The Latest In Financial Advisor #FinTech (April 2020)

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.

Vanguard Pilots New ‘Downmarket’ Robo-Advisor But Is It Really A Custom Target Date Fund Upsold For 3X Revenue? When robo-advisors first hit the scene in 2012, they positioned themselves as a cheaper alternative to ‘traditional’ human financial advisors, but in practice, appealed primarily to do-it-yourself consumers – who were willing to take the time and effort to find, select, and monitor a ‘robo-advisor’ rather than delegating those responsibilities – and accordingly really represented more of a threat to traditional do-it-yourself platforms like Schwab and Vanguard than human financial advisors. Sure enough, just a few years later, Schwab launched its own competing “Intelligent Portfolios” robo-advisor solution, and Vanguard launched its Personal Advisor Services platform. In the case of the latter, though, the reality is that Vanguard’s PAS offering wasn’t actually a robo-advisor at all; instead, while it charged “robo-advisor-like” fees of 0.30%, Vanguard offered direct access to human CFP professionals, quickly hiring up more than 600 of them in just a few years in a more ‘traditional’ human-to-human advisor-client relationship approach (albeit one where meetings occur by videoconference and not in a local branch office). Accordingly, last fall Vanguard announced it was preparing to launch an actual robo-advisor as well, to complement its human CFP advice offering, at an even-lower cost of just 0.15%... and last month, a live pilot for the Digital Advisor platform was launched. As anticipated, the fully-self-directed Vanguard Digital Advisor is effectively a ‘robo-asset-allocator’, and will craft various mixes of Vanguard’s “Four Totals” (its Total Stock Market, Total International Stock Market, Total Bond Market, and Total International Bond index ETFs) based on the client’s time horizon, preferences, and goals. Notably, though, while the new Vanguard offering is being positioned by the media as a ‘downmarket’ alternative to Personal Advisor Services, with an even-lower $3,000 minimum (as contrasted with PAS’s $50,000 minimum), in reality Vanguard clients could already purchase the Four Totals in various allocations directly from Vanguard on its website for an average expense ratio of approximately 5bps, or asset-allocated combinations of its ETFs in various target date funds. In fact, Vanguard’s 0.15% advisory fee is actually identical to the 0.15% expense ratio that Vanguard charges for its long-term target date funds, making Digital Advisor less of a ‘robo-advisor’ per se, and more a technology platform for clients to simply create their own custom target date allocations (simply using the ‘robo’ platform instead of a mutual fund wrapper). Which means in practice, Vanguard’s opportunity with Digital Advisor is not necessarily to broaden its Personal Advisor Services downmarket, and instead to move its more-than-$1 trillion direct-to-consumer offering upstream from simply buying 0.05% ETFs into purchasing 0.15% expense ratio wrappers to asset-allocate those ETFs (whether in target date or Digital Advisor) form as a 3X revenue multiplier!?

Envestnet Partners With Compliance Solutions Strategies To Create Form CRS Automator As June 30^th Deadline Looms. In addition to its goal of lifting the standard of conduct for broker-dealers providing recommendations (albeit not to a fully fiduciary standard), the SEC’s new Regulation Best Interest created a new “Form CRS” (short for Customer/Client Relationship Summary) that all RIAs and broker-dealers will be required to provide to their clients to explain the nature of their advisory or brokerage relationship and provide key disclosures. In practice, Form CRS has a series of 5 mandated sections that must be completed by advisors – an Introduction, a description of Relationships & Services, a summary of Fees, Costs, Conflicts, and Standard of Conduct, the advisor’s Disciplinary History, and guidance on where to go for Additional Information – all to be captured in 2 pages to describe the RIA or broker-dealer’s business (or 4 pages for dual-registrants that have both an RIA and broker-dealer affiliation), with links out to other resources for additional information. Under Regulation Best Interest, the new Form CRS must be delivered before or at the time that a recommendation is made, once the June 30^th effective date has come, and must be filed in advance with IARD (as a new Form ADV Part 3 for RIAs) or CRD (for broker-dealers) between May 1^st and June 30^th. Which means advisory firms have less than three months until Form CRS must be completed, filed, and in use (at least, unless Regulation Best Interest is set aside with the ongoing legal challenges against it). Accordingly, compliance consultants are stepping up the process of preparing advisory firms’ new Form CRS documents… and to help automate the process, Envestnet partnered with Compliance Solutions Strategies to help automate the process with their new “Form CRS Automator”, which will draw on available public information (e.g., from the RIA’s existing Form ADV Part 1A) to pre-populate key information into a Form CRS template, expediting the process by allowing the RIA to just fill in the few remaining firm-specific descriptive details themselves. Of course, the caveat is that Form CRS itself is ‘templated’ enough that smaller RIAs may still balk at CSS’ $1,895 pricetag for the software, while larger firms may already have dedicated or in-house compliance counsel to facilitate the process (and may have businesses too complex to fit the Form CRS Automator). But for mid-sized RIAs that have the compliance budget but not the time (especially in today’s environment), as well as smaller firms that aren’t as compliance-inclined and just don’t want to take the time and effort to do it themselves and pull together Form CRS from the SEC’s available instructions, CSS’ new Form CRS Automator will likely be appealing, especially with the deadline looming large in just a few months!

