The Latest In Financial #AdvisorTech (December 2021)

Halo Investing Raises $100M Series C As Reduced Return Expectations For Stocks Drive Desire For “Protective” Risk-Managed Investments.

Notwithstanding the remarkably good returns for the typical client portfolio over the past decade of bull market returns, most financial advisors face significant pressure when it comes to the modern design of client portfolios.

On the one hand, near-zero yields on bonds – or at least, bond yields that in many cases are similarly lower than the fees that advisors charge to manage those bonds – are driving advisors to seek non-bond “alternatives” in the hopes of improving on fixed-income returns. Which in recent years has led to the explosive growth of a number of major “alternatives” platforms.

On the other hand, elevated valuations for the overall stock market are leading to a litany of projections that equities, too, will produce below-average returns in the decade to come… coupled with an increased risk of a major bear market for stocks. Which in recent years is driving explosive growth in structured notes and annuities and similar “protective” risk-managed investment vehicles.

The end result has been a series of eye-popping capital raises for platforms that are managing to solve for either fixed-income alternatives (e.g., iCapital and CAIS) or risk-managed equity alternatives (e.g., SIMON, Luma, and Halo Investing). For which the latest news is that Halo Investing has raised a massive $100M Series C round to continue to scale their distribution of structured notes, annuities, and buffered ETFs.

The challenge, though, is that historically annuities have been a 4-letter-word for RIAs (many of whom left the insurance and broker-dealer world specifically to get away from annuity-centric product pushing), and structured products have faced even more of an uphill battle as a very complicated 4-letter-word… a result of both their opacity when it comes to pricing, limitations on access (e.g., high investment minimums), and a handful of advisors who experimented with structured notes back in the 2000s only to have them ‘blow up’ in the financial crisis because they were written on Lehman paper.

Nonetheless, the evolution of technology over the past decade has made structured notes increasingly accessible and increasingly transparent with respect to their pricing, allowing firms like Halo to ‘democratize’ structured notes for a wider base of advisors far beyond the base of wirehouse brokers who sold them in the past.

Now, with a fresh round of $100M of capital, Halo ostensibly has all of the money they need to spend their way to massive growth, either via acquisition to consolidate competing structured note providers, or via new/more distribution channels. And the size of the round implies that they have been able to develop a very repeatable go-to-market strategy (up 550% in 2020 alone!?) and found a way to make their messaging resonate with at least a subset of advisors who are concerned about investing client assets into a high-P/E stock market.

And as long as bond yields remain so low, and equity valuations remain so high, it’s hard to see how the growth of alternatives as a fixed-income substitute, and structured notes and annuities as an equity substitute, won’t continue to grow further from here?

Geowealth Raises Huge $19M Series B To Power Its Tech-Savvy TAMP Platform.

The Turnkey Asset Management Platform (TAMP) first emerged in the 1990s, as financial advisors began to shift away from selling one-off mutual funds and towards creating diversified asset-allocated portfolios, where there was little sense in having each advisor spend the time to create and implement their own portfolios for clients, when instead a centralized platform could establish a standard set of high-quality models and implement them for a large number of advisors at once on an outsourced basis. The pitch goes something like this: “Advisors don’t have the same resources that large asset managers do to build great portfolios, and while they may enjoy building the portfolios, they often aren’t really as good at it as Vanguard, Blackrock, or American Funds. They should outsource that into models (or SMAs or UMAs), and focus on adding value in planning and building relationships with clients. Advisors can serve more clients if they outsource.”

In the 2000s, though, an alternative approach to outsourcing investment management emerged: the Separately Managed Account (SMA), where a third-party asset manager could implement trades on behalf of a large number of advisors and their clients as well. The distinction, though, was that TAMPs typically provided the entire investment offering – from the investment management itself, to the back-office operations staff and support, to the technology that was needed to track and report out the results to clients – while SMAs were more often ‘just’ investment managers who had access to implement trades on behalf of advisors while the advisor was still responsible for running the advisory business itself (including their own staff and technology).

