The Latest In Financial Advisor #FinTech (December 2017)

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.

Fidelity’s eMoney Acquisition Paying Dividends As Lincoln Finanical Partners On AdviceNext. When it was first announced that Fidelity acquired eMoney Advisor in 2015, the big question was whether eMoney would eventually be limited to “just” Fidelity advisors, or at least provided with a subsidized discount, as a way to lure advisors to the Fidelity platform (akin to how TD Ameritrade acquired and leveraged iRebal). But when just a few weeks later, Fidelity realigned its custody and clearing services to house all the RIA, broker-dealer, bank, and other channels under one common unit (with shared technology), it suggested that the vision for eMoney was far beyond “just” having some financial planning software to throw into its offering, and that Fidelity was preparing to build a single financial-planning-centric unified advisor workstation that would span all advisor channels. And indeed, in recent years, Fidelity has increasingly built both eMoney’s financial planning software, and its account aggregation capabilities, deeper and deeper into the core Wealthscape platform for advisors. Now, the strategy is finally starting to pay dividends, as Lincoln Financial (one of the largest independent broker-dealers in the country) announced that it will build its entire AdviceNext platform around a custom deployment of Fidelity’s Wealthscape (taking away Pershing’s 40% custodian share in the process). The shift is itself part of a broader trend as broker-dealers increasingly realize they must reinvent themselves as advice-centric platforms (with the DoL fiduciary rule as a catalyst), yet lack the resources to build (or patch together) their own holistic wealth management technology platforms. Of course, the strategy of trying to be and control the holistic advisor workstation is not unique – as evidenced by Envestnet’s string of acquisitions in recent years, from FinanceLogix (financial planning) to Upside Advisor (robo tools) to Tamarac (rebalancing) as the company increasingly became the advisor workstation of RIAs and especially broker-dealers. Yet the reality is that even with the Envestnet platform, the majority of broker-dealers that are not self-clearing still need custody and clearing services, most commonly from either Pershing, or Fidelity’s own Custody and Clearing division. Which means as Fidelity increasingly builds its own holistic – and deeply and natively integrated – wealth management platform with its own financial planning software (not to mention native account aggregation capabilities through eMoney as well) on top of its Custody and Clearing platform, it can effectively compete against both Envestnet (which has the technology but not the custody/clearing layer) and Pershing (which has the Custody and Clearing but lacks the depth of technology). Or stated more simply – as the future of financial advisors increasingly really does shift from products to financial planning advice, the divide between investment-centric platforms, and truly financial-planning-centric platforms, is going to become increasingly apparent… and Fidelity’s decision to build around eMoney is making the company very well positioned for an advice-centric future.

AdvicePay Raises $500k Seed Round For Custody-Compliant Financial Planning Fee Payment Processing. One of the other significant challenges of the industry’s shift from products to advice is that in a world of attaching financial planning to insurance or investment products, it was relatively straightforward to get paid for financial planning (either through product commissions or AUM fees). But in a pure fee-for-service advice model, there may not be any products to sell or investment accounts to bill from (not to mention a giant blue ocean opportunity for bringing financial planning to consumers who simply want to pay for advice without being required to buy an insurance product or roll over money to invest), which means the only way the advisor gets paid is for the client to write a check. Yet unfortunately, for high-volume planning fee firms, the sheer logistical management of managing, cashing, and reconciling individual papers checks can be a major hassle, and for firms that want to adopt an ongoing retainer model (instead of just one-time financial planning project fees), the billing management process becomes even more arduous (especially for those who want to do quarterly or monthly retainers). The obvious alternative is simply to set up a recurring invoice to the client’s bank account or credit card… except many credit card and ACH merchant accounts won’t approve financial advisors. Even worse, the fact that the advisor has access to the client’s financial accounts – through a direct feed billing mechanism – without any limitation against the ability to change (i.e., raise) the fees at any time, technically constitutes custody (since the advisor could hypothetically change the “retainer fee” to be 100% of the client’s account balance, and then disappear with all the client’s money). In fact, even just keeping the client’s credit card or bank account and routing numbers on file can potentially trigger the requirement for a custody audit. AdvicePay is aiming to solve this issue by offering the first custody-compliant payment processing platform to handle financial planning fees, specifically designed to facilitate both one-time and ongoing financial planning retainer fees, in a manner that does not trigger custody for RIAs. The software was originally designed for XY Planning Network’s 550+ advisors (who all operate partially or fully on the monthly retainer model), and is operating in live-beta mode with 250 advisors, but the seed round from outside investors (the majority of whom were financial advisors themselves) is being used to pivot the software to the broader financial advisor community, with solutions for both individual advisors and a coming enterprise solution for large RIAs and broker-dealers. Which may want to use the solution to expedite payment processing of financial planning fees, expand into new client markets (who will only pay for advice from income, and not from their assets), or simply to reduce the impact that billing advisory fees from investment accounts has on their own AUM (as fees billed from external accounts would no longer be outflows from the advisor’s own billable assets!).

