The Latest In Financial Advisor #FinTech (October 2016)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Riskalyze Raises $20M In Series A From FTV Capital. The big news out today is the announcement that Riskalyze has raised a whopping $20M Series A round (after a prior $2.1M venture round in January of 2015), with new funds provided by FinTech VC firm FTV Capital, also known for being an early investor in Financial Engines, and brokered by FinTech investment banker Financial Technology Partners. Riskalyze initially made its mark as software to help advisors gauge their prospective clients' risk tolerance, by guiding clients through a series of economic trade-off questions to evaluate their willingness to take risks, and then comparing the outcome to the prospect's actual portfolio (and how the advisor's solution might be a better fit). In practice, though, Riskalyze's explosive success has been less about their raw risk tolerance process itself (a space where differentiation is difficult), and more about the company's success in building their risk tolerance process into a front-end solution for advisors - an embeddable widget that advisors can use on their websites with prospects as a part of the sales process with a potential client. Since most self-directed investors do not construct well-diversified portfolios, the Riskalyze process almost inevitably shows the prospects their portfolio is misaligned with their risk tolerance, and that the advisor's diversified portfolio would do a better job. And given its success as a prospecting and sales tool, Riskalyze expanded further into the "robo-advisor-for-advisors" space last year with its "Autopilot" solution, which extends the process from not only showing prospects that their portfolio is misaligned and that the advisor's may be better, but helping them to immediately onboard themselves as a new client if they wish to move forward! In a follow-up video interview from Bill Winterberg of FPPad, Riskalyze CEO Aaron Klein notes that the funds raised from FTV Capital is intended to go directly towards new growth initiatives with the current Riskalyze leadership (which will remain in place), further scaling up their 100+ person team based in Sacramento and Atlanta.

Yourefolio Raises $500k Seed Capital For Estate Planning Software For Advisors. Historically, it’s been difficult for financial advisors to efficiently support clients on estate planning issues, from just trying to gather estate planning documents in the first place, to reading them and understanding them (as a “non-lawyer”) to confirm the client’s plan, and then determining appropriate recommendations to consider. Yourefolio – a contraction of Your Estate Folio [of documents] – is aiming to help address the issue, with digital tools that both help to onboard client documents up front, and provide back-end staff support to read through estate documents, analyze the situation, and help provide appropriate recommendations, while working collaboratively with other estate professionals. In essence, the service is aiming to be a combination of back-office estate planning support, and an Everplans-style estate planning document vault. And while the software was initially bootstrapped for its first iteration, this month Yourefolio announced a formal $500,000 seed round from local investment bank Matrix Pointe Group to hire up staff and build infrastructure, further developing its software hub. While it remains to be seen whether Yourefolio will be able to crack the tough nut that is estate planning software and support for financial advisors, the fact that capital is being drawn into this segment of the industry is a promising sign for both Yourefolio, and more potential solutions to come! In the meantime, you can demo the Yourefolio solution yourself here.

Black Diamond Parent Company SS&C Buys Salentica CRM. In early 2015, independent portfolio accounting solution Advent Software (which offers both the Advent Axys and Black Diamond solutions) was acquired by global technology company SS&C, with the expectation at the time that SS&C’s capital and resources could be used to more aggressively grow Advent’s solutions, especially Black Diamond in the independent advisor channel. 18 months later, the strategy appears to be bearing fruit, as SS&C announced this week that it would be buying Salentica to bolster is Black Diamond solution. Founded nearly 20 years ago, Salentica has been known primarily as a reseller of Microsoft Dynamics CRM, though in recent years they expanded into Salesforce CRM as well; in both cases, their primary value-add was building a custom layer on top of the CRM, with configurations relevant for wealth managers, and deep integrations to custodians and portfolio accounting solutions (including Tamarac, Orion, Advent Axys, and Black Diamond). With the acquisition, Black Diamond appears to be gearing itself up as a more holistic all-in-one platform, akin to Envestnet (which offers a combined CRM and portfolio accounting solution in Tamarac through its Advisor Xi platform) and an alternative for advisors who don’t want to be captive to a custodian’s own all-in-one solution (e.g., the upcoming Fidelity Wealthscape). In the meantime, Black Diamond states that it will continue to integrate with other CRM providers, and there’s no word that Salentica will terminate its own integrations to other portfolio accounting providers, though there seems to be little doubt that the all-in-one Black Diamond/Salentica integrations are likely to be the deepest and strongest going forward… and raises the question of whether Black Diamond will soon buy a financial planning software provider as well, to complete the advisor technology stack, after Envestnet itself bought FinanceLogix last year, and Fidelity bought eMoney Advisor, to accomplish the same goal.