Yet over the past two decades, the two channels have increasingly converged, as SMAs were increasingly distributed through the technology platforms that enabled them (e.g., Envestnet), while TAMPs increasingly became technology-driven outsourced investment solutions (if only because the technology made the TAMP more efficient, while also improving the user experience for the advisor and their client). Such that today, SMA platforms often include TAMP providers, and TAMPs increasingly offer a widening range of SMAs and third-party models in their ‘TAMP marketplace’ (all facilitated by their TAMP technology).

In this context, it is notable that this month, Geowealth raised a whopping $19M Series B round to continue its ongoing growth as an ‘emerging’ TAMP (with a very respectable $7B+ of AUM on the platform). Geowealth is somewhat unique in the TAMP world, though, as the provider has largely built its own technology from the ground up, from portfolio accounting and performance reporting, to proposal generation and billing and a client portal… and are now using that technology as the foundation to offer a wide range of investment solutions, from Geowealth’s own investment strategies, to a third-party model marketplace, and even the ability to use Geowealth’s technology for advisors to implement their own model portfolios.

From that perspective, though, Geowealth arguably looks far more like Envestnet or Orion – a technology platform that facilitates advisors implementing a wide range of third-party outsourced or advisor-managed portfolios – and positions itself as a technology solution more so than a traditional TAMP, even as the firm primarily charges basis points like an investment manager. Which helps to highlight just how murky the dividing lines between TAMPs, SMA/model platforms, and ‘pure’ technology solutions have really become.

Ultimately, though, the real challenge for Geowealth will arguably not be one of technology, but of distribution. Most of the household names in the TAMP space have become so through large enterprise relationships, especially large independent broker-dealers, because the provider can complete a selling agreement and have access to hundreds or thousands of advisors and their assets. Yet Geowealth focuses on RIAs – which do have a simpler and faster sales cycle than a complex broker-dealer arrangement, and often better economics for the TAMP provider by cutting out the broker-dealer middle-man – but therefore has to figure out how to reach the much-more-fragmented-and-difficult-to-reach RIA firms.

As in the end, just like so much other technology in the world of AdvisorTech, it’s not an “if you build it they will come” path to success, the biggest driver of outcomes is not necessarily who can build the best tech, but who can figure out the most efficient way to distribute it and get it into the hands of advisors themselves. Which is a mountain that Geowealth still has a long way to climb.

Pershing Announces Pershing X Initiative To TAMP-ify Custodial Tech For Basis Points?

Over the past decade, the dividing line between “technology” and “investment management” has blurred more and more, as exemplified by the rise of the robo-advisor as a tech-enabled asset manager. Ironically, though, robo-advisors positioned themselves as a “technology” platform and not an asset manager, even though robo-advisors priced their services in basis points on assets. Whereas in the financial services industry, the dream of most technology firms is to be able to price in basis points like an asset manager (and not in ‘flat’ per-user software fees).

Accordingly, one of the biggest trends amongst technology firms in recent years has been to position themselves closer and closer to the asset management industry, in an attempt to participate in the basis-point pricing of asset managers – from tech companies that are monetizing with/through/as TAMPs (e.g., Geowealth and Envestnet), to tech companies that have tried to roll out model marketplaces to participate in and profit from asset management distribution (e.g., Riskalyze and Oranj), or in some cases tech companies that just outright acquire and try to convert some of their users into TAMP advisors (e.g., Orion/Brinker).

In this context, it is notable that this month Pershing announced their latest platform, “Pershing X”, which it describes as an “all-in-one” set of technology capabilities (as an alternative to the traditional ‘patchwork’ of third-party vendors), built on top of the Pershing custody/clearing platform, and including access to BNY Mellon’s Investment Management platform.