Portfolio Stress Testing Software Shines As Hidden Levers Announces 30-Day ‘Coronavirus Open House’ Offer. The traditional approach for portfolio design is built around modern portfolio theory, where the goal is to maximize the available return for a given level of risk (or alternatively, to minimize the risk, to the extent possible, to capture the desired return) and then to evaluate the entire portfolio for its risk profile (recognizing that individual components of the portfolio may be more volatile than the overall portfolio if they include zero- or negatively-correlated assets). In turn, various portfolio metrics like the Sharpe ratio have subsequently been developed to further analyze what constitutes the ‘best’ prospective return for a given level of risk (after accounting for the inescapable systematic risk of the market risk). Of course, the caveat of traditional portfolio efficiency metrics, cast in terms of volatility and standard deviation, is that they may quantify aggregate risk exposure for portfolio optimization, but they do a poor job of showing and explaining to clients themselves what that “volatility” really means… a function that in practice isn’t fulfilled much better by Monte Carlo analysis, which similarly evaluates a wide range of possible paths (based on the standard deviation of the portfolio’s prospective returns), but does little to show clients what any particular potentially-scary path might look like. And as witnessed particularly in the financial crisis, and to some extent in the recent coronavirus market sell-off as well, assets that are anticipated to be low-correlation ‘diversifiers’ often see their correlations rise and end out being less diversified at the exact moment they’re needed. So what’s the alternative? Portfolio stress testing. The essence of portfolio stress testing is, instead of simply using standard deviation and normal distributions to model the probabilistic range of potential outcomes, the advisor models prospective outcomes of particular scenarios that might occur, recognizing that certain types of market or economic events will ripple differently through asset classes (and their correlations) than others. For instance, a bear market might occur due to an inflationary shock that ripples through the economy (e.g., the oil crisis of the 1970s), or due to a demand shock (e.g., the coronavirus shutdown of today); with an inflationary shock might cause stocks to decline (due to the recession), bonds to decline (due to rising inflation and interest rates), but both commodities and real estate to rise (as prices adjust upwards for inflation) and gold spike (as the quintessential inflation hedge); by contrast, in an economic recession, stocks may also decline, but real estate and commodities typically decline as well (due to reduced demand), bond prices rise (as the Fed cuts interest rates to stimulate the economy), and gold may remain neutral (at least as long as deflation is not feared). In the past, portfolio stress testing tools were a relatively narrow domain of advisor tools, with players like Hidden Levers, MacroRisk Analytics, and RiXtrema, but in the current environment, are getting a fresh look as advisory firms react in real time to client questions about how the current market environment may play out from here. Accordingly, HiddenLevers announced this month that it was offering a 30-day “Coronavirus Open House” offer, and is running “war room” conference calls for users to talk through how various potential market scenarios may play out within client portfolios. Which, notably, is not only relevant for talking through the unfolding coronavirus session with clients, but also for advisory firms trying to model their own AUM and revenue exposure to the market volatility (with tools like Hidden Levers’ Business Intelligence stress testing solution). In the end, the reality is that bear markets can and do happen once or twice every decade, and while no two are ever the same, it’s safe to “assume” that they will come at some point, and that both advisory firms and their clients should be prepared for the inevitable drawdowns when they occur. Nonetheless, given the unique way that each plays out amongst the specific investment holdings of each individual advisory firm and its clients, platforms like Hidden Levers appear to finally be getting their moment to shine as advisors try to figure out the potential business and client impacts of how today’s particular environment may play out in the months and years to come.