Is Proprietary CRM The New Handcuffs On Independent Financial Advisors? In the world of wirehouses and other “employee advisor” models in the banking and insurance world, it’s very challenging to leave and change firms, both because it’s necessary to completely retrain on new technology systems, and because an advisor breaking away is so limited by the Broker Protocol in the client information that can be taken along. In the world of independent advisors, though, platforms – including broker-dealers and custodians – make change much easier, as the advisor can often change technology while staying with the platform, or change platforms while keeping their (independent) technology. As a result, platforms have long tried to come up with ways to tie advisors to the platform with solutions that are unique and differentiated, and that either can’t be obtained elsewhere (or at least, not without a substantial cost). For instance, Schwab long ago bought PortfolioCenter (then Centerpiece from Portfolio Technologies), TD Ameritrade acquired iRebal, and Fidelity now has eMoney Advisor. And now, a new trend is emerging, particularly amongst broker-dealers: proprietary CRM, as both Commonwealth and Raymond James have or are currently building their own solutions. The virtue of proprietary CRM is that it once again turns an otherwise “independent” and portable advisor into one who would potentially have to retrain their entire staff on technology, and may not even be able to fully extract all of the client information (forcing a literal rebuilding of all the client information in a new CRM after a change). And with CRM systems increasingly integrated directly to the workflows of the business, breaking away from proprietary CRM would be even more disruptive for the business. Of course, the virtue of a custom-built proprietary CRM is that it’s also potentially possible to make the advisory firm more efficient than ever, built around those very workflows and deep integrations with the platform’s other technology systems. That’s the double-edged sword of proprietary software!

Rebalancing Software Is Becoming A Key Workflow Integration Partner. The great breakthrough of rebalancing software when iRebal first arrived on the scene around 2004 was that internal process of constructing model portfolios and keeping clients invested to those models shifted from a multi-hour (or multi-day) spreadsheet process into a centralized software solution. In subsequent years, iRebal built deeper and deeper integrations to the leading RIA custodians, allowing advisors to work up trade orders to rebalance across the entire client base in minutes, and submit those trades directly for execution. Their success (and also their incredibly high starting price point for the original software, at $50,000/year in 2004!) spawned many rebalancing software competitors as well, including Tamarac, TRX (now under Morningstar), TradeWarrior, and a host of ‘simpler’ rebalancing software solutions offered directly from custodians and under portfolio accounting software platforms. However, the notable dynamic of rebalancing software was that it operated purely “internally” to the RIA; key integrations were with portfolio accounting software and RIA custodian trading systems, to facilitate the smooth automation of trading workflows for existing clients. Now, however, the scope of rebalancing software is expanding, as TD Ameritrade released a standalone API to go direct to iRebal, and now both Vanare and Riskalyze’s Autopilot have built direct iRebal integrations. These direct integrations are relevant because Vanare and Autopilot are both client-facing “robo” onboarding tools… which means that if clients are really going to onboard in an automated manner, they need to be mapped to the advisor’s actual model portfolios, and the software needs to be able to queue up the initial trades to get the new client’s portfolio invested on model. In other words, rebalancing software is shifting from a purely back-office workflow tool for trading existing clients, into a central hub for trade management and execution, that pulls in existing and new client information, determines appropriate trades, and then implements them. Or stated more simply, rebalancing software actually is becoming the fully integrated “robo” trading core for the human-powered advisory firm. And the new iRebal integrations put new pressure on competing rebalancing software providers to build and expand their own APIs to keep up with the growing role that rebalancing software is playing in an advisory firm’s workflows.