In part, the Pershing X announcement is notable for its pledge to once again pursue the infamous Holy Grail of the ‘all-in-one, does-everything-you-need-fully-integrated’ platform. Which in theory is very appealing, for all the ongoing woes that financial advisors have in trying to patch together their independent ‘best-in-class’ technology providers. Except at the same time, the reality is that both Schwab and Fidelity, and numerous other broker-dealers and AdvisorTech providers, have all tried to build all-in-one platforms… none of which managed to actually be competitive in patching together third-party solutions (at least not for any sustaining period of time). And despite noble intentions to finally solve the problem, it’s hard to be anything but skeptical about why “this time is different” with Pershing X?

In fact, given the ongoing woes of attempts to build all-in-one solutions, the Pershing X announcement is notable for the underlying adversarial tone it takes towards third-party providers. Few would deny that integrations could and ‘should’ be a lot better. However, third-party providers are well adopted by advisory firms for a reason. Firms like Orion, Black Diamond, Tamarac, MoneyGuidePro, eMoney, Riskalyze, etc., collectively invest many millions of dollars a year in R&D to solve the specific problems that they encounter with their advisors day in and day out. And still, even with all of that collective investment, an incredibly small percentage of firms use any of those providers as all-in-one platforms. There are just too many boxes to check for any one firm to do all of them incredibly well; thus the need for a technology stack.

But in the end, it’s not clear if Pershing is really trying to solve a technology problem, per se, or instead is simply trying to convert its underlying custodial business (and its associated tech) from a traditional transaction-based business model into a basis points pricing structure instead, by utilizing the technology to drive assets to their asset management division through some combination of TAMP- and/or model-marketplace-style offering that sits behind Pershing X. Or stated more simply: it appears that Pershing X is less a technology solution for the sake of solving an all-in-one technology problem for advisors, and more a strategy of technology-as-a-distribution-channel-for-asset-management-bps instead.

Of course, the reality is that the asset management business can be very profitable with strong flows and a significant asset base for scale… which ironically means that the level of development and reinvestment possible if Pershing X really can generate asset flows may actually give it the capital to build the technology that none else have managed to build as a technology solution alone. Still, though, with the challenging track record of all-in-one solutions to date from any provider, the question remains of whether Pershing will really be able to build something that lets it earn asset management basis points for (snazzier) custodial technology?

Orion Acquires BasisCode To Leverage Compliance Tech Gaps As A Pathway Into Enterprises.

Fulfilling compliance is a necessity and an obligation in a highly regulated industry like financial services. Yet despite the ubiquity of its need, in practice there is remarkably little invested into the development of “RegTech”, as while every firm needs to fulfill its compliance obligations – and could benefit from technology to do so – compliance tends to be an area where most advisory firms don’t “invest” for efficiency. Instead, most “manage costs” by minimizing their spending to the lowest amount necessary to check the boxes that must be checked (and nothing more).

Still, though, because compliance involves ongoing repetitive tasks – which tends to make them highly conducive to technology to facilitate or automate – there is often a hunger for RegTech to support compliance functions within advisory firms. The gap is just the budget to fund it.

In this context, it’s notable that this month, Orion announced the acquisition of BasisCode compliance, which had built a suite of RegTech tools to facilitate enterprise compliance functions like scanning employee trading activity for front-running or insider trading risks, verifying staff certifications of trading activity, reporting of gifting and entertainment, automating employee conflict of interest compliance, and facilitating compliance audit reviews.

Strategically, the deal makes sense for Orion, as with the acquisition of BasisCode, Orion brings a more robust set of compliance capabilities it can package into its core platform as part of a sale to larger-scale advisor enterprises (e.g., large RIAs and mid-to-large-sized broker-dealers), similar to its other recent acquisitions-to-bolster-its-core-offering including Financial Planning (Advizr) and Risk Analytics (Hidden Levers). Though in practice, Orion may get even more traction with its BasisCode offering, as while financial planning and risk analytics are already crowded categories – most enterprises already have a solution, and advisors tend not to switch what they’re already using – because RegTech is systematically underinvested, it’s even more likely that Orion will be able to open doors with BasisCode into enterprises that may not need another planning software tool but really need more (bundled) compliance tech.