AdvisorPeak Offers Free Access To Rebalancing Software In Q2 As Coronavirus Recession Amplifies Rebalancing Challenges. Rebalancing is typically viewed as one of the few “free lunches” in the investing world, where investments that have declined or underperformed end out underweighted (while those that have risen or outperformed end out overweighted)… such that rebalancing them naturally engages in a “buy low, sell high” process that can enhance returns (or at the least, ensure that higher-return assets don’t compound and drift to the point of over-risking the portfolio in the aggregate). The caveat in volatile markets, though, is the sensitivity to the exact timing of rebalancing, when a single day or even just an hour or few can result in multi-hundred or even thousand point swings in the market. Which presents challenges not only to figuring out when, exactly, to trigger rebalancing trades, but also simply in executing those rebalancing trades efficiently… as if it takes ‘too long’ to move from one client to the next in the rebalancing process, successive clients can end out with substantively different prices for their rebalancing trades (which in turn raises regulatory scrutiny over which clients are being traded first versus last). The most straightforward solution to this challenge is to be able to rebalance clients all at once… except doing so generally necessitates some form of trading and “rebalancing” software that can efficiently queue up block trades and the supporting files on how trades should be allocated amongst client accounts (as with spreadsheets, the process again can take hours or days and adversely affect the price at which clients are traded). Yet in practice, rebalancing software has remained a category of relatively slow adoption, with fewer than 40% of advisory firms reporting adoption of such tools in the latest T3 Advisor Technology survey. And so it is perhaps not surprising that amidst the market volatility and increased pressure on advisory firms to rebalance efficiently, relative newcomer rebalancer AdvisorPeak (albeit created by the former founders/owners of TradeWarrior rebalancing software) has announced “Operation Rebalance”, offering independent advisors a chance to use their platform for free in Q2 to get more efficient in their rebalancing process. More broadly, though, the real question is simply whether the coronavirus recession and bear market will finally be what drives material growth in the use of rebalancing software – long a laggard in advisor industry adoption – or if it will accelerate the ongoing shift to TAMP outsourcing instead?

Is Schwab’s New PortfolioConnect Quickly Filling The Void In Portfolio Performance Reporting Solutions For Smaller RIAs? One of the biggest challenges for new RIAs that are managing client portfolios (i.e., operating on the AUM model) is finding affordable software to account for and report on their portfolio performance. As while ironically portfolio management and performance reporting tools are one of the most densely populated areas of the current AdvisorTech landscape, they are also one of the most expensive, where it’s not uncommon to pay anywhere from $40 to $70 per client account… which for an advisor with 50-100+ clients that each have 2-5 accounts in the client household, can quickly add up to nearly $10,000/year per advisor for an advisory firm. Of course, the reality is that when independent advisory firms are increasingly built around an AUM model that ties to managing portfolios, it is at least feasible to justify a $10,000/advisor/year pricetag when the software directly supports the advisory firm’s primary revenue driver (when established RIAs often generate $300,000 - $500,000+ of revenue per advisor). As it’s difficult to justify charging ongoing AUM fees to manage portfolios is the firm has no tools to report on how they’re doing in managing those portfolios for clients. And ultimately, the reality is that portfolio performance reporting tools have their own hard costs to deal with, including the process of onboarding new advisory firms (and spinning up and configuring new databases for their portfolio data), connecting the RIA custodian data feeds, and supporting the ongoing data reconciliation process as disparate RIA custodian data feeds each need their own daily scrubbing to clean up the data… which has helped to buoy the pricing of those software tools despite years of intense competition in this popular AdvisorTech category. But in recent years, the competitive landscape has started to shift. On the one hand are RIAs that are increasingly focusing on financial planning as their primary value proposition, are increasingly charging financial planning fees, and simply aren’t willing to pay $10,000/year/advisor for portfolio performance reporting software when they can buy the financial planning software that actually drives their revenue model for 1/3^rd to 1/6^th the price. On the other hand are the RIA custodians themselves, caught in their own battle against commoditization and fighting to differentiate by increasingly offering more components of the advisor tech stack directly. In this context, it was notable 18 months ago when Schwab announced that it was no longer going to keep working on its new ‘next-generation’ edition of its popular multi-custodial PortfolioCenter performance reporting solution, and instead was building a ‘downscale’ version called PortfolioConnect instead. The key distinction of the new PortfolioConnect offering was that it would be a Schwab-only solution and not multi-custodial… and that it would be free for Schwab RIAs that used it (as Schwab doesn’t bear the cost of data feeds for its own data, doesn’t have to reconcile its own data that is already reconciled internally, and already has an existing data infrastructure to support advisors without the cost of spinning up new databases), making it particularly appealing to small-to-mid-sized RIAs that are more likely to use only a single custodian anyway (i.e., not be multi-custodial) and more commonly balk at the cost of traditional portfolio performance reporting tools. And now, barely a year into its April 2019 launch, Schwab has announced that it is crossing 1,000 RIAs on its PortfolioConnect platform – 99% of which manage under $100M of AUM – using its core capabilities of portfolio performance reporting for clients (and also supporting client AUM-fee billing). Which is notable, as even category leaders like Orion Advisor Services have ‘just’ 2,000 RIAs after nearly 20 years in business. Of course, firms like Orion and Black Diamond still likely have a much larger total adoption, as Orion’s average advisory firm is much larger than Schwab’s typical PortfolioConnect user. Nonetheless, Schwab’s incredibly rapid growth with a free portfolio performance reporting solution both validates the void that existing providers have created by pricing out small firms (and failing to go ‘downmarket’ themselves), invites other RIA custodians to offer a similar (free) solution for their RIAs (as startup RIA custodian Altruist is also doing, not free but still for a drastically lower price point of just $12/account), and raises serious long-term challenges for existing portfolio performance reporting competitors like Orion, Black Diamond, and Tamarac… as at least some firms that build today within Schwab’s PortfolioConnect will likely get comfortable enough with it they won’t want to go through the trouble of switching in the future, potentially relegating the larger independent AdvisorTech players to becoming a “premium” solution for just the subset of mid-to-large-sized RIAs that are willing to pay more for a third-party solution to have the ability to be multi-custodial?