Envestnet Buys Wheelhouse To Gear Up For Advisor Benchmarking Analytics. The fundamental fiduciary requirement under the upcoming Department of Labor rule is that the financial advisor must adhere to “Impartial Conduct Standards” by providing best interests advice, for reasonable compensation, and make no misleading statements. The second requirement – to receive “reasonable compensation” – actually derives from ERISA, and is evaluated by whether the financial advisor’s compensation is “reasonable” (or at least, not excessive) relative to what other advisors/providers charge for substantively similar services. Which means that going forward, advisors will actually need to benchmark their pricing, relative to their peers, to understand whether their compensation is at risk of being deemed “excessive” relative to their services. In this context, last month we noted that McKinsey had bought PriceMetrix, an analytics firm that was already doing a version of this exact kind of price benchmarking. And now, Envestnet has purchased Wheelhouse Analytics, a company that already has extensive experience with business intelligence data analytics in the world of wealth management, for what will likely be a combination of compliance-related tools (to determine which advisors have clients that are underperforming, and why) and price benchmarking services (for advisors to compare their pricing and services to peers and identify if there’s a risk of failing the reasonable compensation test). The acquisition also marks Envestnet’s continuing march towards being “big data” company, as Wheelhouse may well be able to further leverage Envestnet’s 2015 Yodlee acquisition as well.

Addepar Rolls Out New Open API For Integrations For RIAs As It Passes $500B On Platform. When it comes to portfolio accounting software solutions for RIAs, there hasn’t been much change in the past 10 years. Fortunately, with the overall growth of the RIA channel, all the main players have had room to grow, including “old” stalwarts from the 1990s like Advent and PortfolioCenter, and “newer” players from the 2000s like Black Diamond and Tamarac and Orion Advisor Services. And so it was notable when in 2014, Addepar announced that it had raised $50M in Series C financing to try to take its family-office-oriented portfolio accounting software solution to the more mainstream RIA community. Thus far, I still don’t hear much of Addepar competing head-to-head against the other ‘traditional’ portfolio accounting solutions for the bulk of RIAs, but the company appears to be making inroads in a select group of RIAs and institutions serving ultra-HNW clientele, where Addepar has better capabilities to aggregate together and calculate performance on illiquid assets that may not be held at traditional RIA custodians. Accordingly, Addepar announced this month that it has passed $500B of assets on platform across 200 wealth management firms (which, notably, means its average firm has $2.5B of AUM), and that it will be rolling out an open API to facilitate more third-party integration, following on the heels of last month’s announcement that it would be one of the providers integrated into Salesforce’s new Wave for Financial Services Cloud (an analytics tool to help advisors understand the opportunities in their client base). Ultimately, though, while Addepar has had some big wins in the HNW space, it still remains to be seen whether they’ll be able to successfully pivot further “downstream” to the typical RIA… or whether they’ll simply assert themselves more deeply in the ultra-HNW space, making it difficult for any of the other providers to move “upmarket” from where they are today with the bulk of RIAs.

Fidelity Launches Its Digital Advice Platform For Advisors Built Around eMoney Advisor. This month, Fidelity began to preview its upcoming new “robo-advisor-for-advisors” solution, called Automated Managed Platform (AMP). What’s notable about Fidelity AMP, though, is that it’s not merely a “robo” in providing a digital onboarding investment solutions for clients tied to a basic data gathering form; instead, capitalizing on Fidelity’s purchase of eMoney Advisor financial planning software last year, prospective clients are steered directly into more interactive financial planning (primarily, retirement projection) tools, and can then follow through to the account opening process if they wish. And once the client is enrolled in the program, they receive ongoing access to the eMoney client portal, to aggregate all their investment accounts (and thus reveal potential additional business opportunities to the advisor). And the whole solution is expected to be fully and deeply integrated into Fidelity’s new Wealthscape advisor workstation, including its new native portfolio performance and accounting solution. Notably, though, since Fidelity AMP and eMoney are so deeply integrated, advisors who want to use the new Fidelity robo solution will not only pay for the AMP robo (pricing not yet announced, but expected to be ‘competitive’, ostensibly in the 10bps to 25bps range), but also must buy at least a base EmX Select license for eMoney. Perhaps most surprising, though, is that unlike Schwab’s Institutional Intelligent Portfolios solution for advisors, Fidelity AMP will require the use of one of 14 pre-constructed model portfolios built by third-party investment manager Geode Capital Management… which means Fidelity AMP looks more like a simple but tech-savvy Fidelity TAMP, and raising the question of whether Fidelity’s independent RIAs actually want to be put in the position of asset-gathering for Fidelity instead of their own advisory firms and their own investment management approach.

