The Latest In Financial Advisor #FinTech (February 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.

The War Over Controlling Access To Consumer Financial Data Is Heating Up. Last year, I had noted on this blog that there was a war was quietly emerging between large financial institutions and FinTech providers (in particular, account aggregation tools) about client financial data, including who has access to it, who controls it, how it should be protected, and ultimately who it belongs to. Financial institutions were complaining that consumers allowing third-party access to outside FinTech providers were a potential security threat and that those FinTech providers were “overloading” the servers of the Financial Institutions. At the time, I had suggested that the most straightforward solution would be providing account aggregators and other PFM solutions a direct feed to consumer data – akin to what many portfolio accounting software solutions already have with RIA custodians amongst independent financial advisors – and now it appears that’s exactly what’s happening, with both J.P. Morgan and Wells Fargo announcing recently that they will provide a direct data feed to Intuit to address the concerns. However, former Intuit CEO (and now Personal Capital CEO) Bill Harris called out the arrangement “baloney” on the Personal Capital blog, pointing out that the FinTech providers usually have more recent technology and better cybersecurity than the Financial Institutions themselves (and Harris would know, having founded three different cybersecurity companies!), that the depth of data requests is not actual material in today’s age of modern technology, and that the real motivation for Financial Institutions is to force outside providers to rely on a bank-provided authentication token, which gives the bank all the control over who has access, when, and what information is transmitted (and also helps them to lock-in consumers). Fortunately, Section 1033 of Dodd-Frank specifically requires Financial Institutions to make account and transaction data available to consumers electronically, and last November the Consumer Financial Protection Bureau began the public feedback process to promulgate more consumer-protection regulations around consumer financial data rights. Except President Trump’s Executive Order this week to begin dismantling Dodd-Frank now threatens Section 1033 as well. As a result, FinTech companies are concerned that the end of Dodd-Frank (and Section 1033) will lead to a power grab by Financial Institutions to take over even more control of consumer financial data, and as a result, several FinTech players (including Harris at Personal Capital) are forming a new Consumer Financial Data Rights industry group to lobby for consumers’ rights to their financial data (including their right to allow FinTech providers to collect it for them). The bottom line: expect the war over who controls and has access to client data to get even hotter throughout 2017, as Financial Institutions try to defend their turf and control the data, while FinTech providers advocate for a consumer data standard to make the information flow more easily (and safely).

TD Ameritrade Launches A TAMP Disruptor With iRebal Model Portfolio Marketplace. At its national conference this week, TD Ameritrade announced that its new Veo One platform is going into wide release. But the real news was the accompanying announcement of a new soon-to-be-launched “iRebal Model Market Center” solution. In essence, this will be a “supermarket” of model portfolios, constructed by well-known asset managers, and able to be dropped easily into iRebal for the advisor to implement (and if desired, automate) trading and rebalancing to that model. Initially, TD Ameritrade will offer a series of models at no charge, including some designed by product manufacturers (ostensibly comprised partially or fully of their own funds). In a second phase of the rollout, though, third-party investment managers (which could include institutional managers, TAMPs, or other RIAs) will be able to offer their models through the marketplace, and charge a (small?) fee to advisors (and/or their clients) who want to use their investment management intellectual property. And because it’s all run through a central platform – iRebal – advisors will be able to easily mix-and-match as well, such as indexing a portfolio core, using sub-advisors for various active “satellites”, while still retaining control and being able to rebalance amongst all of them. Ultimately, the implications of this new model portfolio marketplace are profound. For advisors who otherwise want to outsource investment management decisions, the model marketplace will be a direct competitor to Envestnet (at least in the RIA channel) and newcomers like RobustWealth, and provide what could be a profoundly cheaper alternative to a TAMP, especially since open marketplaces with transparency pricing tend to trigger competitive price wars. Of course, many TAMPs “also” provide back-office outsourcing solutions, but they will now be forced to rely on that as their primary differentiator and only way to justify their full price, even as the ongoing improvement in “robo” onboarding technology, and the portfolio trading and rebalancing automation capabilities of iRebal itself (which was arguably the original “robo-advisor-for-advisors” solution), will likely make that kind of back office support less and less relevant in the future anyway. At that point, TD Ameritrade will simply be operating a pure platform business model, facilitating connections between investment managers and advisors (and their clients), while its advisors use the TDA technology to help make the process as easy as possible to implement and automate, and TDA reaps the financial benefits when all of it happens on the TDA platform.

