leveraged, whether it's scrubbed or not and given back to someone else? And I think it will be in evolution, for a long time, because it hasn't been solved and I don't know if it will be solved little, it will always move.
But those are real discussion but you have to be sensitive. One of my life philosophies or mantras is, always put yourself in the other person's shoes because if you're not, you're doing an injustice to whoever's on the other side. And so we always think through that lens, but we want to give them the best information possible to make those decisions, because this is... We are trying to have a huge impact on what we do.
Josh Itzoe: So what do you think looking forward, let's call it the next five to 10 years, where do you think this industry is going? What do you think the future looks like across the spectrum for employees and participants, but also record keepers advisors, the industry in general?
Aaron Schumm: Yeah. We're seeing the early days of this again, and this has always been a cyclical piece of the financial world, where it's unbundled and rebundled, whatever those services are. We're starting back in that rebundling era, where people are looking, when I say people I mean financial institutions, they say, "What do I do? Where's my core asset and how am I going to bring all of this together?"
So we're seeing people come in and say, I need to own this stack, and I think that stack is going to get bigger and bigger, Whether it's... It all led through technology, and the world we live in now, three months ago, four months ago, this was a totally different world. Now we see people who are caught flat footed and weren't ready to be tech forward or digitally engaged, "That was crap. We have to be."
And that's not going away at this point. So it's all about how do I have a digital first touch point and use that with a human to create that experience and do so at scale and provide the best service. And that service is going to have to be owning the stack. And it could be a small couple person shop that's going to own that stack or it could be a large financial institution. And I think there's room for all of it.
Josh Itzoe: And how would you define the stack?
Aaron Schumm: I mean, so in our world it's, you have to offer, you're going to have the investment side, you're going to have the technology to run the business. And that business could be, we think about it from a workplace to individual and call it cradle to grave.
And how do you actually own that relationship all the way through pricing. 75% of American employees, their only source of invested asset is their workplace retirement plan. So how do you take that and now create the ability to engage them with other aspects that are really important for who they are and where they are in their life, but they may not have the time or experience or knowledge base to actually go explore those opportunities?
So how do you bring those worlds together? And how that touch point, that starts in the workplace that carries someone through. And that could be, we talked about the HSA, it could be insurance, we could talk about... We talk about this all the time, the managed job come, the guaranteed income. And how you have that soft landing and flip into a guaranteed income structure in one fluid motion. You roll out of the plan, you're managing your outcome to very specific point, you know where it's going to be and then boom, guaranteed income go. And so, creating that work stream, it's hard. No one's really solved it, we're working on it, some of our partners and investors are working really hard on it. And I do think we'll get there, but I think that's going to be a key component.
Josh Itzoe: And do you see Vestwell as, really call it, the platform that brings all that together? If you will.
Aaron Schumm: We want to be the engine that powers the industry. We're not yelling, you won't see TV commercials or subways in New York with Vestwell on it. I see that for people that we power but we want to be-
Josh Itzoe: That Intel Inside model, that we've talked about.
Aaron Schumm: We want to be the engine for the future, and for now and all the way through. And it starts with creating the architecture, and the infrastructure to run that, and we're not going to build it all. And I don't... Maybe this will change, but I have no desire to build another wealth system, I've done that a couple of times in my life.
Josh Itzoe: But you see integrating that where you guys are... I mean, could you see, in some ways, let's just... You talk about the experience for employees where they can get access to their entire financial picture, life in one place. I also think about that from the advisor side. Do you envision this in time where advisors are essentially, maybe, running their practice through the Vestwell platform? If you will, bringing in tools that maybe you aren't building, but that you're integrating with, because you've got this kind of API driven platform that can kind of tech enable other tools, if you will.
Aaron Schumm: Exactly. Because you think of wellness planning, student loan, whatever it is, managed accounts, there's things that we're building, that we will build and then maybe in the same vein for the same offering we'll partner and we'll use that managed accounts as a model. We'll have our own managed account solution here and allow advisors to help differentiate their offering with a core management account solution that really separates them from the pack and leading with the tech.
And then also, there are other people who maybe want a more commoditized type of managed account solution, that makes sense, sure. I don't care, we'll give it to you. If that's that's core to your business and your value add you want to bring to your clients, then we'll happily do that. So that's how we think about it and then leading in to everything else. Insurance or... We're not going to be an insurance broker, but someone wants to offer insurance to the participants and businesses, we can make that available through our platform because we have the touch point. And then how do you carry someone through the rest of it?
Josh Itzoe: Okay. As I said, the purpose of this podcast is really to make ERISA fiduciaries smarter. So if could offer one piece of advice or wisdom to ERISA fiduciaries that would make them smarter, make them more effective at what they do, what would it be?