Addepar Raises Fresh $40M Of Capital And Launches AddeparGo To Expand Into Mid-Market RIA And Broker-Dealer Channels? Addepar was first founded nearly ten years ago by Joe Lonsdale, who previously co-founded big-data analytics provider Palantir with Peter Thiel. Built in large part to solve Lonsdale’s own challenge of a portfolio performance reporting and tracking tool that can handle the needs of ultra-high-net-worth individuals – who may hold everything from market-traded securities to private stock, real estate to more complex alternatives, and private equity partnerships that have their own unique tracking challenges in managing capital calls and distributions – Addepar found early traction in the (multi-) family office environment, and a subset of RIAs working with higher net worth clientele whose more complex investment needs weren’t well served (or well tracked) by more ‘traditional’ RIA portfolio performance reporting tools like Advent, Black Diamond, or Orion. However, despite years of trying to push further ‘downstream’ into the middle market of RIAs working with ‘mere millionaires’, Addepar has struggled to gain traction outside of its ultra high net worth environment, charging a premium price to sell ultra-high-net-worth features that simply aren’t relevant to the bulk of independent RIAs that typically invest clients into traditional market-traded portfolios of stocks, bonds, and funds. But in recent months, Addepar has begun to make major shifts in what appears to be a more serious attempt to compete for business with the traditional RIA, including hiring away former Advent founder and lead Axys developer Steve Strand, the launch of a new “Advent Converter” specifically to expedite the data migration and transition for a potential market of nearly 2,000 RIAs still running legacy Advent Axys and APX and reportedly working on a “PortfolioCenter Converter” next (recognizing that transitions and painful data migrations are often still the biggest blocking point for advisory firms to make a shift), and launching “AddeparGo”, which is being positioned as a scaled back version of the full platform targeted more directly (and at a lower cost) for middle market RIAs and broker-dealers. However, the reality is that all of the main competitors for portfolio performance reporting – Orion, Black Diamond, Tamarac, and Morningstar Office – already offer extensive conversion and migration support for new users, and it’s not clear that Addepar’s converter will be much more efficient at handling the true bottlenecks in historical data migrations (erroneous data that itself can’t be migrated or is ‘irreconcilable’). And given that Addepar had already raised $230M through a Series D offering coming into this recent new $40M round, some are questioning why Addepar would still have such a high burn rate that it would need to raise more capital now. In addition, it’s notable that the latest Addepar round was led by WestCap, which also recently joined Goldman Sachs in investing into the advisor-alternative-investments roll-up iCapital, raising the question of whether WestCap sees an opportunity for Addepar to go downmarket into RIAs and broker-dealers with a scaled back offering, or if the firm is making a bet that advisors will increasingly adopt alternative investments (and that the advisor market is coming to where Addepar already shines)? At a minimum, though, the significant infusion of capital, which is anticipated to be directed towards sales and distribution, will likely mean more RIAs in the coming months will hear Addepar knocking on their door to explore whether they’re looking to make a change… which may be especially well timed if AddeparGo can price competitively while RIAs look to manage costs amidst the coronavirus recession?