Tamarac Deepens TD Ameritrade VEO Integration For Straight-Through Rebalancing. As part of its latest release, the Advisor Rebalancing application in Tamarac Advisor Xi will now leverage the API capabilities of TD Ameritrade’s VEO to facilitate the straight-through processing of trade orders generated within the rebalancing software. The expansion for Tamarac isn’t entirely surprising, since TD Ameritrade first announced the capability last fall when it deployed a similar straight-through trade processing API via iRebal, which quickly drew integrations from Riskalyze’s Autopilot and Vanare (now AdvisorEngine). Notably, the virtue of this kind of straight-through trading capability is not merely that it’s a workflow process improvement for advisory firms that will no longer need to generate trade orders in Tamarac and then separately upload a trading file. It’s also a critical enhancement for digital onboarding “robo” tools, as the automation makes it possible for a new client to sign-up electronically, transfer money, complete a risk tolerance questionnaire, select a model, and then actually be invested to the model, with all the steps either fully-automated or at least client-self-directed. Which means rebalancing software itself is effectively shifting from just being a tool to oversee models, to actually becoming the central portfolio management and trading tool, as well as becoming an integral part of the “robo” technology stack for advisors.

Betterment Raises Fees And Pivots To Platform Model Offering Human Advisors. For the past several years, human financial advisors and robo-advisors have been in a pricing game of chicken over what the “real” cost of financial advice should be. The widespread assumption has been that human financial advisor fees would inevitably have to come down, but it turns out now that it’s the robo-advisors who are balking first, with Betterment announcing a whopping 67% fee increase on all accounts over $100,000, lifting up its advisory fee all the way up from 0.15% to 0.25%. In addition, Betterment announced the launch of three new tiers of human financial advisory services as well, including Betterment Plus (0.40% with a $100k minimum to get once-per-year advice from a CFP professional), Betterment Premium (0.50% with a $250k minimum to get ongoing access to a team of CFP professionals), and the Betterment Advisor Network (where consumers are matched to third-party independent RIAs using the Betterment for Advisors platform, who charge their own fees plus the B4A platform fee of 0.25%). On the one hand, the shift represents a remarkable concession by Betterment of the need and demand for human financial advisors, and at a higher price point to boot. But the pivot also puts Betterment in the challenging position of now competing head-to-head with even-larger offerings like Vanguard Personal Advisor Services, and the new Schwab Intelligent Advisory… except ironically, now it’s Betterment that has 5X to 10X the minimums and charges almost 2X the fee of the existing incumbents. More generally, though, it appears that Betterment is trying to pivot away from being a pure B2C solution altogether, and instead run a modern investment “platform” business model, where Betterment simply tries to earn a 0.25% platform fee regardless of which solution the consumer actually chooses (Betterment Digital, Plus, Premium, or Advisor Network). Still, though, the platform business in the world of investments is a brutally competitive one, and it remains unclear whether Betterment will be able to overcome the fundamental challenge that has faced all robo-advisors from day 1: whether they can build a national brand capable of attracting a sufficient volume of consumers without getting buried along the way in prohibitive client acquisition costs.

Is Wealthfront Creating The Financial Planning Software Of The Future? In a world where direct-to-consumer robo-advisor growth rates are crashing, and most robo-advisors have been shut down, sold, or pivoted away to offer or partner with human advisors, Wealthfront is doubling down on its pure robo focus by expanding from being "just" a robo-advisor to a full-fledged "robo-planner” solution, dubbed “Path”. What makes Path unique in the current landscape is that it drives most of the data gathering process by simply having clients link their financial accounts, which it uses not only to pull information like account balances, but even to collect spending data to figure out what the client current saves or spends. Clients then get a series of interactive tools that allows them to manipulate some of the basic assumptions like retirement age or adding extra savings, to see the impact on their financial future. Of course, self-directed retirement calculators are not exactly new, but Wealthfront’s solution and its underlying methodology appears to be unique in its combination of pulling direct client data, and combining it together with data-driven assumptions to fill in the gaps as appropriate (from estimates on return assumptions to Social Security benefits). And while it’s ultimately a self-directed solution, Wealthfront appears to be drawing heavily on what are already the emerging best practices regularly discussed on this blog when it comes to financial planning software, including the use of account aggregation to eliminate most of the data gathering and plan update process, offering “What-If” tools to formulate an actual plan (or as Wealthfront calls it, a potential “Path”), and even framing the financial planning process as evaluating “possibilities”. In the end, Wealthfront is clearly still committed to a subset of consumers that are heavily self-directed and weren’t necessarily going to hire a human financial advisor anyway – so it’s still not likely this is a direct “threat” to financial planners – but just as robo-advisors put a spotlight on the power of a digital onboarding experience over the prior paper-based process of account openings and ACAT transfers, Wealthfront’s new robo-planner solution may be about to similarly embarrass financial planning software companies by showing the full power of using a PFM (Personal Financial Management) dashboard as the central platform to facilitate data gathering, continuous planning updates that trigger proactive client notifications of planning opportunities, the gamification of financial behavior change, and the use of big data to make it even better over time.

