The Latest In Financial Advisor #FinTech (January 2018)

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.

CRSP Puts The Total Stock Market Index On The Blockchain For Vanguard. While there has been a furor in recent months about whether Bitcoin is just a bubble, or the future of digital currency, the real story is the underlying blockchain technology that underlies such cryptocurrencies. The significance of the blockchain is that it’s a way to make information publicly available in a common ledger, in a manner that everyone can view but no one can easily and independently change and corrupt – which is important not only to track who owners various amounts of Bitcoin or other cryptocurrencies, but to track any information that needs to be commonly accessed by many. Accordingly, startups have been trying to innovate ways that apply the blockchain beyond just digital currencies… and now, Symbiont is partnering with the Center for Research in Security Prices (CRSP), with Vanguard as the first trading client, to puts CRSP’s index data directly on the blockchain for Vanguard (and ultimately others) to use. The significance of putting CRSP index data on the blockchain is that it eliminates what is currently a very manual and labor-intensive process of propagating daily index data updates across the entire financial services ecosystem – which for a company of Vanguard’s size, could result in a material operational cost savings. In addition, the fact that all companies and managers that follow CRSP data have direct and immediate – and simultaneous – access to updated index data limits the ability of competitors with faster access to (or faster ability to process the) information to front-run Vanguard’s implementation of any index changes, reducing tracking error and allowing index funds to hew even more tightly to their relevant index benchmarks. Which may not be the kind of “disruption” that is commonly discussed when it comes to Bitcoin and the blockchain, but is a good example of a way that blockchain technology can be applied in the financial services industry to reduce costs and increase transparency and efficiency. Expect to see more index fund data providers converting to the blockchain in 2018!

Quovo Account Aggregator Launches PFM Modules As Enterprises Struggle To Adopt. With the growth of enterprise Big Data initiatives comes a hunger for more raw data, for which account aggregation tools provide a unique opportunity to gain better advisory firm insight. From business intelligence tools to better quantify an advisor’s entire client base, to the ability to spot held-away accounts that may be rollover opportunities, there’s tremendous value in client data. Except for one important caveat: clients need a reason to turn over their data in the first place. Accordingly, UBS recently offered to waive account fees for clients who would willingly account-aggregate their held-away assets with the company. Ideally, though, clients can be incentivized to participate in a firm’s account aggregation tools by simply being offered a Personal Financial Management (PFM) dashboard that makes them want to hand over their data, in order to receive valuable insights themselves – a model that has been at the core of Mint’s own tremendous user growth over the years. Except most large enterprises have no experience developing client-friendly PFM portals in the first place! Accordingly, account aggregator Quovo announced this month that it was launching a series of client-friendly PFM “widgets” that enterprises can embed directly into their own client portals, giving clients a reason to connect their accounts and aggregate their data in the first place. Similar to Yodlee’s launch of FinApps last year, Quovo’s PFM tools should make it easier for enterprises to deploy basic PFM solutions to clients, while allowing the enterprise to reserve its own technology and developer resources for internal business intelligence and other Big Data analyses of the data as it rolls in. Yet while the approach makes strategic sense, the question still arises: can basic PFM modules developed by an account aggregation provider really have the depth and quality of user experience necessary to get clients to adopt? Or is there still a need for more high-quality PFM middleware providers (e.g., WealthAccess) to create the kind of holistic high-quality user experience that really drives client adoption (for firms to get the raw data they want and need)?

Upstart RiskPro Gaining Broker-Dealer Momentum With Compliance Surveillance Tools. For years, “risk tolerance assessment” tools was a sleepy corner of the advisor technology world, with most advisors using “homegrown” questionnaires created by home office compliance departments, and a subset of advisors using more rigorously developed third-party tools like FinaMetrica. Then in 2011, Riskalyze showed up, and rapidly gained market share by converting risk tolerance assessment from a mere “due diligence” Know-Your-Client obligation that occurred after a prospect signed up, into a part of the sales proposal process instead, creating tools that could easily show how the client’s current portfolio was misaligned to their own risk tolerance (and how the advisor could create a better matching one instead). Riskalyze’s rapid growth (and multiple rounds of venture capital) has quickly attracted a number of competitors, including PocketRisk, Tolerisk, and RiskPro. The challenge, though, is that it’s hard for newcomers to differentiate in order to attract business. In this context, it’s notable that RiskPro has been gaining momentum this year, with a string of mid-sized broker-dealer partnerships including Cantella & Co, Kovack Securities, and now Capital Investment Companies, focusing not just on the risk tolerance assessment process, but their back-office monitoring and “surveillance” capabilities to track existing client portfolios that registered representatives have implemented, and alert the compliance department any time the portfolio’s volatility breaches the client’s assessed tolerance levels. In other words, while Riskalyze gained market share by shifting risk tolerance tools from a KYC obligation into part of the sales process, RiskPro appears to be having success by shifting risk tolerance assessments into the criteria for an ongoing compliance monitoring tool. Which is especially appealing as broker-dealers face both increasing scrutiny from regulators about allegations of reverse churning in fee-based accounts (for which “ongoing portfolio monitoring” is a key service to substantiate the ongoing fee), and greater pressure on monitoring appropriate investment recommendations in retirement accounts under the Department of Labor’s fiduciary rule. From a practical perspective, the challenge of creating such monitoring tools is that broker-dealers currently use so many different tools and systems already, that the necessary back-office integrations likely require substantial customization, which may be difficult for RiskPro to scale. Nonetheless, RiskPro’s success in the mid-sized broker-dealer market indicates that there is real interest for building those custom deployments!