Professional Asset Managers Co-Opt Peer-To-Peer Models As Orion Re-Launches Its Communities Marketplace. For nearly 20 years, Envestnet has excelled as the largest purveyor of third-party asset managers and strategists, forming a ‘platform TAMP’ that has increasingly been viewed as the platform to beat… with the caveat that asset managers have struggled to find alternatives to distribution that have Envestnet’s reach, and existing advisor platforms have struggled to figure out how to make a wide range of third-party asset managers accessible to their advisors. In 2017, the ‘breakthrough’ came in the form of “model marketplaces” built on the chassis of industry rebalancing software, as players from TD Ameritrade’s iRebal to Riskalyze’s then-new Autopilot announced they were forming marketplaces of third-party managers that could submit their strategies to the rebalancing platform for advisors to then execute themselves. The goal of model marketplaces was to fill the void between fully-outsourced TAMPs (where advisors delegate both the investment research model design and its implementation) and the full do-it-yourself approach (where advisors retain responsibility for both designing their investment models and implementing them), as a midpoint where advisors could access third-party strategies that design and “manage” the models, but advisors retain responsibility (and control) to implement the trades themselves (or not) through their own rebalancing software. That fall, Orion Advisor Services launched its own model marketplace, built on the chassis of its then-recently-launched Eclipse rebalancing platform. Dubbed “Communities”, Orion’s approach was unique in that it originally sought to facilitate advisory firms that wanted to ‘share’ models with other firms in the RIA community, as mergers and acquisitions were increasingly heating up amongst RIAs and the model marketplace provided the potential for firms to distribute (and get paid for) their models without going through all the time and effort of actually acquiring the partner firm. Now 2.5 years later, though, Orion has re-launched its Communities platform… but with little representation from traditional RIAs themselves, as the model marketplace has become dominated by major asset managers and RIA TAMPs (from American Funds to Vanguard, Buckingham Strategic Partners and Orion’s own CLS Investments) and boutique asset managers (e.g., 361 Capital’s long/short and managed futures strategies, or Meeder Investment Management’s tactical multi-factor approach) that Orion itself screens and vets for due diligence purposes. Notably, though, the shift isn’t entirely surprising, as the desire of asset managers to find alternative distribution channels to Envestnet (distribution that they’re already accustomed to paying for) has led to an explosion of rebalancing software platforms looking to gain advisor market share and fund their businesses through asset manager revenue-sharing (to the point that Oranj acquired TradeWarrior rebalancing software to facilitate its model marketplace and then promptly made its software free to advisors!). In fact, the hunger of asset managers to distribute through rebalancing software has led most of the independent players to be acquired in recent years (as asset managers consolidate and vertically integrate their distribution channels), with only newer players like AdvisorPeak and Blaze Portfolio remaining unacquired. With the caveat that in the end, model marketplaces only “work” – in actually directing investments to asset managers – if there’s already a base of advisors using the software to shop in the model marketplace in the first place… which bodes well for Orion’s potential with Communities, but also helps to explain why professional asset managers so quickly co-opted its original RIA peer-to-peer vision!?