Ultimately, perhaps the bigger risk for Orion in their acquisition of BasisCode is simply that it is yet another acquisition by Orion in relatively quick succession… raising the question of whether Orion can fully digest the integration of BasisCode on top of already integrating Brinker, Advizr, and HiddenLevers. Is it too much to digest at once, and will the advisor/client experience suffer?

In the long run, though, the acquisition of BasisCode, on top of Orion’s other recent transactions, is increasingly positioning the company out of its historical “portfolio management and performance reporting” category alongside the likes of Black Diamond, Tamarac, and Addepar, and increasingly into the All-In-One platform category against Envestnet, with a combination of portfolio management, financial planning, risk analytics, and compliance, all bundled around a platform-TAMP offering via FTJ Fundchoice and Brinker. And with Envestnet so deeply entrenched into large RIAs and mid-to-large-sized broker-dealers already, BasisCode gives Orion a unique new angle to try to get their foot in the door?

Skience Integrates with Redtail As CRM Overlays Move Beyond ‘Just’ Salesforce.

While CRM systems are a staple of service businesses across a wide range of industries that need to keep track of their customers/clients and their ongoing service interactions, the industry-specific compliance demands and cross-platform integrations necessary to implement CRM in an advisory firm means that in practice, almost all advisor CRM systems are advisor-specific CRM systems – from Redtail to Wealthbox, Advzyon to Junxure – and the few more ‘generic’ solutions (e.g., Salesforce and Microsoft Dynamics) typically only complete by partnering with Overlay providers who create advisor-specific templates (e.g., Skience, XLR8, PractiFi) that add the typical information fields that advisors use.

Yet in recent years, CRM systems have begun a shift from being the contact-information-and-working-notes storage area for client relationships to serving more as a workflow engine that tracks and manages the activities within the advisory firm, including and especially the tasks that span across multiple systems (where data itself may need to flow from one system to another). Which has opened the door for increasingly sophisticated overlay systems – particularly on top of Salesforce, which has a more robust engine for integrations and workflows than most industry-specific systems – to become the enhanced engine for making the most of out-of-the-box CRM systems.

And so in this context, it’s notable that Skience – one of the more popular Overlay providers for Salesforce – announced this month a new integration with Redtail, which will begin to flow Redtail client data into Skience’s client onboarding workflow engine.

At the most basic level, the significance of this news is that Skience itself is broadening beyond ‘just’ being a Salesforce overlay, taking the tools that they’ve built (from digital onboarding for clients, to tools that facilitate the re-papering process for Advisor Transitions as they’re recruited from one firm to another), and rolling them out as support tools to enhance multiple CRM systems.

More broadly, though, the real impact of Skience’s announcement is that even as advisors begin to shift from having their broker-dealer or RIA custodian as the ‘hub’ of their systems to using CRM as the hub instead, Skience is creating an infrastructure that positions them to be an ‘operating system’ for wealth management firms regardless of the CRM system.

In other words, an advisory firm may want to use Redtail as their CRM, or prefer the scalability and configurability of Salesforce, but no matter how a firm wants to handle the selection of the CRM interface itself, Skience is building the core operating elements that feed into the CRM system – from data aggregation and warehousing to (multi-)account opening and re-papering, and compliance functions from trade surveillance and document storage – that add value to the implementation of any CRM system deployed in an advisory firm. (Which means it’s likely only a matter of time before Skience adds Wealthbox, Microsoft Dynamics, and other CRMs as well.)

In turn, leveraging Skience to overlay advisor CRM systems also makes it easier for advisors to eventually switch CRM systems in the future. Not that advisors need to frequently make changes to CRM systems – in fact, CRM turnover tends to be fairly low amongst financial advisors – but there is a ‘typical’ progression that the CRM systems used by small-to-mid-sized firms (Redtail and Wealthbox and Advyzon) are different than mid-sized firms (Redtail and Junxure) which are different than the most common systems amongst large firms (Salesforce and Dynamics). A spectrum that becomes easier to navigate when key functions integrate to advisor CRM systems but aren’t dependent on any one in particular. (Albeit at an ‘extra’ cost of paying for Skience on top of the underlying CRM system.)