Gainfully Raises $2.5M For “Free” Client-Friendly Content Curation Platform For Financial Advisors. When it comes to social media, email, and other digital marketing for financial advisors, one of the greatest challenges is just figuring out what can be shared, without running afoul of compliance obligations. Accordingly, content services like Forefield Advisor and more recently Financial Media Exchange (FMeX) have cropped up to provide client-friendly (and compliance pre-approved) content, along with solutions like Hearsay Systems or Vestorly or eMoney’s Advisor Branded Marketing to help distribute it. While Gainfully competes in a similar market, providing tools to ease the social media and email sharing of approved content, what’s unique about Gainfully is their business model, that is driven primarily by asset managers and insurers who pay to have their content distributed on the platform (for advisors to use), rather than by trying to primarily charge the financial advisors themselves (as most others do). Over time, Gainfully has further expanded into making the platform one where home offices can include their own proprietary content in the mix as well (relevant for large Gainfully-partner companies like LPL that have their own investment research teams), and the fact that Gainfully runs through the institution first ensures that they can check all the requisite home office boxes for compliance. And after iterating for several years, Gainfully’s substantial $2.5M seed round (from MassMutual Ventures) indicates that the company is finding traction in its unique model. Though their success is perhaps not entirely surprising, as product manufacturers themselves struggle with wholesaler distribution and how to get in front of increasingly busy financial advisors, Gainfully provides a unique new form of content distribution channel for companies to get their resources in front of advisors.

Morgan Stanley Partners With LifeYield To Systematize Tax Loss Harvesting And Asset Location. Historically, when advisors managed multiple client accounts, each account was invested either to its own strategy, or as a mirror image of the other accounts. Either way, though, the strategy and investment allocations were typically confined by the amount of assets in the account (and for especially large accounts, 2+ strategies might be run in parallel under the Unified Management Account [UMA] structure), and then applied to each account separately. In situations where the client had multiple types of accounts – for instance, brokerage accounts vs pre-tax IRAs vs tax-free Roth accounts – the advisor could tactically match the investment strategy to the associated account type (e.g., with higher turnover strategies IRAs, tax-managed strategies in brokerage accounts, and high-expected-return strategies in tax-free accounts). However, the limitation of this kind of “asset location” approach is that when each account is tied to a particular model or strategy, there’s no effective way to asset locate multiple accounts within one strategy – for instance, to take a 60/40 portfolio where the high-turnover stocks and high-yield bonds are only in the IRA, while the tax-efficient stocks and low-yield bonds are only in the brokerage account. To fill the void, Morgan Stanley announced this month a new partnership with LifeYield, which will implement such multi-account asset location strategies (along with more automated tax loss harvesting) by overlaying the entire Morgan Stanley investment infrastructure with LifeYield’s Portfolio Advantage solution. Notably, the independent RIA community has been able to achieve similar asset location execution with modern “rebalancing” and model management software tools like iRebal (which first pioneered the approach in software), Tamarac, and tRx. And many “robo-advisor” software solutions also have a strong focus on automated tax alpha through technology (albeit primarily tax loss harvesting and not asset location). But LifeYield marks the first major partnership of a large wirehouse to adopt such technology, which is both a significant shift for a wirehouse (which historically have tended to build their own software, although Morgan Stanley has shown a willingness to “go outside” on advisor FinTech with its recent Addepar deal), a big win for their recent round of capital from FinTech VC Vestigo Ventures, and another reminder of how technology-automated tax alpha strategies are increasingly become minimum table stakes for all financial advisors. It will also be interesting to see if LifeYield can parlay its wirehouse win to gain momentum with additional broker-dealer enterprises in the competitive landscape of tax-alpha-driven rebalancing and model management software solutions for advisors.