Did Robo-Advisors Get Robo-Advisor Pricing Wrong? The “conventional” view of the robo-advisor was that at the price point of 0.25% from Betterment and Wealthfront, a new threshold was set for the “true” value of basic investment implementation, and anything above that threshold would face scrutiny and struggle to justify itself. Yet throughout 2016, as more and more competitors have launched robo-advisors – from incumbents that launched their own services (e.g., Fidelity Go), to asset managers who will use a “robo” platform to distribute (this month the latest is Zack’s built on top of Schwab Intelligent Portfolios), and now even a wirehouse getting involved (with Merrill Lynch’s announcement of Merrill Edge Guided Investing) – notably, all of them are charging more than 0.25%. Zack’s will assess “robo” fees of 0.35%, Fidelity Go is 0.35% to 0.40% (depending on the underlying investments), and Merrill’s Guided Investing is priced at 0.45%. And while a difference of 0.1% or 0.2% may not seem huge, it raises serious questions about whether robo-advisors made a pricing mistake; after all, on a relative basis, Fidelity’s robo at 0.35% is actually charging 40% more than Betterment or Wealthfront for the “same” service, and Merrill Lynch’s 0.45% is actually an 80%(!) higher price point. In other words, the presumption of robo-advisors was that 0.25% was the “right” price point and everyone else would have to come down, but now as the original robo-advisors are struggling to grow, while incumbents (with more capabilities to do market testing and research, and that already have a national brand and scaled marketing) set a price point that’s 40% to 80% higher, it’s looking like the founding crop of robo-advisors may be the ones that were wrong about how automated investment management should really be priced (especially when considering client acquisition costs)!

Like ‘Traditional’ Robo-Advisors, P2P Robo-Advisors Are Pivoting To Financial Advisors, Too. The world of “P2P” (peer to peer) lending, led by LendingClub and Prosper, has become an appealing option for many investors who are looking for higher-yielding fixed income alternatives than publicly traded bonds. The risk of peer to peer lending is that ultimately, it’s making a small unsecured loan directly to another individual, which means there’s a material risk of default – and for investors with limited capital, the danger of taking an over-concentrated risk exposure in any particular borrower’s loan. P2P platforms help investors mitigate this risk by making it easy to invest into fractional shares of multiple loans to diversify, but that in turn creates a burden on the investor to allocate small dollar amounts amongst dozens or hundreds of small loans. Fortunately, though, technology tools can help – both with on-platform tools offered by LendingClub and Prosper, and for those who don’t want to be responsible at all, third-party managed “robo” solutions like LendingRobot and NSR Invest. The caveat to these third party robo solutions, though, is that just like their “traditional” investment robo peers, it’s hard to gather investor assets as a third party manager. Thus, after nearly 4 years, LendingRobot charges just 0.45%, but has only invested $110M of assets. And so to expand their distribution, P2P robos are turning to human advisors to find investors. Accordingly, this month LendingRobot announced a new advisor platform for advisors who want to facilitate P2P loans for their clients. And last year NSR Invest debuted a similar offering for advisors, along with tools that allow advisors to manage their own P2P portfolios for clients (rather than fully outsourcing to a third-party investment manager). However, it remains to be seen whether or how much P2P lending will really catch on with advisors; the “good” news is that it does provide an alternative path to higher yield for clients, but the bad news is that the whole P2P space has been struggling this year after LendingClub’s CEO for forced to leave after revelations that LendingClub was selling loans to investors that didn’t meet the investor’s criteria.