Beyond “CRM Independence”, though, perhaps the biggest potential impact of the kind of solution that Skience is building is that it accelerates the independence of advisors from their broker-dealer or custodian platforms that have historically been the dominant operating system for advisory firms. In part, the shift appears to be driven by the fact that the largest platforms have become so large they’ve struggled to keep up with the pace of innovation for new tools and developments (as evidenced by how badly most broker-dealers and custodians lagged in digital onboarding compared to robo-advisors over the past decade). But it’s also a sign of the shift away from investment- and asset-centric business models into more advice-centric businesses that, by definition, are less dependent on their investment platforms to execute their businesses.

Technology conversions are no fun for most advisory firms, no matter the type of product, because most advisors set out to serve clients, not solve technology problems. But the more advisors shift towards independence, the more important it becomes to control their own foundation. Which augurs well for CRM to be positioned as the hub of the future – and positions Skience well to be the hub that powers CRMs?

Vestwell Expands Beyond 401(k) Plans To Facilitate State-Sponsored Auto-IRAs, 529s, And ABLE Accounts For Small Businesses.

One of the most intractable challenges of the US’ workplace-provided benefits systems is that when it comes to small businesses, it’s difficult to get them to adopt such employee benefits in the first place. In some cases, the challenge is the cost of the plans – either the cost to setup and administer, or more commonly the cost of employer contributions into the benefits (from covering a portion of health insurance to the paid match/contribution for a 401(k) plan). Though more often, the challenge is simply that small business owners are busy, with limited time and bandwidth to figure out what to offer in the first place.

The emerging alternative in recent years has been the advent of state-sponsored, automatic-enrollment IRAs (for employees who don’t have 401(k) plans through work), and the rise of other state-operated programs like 529 college savings plans (and their 529 ABLE account brethren for disabled beneficiaries). Except, even in the case of auto-IRAs and 529 plans, someone still has to administer the plans, facilitate enrollment… and try to encourage employees/citizens to actually participate and contribute to the programs. In an environment where there is immense pressure on traditional recordkeepers for employee benefits, which often have outdated technology and are facing a growing margin squeeze as ERISA fiduciary regulation steadily squeezes out historically lucrative proprietary products and shelf-space agreements.

Against this backdrop, Vestwell has emerged as a ‘next generation’ 401(k) recordkeeper that has been making steady headway in competing against traditional recordkeepers by working directly with financial advisors who want a more modern ‘robo-style’ digital experience for 401(k) onboarding and implementation.

And now this month, Vestwell announced a major deal to acquire Sumday from BNY Mellon, which handles the back-end administration for a number of states’ 529 college savings and ABLE accounts, along with a Secure Choice IRA that can fulfill the auto-IRA obligation for small businesses in states that mandate the employer implement an IRA if a 401(k) plan is not offered.

Beyond the straightforward opportunity to gain additional economies of scale by administering more assets across more different programs through its systems, though, the significance of the Sumday acquisition for Vestwell is a unique form of asset consolidation that’s happening across and through AdvisorTech platforms.

The idea is that an AdvisorTech provider has an insight or design process that creates a tool or offering that leads to a better advisor experience (or candidly is sometimes just a better overall mousetrap). Once their technology has reliably been established and gains traction, the company begins to seek out acquisition targets purely based on the amount of assets they would be bringing over to add mass to the system. Envestnet did this with the acquisitions of Placemark and FolioDyanmix, and Orion has done it with their FTJ Fundchoice and Brinker Capital. It seems like this is a similar play by Vestwell (with the added benefit of some additional 529 expertise and technology).