Can Morningstar Challenge Riskalyze With Its Indirect Acquisition Of FinaMetrica Risk Tolerance Software? For the decade of the 2010s, one of the hottest categories of AdvisorTech was risk tolerance software, as Riskalyze showed up to compete against home-office-created risk tolerance questionnaires and long-standing (but limited market share) players like FinaMetrica to quickly dominate the category. In fact, Riskalyze was so successful in its growth and market penetration, it quickly spawned a slew of startup competitors, including Totum Risk, Tolerisk, Pocket Risk, Capital Preferences, RiskPro, and more… none of which managed to successfully make much of a dent Riskalyze’s rapid growth. Because in the end, Riskalyze’s key to success wasn’t just its ability to conduct a risk tolerance evaluation process, per se, but the way its visual and intuitive interface facilitated advisor-client conversations about risk tolerance… and more importantly, facilitated advisor-prospect conversations as well, effectively turning their risk tolerance solution from a post-sale due-diligence compliance obligation (to fulfill regulatory Know-Your-Client [KYC] requirements) to a prospecting tool that generated new business for the advisor. Consequently, even as FinaMetrica lauds its psychometrically validated design, and debate continues about whether Riskalyze’s ‘gamble preferences’ approach is even an accurate way to determine a clients’ willingness to hold a risky portfolio during a bear market, Riskalyze has managed to both out-charge (with a more-than-2X price point) and outgrow Finametrica and its startup competitors. But last month, Morningstar announced it was acquiring Canadian financial planning software provider PlanPlus, which may complement its recently launched Goal Bridge financial planning offering in the US and gives Morningstar the opportunity to significantly amp up its international opportunities in financial planning software (e.g., in Canada, the UK, and Australia, where PlanPlus can compete even more vigorously with Morningstar’s brand and sales firepower)… but also a chance to compete in the US risk tolerance category, as PlanPlus itself had acquired FinaMetrica just over two years ago. And given Morningstar’s sheer existing reach into large-firm advisor enterprises – including both a large number of RIAs and the bulk of the broker-dealer community – Morningstar’s acquisition of FinaMetrica and ability to deploy it to the company’s existing channels instantly makes it a major competitor in the category. Of course, the caveat is that despite its ‘intellectual rigor’ in (psychometric) design, FinaMetrica has struggled to gain significant adoption and market share in the US despite being around for more than 20 years (and having been leap-frogged by Riskalyze over the past decade), given its relatively basic questionnaire-style interface and post-sale workflows (rather than being feasible to support the sales process with prospects). Yet Morningstar’s existing capabilities in Proposal Generation give it the possibility of retooling FinaMetrica into a solution that works for both fulfilling compliance KYC obligations for existing clients, and as a way to support conversations with prospects as well (to chip more directly at Riskalyze’s successful growth strategy). Though on the other hand, as Riskalyze has shown throughout its successful growth story despite numerous challengers along the way, it’s hard to overstate the sheer power of Riskalyze’s strong software design and user experience coupled with their intimate understanding of and ability to operationalize exactly what advisors need to support their conversations and relationships with clients!

Skience For Salesforce Ramps Up Onboarding Integrations As CRM Takes Control Of The Advisor Dashboard. Because financial advisors use so many different pieces of software, one of the biggest questions is what will be the “first” or “primary” software the advisor logs in to every morning. The question of what becomes the hub of the advisor tech stack is crucial, not only because it’s harder for the advisor to leave the hub than the spokes (i.e., it improves retention rates for the software provider), but from the advisor perspective, the hub is also what becomes the core source of truth for the firm’s data, and the anchor for the advisor’s workflows. Accordingly, both financial planning and portfolio performance reporting systems (that hold key client data), broker-dealers and RIA custodians (that hold at least investment-related client data and drive advisor workflows), and CRM systems (that also hold client data and facilitate advisor task tracking and sometimes manage workflows) have all been making plays to become the central advisor dashboard. Except in the end, the interplay of different systems, that use different data and touch different workflows, have simply increased the amount of duplicative data entry and advisor frustration. But now, increasingly, it appears that overlays to advisor CRM systems are becoming the forerunner of what’s to come: the advisor dashboard settling within CRM systems, and not RIA custodians or broker-dealers (or financial planning or portfolio performance reporting systems) as the central hub to execute an advisory firm. The key transition is that while CRM systems were historically giant Rolodexes of client contact information, they are increasingly being rebuilt as workflow engines that use that data to drive actions and events… which, through API connections, can increasingly trigger cross-platform events to all the other components of the advisor technology stack as well.  The latest case-in-point example is Skience, a Salesforce CRM overlay for advisors that recently released its latest version 12.0, which can pull account opening forms from the advisor’s custodian, pre-populate them with the relevant CRM and custodian data for multiple accounts across the entire client household, and package and deliver them for electronic signature all in a single workflow. And for Envestnet users, Skience will even be able to pull in the data from a proposal for a prospect to Skience’s own new account wizard to populate the relevant data to turn that prospect into a client with a new account. In other words, Skience is facilitating Salesforce to be the central hub for the advisor, pulling in prospect data, pushing out client data, populating forms and key data across multiple systems, and then triggering the workflow events (e.g., delivery of the e-signature package) to complete them… as one would expect any true advisor dashboard to do!

