Executive Summary
Welcome to the November 2017 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!
This month's edition kicks off with the big debut of CleverDome, a next-generation cybersecurity solution that aims to bring all major financial services providers into a closed network that operates with a “Software Defined Perimeter” (SDP) to block out hackers and only permit known entities to interact with vendors. At the T3 Enterprise advisor technology conference, CleverDome announced that it is launching with Redtail CRM, Orion Advisor Services, Riskalyze, Entreda, and TD Ameritrade all “under the dome”, and is looking to rapidly add more advisor tech providers in the coming months.
Also in the news this month was a slew of new “Model Marketplace” announcements, including the launch of Orion Advisor Services’ “Communities” model marketplace built around its new Eclipse rebalancer, a pivot by Oranj to build a new MAX model marketplace around its recently acquired TradeWarrior rebalancing software and make its platform free to advisors to place assets in MAX, and the announcement that Apex Clearing is launching its own API-based rebalancer called Equilibrium that may also become a future player in Model Marketplaces (while enhancing its capabilities to compete with other RIA custodians as well).
From there, the latest highlights also include a number of major new product and feature rollouts this month, including:
- Morningstar launches its “Best Interests Scorecard” solution to help advisors with DoL fiduciary due diligence and compliance on IRA rollovers
- Redtail launches “Redtail Speak”, a new compliant text-messaging solution for advisors
- Advizr launches “Accelerate”, which will allow advisors to directly open investment accounts or begin insurance applications from within a financial plan presentation
- CapGainsValet re-opens its annual tracking database of end-of-year mutual fund distributions
You can view analysis of these announcements and more trends in advisor technology in this month's column, including fresh Series A rounds of capital for Snappy Kraken and Vestwell, the launch of U.S Bank’s “FundKeeper” platform that aims to reinvigorate the “direct mutual fund” business of small- and mid-sized broker-dealers (with better compliance oversight and a fraction of the cost!), and the release of a series of “Consumer Protection Principles” from the Consumer Financial Protection Bureau to re-assert that consumers are the owners of their financial data and have a right to grant third-party data aggregators access to it (despite a desire of many Financial Institutions to limit the flow of data that is increasingly being used against them!).
I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!
*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!
NetFoundry Launches CleverDome Next-Generation Cybersecurity Solution – Last year, then-SEC chairwoman Mary Jo White declared that cybersecurity is the biggest risk facing the financial system, which in 2017 has been further punctuated by not only an SEC Risk Alert on its latest cybersecurity examinations, but the fact that the SEC itself revealed its EDGAR system was recently hacked, along with high-profile consumer hacks like Equifax. Yet the challenge for the typical advisory firm is that most are small businesses… lacking in expertise on information security, and too small for sophisticated cybersecurity systems (although as the recent SEC Risk Alert reveals, even larger broker-dealers and RIAs are struggling with cybersecurity issues). In this context, the big buzz from last week’s T3 Enterprise conference on advisor technology was the launch of CleverDome, powered by NetFoundry, which is being billed as the next generation of cybersecurity. The key distinction of CleverDome is that it everyone using it operates within what is known as a “Software Defined Perimeter”, a closed network that uses the existing infrastructure of the internet but only allows known devices and participants to interact with the network. Accordingly, by ensuring all devices, systems, and vendors have been vetted in advance, those operating within the SDP can exchange information safely, without risk of cybersecurity breach to the outside world (and in fact, Gartner has already predicted that within 5 years, the majority of enterprises will replace today’s VPN connections with SDPs instead). Because the key to an SDP system like CleverDome is that all of the vendors involved must themselves be part of the SDP, getting actual commitments of participation from major vendors is crucial; accordingly, it is notable that CleverDome is launching with Redtail CRM, Orion Advisor Services, Riskalyze, and Entreda, all working with TD Ameritrade to operate “under the Dome”. And notably, CleverDome itself has been structured as a co-op registered as an Arizona Benefit Corporation that is a Certified B Corporation – in other words, the technology vendors, broker-dealers, RIAs, and custody and clearing firms that participate in CleverDome will themselves be part of operating the organization, to ensure that it runs for the benefit of the advisory community it is intended to support. Expect to hear a lot more about CleverDome in the coming months, as the organization looks to quickly expand and bring more and more financial services vendors, and the advisors who use them, to come “under the Dome” (with the added benefit that the CleverDome SDP network also runs much faster, as well!). Or interested firms can contact CleverDome directly.
