With all these new mobile interfaces, it may feel like Silicon Valley has taken over the Street, that money now flows transparently and cheaply, and that the digital world has come to take our bearer bonds.

Not so. In reality, there is an aged, crumbling foundation beneath the shiny veneer of technology slapped onto capital markets. It is buttressed by a labyrinth of mistrust and conflicting incentives and bundled tightly in a wrapper of tight regulatory oversight that keeps real innovation at bay.

We could discuss many areas of opportunity—clearing, custody, settlement, registration, securities lending—but today, let’s focus on one broad, high-level problem: integration for retail accounts, specifically the painful lack of it.

Have you ever moved a 401k?

Seriously, have you? There’s a physical check involved. And if you don’t receive it and ship it to the right place, in the care of the right person, with the right account name on it, you get hit with massive penalties as it effectively becomes an early withdrawal. This complexity helps drive the sub-optimal cash-out outcome—30% of participants who left a role in one study cashed out their 401ks instead of trying to navigate this.

Perhaps migrating a balance to a digital broker’s IRA will be better. But the truth is, regardless of the snazzy UX of the RIA or broker, for a money transfer to happen the broker’s underlying custodian has to communicate with the trustee currently holding the assets and any other relevant parties like the plan administrator, recordkeeper, etc.

We’re also talking about tax-advantaged assets, so complexity is higher. But how about just migrating taxable balances? Say, from one financial advisor to another? Good news, there’s been some innovation there. In 1989. That was the launch of the ACATS system to migrate securities and cash. It works(-ish). Once a request is made and approved, you’ll lose the ability to interact with your positions in the system of the transferring institution, and in a week or so, if everything matches up, you will see them in the new institution. And you get billed $75 for the privilege of moving your own assets.

And to be really clear, that’s only possible with a broker-to-broker asset migration. If you happen to be a participant receiving public company stock as as incentive, you need to migrate those assets using another system entirely – DRS – and as far as I can tell, none of the neo-brokers support it and only possible with some asset types. If the custodian of the receiving broker doesn’t support a certain asset, the position may need to be liquidated before moving. And, of course, annuities held by insurance companies are a whole other ballgame to migrate…

Do you see the problem?

Can we fix this?

If you’ve ever enjoyed the seamless process of linking a bank account through third-party APIs and instantly funding everything from a child’s 529 to a gambling habit, you may ask why moving assets in brokerage accounts is so much harder. I did. I don’t have great answers, but here are theories:

1. Elephants can’t dance. The vast majority of invested assets are held by a handful of custodians, and they are not new players. Schwab, Fidelity, Pershing – about $26tn of assets sit with these folks. Yes, they could adapt, and to a degree they do improve their processes and acquire more nimble players. However, these are fairly ingrained systems that require a serious catalyst to force change.
2. Gotta collect ‘em all. One major issue is it wouldn’t be enough for one of them to build a great transfer process – all of them would have to agree to open data access to enable integration amongst each other or through third parties to facilitate a different movement of assets.
3. They don’t wanna. Sure, Robinhood wants ACATS to be replaced by an instant and easy process, because they would benefit from it. They’re a new player, and together the neo-brokers and robo-advisors are sitting on about $100bn of assets. The people sitting on the other $26tn are concerned about outflows. Make the process hard enough, and the only IRA a Fidelity 401k holder will migrate to is Fidelity’s, and that’s exactly how they want it. Why build an easier offramp? Reminder, the generational transfer is upon us and guess who uses the neo-brokers?
4. No one is nipping at their heels. Building a new custodian is very hard. It is so hard, it is arguably not venture backable.
   1. You need to be a member of NSCC / DTCC; this comes with a basic capital requirement and some services will pull you into much higher capital requirements.
   2. You need a large lift to have service parity to compete, and even then, you hit a massive wall of distrust and tolerance of incumbents. Even if brokers and RIAs appreciate the source of their pain, they are likely to avoid instability for clients with a switch.
   3. They also trigger those ACATS fees with migrations and have to tell clients they’re migrating to NewClearingCo – scary stuff.

There have been efforts for real cloud-native players on modern tech stacks, and we’re fans – Drivewealth, RQD, Clear Street, Altruist – but they are still a ways off from forcing industry change.

1. It’s not annoying enough. Yes, this affects A LOT of money. But it doesn’t affect that money regularly. 401k transfers are irritating at most as often as you change jobs, which, for Millennials, seems to track to about 12 times. You can open a new investment account with checking / savings accounts; it’s possible to keep multiple and never consolidate. So, a long ACATS process is unlikely to deter money movement, and as a result, it is less of an issue to the recipients of that flow.

There are forces at work…

The truth is regulators are trying to push change. Long ago, the DTCC tried to facilitate 401k transfers specifically but gave up. The Secure 2.0 Act was focused on lost asset value to cash outs or left-behind assets, and now there’s a planned database to find old 401k’s. Under pressure to improve, the largest custodians created the Portability Services Network to automate the migration of small tax-advantaged balances. These accounts are most susceptible to suboptimal results from cash outs or terrible fees. To the best of my knowledge, this is manually managed and offers little hope of broader integration.But let’s be honest, mild SEC pressure isn’t going to do it. No, we need real forces to drive integration and motivate seamless data and asset transfer across the entities in this space. There are a few folks that could do it:

1. RIAs and financial advisors have a lot of motivation. For them, asset transfer is a constant problem—not just in acquiring new customers but also in offering customers assets that they want—fixed income, alternatives, etc. Many are already multi-custodial. They can put pressure on the larger custodians to innovate and work together.
2. Start-up custody players are growing. I conveyed that trust is a huge barrier, but on the other side of that barrier is the scene from that Brad Pitt zombie movie – there is a lot of pain driving people over the wall, and the right motivation opens floodgates. Brokerages seek out the redundancy of multiple clearing brokers even if they need substantial trust to migrate customers; it’s an opening that a strong new player can leverage to win over accounts and, over time, really threaten large players.
3. Integration support disguised as cost efficiency. Startups offer to replace whole teams by facilitating digital asset transfer processes and API-driven data sharing. Eventually, the profit motivation here should win out, and one lucky player will hold the keys to integrating funds flow across the system. Lots of companies are actively chipping away at this problem, including Capitalize, Manifest, Beagle, Clifton, Golden Basis.

Our collaborative future

Integrations facilitating the movement of retail accounts are one very specific aspect of impending change to capital markets. Interconnectivity to drive more asset access, increase the speed of settlement, and drive transparency for all market participants—there’s a lot of wood to chop in this space. But if you know anyone trying to solve the custodian integration challenge specifically, we’d love to hear from you.