Morningstar Deeply Integrates Portfolio Performance Reporting And Research With Its New Office Cloud. Morningstar has long been in the marketplace of solutions for various investment research and reporting tools, but has spent years consolidating them, integrating them, and migrating them to cloud. At the recent Schwab IMPACT conference, Morningstar announced the newest version of its Office Cloud solution, a beefed-up version of its portfolio performance reporting tools launched in an effort to (re-)gain market share from competitors like Orion Advisor Services, Envestnet’s Tamarac, and Advent’s Black Diamond. What makes the new Morningstar Office solution unique, though, is its deep integrations to Morningstar’s own native research capabilities, which makes it easy to delve deeper and investigate any particular investment holding when viewing the performance reports. For instance, the advisor might pull up a Morningstar report on the spot to provide additional information to the client about the investment, or delve right into Morningstar’s screening tools to find a replacement (and the user interface appears to have been designed specifically to facilitate this). In addition, with Morningstar’s acquisition of tRx in 2015, it can also offer native rebalancing capabilities in Morningstar Office (akin to Envestnet’s Tamarac, or Orion’s recent Eclipse offering). Of course, for an increasing number of advisory firms that are de-emphasizing the investment management process altogether, and focusing more on financial planning – or simply have centralized their investment management process to a home office or dedicated investment team – there is little value to deepening research and proposal tools for advisors who don’t design their own client portfolios anyway. But for advisors who do still remain hands-on with their client portfolios, and already use Morningstar research, the ease of being able to better research and manage client portfolios directly from the Morningstar Office performance reporting results interface will likely be very appealing. The new solution is expected to be available in full release in the first quarter of 2018.

UBS Provides Account Fee Waivers For Clients Who Utilize Their Account Aggregation Tools. From the financial planning perspective, the appeal of “account aggregation” services is the ability to automate financial planning data updates, and to get a more holistic perspective on the client’s financial situation. And even in the context of “just” investment management, using account aggregation to bring in the details of outside accounts allows for the ability to give advice on investment accounts, and/or to at least design portfolios of managed accounts based on all the clients’ assets (and not just the ones that the advisor manages). However, account aggregation of held-away assets also has a more basic appeal as well for any advisor who runs an AUM model: it shows where there are more opportunities to get investment assets from existing clients. Of course, the caveat is that clients are often quite aware that their advisors want to aggregate assets through account aggregation so they can have a chance at aggregating the account itself (under the advisor’s management), and as a result many firms struggle to gain adoption on their account aggregation and client portal solutions. In this context, it is notable that when UBS recently announced that it was increasing its account fees (up from $150 for brokerage accounts and $75 for IRAs to $175 per account) for any household that keeps less than $2M with the firm (up from a $1M minimum), the company also announced that clients can get the account fees waived if their account-aggregated total assets are over $2M (even if the account isn’t managed by UBS). On the one hand, affluent clients may find it appealing that they can avoid non-trivial account fees by “proving” they’re a HNW investor (even if not all their investment accounts are with UBS). On the other hand, though, this “account aggregation incentive” effectively means UBS is paying clients (with fee waivers) just to aggregate their accounts, ostensibly in the hopes that it will eventually allow their brokers to better consolidate assets to the platform. Will this become a trend that other advisory firms adopt as well, as a way to incentivize clients to reveal all their held-away accounts?