Fi360 Integrates “Reasonable Compensation” Fee Benchmarking For Retirement Plans Into Fiduciary Toolkit. One of the most controversial aspects of the Department of Labor’s fiduciary rule is that advisors must receive only “reasonable compensation” for their services. Yet while many have decried this requirement as “government regulators setting private market rates”, the reality is that the reasonable compensation standard has already existed for decades under ERISA, and it’s evaluated by comparing the advisor’s compensation to what other advisors charge for similar services to a similar type of client. In other words, “reasonable compensation” simply means not charging excessively more than what competitors do for the same solution, and the going rate is set not by regulators, but by the market itself. However, this means that advisors can’t determine what compensation is “reasonable” until they have a process to benchmark their services and compensation against the marketplace in the first place. Accordingly, a few years ago Fi360 – which provides fiduciary training and tools, primarily for those serving employer retirement plans – acquired retirement plan research firm Ann Schleck & Co and her retirement plan fee benchmarking tool. After several years of enhancements, the Fee Benchmarking tool has now both been fully integrated into Fi360’s broader Fiduciary Toolkit, and is available on a standalone basis for advisors who simply want to document and affirm that their fees are “reasonable”, based on the exact type of services being provided (as the new Fee Benchmarker can now filter fees separately for 3(38) vs 3(21) fiduciaries, and a range of other service models). More generally, as Fee Benchmarking tools become a standard in the 401(k) space – a growing area of focus given the eruption of 401(k) fee lawsuits over the past decade – expect to see more benchmarking tools developed to similarly assess “reasonable compensation” based on the scope of services provided to IRA owners under the DoL fiduciary rule as well.

M1 Finance Pivots “Robo” Management Tools To “Free” Brokerage Platform For Consumers. Despite the early buzz that robo-advisors would eventually reduce investment management fees to zero, over the past year the trend has been increases in the going rate for robo-advice, from the announcement in early 2017 that Betterment was raising fees 66% on its top clients to 0.25%, to Morgan Stanley launching its robo-advisor at 0.35% and Merrill Edge’s Guided Investing portfolios at 0.45%. It this context, it’s notable that newcomer “robo-advisor” M1 Finance announced this past month that it was cutting its platform fee from 0.25% for the first $100k and 0.1% for larger accounts, down to “free”. For those who aren’t familiar, M1 Finance is effectively a combination of a traditional robo-advisor (a la Betterment or Wealthfront), and a traditional brokerage platform; the platform allows clients to construct “pies” of various investment allocations (which can be comprised of individual stocks or ETFs), while also offering a series of “expert-designed” pies (typical asset-allocation models), all of which can then be automatically rebalanced, and last year also partnered with Nuveen to launch a set of ESG-oriented “NuShares” ETFs. In other words, M1 Finance functions like a direct-to-consumer version of rebalancing and model management software built on top of its own brokerage accounts. In this context, M1 Finance has effectively decided to pivot from the “robo-advisor” model (charging basis points for asset allocation models) to a traditional “brokerage” model instead (with plans to generate revenue from securities lending, margin interest, earning a spread on cash balances, and revenue-sharing distribution payments from asset managers and product manufacturers who want to get their solutions in front of M1 Finance’s clients). Of course, the reality is that offering brokerage accounts for “free” isn’t new – most brokerage firms today don’t charge just to have a brokerage account and invest, instead choosing to make money from a combination of the exact same brokerage revenue pillars (plus commissions on trades, which M1 Finance is eschewing, but only because the company positions itself as being for long-term investors and implements trades across all client accounts in a single block transaction during a single daily trading window). Nonetheless, it’s notable that “model management” tools for longer-term investors is actually something that many brokerage platforms lack, while robo-advisors offer models but without the same level of customization and flexibility, which puts M1 Finance at an interesting intersection between the two. And is another example for financial advisors of how “just” using rebalancing software to manage models – even customized models for individual clients – is an increasingly commoditized investment value proposition.