Starburst Labs, Maker Of Wealthbox CRM, Raises $6.25M In Series A Round. Starburst Labs, formerly known as Gotham Tech Labs, is the maker of Wealthbox CRM, and has just announced a $6.25M Series A round led by Bel45 Capital Partners (itself a wealth manager for a private family office), supplementing $4M of prior seed funding. The new round of capital is expected to not only ramp up growth Wealthbox itself (which already has traction in the small independent RIA marketplace, but limited broker-dealer enterprise adoption thus far against competitors like Redtail and Salesforce) and add new features, but also to facilitate a series of new “apps” under the Starburst umbrella, including InvestorSay (a community platform for investors and advisors around investment ideas), a competitive virtual-trading platform called PaperTrade.io, and a Q&A app called Wealthbase that can be embedded into third-party media sites where consumers ask financial questions and are matched to financial advisors. In the meantime, Wealthbox also announced a new eMoney integration this month as well.

Grendel CRM Makes Push To Become Central Investment Advisor Dashboard. With an increasingly complex technology stack for financial advisors, there is increasing demand from advisors to have one central advisor dashboard to log in and see and manage it all. When it comes to those who are focused on investment management in particular, Grendel CRM is making a bid to become that one-stop shop, at least for advisors on TD Ameritrade, with a new deep integration to TD Ameritrade’s Veo that would allow not only the typical bi-directional flow of data, but full-on capability for advisors to execute trades, perform cash transfers, generate reports, and do fee billings, all from directly within the Grendel CRM interface. Ultimately, Grendel claims it is “custodian agnostic” and has at least some partner relationship or integrations with Schwab, Fidelity, and Trust Company of America as well, but the broader open-API capabilities of TD Ameritrade have permitted a deeper integration. Which just emphasizes the increasingly disparate FinTech landscape between TD Ameritrade’s open architecture and open API framework, and Schwab and Fidelity’s more limited “walled garden” approach of building deep integrations with just a handful of select vendors.

RightCapital Financial Planning Software Startup Announces First Enterprise Deal. One of the fundamental challenges in trying to enter the competitive financial advisor marketplace as a new advisor FinTech solution is that finding enterprise deals can be a brutally long sales cycle (and challenging developmentally, given the cybersecurity and deployment integration requirements of many broker-dealers), while the faster-to-decide independent advisors are so scattered it’s hard to gain revenue traction quickly (and client acquisition costs can be dangerously high). In this context, it’s notable that this month financial planning software newcomer RightCapital announced both a group discount arrangement for the 240 advisors in the Garrett Planning Network, and more significantly its first broker-dealer enterprise contract, with Parsonex Financial Services, which definitively puts RightCapital on the map as an enterprise contender for financial planning software solutions. While it still remains to be seen whether RightCapital can get traction against major enterprise solutions like MoneyGuidePro, eMoney Advisor, and Advicent’s NaviPlan, the buzz on the street is that RightCapital is carving out a unique niche for itself being able to illustrate more complex tax-sensitive retirement withdrawal strategies, and simply being able to iterate much faster development cycles thanks to being built on a more modern and less legacy-laden code base than its larger competitors.

Northwestern Mutual Launches $50M FinTech Venture Fund. Building on its previous investments and acquisition of LearnVest in 2015, along with a successful upround investment into Betterment’s Series D and even an early investment into financial planning software pioneer FinanceWare, Northwestern Mutual has seeded $50M into a corporate venture fund to invest into FinTech startups. The new Northwestern Mutual Future Ventures will invest $500k to $3M in tech companies “that provide services which help consumers achieve financial security”, which reportedly means those focused on “digital health services, analytics, changing consumer preferences, and innovative client experience.” Notably, the launch of a FinTech venture arm by a financial services company isn’t entirely unique; Citigroup has one (that invested into Betterment and Square), so does American Express, and BBVA has a large $250M fintech venture fund. Although notably, Northwestern Mutual’s appears willing to invest into smaller and earlier stage ventures than many others… which could make it especially appealing as an option for those looking for funding to create Advisor FinTech solutions.