Is Term Insurance Next Up For Robo Disruption? There’s an old saying in the world of life insurance: that it is “sold, not bought” – meaning it’s the kind of thing that consumers will only buy if there’s someone there to sell it to them. No one wakes up in the middle of the night in a sweat over their lack of life insurance, so stressed that they feel the need to go online immediately and buy it. Or do they? This past month, Ladder Financial raised $14M of venture capital. For those who aren’t familiar, Ladder Life is an online-only term insurance company that offers cheap life insurance directly through its website, with the ability to underwrite and issue a policy immediately in most cases. The company is one of several direct-to-consumer “InsurTech” companies cropping up, aiming to bring term insurance to consumers without an insurance agent, and betting that perhaps the reason life insurance has always been sold and not bought was simply because it was too difficult and complex to buy, and too expensive – problems that these InsurTech players aim to solve with easy-to-use websites, a quick-and-easy application process, and lower costs by eliminating what are still often 100%-of-first-year-premium commissions for insurance agents. Of course, for financial advisors, this story may sound familiar – it’s the same go-to-market story once used by robo-advisors, who eventually found out that the marketplace for self-directed investors was still quite small, and skeptics are already suggesting the same may be true for self-directed term insurance transactions as well. Nonetheless, if the “robo” marketplace is any guide, while the direct-to-consumer technology of some InsurTech may not gain traction, the potential for no-load term insurance and great technology to apply for coverage could soon become popular with human financial advisors – a path some no-load insurance providers (like Haven Life) are already exploring, along with some early B2B providers like Assurance trying to bring better technology solutions to facilitate the easy implementation of life insurance policies.

FinTech Incubators Are Cropping Up Everywhere! For the past several decades, “tech innovation” was viewed as the domain of Silicon Valley. But one of the fascinating effects of technology and the internet itself is that it’s becoming easier and easier to form a tech company in any location (and hire in any other location, as necessary). The effect is playing out in a number of industries, including financial services, especially given that there are many cities around the country that have a concentration of financial services (and can now attract the tech talent). This includes not only the rise of “Silicon Alley” – the New York City tech startup scene, including FinTech players like Betterment and Quovo and accelerators like the FinTech Innovation Lab – but the St Louis FinTech accelerator SixThirty (which incubated Upside Advisor, ultimately sold to Envestnet), the FinTech Sandbox in Boston, and the Queen City FinTech incubator in the financial services hub of Charlotte, NC (a major home to the banking sector, not to mention a major corporate office of LPL Financial now). In fact, if you’ve got a FinTech idea you’d like to cultivate, the QC FinTech program is now taking applications for its 2017 class of startup firms!

CapGainsValet Launches Pro Version Of Tracking Service For End-Of-Year Mutual Fund Distributions. One of the great challenges in end-of-year tax planning is incorporating the effects of end-of-year mutual fund distributions, particularly when we’re so far into a multi-year bull market and many funds have substantial embedded capital gains that could be distributed soon (with some already reporting anticpated end-of-year distributions in excess of 20% of NAV!). And given that mutual fund companies report estimates of their capital gains distributions erratically, inconsistently, and often just buried on their own websites, it’s hard to keep track of it all. Accordingly, financial advisor Mark Wilson launched CapGainsValet in 2014 by culling together all the mutual fund distribution reporting information he was already researched for his own clients, and putting it online for any fellow advisors or investors who wanted to view all the information in one place. After several years of building, CapGainsValet now tracks a whopping 255 fund families in its database, and posts both estimated capital gains distribution information as it’s released, and then final capital gains distribution amounts once they actually occur in December. Notably, in the past, CapGainsValet made all of its information available for free, but in 2016, the “free” service will only cover about 20 fund families (albeit the most popular ones that comprise about 70% of all mutual fund assets, including Vanguard, Fidelity, T. Rowe Price, DFA, American Funds, etc.). For advisors (and heavy-duty investors), a “Pro” version is available for a very reasonable $45 one-time annual payment, which expands access to the full database of 250+ fund families (and largest ETF providers), and includes access to all available estimates and preliminary distribution details as they’re released from the fund companies. For advisors (or other investors) who are interested, CapGainsValet has offered a $10 discount for all Nerd’s Eye View readers with the discount code Kitces10, and you can sign up directly for the Pro service (and enter the discount code) here.

For further coverage of AdvisorTech news, be certain to also check out Bill Winterberg’s FPPad, Joel Bruckenstein’s T3TechnologyHub, and Craig Iskowitz’ Wealth Management Today.

And if you’re an #AdvisorTech company who wants to submit a tech announcement for consideration in future issues, please submit to [email protected]!

So what do you think? Did robo-advisors actually get it "wrong" with the 0.25% AUM fee? Are institutions offering proprietary CRM with workflows an efficiency positive, or a business risk? Would you use the new Fidelity AMP platform if you have to outsource investments to Geode, or will you avoid the quasi-TAMP? Would you recommend more term insurance to clients - and help them implement it - if there was technology to make it easier (and cheaper) to buy? Please share your thoughts in the comments below!