Orion Launches Peer-To-Peer Communities Model Marketplace As Eclipse Rebalancer Finishes Beta – While rebalancing software for financial advisors to manage model portfolios has been around for more than 10 years now, it was only earlier this year that the industry pivoted from simply using rebalancing software for advisors to manage their own models, to turn them into a “Model Marketplace” where advisors can choose third-party models and then use the rebalancing software to implement them. First it was TD Ameritrade launching a Model Marketplace inside of iRebal, then Riskalyze announced a Model Marketplace in their new Autopilot platform, and Morningstar announced they’d be making their own Model Marketplace. And so it’s not entirely surprising that as Orion completes the Beta testing of its own new internal rebalancing software solution, dubbed Eclipse, that it, too, is announcing a Model Marketplace called Communities. What’s unique about Communities, though, is that while it will include models from some major asset managers like Russell and Blackrock (in addition to sister company and ETF strategist CLS Investments), it will be a Model Marketplace for RIAs to offer their models to other advisory firms as well (while the Orion Communities platform supports the ability of advisors to charge for their model strategist services). Which means rebalancing software, and its robo-advisor counterpart for consumers, really is becoming an asset management distribution channel unto itself!
Oranj Pivots To Model-Marketplace-Subsidized “Free” Platform With MAX – One of the primary reasons that Model Marketplaces are quickly gaining interest is that asset managers, struggling to figure out how to get advisors to use their funds, are paying rebalancing software companies for the opportunity to have their “free” models included on the platform (because those models include the asset manager’s ETFs or mutual funds). For custodians like TD Ameritrade, asset manager revenue for its iRebal Model Marketplace is an opportunity to supplement income into a commoditized custody business with margins getting squeezed; for technology companies that are also asset managers like Morningstar, it’s a means to distribute their proprietary product (Morningstar Managed Portfolios); and for technology companies like Riskalyze, it’s an opportunity to add a highly scalable business line and generate a return on its recent round of capital. And now, taking it one step further, is Oranj, a client portal client solution that added “robo” onboarding tools, recently acquired TradeWarrior rebalancing software, that is now pivoting its entire business model by offering its software for free to advisors who use its TradeWarrior-powered MAX Model Marketplace to manage client portfolios. In other words, Oranj is offering to throw in nearly the entirety of its technology stack (a few “premium” features like goal-setting tools and real-time client messaging will still cost extra), betting that it can generate equal or better revenue in basis points from asset managers for client assets than it can by charging advisors directly, while attempting to lure advisors with the siren call of “free” software combined with “free” model portfolios. Of course, the reality is that none of this is truly “free” at all; instead, the costs are being borne by the asset managers, which in turn pay for it through higher (or at least, not lower) expense ratios in the underlying funds and ETFs that clients are invested into. Nonetheless, in a world where advisors have largely rejected industry attempts to charge them basis points for software solutions, the Model Marketplace approach provides a means for technology companies to get basis points in a more indirect (and potentially more palatable?) way that financial advisors may tolerate (because it’s buried in the expense ratio that the client pays, rather than coming off the advisor’s Profit & Loss statement), while allowing the technology company itself to execute a true “platform” model (where revenue grows based on the assets that flow across the platform) that could ultimately scale in a far more profitable way while “undercutting” competitors that charge advisors a traditional software fee. With the caveat that, as the recent hubbub of TD Ameritrade eliminating Vanguard ETFs from its no-commission Market Center line-up showed, platforms must be careful when operating an asset-manager-subsidized model, as popular fund companies like Vanguard and DFA still refuse to make revenue-sharing payments for distribution, and advisors will not lightly tolerate changes in the investment lineup just to accommodate the platform’s conflicted revenue model!
