Abaris Financial and the Revolution in Retirement Spending

Originally published on the Wharton FinTech blog on April 1, 2015.

The following is an interview between Daniel McAuley, Co-Founder of Wharton FinTech, and Matt Carey, Co-Founder of Abaris Financial. This interview took place March 22, 2015.

Abaris is a first of its kind online marketplace for annuities that sells directly to consumers. Their initial focus is on Deferred Income Annuities (DIAs), a product that can protect retirees against longevity risk.

Annuities are something that a lot of people may not be familiar with. Can you start by giving us a little background on Abaris and your product?

Let’s start with annuities. An annuity is a recurring form of income that lasts for your entire life. Examples of annuities that most people are familiar with are Social Security and corporate pensions. Social Security is an annuity provided by the government and pensions are an annuity provided by an employer. An annuity is provided by an insurance company and you purchase it yourself. Maybe it helps to provide an example. Let’s say I’m 55 today, I want my annuity to start paying me at age 75. $10,000 today could buy you as much as $1,900 a year, every year starting at 75 for as long as you live. And that’s really important, that last part: as long as you live. You no longer have to worry about whether you live to 85, 90 or 95. You want to live as long as you’re healthy and happy and you don’t have to worry anymore about your money running out. These types of products are underwritten by large insurers, household names like MetLife, Lincoln Financial, The Principal, or MassMutual, so buyers can have confidence that income will be there when they retire. We’re not there yet, but we’re working to become appointed with all of these insurers.

Abaris is the platform where people can actually purchase these products. Right now, you have to go through individual insurance agents who might not be appointed to sell a lot of different insurance carriers’ policies. We are able to quote and sell a majority of the market, but we’re not creating these products. What we’re doing is providing people the place to learn about annuities, compare different insurers’ side-by-side and then complete the purchase if they decide to buy. We’re doing kind of like what Orbitz has done for flights or what Coverhound is doing right now for auto insurance.

Why is retirement spending such an important problem to solve and why isn’t much being done about it?

It’s important to solve because in almost every case retirees today are either overspending and running out of money or underspending and forgoing the lifestyle they could have had. In addition, no matter what happens, retirees are losing a lot of peace of mind along the way.

I think there are two reasons though why more hasn’t been done to solve it. The first is that getting people to save for retirement is still an unsolved problem. In order to develop solutions for better retirement spending you first need to make sure that you’ve saved enough and figuring out how to get people to save more and invest it appropriately is really challenging. Only recently have you started to see some big developments with companies like Wealthfront or Betterment getting people to do a better job saving and putting that money away and kind of forgetting about it and investing it in a really smart, tax efficient, behaviorally sound way. The markets are still largely focused, for a good reason, on getting people to save enough, so the idea of retirement spending is only starting to be talked about. The innovation is only starting and we’re at the forefront of that. The second reason we haven’t seen as much being done about it is because of the demographic. Customers who buy DIAs tend to be nearing retirement, so between ages 50 and 65. And only recently has Internet usage and comfort with online purchasing reached a point where the market was ready for this. If you look, for example, about where Facebook’s domestic user growth is coming from, it’s basically the baby boomers and those who are a little bit younger. They’re doing a lot more online these days than just checking e-mails. So now we feel like it’s finally the time to launch this product because our customers feel comfortable with a process that is partially online, especially at the beginning of the sales funnel.

What do you see as Abaris’ main advantages when compared to insurance agents and other competitors?

We have a few advantages over insurance agents who are the ones selling most of the policies today and the first of those is education. At the moment, annuities are sold, not bought. What that implies is that it requires really pushy sales tactics and often times a “fear driven” sales approach to get people to purchase annuities. We don’t think that, in this day and age, people should be buying because they are psychologically forced into a corner. What we’re doing is providing everyone with information about when it makes sense to purchase a DIA but also when it doesn’t, and that is pretty unique in this market. Second, we offer people the ability to compare different product offerings, and I talked about that a little bit earlier but right now your insurance agent might only be appointed with one insurance carrier and they’re just going to try and sell you that product. But you never know if you’re getting the best price, if you’re getting an annuity from an insurer that is very safe with a high credit rating, and the trade off you’re making between price and credit rating, those sorts of things. So comparison is not something that really exists today and we’re providing it and that’s a huge value proposition to the consumer. Lastly, our cost structure is lower, so our incentive is to make sure that you get the best price, not to sell you a product where we get paid the highest commission, and that also is a big difference. So you can be sure that we have your best interests in mind when you’re on our platform.

There are a lot of mental biases that come along with consumer financial products specifically. What is Abaris doing to help consumers overcome these hurdles and where do you see your biggest challenges?