RetireUp Attempts To Patent Collaborative Real-Time Retirement Planning Projections. Back in 2011, the financial planning software world shook when Wealthcare, which developed one of the first financial planning software tools with Monte Carlo analysis (known as FinanceWare), sued UBS (and indirectly its financial planning software provider MoneyGuidePro) for patent infringement. At the core of the lawsuit was Wealthcare’s claim that it had patented a “Method and System of Financial Advising” of gathering client information, plugging it software, and determining an optimal portfolio to achieve client goals (rather than just identifying a portfolio on the efficient frontier) – a goals-based planning approach that now is viewed as an industry standard, but was a significant departure from the popular portfolio optimizer tools of the time. Despite debate about whether such a “basic” element of the financial planning process even could be defensibly patented, the lawsuit was ultimately settled privately between Wealthcare and MoneyGuidePro for an undisclosed sum. Nonetheless, concern has lingered that some software company might again someday try to use a patent to limit competitors’ ability to model and implement existing financial planning processes. And so in this context, it’s notable that newcomer retirement planning software provider RetireUp recently announced that it was finalizing a patent for its planning tools (Patent #US20150095265A1). As the Patent application itself describes, RetireUp is aiming to patent a process of making dynamic real-time adjustments to a retirement projection, including illustrating changing inputs (e.g., retirement age, retirement expenses, rates of return, etc.), the impact of market volatility and other “stress tests”, the ability to solve for optimal retirement spending given certain inputs, and the benefits and disadvantages of reallocating retirement assets to various products. Yet the reality is that financial planning software that uses sliders to make dynamic real-time changes to a retirement projection has been around since the early 2000s from companies like FinanceLogix and MoneGuidePro (and are now in common use, from MoneyGuidePro’s “PlayZone” to eMoney Advisor’s “Decision Center”), and similarly MoneyGuidePro launched a “SuperSolve” function in its G2 release in 2008, while RetireUp was founded just 5 years ago. To be fair, it’s worth recognizing that few retirement planning tools effectively illustrate the impact of specific products (although tools like Income Discovery have been working on this since 2010), and each planning software has its own user interface design and list of particular options for adjusting parameters and stress testing (which vary from one tool to the next). Nonetheless, while it’s fair for any company to want to defend its innovations, the question arises: is RetireUp really patenting a new innovation at all, or is it simply trying to patent what is already an industry-standard techniques of using slides to do real-time planning adjustments that have already been in common use by other financial planning software providers for more than a decade? And perhaps even more important: what exactly does RetireUp plan to do with its patent, and is this the tip of the iceberg for a new wave of intra-software-company lawsuits that could slow the pace of actual software development improvements for financial planners? Will any of today’s leading financial planning software companies feel threatened enough to challenge the new RetireUp Patent #US20150095265A1 directly?

New Software To Watch

Advisor Launches Assisted-Digital-Marketing Solution With Hyperchat Social. While the buzz of social media for financial advisors has grown in recent years, relatively few advisors have real success stories to show for their digital marketing efforts, in large part because the advisory industry’s existing tools aren’t built to distribute the steady cadence of social media messaging necessary for success. While outside-the-advisory-industry social media tools like Hootsuite, Buffer, and MeetEdgar are available to fill the void, even then most advisors don’t have the time, inclination, or know-how to figure out what to post to their social media accounts. Accordingly, advisor Ted Jenkin of oXYGen Financial – one of the few advisory firms that has had success in digital and social media marketing – decided to build his own social media marketing tools, and make it available to other advisors. The end product – dubbed Hyperchat Social – is effectively a combination of a Hootsuite or MeetEdgar kind of social media scheduling and queueing tool, but able to be connected directly to a FINRA-reviewed content library, along with some of Hyperchat Social’s own content, and even custom content created specifically for the advisor. The key distinction of Hyperchat Social, versus curated content library competitors like FMeX, is that as a solution built specifically by a social-media-using advisor, it’s developed first and foremost to make it easy to post to manage a high volume of active social media posts (for which the available content simply plugs in), rather than as a content library where the advisor can click to send out on social media (which is highly inefficient for active social media users). Notably, though, Hyperchat Social aims to be a social media tool with a service layer, as it offers both a “DIY” solution for advisors who simply want to use the technology to queue up their own social media activity, but also has multiple additional tiers for advisors who want Hyperchat Social’s own team to curate additional third-party content to share out on their social media channels, or even help to produce custom written content for the advisor themselves. Which will make Hyperchat Social particularly appealing for advisory firms that have some resources to invest into a more substantial social media presence, but aren’t ready to hire a full-time marketing person to focus on it.