Apex Ramps Up RIA Custodian Assault With Equilibrium Rebalancer API And Coming New ACATS APIs – In the normally staid world of RIA custody, the “sleeper hit” of the year has been Apex Clearing, which is best known as the tech-savvy back-end platform that powered the start of most direct-to-consumer robo-advisors (including Betterment, Wealthfront, Personal Capital, Stash, and Robinhood), but in 2017 began a systematic expansion into the RIA space. The caveat of Apex is that it’s “just” a sophisticated set of APIs for handling RIA custody… which means it is both a far more modern infrastructure than traditional custodians, and able to execute far more quickly (thus allowing Betterment users to open accounts on a smartphone, fund them, and invest them in under an hour), but that it requires developer capabilities beyond what most financial advisors can create on their own. Accordingly, the Apex strategy to reach the RIA marketplace is through “robo-for-advisors” intermediaries, thus announcing a slew of deals over the past year with providers like AdvisorEngine, Trizic, InvestCloud, and RobustWealth. To further bolster its ability to provide a robust back-end to various front-end middleware software for advisors, at the T3 Enterprise advisor technology conference, Apex announced a new set of rebalancing software APIs dubbed Equilibrium, shortly after announcing a new partnership with Quovo to develop a set of APIs for handling ACATS transfers (with the hopes of turning the multi-week ACATS transfer process into just a few days, with fewer NIGOs). Which ironically would not only be a tremendous boon to financial advisors trying to more rapidly onboard new clients with fewer errors, but would also help expedite the process of transferring client accounts away from a competing custodian for any advisors who decide to make a switch to Apex!
Morningstar Launches Their Best Interests Scorecard Solution For DoL Fiduciary Rollover Compliance – The Department of Labor’s fiduciary rule imposes new requirements on financial advisors to demonstrate that they really conducted due diligence on a prospective rollover, including an analysis of the prospective client’s existing funds and their performance and costs, before making a recommendation to actually do the rollover. Which is challenging to do in a systematic and documented way, as when it comes to rolling over from 401(k) plans in particular, it’s often difficult to even get good data on the plan’s investment line-up. To help resolve the dilemma, Morningstar released its own solution this month, dubbed “Best Interests Scorecard“, as an add-on to the Morningstar Advisor Workstation. In essence, Best Interests Scorecard is a proposal generation tool, that gathers details about the client’s current investment holdings (from Morningstar’s own extensive data) and the advisor’s proposed recommendation (based on the advisor’s models or more customized recommendation), and then effectively “scores” the quality of the recommendation (with a green/yellow/red evaluation system) based on Investment Value (using Morningstar data to compare the current vs recommended), Client Fit (and whether the existing plan can effectively deliver an appropriately diversified portfolio consistent with his/her risk profile), and Service Value (attempting to quantify the value of the advisor’s additional financial planning services). The Best Interest Scorecard can also capture other relevant factors, such as unique investment circumstances (e.g., appreciated employer securities or the employer’s financial health), and the investor’s desire to work with an advisor in the first place. Of course, with the recent news that the Department of Labor has officially submitted their proposal to OMB for an 18-month delay on the rule (until July of 2019), there is suddenly less urgency for DoL fiduciary tools than there was just a few months ago. Nonetheless, with the DoL fiduciary rule still a seeming inevitability in some form or another, and the simple reality that advisors arguably should be conducting thorough due diligence anyway (regardless of regulatory requirements), the Best Interest Scorecard is incredibly well positioned, especially given its ability to leverage Morningstar’s existing core competency in data regarding the world of investment performance, costs, and other due diligence information.