Aaron Schumm: Probably the wrong person to ask because they're smarter than I am. But I would say... The way I think about this is, it's our job as an industry to provide the best financial advice and service possible, and making sure that we're always doing the right thing. Which fiduciary, you're doing, and how do you alleviate that for people? So I think it's not over complicating things, but being cognizant and doing the right thing for people. And that's the only advice and that's things I think everyone's doing. But, we need to be part of the solution, we shouldn't be the problem. And I say this, I was telling someone this little while ago when would COVID first hit, is, "In '08 when the market crashed financial services were part of the problem."
Or the core of the problem in a lot of ways. And on this side, we needed to be part of the solution. This is when people need advice, they need the right thing, they need direction. And we all have a lot going on in their lives, people are stressed and overworked. But let's make our life easier, give them something that sets them up for the right future. And that as core as I think how we should all live and behave.
And if we do that, we're going to improve the world that we started at, and if we can all make it better than we did our job. We're not going to be perfect, no one is, but let's create the framework and stepping stones to keep marching on that path. So I guess, a long winded way to say, we just need to do the right thing. And we can't put the burden on people because people just, they shouldn't have to worry about that. That's our job and let's help change that.
Josh Itzoe: Yeah. It's interesting. I was listening to a podcast this morning. I was taking my dogs for a walk. I was listening to a podcast with, the guy was Jason Fried who is the CEO and founder of Basecamp, if you know who Basecamp is, and he's got-
Aaron Schumm: Oh no, I don't know it but yeah.
Josh Itzoe: He’s a really bright guy. He's very contrarian in the way that he thinks about business and whatnot. The host was asking him about their hiring practices and they do some... They're just different in the way that they hire folks. And he said, "One of the things is that we are committed to paying employees in the top 10% of what employees earn in San Francisco for comparable roles." He was just saying, "We post on our job postings what the salary is going to be." And the host was like, "Well, do you ever get anybody to come back and negotiate?" And he's like, "No." He's like, "Because we put it out there and we pay people really well." And he said, "We don't believe that..." He's like, "We want to get the best people, but then we don't want to have to force them to be the best negotiators for their own salary as well. We just want to pay them really well and get them on board."
And it's just what you said at the end of there made me think about that as, we can't put the burden back on everybody else. At the end of the day the essence of the essence of what it means to be a fiduciary, whether you're contractually one or not, it's just a good way to live. It's a better way to live, to think about the interests and the needs of others and put those first. And if you do that, it generally leads to good outcomes all the time.
Aaron Schumm: Yeah. It's about doing the right thing. So this is an example, maybe this will get me in trouble later. But we had a 5330 tax payment. So the loss gain tax that you have to provide back to the department of treasury is something plan sponsors have to do. So this is, you miss payroll, you miss an eligible employee, you can do loss gain calcs, you fund it, you get taxed on that amount. Myself, my CFO and general counsel, we spent a lot of time physically writing checks to the US Department of Treasury for one cent and three cents, not even worth the paper.
And it was one of those things and it was funny because our compliance person, she was like, "I'm not comfortable signing this." And I'm like, "I will sign this and I will gladly sit in front of a judge and tell them why we're doing this on behalf of our clients," because this is our problem, that we as an industry created this problem and we have to fix it for our clients.
And so, a lot of time wasted in that regard, but we want to take the burden off of the sponsors. Like, "Hey, this is on us." Even if it's their fault because they missed the payroll, they missed the eligibility, but we're going to fix this for them and help them and do what's right, and then hopefully we can get the mindset of the legislative crew to say, "Listen, you shouldn't be doing this because this keeping people out of the retirement industry. This is causing people not to offer employees 401(k)s because, I don't want to deal with this." So those are things that run through my mind, what we're trying to solve and take that off of you.
Josh Itzoe: Yeah. That's an interesting perspective just in terms of, one that sounds like the startup life right there. But the real battle, and it's becoming more challenging in the advisory industry, because every advisor, whether they're a specialist or not, I would say it's at the same in the record keeping industry. It's, whether or not it's true, everybody's saying the same thing.
So if you've got a business owner, you've got a committee, your plan sponsor and they're sitting and everybody's saying the same thing, it's hard to differentiate. And then, you don't know who's actually telling the truth or just telling a good story. And you can't really, clients can't really know that until they've lived it. And I would say one of the most important things, speaking on the advisory, but even for record-keepers is, at the end of the day just keep your promises and do what you say you're going to do.
And if you can be the person or the team that when a client has an issue, that they can turn to you and you can fix it for them, and do 90 or 95% of the heavy lifting, so that they can focus on their business. These relationships, they're sticky. I think about it as a business owner, we're 25 people now and there are things that I used to do operationally that now it's like, I don't have time to do that. If we have a good partner and they can take care of it, that's what I'm hiring people for.