Account Aggregation Begins Shift To Direct API Feeds As Fidelity Access Launches. Over the past few years, a behind-the-scenes war has been emerging between independent technology companies that provide account aggregation, and the financial institutions that house actual client accounts and provide the data. Of course, in the early years, all tools like Mint.com did with this data was provide helpful personal financial management dashboards – providing a solution that banks and other financial institutions didn’t want to spend the time to build anyway. And since 2010, Section 1033 of Dodd-Frank unequivocally stated that consumers own their own financial data, and had/have the right to share it (or let it be shared) with whoever they want. Yet in more recent years, the rising popularity of account aggregation has substantially increased the server loads for financial institutions to provide the data, many institutions have expressed concern that consumers providing their data to third party technology companies could introduce security breaches (although notably, no substantial public breaches have ever been announced), and perhaps most significant: technology companies have come up with increasingly sophisticated ways to use account aggregation, including using the data flows to automate processes that take money away from the financial institutions (e.g., Betterment’s SmartDeposit feature). Accordingly, the flow of data between financial institutions and outside providers has been increasingly tense, punctuated by events like the time in late 2015 when JP Morgan and Wells Fargo cut off account aggregators for several weeks. In this context, it’s notable that Fidelity has just announced Fidelity Access, which will provide account aggregators a means of extracting client financial account data directly via APIs (rather than through the typical “screen scraping” technology still prominent today), falling in line within similar recent programs from JP Morgan, Bank of America, and Wells Fargo. The good news of this approach is that it means cleaner data for the software providers, and that clients won’t need to keep “fixing” and resetting their connections and re-inputting their credentials (a common challenge of account aggregation today). The bad news is that it means “everyone” will have to reset their connections at least once more (to enable Fidelity Access), and it remains to be seen whether the breadth of data from these APIs really is as complete as what’s available directly to consumers (via portal screen-scraping), and whether Fidelity (or others) will use API access rights as a negotiating tool to somehow increase the cost or limit the growth of account aggregation providers. And of course, if the approach becomes widespread, eventually consumers will have to get into the habit of going to every one of their major financial institution provider websites to create similar API Access authorizations. Nonetheless, as major banks and now custodians like Fidelity come on board, expect to a coming shift in account aggregation that will eventually improve the stability of account aggregation services, and reduce the practical advisor/client frustration of needing to regularly fix broken links. In the meantime, hope that the financial institutions and technology providers continue to play nicely in the sandbox together.

Capitect Launches Rebalancing Module To Accompany Client-“Personalized” Portfolio Construction Tools. The rise of advisor rebalancing software over the past decade has supported incredible scalability of the AUM business model. Once advisors systematize their model portfolios, hundreds or even thousands of accounts can be consistently rebalanced with just a little more than the click of a button, allowing one internal “trader” to support multiple advisors and hundreds of clients at once. The caveat of this approach, though, is that it tends to lead advisors to a limited number of standard model portfolios that they use for all of their clients. On the one hand, the reality is that when most clients pursue common big goals (e.g., “retirement”), the “best” portfolio for one often really is the best portfolio for most of them (with perhaps just a few alternative options for varying levels of risk tolerance). On the other hand, clients often like to feel as though they’re getting customized solutions, and sometimes clients really do need to be an exception to the standard portfolio model. However, most rebalancing software quickly becomes cumbersome as the number of “exception” cases rises, and none of the tools are built to engage clients in the portfolio construction process itself. Capitect has long aimed to differentiate itself by making it easier to create “personalized” portfolios for clients, with simple sliders that allow the advisor to adapt (i.e., “customize”) a standard model portfolio into something more client-specific, or even building custom client glidepaths that will change allocations over time. Of course, the caveat to this approach is that if Capitect helps advisors build custom model portfolios, it’s still necessary to have a rebalancing tool that facilitates the trading and implement of those models consistently… or Capitect’s client-by-client custom models would just deleverage the advisor’s business. Accordingly, Capitect has now announced a new “Rebalance Architect” module, that accompanies their portfolio construction tools, to facilitate trading and rebalancing to client-customized models. From a practical perspective, those who are content with building a series of firm-wide standardized models will probably continue to use more “traditional” rebalancing software tools. But for those who want to adapt customized model portfolios for each client, especially done in an interactive and collaborative manner with the client (where you use Capitect’s Portfolio Architect to adjust the sliders of the model live with the client), the addition of a rebalancing solution makes Capitect’s software much more practically implementable (and scalable) for advisors.

