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The Health Savings Account (HSA) vehicle has significantly evolved since its development in 2004. While the industry previously prioritized spending and saving, 2019 marked the beginning of a new era. It not only introduced the retail revolution that sparked a new paradigm of investing that will transform consumers' financial lives over the next decade, it also initiated The Age of the Investor for the HSA industry.
Today, HSA accounts have reached nearly $93 billion in total assets, of which $30 billion are in investments. Tomorrow, the future of the HSA will be powered by the embedded investing experience, which will empower consumers with investment choices and a user experience that offers personalized investing guidance. In order to remain competitive, administrators will need to Modernize, Monetize, and Control their HSA investment features.
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Modernize
As consumers are increasingly exposed to modern investing outside of the HSA, The Age of the Investor requires administrators to modernize their investment offering to differentiate themselves in an industry that has become commoditized in cash management features. During this new era, everyone is considered an investor. Investment user interfaces need to be easy and intuitive, quick to operate, and designed to meet the needs of the consumer-investor. Users require an interface that is mobile and offers the ability to invest in mutual funds, ETFs, stocks, and cryptocurrencies, among other securities. They expect to fund accounts and execute trades in real time, and also make small, periodic investments into diversified portfolios using fractional shares.
Monetize
The current economy has driven cash interest rates to near zero, which has adversely impacted net interest income on HSA assets. In the Age of the Investor, administrators must learn how to monetize their invested assets as investments will soon comprise the majority of all HSA assets. Failure to adapt to this business model change has the potential to dramatically upset the ranking of top providers in the next few years.
Administrators will have to retain control of the investment experience, and charge an appropriate rate for investing. As this new revenue stream develops, investment advice will become more sophisticated, automated, and personalized. Solutions that can outperform passive ETFs or indices will clearly have an opportunity to charge a greater fee for adding value. Rather than a checkbox feature, real returns on investments will be measured, compared, and will drive competitive advantage.
Control
Before administrators are able to modernize and monetize, they must first regain control by bringing the investment experience to their platforms. Controlling the investment experience will enable differentiation and the development of potential new revenue streams.
For example, imagine a UI that allows a consumer-investor to create their own mix of stocks, bonds, ETFs, and mutual funds, define their own allocations among them, and create a personalized "synthetic ETF." The user could configure their HSA to automatically direct future contributions using fractional share investments to maintain those allocations, even with small contributions from payroll deductions. The opportunities for diversification and revenue generation are endless, and far more abundant than the current commoditized cash management features of HSAs.
Once administrators gain control of the investment experience, they should expect to see investment thresholds that are individually set by the consumer so they can create the HSA investment experience of their choosing. Offering a native solution allows the provider to have more visibility around investment contributions and trading habits, which can be beneficial in driving behavior that supports long-term investing.
The new age broker-dealer
Administrators are already feeling the squeeze of diminishing fees, near-zero interest margins, and saturated sales channels. While reinventing models for the Age of the Investor may seem daunting, it is important to recognize that investing tools have developed in tandem with the industry and are helping traditional players reinvent themselves so they can meet consumers' needs today and tomorrow.
So how can administrators survive and thrive in the Age of the Investor? By partnering with broker-dealers who can provide access to fractional share trading using real-time APIs. This will allow administrators to benefit from the instant creation of individual accounts at the brokerage to eliminate the cost and compliance burden of omnibus recordkeeping, while enabling consumers to access real time traded instruments, including stocks, bonds, and ETFs, directly through their existing interface. As a result, HSA administrators will finally be able to monetize their investment assets. Offering a modern HSA investment also allows administrators to provide additional investment accounts, such as an emergency fund, 401K rollover, or joint/individual accounts, which equips the end-user with a consolidated view of their total assets.
The Age of the Investor is upon us and is positioned to introduce significant challenges for legacy administrators. As investing continues to become the prime focus of the industry, the race to see which administrators are prepared to Modernize, Monetize, and take Control of their offerings has certainly begun. Only time will tell who is ready to revamp business models to remain on top, and who will fall behind.
Mike Chapman is Technology Ambassador at DriveHSA, powered by DriveWealth.
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