RIAInABox Launches Open API To Begin Pivoting From Compliance Interface To RegTech Engine? One of the most fundamental shifts in advisor technology wrought by the internet was the newfound feasibility of otherwise-independent software solutions to “talk” to each other through the use of Application Programming Interfaces (APIs). Prior to the internet and APIs, the only way to build a ‘comprehensive’ solution was to literally build each component of the solution, to be accessed through one centralized platform that was typically built by whatever firms were largest and had the most economies of scale to build their own (proprietary) technology; after the rise of APIs, disparate independent software solutions could pass data or even actions from one to the other, making it possible to weave together a series of independent best-in-class solutions and let each do what it does best. The good news of this shift was an explosion in the size of independent AdvisorTech providers, to the point that today the largest independent firms have 2X, 3X, or even 5X the user base of even the largest advisor enterprises and their proprietary platforms. The bad news of the shift is that when each software solution is built independently, the advisor often ends out needing to log into each to perform key functions, and many providers compete by trying to draw advisors into their solution to be the “hub” in the hopes that controlling the advisor’s dashboard will so deeply ingrain them into the advisor’s business that the advisor will never leave… which may be true for an individual software solution, but paradoxically in the aggregate creates multiple advisor dashboards that are actually less efficient and just generates advisor frustration instead. In this context, it’s notable that RIAInABox, a compliance consulting firm that has increasingly built towards becoming a full-fledged “RegTech” platform, announced this month that it has built a set of open APIs to make it easier for the compliance software to be integrated into other advisor platforms, and in particular to advisor CRM systems into which RIAInABox compliance tasks can be pushed. As while in practice, the value of RegTech solutions like RIAInABox is to automate or at least remind and expedite the advisor’s execution of key RIA compliance processes that must be completed on a monthly or quarterly basis, most advisors already manage the bulk of their ongoing tasks and duties in their CRM system (and not a separate third-party compliance system). Which means from a practical perspective, pushing RIAInABox compliance tasks into the advisor’s CRM better fits the typical advisor workflow. Strategically, though, the RIAInABox pivot is notable, as the decision to serve as more of a compliance engine than necessarily requiring advisors to use it as the primary compliance interface may actually give RIAInABox more adoption of the platform, by not trying to be the ‘hub’ and impose themselves as yet another system for advisors to log in to, and instead simply meeting advisors where their natural workflows already are?

Fidelity’s Integration XChange Expands Self-Service API Functionality To Facilitate Enterprises Building Their Own Platforms. In the 1990s and 2000s, the prevailing view amongst RIA custodians was that the best way to attract and more importantly retain advisors was to have proprietary software that would bind RIAs to them, resulting in very closed-architecture proprietary systems. Competing against this, TD Ameritrade ‘broke the mold’ by developing an open-architecture system (that it had acquired as TD Waterhouse when it acquired Ameritrade in 2006), now known at VEO, going the exact opposite direction of its competitors by eschewing proprietary tools and instead making it easier and easier for independent software providers to build their own solutions on the TD Ameritrade VEO platform instead. The end result, nearly a decade later, was that TD Ameritrade flourished against the “Big 2” (Schwab and Fidelity) as AdvisorTech innovation disproportionately developed first and foremost for TD Ameritrade, creating a wider breadth of capabilities than the competing custodians that attracted more and more RIAs. Notably, though, the strategy that underlaid TD Ameritrade’s VEO platform also shifted over that time period; in the first phase, TD Ameritrade became an increasingly robust dashboard, as more and more technology tools integrated to VEO to facilitate movement of data, widget-sharing, and single sign-on; in the second phase, though, third-party CRM systems, or robo-advisor-for­-advisor platforms, started to become the primary hubs, while TD Ameritrade’s system started to become the underlying engine that powered those systems to facilitate custodian functions (but not necessarily require the advisor to log in). Now, built on TD Ameritrade’s proof of concept and as larger advisor enterprises begin to build their own hubs and platforms, the desire and willingness for RIA custodians to be the key engine under the hood (rather than the dashboard for steering) is expanding… as exemplified by Fidelity’s recent announcement to expand its self-service API functionality to make it easier for integration partners to develop and test their own integrations to Fidelity’s engine, including “making it easier for firms to manage their end-to-end technology ecosystems on their own”. From a practical perspective, Fidelity new capabilities will make it easier for firms to generate sample code and build prototypes of their integration (before moving forward with a full build), as well as better control where and how their data is used after the integrations are complete. But from the broader strategic perspective, Fidelity’s shift appears to be part of a broader transition underway in the AdvisorTech ecosystem where RIA custodians are becoming more willing to not necessarily be the central interface for advisors using their platform (at least amongst larger enterprises that can build their own platform layer), and instead adopt a more “Intel within” approach to be the essential engine that powers it all instead.