MoneyGuidePro Launches Self-Directed Data-Gathering Discovery Tools. One of greatest inhibitors to doing a financial plan for prospective clients is an inability to get the data necessary to do the financial plan in the first place… which is especially unfortunate given that the most financially disorganized clients, who struggle the most to provide data, are often also the ones who need the most help. Yet the secondary and perhaps underestimated challenge to the data-gathering process is that many clients know that they have made financial mistakes, and balk at providing data simply because they’re afraid that they will feel judged for their mistakes… either by the advisor, or potentially by their own spouse. In fact, a recent proprietary research study from MoneyGuidePro earlier this year found that two out of three clients prefer to enter their personal financial planning data themselves, and discuss their goals at home, before a meeting with their financial advisor – because entering data themselves was less stressful, and providing them an opportunity to air any concerns with a spouse before the meeting with the advisor. Accordingly, MoneyGuidePro announced at the recent T3 Enterprise conference the launch of “Discovery Lab”, a tool that allows prospective clients to enter their own financial planning data on their own, in a guided process that helps them understand where/how to enter the data properly (and support a couple’s ability to have productive conversations about any conflicts/differences in their goals before meeting with the advisor). For couples facing the retirement transition in particular – where there are a myriad of potential goal differences between couples that they may not feel comfortable discussing (or fighting about!?) in front of the advisor – MoneyGuidePro also launched “bliss”, which it characterizes as a “Retirement Compatibility Game” designed to help couples learn about their differences and similarities regarding their retirement goals. On the one hand, it’s stunning that MoneyGuidePro has taken so long to deepen its data-gathering capabilities, in a world where PreciseFP charges as much as MoneyGuidePro just to collect data that is piped into MGP itself. On the other hand, though, MoneyGuidePro’s strength has always been its ability to help craft client experiences and conversations, which means its entry into the data gathering process may be a substantial upgrade over the status quo for many advisors (because let’s face it, few prospects will ever enjoy a meeting talking about numbers written into a big data gathering form). Not to mention the added benefit that clients who enter their own data save the advisor the time of keying it in for them later, too!

Robo-Advisor BrightPlan Obtains CEFEX Fiduciary Certification. When robo-advisors first emerged, they were hailed by many as the ultimate in simple fiduciary portfolio design: a series of broadly-diversified asset-allocated ultra-low-cost ETF portfolios. The caveat, however, is that in a world where clients self-direct and self-qualify their own investment decisions to select a robo model, it’s not entirely clear whether robo-advisors can effectively fulfill their fiduciary duty and manage client accounts to the individual’s specific situation… or if they’re more akin to a Registered Investment Company (i.e., a quasi mutual fund) under Rule 3a-4. And so in this context, it’s notable that robo-advisor BrightPlan recently obtained CEFEX certification to affirm its adherence to fiduciary best practices. To be fair, though, BrightPlan actually incorporates some (basic) financial planning tools, along with account aggregation capabilities, to craft substantially more “personalized” recommendations, and also provides a “hybrid” (i.e., human) advisor service through a partnership with PlanCorp (a $3.6B independent RIA that it bought a 40% take in earlier this year). Which means arguably, the software is as much a digital onboarding tool for (virtual) human advisors as it is a real “robo” solution in the first place. Nonetheless, the point remains that even as parts of the advisory community questioned whether “pure” robo-advisor solutions could be effective fiduciaries to clients, the technology itself – often married to a human advisor as well – is quickly moving to greater levels of depth and financial advice to help eliminate any doubt about the rising level of personalization in their financial advice. Not to mention institutionalizing recognized fiduciary best practices from organizations like CEFEX itself.