Which means Vestwell’s Sumday acquisition is likely the first of more to come in a kind of “recordkeeper/administration” roll-up opportunity. Leaving Vestwell positioned well, as it will have its pick of the litter when it comes to this strategy as more and more companies seem to be flooding out of the retirement business, given the headwinds of increased regulation, limitations on selling proprietary funds, and low overall profitability. (While Vestwell has built their platform more recently, leveraging more modern technology infrastructure to scale in a more cost effective way.)

From the advisor perspective, more deals and programs for Vestwell means more offerings that advisors may be able to facilitate through Vestwell for their small-business clients, especially as the lines blur between employer-provided benefits and state-sponsored programs that happen to be implemented through employer payroll systems (which makes 401(k) plans and state auto-IRAs first cousins to one another). Envision a system where advisors get an ever-growing list of programs that their small business owner clients can implement for their business/employees, all via a single central platform, and advisors help to bridge the adoption gap by being the advice provider on the spot who makes a recommendation and helps with follow-through implementation to create value for their business owner clients?

TIFIN Group Raises (Another) $47M In Series C Funding, But Will The Whole Ever Be Worth More Than The Sum Of The Parts?

For most of its industry, the world of advisor technology has largely been a cottage industry of ‘homegrown’ solutions. The creation story is usually exactly the same: advisor struggles with a challenge in their businesses for which they can’t find a solution, eventually decides to build their own technology to solve the problem, begins to sell the software to other advisors who also face the same struggle, and ends out with a software company on the side. Thus was the path of many of the most popular advisor software solutions of years past and present, including Junxure CRM, Redtail CRM, ProTracker CRM, Orion Advisor Services, Tamarac, Oranj, iRebal, TradeWarrior, tRx, Rebalance Express by RedBlack, Capitect, Tolerisk, RiskPro, eMoney Advisor, Advizr, Hidden Levers, and AdvicePay, amongst others.

Yet, while in practice, the homegrown-tech approach has yielded many of today’s most popular AdvisorTech solutions – driven by the intimate understanding of the Job To Be Done when technology is built “by advisors, for advisors” – the reality is that most financial advisors have little-to-no experience actually building technology and what it takes. Which means for every AdvisorTech homegrown solution that ‘made it’, there are likely 3, 5, or 10 other solutions that advisors tried to build, but never figured out how to effectively navigate the dynamics of hiring and managing product designers, developers, support, and the sales-and-marketing that it takes to actually build a successful technology business.

In an attempt to help fill this void, back in 2018, the TIFIN (Technology In FINance) Group launched, with a vision of operating as a part-incubator-part-dev-shop with small advisor technology solutions to help them build successfully. Which after 2 years of incubation, and a successful sale of one of its portfolio companies, 55ip, to JP Morgan, pivoted in late 2020 to a more direct operating model of trying to not just incubate but grow and scale the technology companies together under TIFIN’s umbrella.

In turn, TIFIN’s new focus on growing and scaling AdvisorTech solutions has led to a rapid sequence of capital rounds – a $22M Series A last December 2020, another $22.3M Series B in April, and now a $47M Series C this past month – in an effort to both expand the technology and scale the distribution of its portfolio companies, acquire new AdvisorTech solutions to broaden its portfolio (most recently including Totum Risk and MyFinancialAnswers), and begin to develop the consumer side of its marketplace by acquiring consumer media companies with existing audiences who might someday be paired via TIFIN with advisors as a lead generation service.

At its core, then, TIFIN Group is positioned in two of the ‘hottest’ areas of AdvisorTech – the red-hot category of advisor lead generation, where advisors have demonstrated a willingness to pay as much as 15% to 25% of lifetime revenue worth thousands (or $10s of thousands) for high-quality leads that turn into clients, and creating (truly) integrated technology that allows advisors to operate more efficiently without needing to live with a patchwork of existing ‘best-in-class’ solutions that don’t always talk well to one another.