AdvisorClarity Launches Data-Aggregating Business Intelligence Tools For Advisors. In a world where most “financial advisors” were insurance or mutual fund salespeople, the most valuable asset of the advisor was literally their “book” of clients… the list of names and contact information of the people they had done business with in the past, who might be willing to buy again in the future. However, such advisory firms generally never grew very large, as it’s difficult to hire much staff when every year, compensation starts out at $0 until the advisor gets some new sales. But the transition to fee-based advisory accounts, and the recurring revenue AUM model it supports, make it possible for firms to hire staff – including full-time “service” advisors – just to take care of existing clients, and the business itself begins to actually scale. The challenge, however, is that most advisory firms don’t actually have any tools to track and manage the Key Performance Indicators of a growing business… such that even just participating in annual industry benchmarking studies is usually a multi-hour – and for large firms, multi-day – process of gathering data from disparate systems just to report out key business metrics. In this context, it’s notable that AdvisorClarity has launched a new business intelligence software platform, aiming to turn what is now typically a series of Excel spreadsheets used by advisory firms into standardized reports. While the idea of standalone business intelligence software solutions for advisors isn’t entirely new – for instance, Truelytics similarly can help advisors understand and benchmark their business KPIs – what’s unique about AdvisorClarity is that the company is building integrations to existing portfolio accounting tools like Black Diamond and Tamarac, and advisor CRM software like Junxure and Salesforce, which will make it possible to automate the process of data updates (whereas Truelytics requires advisors to manually gather and enter their own data). Arguably, such tools should already exist within today’s portfolio accounting solutions, or directly from RIA custodians or broker-dealers, but given the fact that many advisors span multiple systems – from RIAs with multiple custodians to brokers with a hybrid RIA relationship – and that traditional investment platforms don’t always even have all the requisite business data (e.g., financial planning fees, data about number of meetings and service interactions, etc.), the door is open for third-party software that can successful find and weave together the relevant data sources into meaningful data. Expect to see competitors like AdvisorClarity in the coming years, especially as “Big Data” becomes increasingly popular (although arguably, business intelligence for financial advisors is not really about Big Data but meaningful “small data” instead).

Clearnomics Creates White-Labeled Investment Chartbooks For Financial Advisors. In the world of institutional investment management, it’s common to have a “pitchbook” that conveys the key talking points of the firm’s investment process, or at least a “chartbook” that provides economic charts and data to illustrate important points. Most individual financial advisors, though, lack the resources to produce their own high-quality chartbooks – which has made offerings like JP Morgan’s “Guide To The Markets” chartbook especially popular in recent years. Yet ultimately, the challenge of the JP Morgan guide is that, not surprisingly, it’s branded to JP Morgan, and used as a means for the firm to expand its own visibility and footprint, which makes some advisors reluctant to use it with their own clients. Accordingly, James Liu – one of the original developers of JP Morgan’s Guide To The Markets – has gone out on his own to launch Clearnomics, which creates a similar series of key investment and economics charts for advisors to use, but with the ability for the firm to select and choose the exact charts they want, and then white-label it for their own use. For the ongoing subscription fee, updates to the advisor’s chartbook are delivered automatically (e.g., as new monthly and quarterly data comes in), along with templates that can be used for social media purposes, and even includes supporting talking points commentary for advisors who want suggestions on how to discuss certain data points. For advisors who have their own highly refined investment process and philosophy, it will likely still be more appealing for them to make their own pitchbook. But Clearnomics may be especially appealing for either very planning-centric advisors who don’t actually spend a lot of time on investments (but want some high-quality visuals and easy talking points with clients), or brokers who sell a wide range of investment products but want a standardized way to talk through the latest economic and market data (without the burden of producing it all themselves for each client).

Advisor FinTech Trends To Watch In 2018

While the world of Advisor FinTech has been on the rise for several years now, arguably 2017 was the year it really gained legitimacy – because 2017 was the year that investors started to invest heavily into Advisor FinTech companies.

