Brokerage Retirement Platforms are Pipelines
Pipelines and Platforms: Today’s Inefficiencies in Retirement Product Distribution
Almost weekly one financial services brokerage firm announces their new “platform” with lower commissions for retirement savers. Upon closer examination these “new” brokerage platforms are a repackaging of the traditional brokerage pipeline that is not transparent in terms of performance and fees. Brokerage platforms are really pipelines.
These “new” platforms limit consumer choice and are not transparent. A platform, by definition, is transparent and facilitates an informed choice. The broker dealer selects what product is highlighted in their pipeline, based on criteria that advantages the broker dealer.
“Pipelines, Platforms, and the New Rules of Strategy,” (Van Alstyne, Parker, and Choudary) clearly presents the important distinctions between pipelines and platforms and is a must read. https://hbr.org/2016/04/pipelines-platforms-and-the-new-rules-of-strategy
“Platform businesses bring together producers and consumers in high-value exchanges. Their chief assets are information and interactions, which together are also the source of the value they create and their competitive advantage.”
“Understanding this, Apple conceived the iPhone and its operating system as more than a product or a conduit for services. It imagined them as a way to connect participants in two-sided markets—app developers on one side and app users on the other—generating value for both groups. As the number of participants on each side grew, that value increased—a phenomenon called “network effects,” which is central to platform strategy. By January 2015 the company’s App Store offered 1.4 million apps and had cumulatively generated $25 billion for developers.”
The professors readily acknowledge that platform companies are not new – shopping malls bring together consumers and retailers, and newspapers bring together subscribers and advertisers – what is new is the flexibility of platform companies and the expanded roles of producers and consumers in a world no longer strictly governed by pipeline intermediaries.
Differences between Pipelines and Platforms: Pipelines, Platforms and the New Rules of Retirement Saving
If you say pipeline my first response is efficiency and control. Control in the sense that you put a fluid in at the beginning of the pipeline and you take it out at the end; there is no flexibility. That being said, talk to a production engineer and they will quickly identify the efficiency and profitability of a working pipeline versus other delivery methods.
Fifty years ago retirement saving was a pipeline – employers put monies aside and based on age and longevity with the company the worker received a pension upon retirement. The system was not flexible; but it was efficient.
Fast forward to today – retirement savers have tools and information at their fingertips as never before, but they have not received – nor sought out – the training – training they need to utilize a bona-fide retirement platform where they evaluate the offerings and make their decisions.
Today’s consumers are very adapt at going to a mall, online or going to a store and making their food, clothing and other selections – consumers have received the training they need from parents and friends; and they reap the rewards of greater selection and lower prices.
This is in comparison to the pipelines that have been created by the company/ employee benefit consultants / brokerage industry troika where platform efficiency and flexibility is captured by the broker pipeline and the retirement saver is paying high fees for poorly performing financial products.
The irony is that in a 401(k) plan one of the plan expenses is investment education – retirement savers are paying for “education” – however this education is presented by a brokerage entity that is also selling financial products. The financial industry has perpetuated the myth that “advice” is “education;” the problem with this is simple – advice does not help someone learn how to evaluate performance and investment expenses – advice simply tells someone what to do even if there is a better alternative.
Advantages of Independent Education that Creates a Transparent Platform and Informed Choice for Consumers in Retirement Investment Selections
Just as consumers have enjoyed the options that Amazon, Lyft, Airbnb and Kayak have provided; retirement savers can look to Check the Ticker for the independent tools, transparency and training they need to benefit from the platform environment.
The Department of Labor “fiduciary rule” cannot eradicate conflicts of interest. Existing securities laws, created after the Great Depression, rely on disclosures on key criteria, such as audited performance, audited portfolio turnover, expenses and audited dividend yields. These securities laws are dependent on an informed and engaged consumer.
Today’s intermediary pipeline does not meet the requirements of the Investment Company Act of 1940 and blurs the original intent of the Investment Advisers Act of 1940, that mandates a clear dichotomy between salesman and investment adviser. Only training on evaluating and understanding SEC disclosures can mitigate excessive and redundant costs from intermediary conflicts.
Consumers eradicate the conflicts of interest presented by sales intermediaries through informed choice. Informed choice is made possible by today’s technology that permits easy understanding of SEC disclosures, as to performance, fees and turnover. Transparency, through independent technical training on SEC disclosures, with today’s online tools, creates the platform retirement savers today demand.