The caveat, though, is that while advisor lead generation has very lucrative economics on paper (with extraordinary lifetime client values ‘just’ for providing leads that close), there’s a reason why client leads are so valuable: because lead generation is hyper-competitive, with very high multi-thousand-dollar client acquisition costs per client, and it’s very very difficult (and costly) to scale a large volume of client leads (as robo-advisors, amongst others, have learned the hard way). And at the same time, while advisors have long longed for the “holy grail” of an all-in-one technology solution that is competitive with best-in-class one-offs but exists in fully integrated form, in practice all providers that have attempted such a quest have failed to maintain their competitiveness as individual technology categories tend to iterate far faster than an all-in-one can maintain.

In other words, the question for TIFIN Group is whether an infusion of capital, with centralized development and resources, can actually incubate and scale a large number of AdvisorTech solutions into a roll-up where the whole really is worth more than the sum of the parts… or if TIFIN Group instead will struggle to find ways to bring it all together in a coherent way, and remain trapped in a world of disparate parts that don’t really fit together into a bigger picture of success.

If it works, TIFIN Group will likely become a model for others in the future, who similarly seek out nascent homegrown AdvisorTech solutions, and offer to acquire and bring them under the fold to distribute and scale as a form of AdvisorTech innovation cycle. Which could ultimately accelerate the pace of industry innovation, when it becomes clearer that AdvisorTech entrepreneurs have pathways to grow and scale more quickly once they initially validate their offering and demonstrate a real product-market fit. Yet in the end, success as an AdvisorTech roll-up still depends on the success of its individual components each adding enough value to attract advisors as users… and at this point, the jury is still out on whether TIFIN Group has even managed to bet on the right companies in the first place?

FeeX Adds Integration With Advyzon As Advisors Continue Shift From AUM To Managing Held-Away AUA.

Notwithstanding the tremendous growth over the past 20 years with the industry's shift from commission-based to advisory accounts, the Assets Under Management (AUM) model is still fundamentally limited: it only works with clients who have A(ssets) to M(anage) in the first place. Which means not only is the AUM model limited to just a subset of clients who want to delegate their portfolio to a third-party advisor to manage… it also necessitates having assets that can be delegated in the first place. Which is especially problematic when it comes to employer retirement plans, that typically don’t connect to ‘traditional’ brokerage accounts and portfolio management/trading systems, and in practice aren’t accessible or feasible for most advisors to manage.

Historically, this requirement has led financial advisors to take a special focus on prospective retirees – not only because they tend to have accumulated substantial potential assets to manage by the time they can afford to retire, but also because the retirement transition itself often ‘unlocks’ a significant pool of available assets: the 401(k) balances and the lump-sum equivalent of a defined benefit plan, which suddenly becomes available to roll over (to the advisor’s management) when the new client retires (and separates from service).

In recent years, though, a new trend has begun to emerge: the Assets Under Advisement (AUA) model as an alternative to the AUM model, where advisors “advise” on assets that are held outside of their traditional account structures, and charge an ongoing advice fee for monitoring, portfolio reviews, and periodic trading/rebalancing recommendations. Which allows the advisor to expand their value proposition beyond ‘just’ the client’s currently-available-to-manage investment accounts, creating growth by expanding the relationship with existing clients.

The caveat, though, is that because advisors typically manage the portfolios under their (discretionary) control, but only ‘advise’ on held-away accounts, there is often a limitation on the depth of value provided, and therefore on the fees that can be charged. Which makes it especially appealing to find a way to actually manage held-away accounts, being able to enact trades in those accounts, and therefore making it feasible to justify a (higher) bona fide investment management (AUM) fee.

Which a few years ago, led FeeX to launch a service specifically to facilitate the management of held-away 401(k) accounts, where the company has created its own version of an Order Management System for third-party 401(k) plans by getting permission from clients to be able to access their accounts directly to enact trades at the advisor’s direction (but without granting the client’s password to the advisor for direct login access, to avoid triggering custody for the advisor). Effectively turning the AUA model for held-away 401(k) plans into a more ‘traditional’ AUM model.