Redtail Launches In-CRM Compliant Text Messaging For Advisors To Text Clients – Text messaging has become a staple of modern communication, with young adults estimated to send more than 100 text messages per day and even Baby Boomers aged 55+ sending an average of 500 text messages per month. Yet for most financial advisors, text messaging with clients is not permitted, as FINRA Regulatory Notice 17-18 emphasized earlier this year that all text messages must be archived as client communication (and RIAs face a similar archiving requirement under Rule 204-2 of the Investment Advisers Act). And because SMS text messaging occurs directly through the phone carriers, there’s no easy way for firms to automatically execute a compliance process. To fill the void, Redtail CRM this month announced the launch of “Redtail Speak” at the Riskalyze Fearless Investing Summit. The new Redtail Speak solution will allow advisors to push SMS text messages directly to a client’s mobile phone, while any text messages the client sends in reply will appear as notifications within the Redtail app. The good news of this approach is that by routing all text messages through Redtail, they can automatically be archived directly into the client’s CRM record compliance purposes. The bad news, though, is that it requires advisors to use the Redtail app for text message purposes, which both eliminates the some of the “immediacy” of real-time text message communication, and presents the practical risk that the advisor may not see a Redtail notification while they’re out on the road when they actually need to get the message. As a result, most advisors will probably use Redtail Speak “just” for outbound messaging to clients – such as staff members confirming upcoming meetings directly through Redtail’s text messaging capabilities – and not for true real-time text message communication with clients. For those who are interested, Redtail Speak will retail as an add-on to the core Redtail CRM, for an added price of $79/month.
Advizr Launches “Accelerate” To Facilitate Direct In-Software Implementation Of Insurance And Investment Recommendations – One of the great ironies of financial planning is that despite its long history of being used as a tool to demonstrate the need for and facilitate the sale of insurance and investment products, few comprehensive planning software solutions are ever built to actually illustrate or implement products from directly within the software. At last year’s T3 Enterprise advisor technology conference, MoneyGuidePro announced a partnership with Covr that would extract MGP data into Covr to illustrate an insurance need, and then the Covr technology would be able to begin the insurance application process on the spot. And now at this year’s T3 Enterprise conference last week, relative newcomer financial planning software company Advizr announced “Accelerate”, a solution that will allow advisors to implement insurance or investment recommendations directly from within the financial planning software interface. Investment accounts would be opened entirely electronically through Apex Clearing, and insurance products will be implemented via a yet-to-be-named insurance partner (potentially Covr again?). The significance of the Advizr shift is that it introduces tremendous new potential for efficiencies in the advisor workflow process, when the financial planning process can seamlessly lead to the implementation phase. And it provides a meaningful way for Advizr to differentiate in the crowded financial planning software marketplace. On the other hand, it also emphasizes that just as “robo” and rebalancing software solutions have turned into a technology-based distribution channel for investment products, Advizr may mark a looming shift for financial planning software to become a distribution channel as well – which both creates the potential for opening new markets for insurance and investment product distribution, introduces new platform revenue models for advisor software companies to be subsidized by product distribution and shelf space agreements, opens new distribution channels for planning software itself (as it’s surely no coincidence that Advizr also announced a new “Workplace” solution where Advizr is made available directly to 401(k) plan participants, who will now be able to buy insurance and investment products directly through the software)… and raises challenging new questions about how shelf space and revenue-sharing agreements are determined, the opaqueness of back-end financial arrangements for product distribution, and whether a product-distribution-based model for financial planning software could potentially challenge its perceived independence and model integrity.