While there had been several high profile deals in prior years – from TA Associates investing into Orion and SS&C buying Advent in 2015, and of course Fidelity acquiring eMoney Advisor – those were arguably all large and established companies being purchased for their existing user base and cash flows (and/or their strategic value). In 2017, we witnessed an explosion of new capital being invested into advisor startups, from financial planning software companies Advizr ($7M Series A) and RightCapital ($1.6M seed), to robo-advisor-for-advisors platforms like Trizic ($2.5M seed) and AdvisorEngine, advisor CRM Wealthbox ($6.25M Series A), account aggregator Quovo ($10B Series B), along with digital marketing tools and social media compliance tools like Snappy Kraken and Gainfully and new categories like AdvicePay for processing financial planning fees from credit cards and ACH.

Given all this investment, what’s on the horizon for 2018? A few emerging trends that will likely become “hot” in 2018 include:

- Indexing 2.0. Even as ETFs have continued to take market share from mutual funds, the ETF-killer may already be coming: indexing without the index fund. Dubbed “Indexing 2.0” or “Direct Indexing”, the basic concept is to skip the index fund, and instead just use rebalancing and model management software tools to buy the underlying stocks of the index directly, which both saves on the cost of the mutual fund or ETF fund wrapper, and allows for better tax loss harvesting by owning the individual index components directly (as well as the ability to create more “customized” indices that adjust factor weightings or tilt towards/away from various ESG components). While such Direct Indexing solutions have already existed for some years in various separately managed account structures, from SMArtX to Active Index Advisors, now portfolio accounting and rebalancing software providers like Orion are reportedly working on their own solutions to mainstream the solution for financial advisors. Ironically, the first company to try to mainstream an Indexing 2.0 solution was actually Wealthfront, but the company’s insistence at competing with financial advisors, instead of distributing its technology to financial advisors, means their existing solution may soon be leapfrogged by industry incumbents.

- Technology As A Distribution Channel. One of the big trends of 2017 was the launch of Model Marketplaces, where financial advisors use their rebalancing software to execute models provided by third parties… in essence, a form of outsourced model development, where the advisor retains control of implementation (and therefore retains the right to claim the assets are regulatory AUM). Yet despite what appears to be relatively tepid early adoption, one provider after another has launched a solution, driven by what appears to be product manufacturers who offer models using their own proprietary funds and dangling appealing revenue-sharing opportunities to technology companies eager to get paid in basis points instead of monthly software fees (such that Oranj launched a MAX solution that gives its software away for “free” to those who use its revenue-shared third-party marketplace models). But what this trend really highlights is a broader recognition that advisor technology itself is becoming a product distribution channel, as product manufacturers seek to inject their products into existing tools (and software companies look to new ways to monetize their user base). Accordingly, expect to see more efforts for software to directly illustrate and implement investment and insurance products in 2018 – which on the one hand, introduces potential new efficiencies to the implementation process, but will also raise substantial concerns about whether and how those product placements are being evaluated and vetted as new forms of revenue-sharing and shelf-space agreements emerge.

- The FinTech Divide Between Investment and Planning Firms. As the Department of Labor’s fiduciary role, and the ongoing commoditization impact of technology, drive more and more financial advisors away from doing “just” investment products and portfolios and towards more holistic financial advice, it’s becoming increasingly clear that advice-centric advisors need different technology tools than those who are (and remain) investment-centric. Expect these dynamics to become more noticeable in 2018, as companies that focus on more holistic advice stake themselves on the ability of their integrations to make advice and financial planning easier, while investment-centric firms focus more on their investment-related workflows. Which matters, because as investment-centric and planning-centric software companies begin to iterate in different directions, their capabilities will become increasingly disparate over time, driving advisors to begin switching tools and drawing new lines for market share opportunities.

The bottom line, though, is that as it becomes increasingly clear that “robo-advisors” are no threat to real advisors, and that the evolution of advisor technology has the potential to make all financial advisors more efficient, new waves of investment will continue to drive new solutions in the advisor landscape. Which is great news for those who are eager for more choices and solutions. And ironically, bad news for many who will find it increasingly difficult to select from an ever-growing list of potential providers with varying capabilities!

So what do you think? What do you anticipate will be the biggest advisor technology trends of 2018? Would you consider an Indexing 2.0 solution for your clients? Do you think software companies should be permitted to patent their technology to encourage innovation, or will advisor software patents inhibit the pace of software development? Please share your thoughts in the comments below!