Aaron Schumm: You scale it, right? No, you're right.
Josh Itzoe: But it still comes down to the people, at the end of the day, you can automate so much, which is critical, to create scale, which then frees you up to be available when actually people need a human. And I think that's the... Even with this whole digital revolution, and I'm a techie guy, I love technology. But, at the end of the day, I think there is still, how do you marry the digital with people who are knowledgeable? And then freeing those people up to forecast on highest and best use activities for clients instead of writing three cent checks.
Aaron Schumm: Yeah, no, it's funny. One other little thing. I challenge our team all the time over this and because we have, a lot of us came from this industry. And oftentimes, I've heard from the team, "This is what every record keeper does." Or, "This is what all record keepers do." And I always like, "I never want to hear that come out of your mouth." I don't care what everyone is doing, is this the right thing to do? Are we doing the best thing possible? And you have to reset yourself and there are, in particular, inherent things you have to do. Legally have to... Obviously there's a lot of regulatory things we have to abide by, but are we doing it the right way versus just what people have done? Because I'm like, "We're trying to... We're resetting the bar. It's going to change. How do we change it and change it for the better?"
Josh Itzoe: Yeah. You're a New York guy. My parents used to say to me all the time, "If your friend told you to jump off the Brooklyn Bridge, would you do it?"
Of course not. And that is the... While I very much appreciate, I think, what you guys at invest well are trying to accomplish because you are pushing the industry forward, I think there's a lot of... It's easy to kind of get in the... I heard this quote from an owner of another RIA on a different podcast, but he called it the RIA hot tub.
So a lot of RIAs, instead of innovating and trying to kind of do things differently or do things better. A lot of times we like to just sit in the hot tub and be like, "Hey, the water feels great." But I do appreciate what you guys are trying to advance and push forward in terms of doing things different, doing things better. At the end of the day, as an industry, we really need to start to step our game up.
We've got millions and millions of people that are relying on us, as you said, to do our jobs and do it well. I'm always amazed, I think, at just quite frankly, and not casting aspersions on anyone. I would say this collectively as an industry, we have to be better than mediocre. And quite frankly, plan sponsors have to start demanding more of us as service providers. We need to raise up our game. And so I do appreciate very much what you guys are trying to do. It's hard to take on the big boys, but you guys have a big vision and-
Aaron Schumm: Now we're part of the big boys. That's our-
Josh Itzoe: The long-term vision of being that Intel Inside, if you will.
Aaron Schumm: Be the engine. But yeah, I mean, it's a hard thing to build. We're not perfect like everyone else but I think we take it to heart. We're constantly just beating ourselves up like, "How do we make this better?" And all of us, and I think what you guys do at Greenspring, you guys are rock stars. And you guys are changing and servicing your clients at a level that others don't get. But everyone should get it. Everyone should have that ability to get the service they need, regardless of how big they are. If I'm a 20 person company and this was my first time offering 401(k), I need help, someone's got to help me. So-
Josh Itzoe: Well, I think that's the virtuous aspect of what you guys, I think, are trying to do as well as... We even see it, I think one of the failures of our industry, and there are things that are changing, there's no doubt about it, but is that, really good access to really good financial advice and financial planning is been relegated in most cases on the private wealth side to people who have the money to pay for it.
And so as an industry, we've struggled to deliver comprehensive financial planning to the masses. Because especially around this AUM model, and if people don't have assets, it's like, "Hey, I can't work with you because you don't meet our minimums or you don't have enough money or whatnot." And the reality is that's a small swath of Americans. And so, in a lot of ways, small plans because the economics to get paid in a lot of cases for service providers, aren't there. I think what you're trying to deliver is a really an underserved market, is to deliver an experience that is available to mid and large sized companies to businesses of any size.
Aaron Schumm: Yeah, that's exactly. That's the goal. We do that, we move the needle in the right direction.
Josh Itzoe: Absolutely. Well, hey, I really appreciate you spending your time with me on the Fiduciary U™ podcast. I think, a great discussion. I'm excited about what the future holds for Vestwell and I think, hopefully listeners have gotten a lot out of it and I expect they will and keep up the great work and thanks so much.
Aaron Schumm: Thank you. I really appreciate the time. This is a lot of fun. I appreciate it. I love the conversation. Thanks John.
Josh Itzoe: Thanks for listening to today's episode with Aaron Schumm from Vestwell. I hope you enjoyed our discussion, you have a better understanding about how technology is reshaping the record keeping industry and it helped to make you a smarter ERISA fiduciary. If you'd like more information or you'd like to connect and learn more, go to fiduciaryu.com.
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