BlackRock and Microsoft are building a platform that will help people develop better saving and investment habits through more regular engagement with their retirement assets.
This initiative was announced in December 2018 and the Wall Street Journal (WSJ) noted at the time:
“The firms plan to develop a technology platform that will provide digital financial-planning tools and new BlackRock funds offering guaranteed retirement income to employees through their workplace saving plans.”
This is close to the Uber moment for the Wealth Management industry: technology platform providing retirement planning tools and direct access to new generation Investment Solutions.
BlackRock, the world’s largest money manager, according to WSJ “wants to shape the technology plumbing that connects it to different parts of the financial ecosystem handling workers’ retirement money.” And for Microsoft, who needs no introduction, “an investment platform built with its technology could bring in new revenue as it looks to become a bigger cloud-computing player.”
BlackRock and Microsoft have made progress since December and FinancialPlanning.com provided further details in July 2019:
“The technology giant and the asset manager overseeing 15 million Americans’ 401(k) portfolios are developing an app and desktop tool aimed at narrowing the widening gap between what workers will need in retirement and how much they’re saving.” (401 (k) is like KiwiSaver)
BlackRock and Microsoft are looking to reimage America’s path toward achieving greater financial security in retirement by bringing together BlackRock’s investment capabilities and Microsoft’s technology strength.
Together, they are exploring the next generation of investment solutions to help more people make better decisions as they work toward their financial goals in retirement.
Taking advantage of Microsoft’s technologies and BlackRock’s investment products, the companies are aiming to make it easier for people to both save for retirement and achieve the lifetime income they need through their employers’ workplace savings plan.
The firms will begin rolling out their tool later this year.
By all accounts, this is going to be a powerful platform. I’d imagine some of the tools will be like the BlackRock CoRI Index, which estimates the level of lifetime retirement from current savings.
Lifetime Income Focus – Next Generation of Investment Products
From an investment perspective the retirement tool will include guaranteed retirement income planning.
As part of the rollout Microsoft and BlackRock are designing methods of showing workers how much extra contributions today could end up netting them in retirement. The intended result is that employees “have a clearer picture of how their contributions today will translate to long-term retirement income”.
BlackRock intends to offer the platform in connection with next generation investment products that it will design and manage. The new products from BlackRock will seek to provide a lifetime of income in retirement.
Therefore, BlackRock will be offering more sophisticated products than widely available now. These Funds will seek to provide guaranteed income streams to participants as they get older, an element not common in 401(k) (like KiwiSaver) and other retirement plans.
The funds will be like Target Date Funds, a blend of investments that get more conservative as investors head into retirement. However, the funds BlackRock wants to roll out will also increase their concentration in financial instruments that provide regular payouts as participants reach retirement. This is a massive enhancement.
As an aside, Target Date Funds would be a good option as the Default Fund for KiwiSaver.
Importantly, the focus is on providing an income stream in retirement. There is a strong argument this should be the primary investment goal and not the targeting of a lump sum at time of retirement. What matters in retirement is income.
The OECD encourages the retirement objective to be the generation of income in retirement and for there to be coherency between the accumulation and pay-out phase of retirement.
Currently most investment products are poorly positioned to meet these objectives.
The central point is, without a greater focus on generating Income in retirement during the accumulation phase the variation of income in retirement will likely be higher.
Therefore, volatility of income in retirement is a good risk measure.
It is encouraging that KiwiSaver providers are required to include retirement savings and income projections in annual statements sent to KiwiSaver members from 2020 onwards.
More specifically, the focus on retirement income and use of more advanced portfolio construction techniques as liability-driven investing overcomes one of the main criticisms of Target Date Funds. Particularly, Target Date Funds should have a greater focus on generating income in retirement. This means the fixed income allocation should act more like an annuity so that is pays a steady stream of income to the investor once they reach retirement.
The investment knowledge is available to achieve this.
Accordingly, BlackRock’s solutions appear to be more aligned with Goals-Based Investing and will be a more robust Retirement Income Solution than those available now.
There is a real need for these new generation investment solutions as many of the current financial products have shortcomings in meeting future customer needs, particularly the delivery of a stable and secure level of retirement income.
It is also important to note that there is a paradigm shift underway within the wealth management industry in relation to the development of new and improved investment solutions.
The industry is evolving, new and improved products are being introduced to the markets in other jurisdictions to meet a growing savings crisis.
Defining Social Challenge – Addressing the Savings Crisis with Technology
As BlackRock outlined when making the initial announcement in December 2018:
“Retirement systems worldwide are under stress and providing financial security to retirees has become one of the most defining societal challenges of our time,” said Laurence Fink, chairman and chief executive of BlackRock.
“BlackRock has a tremendous responsibility to help solve this challenge, and we recognise the need to act now. Working with Microsoft will enable us to build a powerful solution for millions of hardworking Americans.”
There has been a major shift globally away from Defined Benefit (DB) schemes to Defined Contribution (DC).
As a result, the individual has become increasingly responsible for investment decisions, for which they are generally not well equipped to make. This has been likened “financial climate change” by the World Economic Forum
In America, millions are struggling to achieve their financial goals in retirement. BlackRock and Microsoft are aiming to narrow the “gap” between what workers will need in retirement and how much they are saving. This gap is estimated to be expanding by $3 trillion each year!
Therefore, there is a very real need to help people who are struggling with the difficult task of saving, investing, and turning this into a retirement income.
In BlackRock and Microsoft’s view the “shift in responsibility, from corporations to individuals, combined with ever increasing life-spans, has created a need to reimagine a new approach to securing a sound financial future in retirement – one that is powered by innovative investment solutions and the most advanced, trusted and cutting-edge technologies.”
“Technology is already revolutionizing entire industries and the way people interact with everything from health care to education and transportation. And yet, retirement solutions of today have been slow to keep pace. Taking advantage of Microsoft’s cutting-edge technologies and innovative investment products from BlackRock, the companies aim to make it easier for people to both save for retirement and achieve the lifetime income they need through their employers’ workplace savings plan.”
Thus, the need for new innovative investment solutions and technology platforms.
This is close to the Uber moment for the Wealth Management industry.
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