fpPathfinder Announces Redtail CRM Integration Of Financial Planning Checklists For Advisor Diligence And Compliance. Over their first 5+ years as a financial advisor, most advisors accumulate a wide range of clientele, the natural outcome of the industry’s traditional get-any-clients-you-can-to-survive shotgun approach to starting an advisory firm. The good news of casting a wide net is that it increases the likelihood that an advisor can work with any particular prospect they happen to meet. The bad news is that it results in such a wide range of clients with a wide range of needs that the financial advisor may constantly need to research new and different client scenarios to figure out what recommendations to make and never creates any ‘repeatable expertise’. As a result, there is a constant threat and pressure – especially given the obligation of a fiduciary duty – for financial advisors to be diligent and thorough to ensure that they don’t ‘miss’ something when making recommendations. To fill this void in 2018, fpPathfinder was launched to provide flowcharts and checklists that advisors can use to ensure they don’t miss anything important in important-but-not-always-common financial planning situations. The caveat, though, is that while fpPathfinder’s flowcharts and checklists may be helpful as a tool in a client-facing meeting to figure out what to recommend on the spot, a physical printed checklist doesn’t necessarily fit the advisor’s workflow (e.g., when a client calls or emails and the advisor is in their CRM system), nor does it necessarily commemorate the conversation and actions taken (at least unless the physical checklist is scanned and saved in the client file). Accordingly, in February fpPathfinder announced the launch of a new “interactive checklist” feature that would allow its popular checklists like “Issues to Consider when a Client’s Spouse Passes Away” or “Issues And Planning Opportunities When A Client Loses Their Job” to be completed online (for when the advisor is fielding a phone call or email from a client)… and now, has launched an integration with Redtail CRM that will allow advisors to pull up their due diligence checklists for common planning situations directly within Redtail, both to better fit the advisor’s workflow (when client communication already typically happens within the CRM hub) and to facilitate a record in the CRM system of the advisor going through the checklist issues with the client for compliance purposes. Ultimately, though, as embodied in the famous “Checklist Manifesto” book by Atul Gawande, the real key for checklists is simply to reduce the risk of mistakes and accidents in advice provided to clients, as all human beings get distracted and fail to follow “the process” from time to time, and no human being can remember all the unique exceptions that may crop up… which is as relevant for doctors practicing medicine (where Gawande focuses) as it is for diligent financial planners, too.

In the meantime, we’ve updated the latest version of our Financial Advisor FinTech Solutions Map with several new companies, including highlights of the “Category Newcomers” in each area to highlight new FinTech innovation!

So what do you think? Will CRM systems overtake RIA custodian and broker-dealer platforms to become the central hub for financial advisors to run their own businesses in the future? Will Morningstar be able to leverage FinaMetrica to challenge Riskalyze? Are you considering stress testing software to help evaluate client portfolios on an ongoing basis amidst the current market volatility? Do you think checklists are a relevant tool for financial advisors to ensure they’re being diligent in client recommendations? Please share your thoughts in the comments below!

Michael Kitces is the Head of Planning Strategy at Buckingham Strategic Partners, co-founder of the XY Planning Network, AdvicePay, and fpPathfinder, and publisher of the continuing education blog for financial planners, Nerd’s Eye View. You can follow him on Twitter at @MichaelKitces.

Disclosure: Michael Kitces is a co-founder of fpPathfinder, which was mentioned in this article.