CapGainsValet Returns With Centralized Database Of Estimates For End-Of-Year Mutual Fund Distributions – One of the biggest challenges of end-of-year tax planning is that mutual funds (and on rare occasions, even ETFs) can make potentially substantial year-end distributions of interest, dividends, and capital gains… especially after nearly 9 years of a raging bull market. And while mutual fund companies do typically provide estimates of year-end distributions, the exact timing and format of the notifications vary significantly from one asset manager to the next, which makes it difficult for financial advisors invested across multiple fund companies to keep track of it all. Which is where CapGainsValet comes in. Created by financial advisor Mark Wilson, CapGainsValet provides a consolidated database of all mutual fund distribution announcements. A “Free Search” version provides links to the fund distribution estimates for 20 of the largest mutual fund firms (collectively, about 70% of all mutual fund assets) including Vanguard, Fidelity, American Funds, DFA, PIMCO, and Franklin Templeton. The “Pro” version, priced at a modest $45/year, includes a whopping 250 mutual fund families, as well as major ETF carriers, and information on last year’s fund distributions (for some context for those who haven’t yet released current-year information). Notably, CapGainsValet does not actually provide a database of the mutual fund distributions themselves – just a list of links that go directly to the mutual fund distribution reports of the various fund companies (as they’re released). Still, for just $45, the time-savings shortcuts of using CapGainsValet Pro are well worth it, especially when there are already 169 mutual funds reporting more-than-10% distributions, 16 estimating more-than-20% distribution, and 5 indicating a whopping more-than-30% end-of-year distribution! Do you know if any of your mutual fund holdings are in the end-of-year distribution doghouse? Further details directly on the CapGainsValet website, and Nerd’s Eye View readers can receive $10 off the Pro Search version with kitces-10 discount code.
Snappy Kraken Raises $1M Series A And Releases Marketing Automation Tools For Financial Advisors – Snappy Kraken is an email and social media marketing platform for financial advisors that first debuted in late 2016 with a Best In Show win at the XY Planning Network FinTech Competition, only to disappear from sight for the better part of a year. As it turns out, though, the company was simply in the process of building out its marketing solution for enterprise clients who approached Snappy Kraken after its FinTech Competition win, and a year later Snappy Kraken has announced that one of its enterprise clients is now staking a $1M Series A investment to help the company scale up, and at the recent T3 Enterprise conference for advisor technology revealed that it is ready to open its marketing automation tools directly to the financial advisor community. Co-founded by Robert Sofia (previously of advisor marketing consulting firm Platinum Advisor Strategies), Snappy Kraken is unique compared to generalized marketing automation competitors like MailChimp, in that it’s designed with a long list of pre-written marketing emails and entire marketing campaign templates that advisors can quickly edit and customize and then deploy. Templated campaigns include drip marketing cold prospects every two weeks for two months about the benefits of working with an advisor to encourage them to set an appointment, to inviting clients to an upcoming wine-tasting or other client appreciation event, or simply provide a higher-touch onboarding campaign to welcome new clients when they join the firm. Pricing starts at $60/month for up to 500 emails per month, with higher tiers available for higher-volume senders. Further information available on the Snappy Kraken website.
Vestwell Scores XYPN FinTech Competition Win And Raises $8M Series A – While Apex Clearing has been the sleeper hit of 2017 in the advisor marketplace, Vestwell is the new entrant already generating the most disruptive buzz. Founded by former FolioDynamix TAMP platform founder Aaron Schumm (who sold the company in 2012 for $199M), Vestwell is aiming to bring a FolioDynamix TAMP-style solution to the 401(k) marketplace, providing financial advisors a turnkey packaged white-label solution that allows them to offer 3(16), 3(21), and 3(38) fiduciary investment management services with a tech-savvy interface that expedites the process while handling all the back-end recordkeeping (which is especially important for advisors who are offering small business retirement plans as a supplement to the rest of their services and don’t want to be mired in the servicing details). Earlier this spring, Vestwell generated some buzz at the Benzinga FinTech awards, in the summer they were recognized with a Best In Show award from the XYPN FinTech Competition, and now this fall Vestwell has announced a whopping $8M Series A round, led by Fidelity’s F-Prime Capital Partners, as it looks to scale up its solution to both RIAs, independent broker-dealers, and banks. Given founder Aaron Schumm’s success in already building a tech-savvy TAMP platform once (with FolioDynamix), it will be extremely interesting to see just how quickly Vestwell can grow in 2018 by leveraging the know-how of having already done it once but in an adjacent 401(k) marketplace instead. Especially given that Vestwell’s pricing is just a fraction of existing all-in-one incumbents that continue to languish with outdated technology.