SEC Adds “Electronic Investment Advice” To Exam Priorities List For 2017. The rapid growth of robo-advisors has begun to raise concerns amongst regulators, starting last spring when Massachusetts issued a “policy statement” on robo-advisors questioning whether they could even fulfill their fiduciary obligations. Now, the SEC’s Office of Compliance Inspections and Examinations (OCIE) announced that a deeper exploration of “Electronic Investment Advice” will be an exam priority for 2017, which includes platforms that are both “automated” (e.g., Betterment, Wealthfront, Schwab Intelligent Portfolios) or “digital” (e.g., Personal Capital, Vanguard Personal Advisor Services, Schwab Intelligent Advisory). The SEC isn’t specifically raising questions about whether a robo-advisor “can” fulfill a fiduciary duty, but the SEC noted that examinations will focus on compliance programs, marketing, how investment recommendations are formulated, data protection, and disclosures relating to conflicts of interest (given that some robo-advisors use their own proprietary funds, which definitely raises conflict-of-interest concerns). In addition, the SEC specifically noted that it will review firms’ compliance practices for overseeing their algorithms that generate investment recommendations. Notably, SEC exam priorities don’t necessarily mean a “crackdown” is coming or even that the SEC sees anything wrong in particular. But it does mean that the SEC is going to be spending a lot more time pouring over the details of exactly how robo-advisors operate – and if it turns out there are any concerns about what’s happening behind the scenes, expect to see more pointed and stringent guidance on automated and digital advice providers in 2018.

Addepar Lands Enterprise Deal With Morgan Stanley For Ultra-HNW Account Aggregation. Amongst the financial advisor community, Addepar is generally known as a portfolio reporting and accounting solution, in the same category as Orion Advisor Services, Black Diamond, and Tamarac, but targeted more directly at ultra-HNW investors. The solution is currently adopted primarily in private banks, family offices, and independent RIAs service ultra-HNW clientele, where Addepar’s ability to help aggregate across multiple institutions and report on hard-to-value and complex privately held investments, is especially appealing when so many firms still track those values manually with Excel spreadsheets. And now, Addepar has landed its first major wirehouse deal, with Morgan Stanley – which makes sense given the wirehouse focus on ultra-HNW clientele these days – and it will be a major boost for Addepar’s credibility, likely helping it close deals with other wirehouses and more private banks and trust companies. Equally notable, though, was that Morgan Stanley decided to do a deal with an “outsider” solution in the first place; following on the heels of last year’s announcements that UBS and Wells Fargo were partnering with SigFig on a “robo” digital advice solution, there now appears to be a trend underway that wirehouses are playing “catch-up” on their FinTech solutions by partnering rather than continuing to build their own solutions as they typically have in the past.

New Product Watch: Asset Map. One of the major shifts currently underway in financial planning software is the transition from advisors using it like a calculator to analyze and report on a client’s planning situation, to instead using it as a collaborative and interactive tool to facilitate a client planning meeting and illustrate various “What-If” alternative scenarios on the spot. However, using planning software collaboratively only works once the data is in the software in the first place, which can itself be a blocking point because not all clients are organized enough to collect and present the data, and a data gathering meeting itself isn’t often a very enjoyable experience. Some advisory firms have been trying to enhance the data gathering experience by using Mind Mapping tools to make it more engaging for the client, but thus far adoption has been limited – likely because executing mind-mapping well requires some training and experience, especially when working with a blank slate mind map. In this context, financial advisor Adam Holt created Asset Map, a kind of mind mapping solution that he built for his own use with clients and is now turning into a software company so other advisors can use the tool. Conceptually, Asset Map is similar to a mind map, in that it creates a visual display of all the client’s assets (and income stream) that they can see on one page (or the big screen of a computer monitor), but with templates (“stencils”) of typical client profiles, specifically designed for and relevant to the financial advisor’s data gathering process. With the rise of new technology solutions for every other part of the financial planning process, from digital onboarding to interactive financial planning presentations and deliver, it will be interesting to see if Asset Map can get traction specifically as a solution to make the data gathering meeting more engaging for clients.

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

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

So what do you think? Will the fight between Financial Institutions and FinTech providers over who has control of and access to consumer data intensify in 2017? Will Betterment be able to make the shift to a platform business? Do we need new tools like Asset Map to make the data gathering process more engaging for clients? Please share your thoughts in the comments below!