Wealthfront’s Path Shows The Power Of Data-Driven Financial Planning Software Assumptions. Doing financial planning projections requires making assumptions about the future, regarding everything from what prospective retirees will likely spend in retirement, to what level of Social Security benefits they may qualify for, or what kind of college financial aid they might obtain when kids go off to school. Traditional, most financial planners make the “best” assumptions they can, from assuming whatever standard of living the client suggests they want, whatever Social Security benefits their statement shows, etc. Wealthfront’s Path – the financial planning software included as part of their robo-advisor experience – goes one level deeper, though. For instance, retirement expenditures aren’t simply based on a rough guesstimate from the client of what they might want to spend; instead, the software defaults to using account aggregation to identify the client’s actual 12-month rolling savings and spending rates, and then projects shifts in future retirement spending based on the Consumer Expenditure Survey, in order to calculate a more realistic age-banded retirement spending projection. Similarly, the software doesn’t just use estimated Social Security benefits from the Social Security Administration, but attempts to calculate Social Security benefits based on projected income and how long the individual plans to continue to work (or not). And potential future college financial aid estimates are calculated automatically as well, based on the actual Federal FAFSA and Institutional Methods and average grant amounts from thousands of schools. Of course, clients may ultimately still adapt and change these numbers further… but arguably, these more analytically-intensive defaults, powered entirely and automatically by their financial planning software, form a much stronger default assumption for clients than today’s typical financial planning software!

Betterment Charitable Giving Automates Tax Lot Selection For Donating Appreciated Securities To Charity. As the end of the year approaches, ‘tis the season for both charitable giving, and year-end tax planning. And in this context, Betterment has launched a new “Charitable Giving” solution, which takes the dollar amount donation that the client selects, determines which tax lot(s) of which investment would be best to donate (i.e., has the most appreciation that can be avoided via a charitable contribution), and completes the charitable contribution transfer on behalf of the client. Notably, in order to facilitate the transfer, the charity itself must also have an account at Betterment, although the company is allowing charities to have accounts up to $1M in assets for free. And at launch, Betterment already includes a number of major charities, including UNICEF, the World Wildlife Fund, Save the Children, Wounded Warrior, and DonorsChoose. Of course, those who want to make a more substantial contribution at once for tax purposes, but actually donate the funds over time, will still use a Donor-Advised Fund instead. Nonetheless, for those who were already going to do some charitable giving already, and where the charity has (or is willing to easily establish) an account at Betterment, the technology simplifies the process of donating appreciated securities to be as simple as donating cash… but with the better tax benefits of donating appreciated investments (which Betterment even helps to identify, at least until/unless Congress changes the rules and requires FIFO accounting for all transactions!). Which is a substantial improvement over the typical tools available to financial advisors, where everything from identifying and selecting the appropriate tax lots, to facilitating the in-kind transfer of securities, it a substantially more manual and labor-intensive process! A good example of how, even as advisor technology is beginning to catch up to robo-advisors in the world of onboarding, that the leading robo-advisors themselves are continuing to iterate one step ahead.

So what do you think? Would you offer a discount on your advisory fees (or some other financial incentive) for clients to use account aggregation in your client portal (to know whether they have outside accounts and where they are?)? Would you use more automated tools to help with tasks like donating appreciated securities for clients? Do you think it really would be better to let clients go through a “Discovery Lab” to enter their own financial planning data in the comfort of their own home? Please share your thoughts in the comments below!

 (Disclosure: Michael Kitces is a co-founder of both AdvicePay and XY Planning Network, which were mentioned in this article.)