Refi and Robos: The perfect couple?
As seen in Financial Planning and republished in On Wall Street, Bank Investment Consultant, and American Banker.
The road to reaching millennials’ assets is littered with ideas.
Some in the industry say insurance products are the key to onboarding young clients, capitalizing on their financial uncertainty. Others swear by social media, arguing that staying connected with potential clients is the best technique for capturing a demographic known for demanding accessibility and transparency.
But fintech firms and millennial-focused advisers are taking a different approach. They’re providing advice on student loan refinancing, with the expectation that over time it will eventually lead to new business in the form of brokerage and retirement accounts.
The idea is that young professionals, especially those who are making good salaries but are facing high levels of student debt, will refinance their loans and put the savings into a brokerage or retirement account. Or at the very least, feel confident enough with their adviser to start using expanded services down the road.
MONEY SAVED, TRUST EARNED
“If you’re looking for someone in the millennial mindset, the quick and easy way to build trust is to save them money right away,” says David Carter, business development director at CommonBond.
CommonBond is one of a growing list of options for young professionals seeking to refinance their student loan debt. The company is associated with both human and robo advising outfits seeking to grow their businesses by picking up millennial clients. The company has a friendly relationship with Betterment, for example, even offering the robo's own employees access to CommonBond products.
Americans are buried under $1.26 trillion in student loan debt, more than auto loans or credit card debt, with the majority of those loans backed by the federal government. And there’s no slowdown in sight. Student loan balances are growing faster than any other type of debt, according to estimates made by the Federal Reserve Bank of New York, and over half of it belongs to professionals under 40.
Although federal student loans come with their own benefits, limits on federal assistance creates a space for private lenders to step in and make up the difference between the cost of attending a college or university and federal loans designed to pay for it.
In fact, an estimated $9 billion in private student loans were issued for the 2014-2015 academic year, according to the College Board, up from $6.6 billion for 2010-2011. For comparison, total federal loans fell over the same period, down to $96 billion for 2014-2015, from $116.1 billion for 2010-2011.
Digital players, hungry for assets, are pouncing on the debt-heavy demographic. Some of them see student loan refinancing as a gateway product: the end client saves money through refinancing, which can then be invested in a brokerage or retirement account. Who better to offer those wealth management services than the digital players who saved them money in the first place?
One digital platform that's already combined student loan refinancing and wealth management is the San Francisco-based SoFi, which manages $3 million in assets, according to its most recent filing with the SEC.
Retirement savings and student loan debt payments belong in the same space, says Hedgeable CEO Michael Kane. “We don’t view them as mutually exclusive.”
The digital advice provider manages $50.5 million in assets and pioneered the use of bitcoins and venture capital funds in its customers’ portfolios, according to the company. Kane says many of Hedgeable’s clients, even into their 40s, have student loan payments still to make.
Robo advisers aren’t the only ones capitalizing on the opportunity. Sophia Bera, founder of Gen Y Planning, sees plenty of opportunity in the value-add of student loan refinancing. “So many of the financial planners don’t know anything about student loans,” she says, “they aren’t even on financial planners’ radars.”
Conversations about student loans with her clients have led to advice for retirement planning, investing, and even insurance, she says. “For young people I joke that I manage more debt than I do assets,” adding that she’s used CommonBond with some clients to help them refinance their loans.
Lately she’s been called on to help her clients evaluate job offers. Companies are beginning to extend student loan payment match plans, similar to 401(k) matches, through benefits platforms like Student Loan Genius. “That’s something that’s going to completely shake up financial planning,” she says.
In an effort to retain talented professionals, companies in competitive industries are offering the loan repayment incentives as part of their benefit packages. The Affordable Care Act leveled the playing field when it came to health benefits, giving employers fewer options to differentiate themselves from the pack when it comes to employee perks. Student loan repayment plans, which can make a huge difference for millennial employees, are one of the ways companies are speaking to younger professionals.
“It’s about meeting the millennial generation on their terms,” Carter says. The generation most affected by student loans is the most likely to respond to someone, or something, offering to help. Professionals who’ve been helped with their student loans today, he adds, are likely to be looking for someone to help them invest their savings today—or their accumulated wealth a few years down the road.
Established players are also taking note. Wells Fargo and Amazon are experimenting in the student loan refinancing space and recently announced a partnership in which Prime Student members would receive a discounted private student loan from Wells Fargo. The option could be used to refinance or as an initial loan.
With refinancing saving some professionals thousands of dollars over the life of their loans, nimble and asset-hungry robos are circling, eager to be the first choice in wealth management for young professionals.
“I think the landscape has changed so much and that’s one of the things that I don’t think people get,” says Bera. “This is a huge priority for young people.”