That’s a great question and something we’ve been focused on since the beginning. The first advisor we brought on is a professor by the name of Hal Hershfield. Hal is a Stanford Ph.D. and teaches at UCLA, and his focus is on the type of issues you mentioned. The biggest psychological issue here is present bias. In order to purchase one of these products, you basically have to say “alright I’m going to take money that I could spend today and put it in a product that’s not going to start benefiting me for a long time into the future.” And that requires a lot of foresight and we know from psychology that that can be challenging. What Hal has done in his research is demonstrate that if you show someone an aged version of their own face, they are much more likely to save. We’re going to incorporate things like that into our platform so people can combat this present bias. Another thing we’re dealing with is, and the annuity market has very much had a challenge with this, is choice overload. We wish the market were as simple as, “hey I want an annuity right now that starts paying me at age 70 or 75 or 80 and I want it to be inflation-protected the whole time and that’s that. Tell me what I should buy.” But right now products aren’t that simple. The market has added a lot of complexity and customization and what we’ve tried to do is essentially say, “alright, tell us a little bit of information about yourself and we’ll suggest some default options so that you’re not overloaded with all these choices and, if you want, you can customize that but we’ll tell you why we chose these default options.” We think it’s really important to get people to actually feel comfortable with what they’re doing.

This is all really cool, innovative and exciting, and it sounds like it’s very good for the consumer. Are the existing insurance companies and the other players in the annuity space supportive of what you’re doing or are you getting pushback from entrenched interests?

I think I would describe it as more support than push back. From the insurance carrier’s perspective this is another channel for them, another way for them to get their products into consumers’ hands. I don’t think it’s a secret that the insurance industry has been a bit behind in terms of innovating on distribution, underwriting and marketing. Now what we’re starting to see is a lot of interest in the insurance community to do more because their customer base is shifting in terms of who is buying these products. The average 50 year old wasn’t thinking about this at all ten years ago and now they certainly are. Everyone, carriers especially, see the opportunity and want to figure out how they can fit this in both right now and as part of their future product roadmap.

Annuities are just one of many financial products specifically. Where do you see opportunities for Abaris to apply this model that you’ve developed to other markets or products?

If you think about how quickly pensions have gone away over the last three decades and how much less of someone’s total spending needs that Social Security actually provides than it used to, you realize that we’ve got a huge opportunity in DIAs alone. In many cases, this product is the one that should be filling that gap and it is not really today in terms of sales volume. So we think there is a really large opportunity to get this product in more people’s hands. That’s our focus for the near and medium term. One way we’re thinking about innovating further in this market is by making it easier for people to purchase these products in low dollar amounts on a recurring basis. Right now, you have to save up 10, 20 or 50 thousand dollars before you buy one of these and it’s pretty challenging for folks to make that big of a decision and it’s not really how they think about their money. Right now, every two weeks, money comes out of your paycheck to go to your 401(k). There’s no reason why in the future some of the money you’re taking out of your paycheck for your 401(k) can’t go straight into an annuity and fund your DIA on a recurring basis. By expressing it in terms of monthly income, people can see actually how much they’re saving for retirement.

What advice do you have for aspiring FinTech entrepreneurs out there, particularly MBAs that may not have technical experience?

I think the key is to go after a market you know. I chose this market, for example, because I worked on retirement policy at the Treasury Department at a time when there was a lot happening in this area. I got to learn the space pretty well and I saw an opportunity to bring technology into the market. I think you’re always going to have the easiest time pursuing a startup in an area that you know really well because otherwise there are inevitably going to be things that surprise you along the way. I’d say that’s the biggest piece of advice I have. At the same time, I think financial services and insurance are certainly behind the curve in adopting technology. I think that there are lots of opportunities right now to go out there and find a niche, carve it out, acquire customers and really build a profitable growing business.

That’s great advice. Before we close do you have any last words you’d like to leave us with?

Two things. The first is a huge thank you to you and Steve and the rest of Wharton FinTech. This group didn’t exist during my first year at Wharton and in less than a year’s time it’s already made a huge impact on innovation in financial services, not just at Wharton but in the broader FinTech community. You guys have really established yourselves as thought leaders and that’s great for the school and the industry. Second, this issue we’re talking about is a really big one and I think people are starting to understand how big it really is. When Social Security was created you had people living maybe five or seven years into retirement. Now, on average, a 65 year old is going to live to about 88 and by the time we’re ready to retire that number could be well into the 90s. And what this means is that if you’re living for 30 years post-retirement you really having to think a lot harder and more seriously than in the past about how you’re going to accumulate enough money to live and then how you can be more sophisticated in spending that money down. We’re super excited about what we’re doing because we think that this is just the beginning. There’s going to be a lot more innovation in the space and we feel like this will be a transformational couple of decades for retirement spending.