Will U.S. Bancorp’s FundKeeper Revive The Efficiency Of Small-To-Mid-Sized Broker-Dealers? – In the “old days” of independent broker-dealers, it was common for broker-dealers to facilitate direct-sold mutual fund business, where their brokers opened accounts directly with the mutual fund carriers that simply routed commission compensation back to the broker-dealer intermediary, that had to keep track of an ever-growing coterie of external fund companies their reps did business with. The operational challenges of managing an ever-growing series of direct connections to various mutual fund companies helped to support the rise of consolidated brokerage accounts with omnibus accounting to consolidate those agreements… with the caveat that most broker-dealers didn’t have the depth and financial resources to self-clear, and as a result became beholden to building on third-party clearing platforms instead. In this environment, U.S. Bancorp has partnered with recordkeeper Envision Financial Systems to launch a new service called FundKeeper – which aims to be a centralized supermarket of mutual funds, akin to what is available through third-party clearing platforms, but at a fraction of the cost by facilitating the ability of broker-dealer reps to open the equivalent of direct-sold mutual fund accounts again, but with one common set of connections (through FundKeeper) operating like a giant supermarket, instead of thousands of connections from each independent broker-dealer to each mutual fund company (and allowing clients to see all the “direct” mutual funds in one mutual-fund-only account). For large broker-dealers that already run their own self-clearing operations, the FundKeeper solution won’t be appealing, as it would effectively disintermediate their own clearing business. But for smaller and mid-sized broker-dealers that are tired of the costs they incur and/or have to pass through to work with third-party clearing firms like Pershing or NFS, and fearful of their ability to manage DoL fiduciary compliance, there may be substantial appeal to shift to FundKeeper, especially for broker-dealers with already-mutual-fund-centric reps doing a lot of direct business (as FundKeeper would specifically be for mutual-fund-only accounts, not stocks, bonds, or ETFs).
Consumer Financial Protection Bureau Reasserts Consumer Data Rights To Power Account Aggregation – For the past few years, as account aggregation FinTech solutions continue to grow in popularity and become more sophisticated, a quiet war has been going on behind the scenes, as the “keepers” of financial data, particularly banks, are not entirely thrilled that outside providers are extracting that data in ways that may ultimately be used against them. After all, in the early years, account aggregation solutions like Mint.com simply extracted the data to help people get a handle on their financial situation; more recently, though, we’ve seen the evolution of solutions like Betterment’s Smart Deposit feature, or the MaxMyInterest cash yield management tools, which use account aggregation combined with ACH transfers to automate the transfer of “excess” cash out of banks and into alternative providers or platforms that may offer better yields or returns for consumers (and reducing the bank’s deposits as a result!). The staying force against the threat that banks might someday just cut off access to “their” consumer data is Section 1033 of Dodd-Frank, which declares that consumers ultimately own their own data and have a right to say where it goes. However, concerns arose earlier this year that President Trump might begin to dismantle Dodd-Frank… and unwittingly eliminate Section 1033 along with it. But this past month, the Consumer Financial Protection Bureau (CFPB) reasserted its view – through a series of “Consumer Protection Principles” – that consumers are the ones who ultimately own their own financial data, and that banks and other financial institutions must continue to play nice in the sandbox with third-party technology that consumers want their data shared to (i.e., account/data aggregation providers). Although notably, even a re-assertion by the CFPB may not entirely protect consumers, as some pundits have pointed out that banks are still using “data safety” as a shield to potentially try to limit third-party access to data that consumers want to share; of course, while data privacy protection is clearly important, it would be nice to see banks and other Financial Institutions work more proactively to find better ways to share data securely, rather than using data security as an excuse to limit the flow of consumer data.
So what do you think? Would you be interested in using a Model Marketplace? What about one that throws in the rest of the wealth management platform for free? What do you think about using your CRM for text messaging to clients? Would you add 401(k) plans to your business is a company like Vestwell made it “easy enough” to do? Please share your thoughts in the comments below!
The in-CRM compliant text messaging system for advisors is such a great concept!