And now, FeeX is rolling out a growing number of integrations to existing portfolio management systems for independent advisors, including Orion earlier this year, and more recently a new integration with Advzyon. Which makes it possible for advisors to manage (and facilitate the billing process for) clients’ 401(k) plans directly through their existing portfolio management/reporting systems, in a form of ‘unified’ trading of on-platform and held-away accounts.

Notably, the expansion of the AUM model to an AUA approach for held-away assets comes at a time that large national providers are increasingly trying to deploy financial advisors directly into the 401(k) channel as well, with deals ranging from Financial Engines acquiring Edelman Financial, Empower acquiring Personal Capital, and large recordkeepers like Fidelity increasingly cross-selling their own internal advisory services to their existing plan participants. Which means just as 401(k) plan providers are trying to retain 401(k) assets by establishing advice relationships with their plan participants before they can be introduced to an independent advisor to roll over, independent advisors are moving into the business of managing (still held away) 401(k) assets to expand those relationships in the “pre-rollover” stage as well.

The good news of this shift is that in the long term, it increasingly positions advice and advice-relationships as the central value proposition that attracts and retains clients (regardless of their current stage of life or where their assets are held). The ‘bad’ news, though, is that it will increasingly challenge financial advisors focused on pre-retirees transitioning into retirement… who in the future, appear less and less likely to have any money in motion at retirement because they are more and more likely to already have a holistic advisor relationship long before they get to the retirement transition?

CapGainsValet And Blackrock Tax Evaluator Ramp Up For End-Of-Year Capital Gains Distribution Estimates.

Driven by their popularity as a new low-cost ‘building block’ of client portfolios, financial advisors in recent years have increasingly begun to construct portfolios using Exchange-Traded Funds (ETFs) instead of mutual funds, helping to drive US-based ETF assets to nearly $7 trillion of total AUM this year. However, the reality is that the bulk of investment assets are still in mutual funds, which total nearly $24 trillion of AUM, and many advisors still hold wide swaths of client portfolios in mutual funds. Which can create unique challenges in years like 2021, with the S&P 500 up more than 20% this year, and up more than 100% from the pandemic low less than 2 years ago. As with growth comes capital gains… and with mutual fund growth, comes the potential for end-of-year capital gains distributions. Which this year is projected to include more than 750 mutual funds distributing at least 10% of their NAV, over 100 distributing 20%+ of their value, and more than 2 dozen projected to distribute 30%+ of their NAV in December!

From the advisor perspective, late-year capital gains distributions create a number of tax planning challenges, including a potentially material impact on total income for the year (which can change the optimal amount of dollars to convert for Roth conversions, or trigger a Medicare IRMAA threshold), the risk that a new client buys into a mutual fund right before it makes a capital gains distribution for prior gains (sticking a new shareholder with an immediate tax liability for gains they didn’t even participate in!), and at best an ‘awkward’ conversation when clients realize that all the growth they’ve been earning has now come home to roost for tax purposes.

As a result, it’s important to get a handle in advance on what capital gains distributions will be before they actually occur (often in just the last 2 weeks of December, when it’s too late to do much planning). Except in practice, many mutual funds don’t even know what their gains distributions will be until relatively late in the year, as it depends on what trading they actually do (and what gains are turned over) right up through December. And each mutual fund family (and sometimes different funds within a fund family) has its own timing about when they do the calculations on expected gains and share that information with shareholders and their advisors.

Which in recent years, has led to a rise in third-party solutions that help advisors by aggregating together all the mutual fund estimates from a wide range of mutual fund providers (and also capturing the small subset of ETFs that can and do occasionally make capital gains distributions as well), including both Blackrock’s Tax Evaluator, and CapGainsValet.

At its core, both services are similar in giving advisors the ability to look up capital gains distribution estimates for a wide range of fund families all in one place, with Blackrock allowing advisors to upload client portfolios and get the estimated size and date of anticipated distributions for each holding, while CapGainsValet simply provides a giant list of fund families and their tickers to look up (including a Free search for the ~20 largest fund families, including American Funds, PIMCO, Vanguard, Franklin Templeton, DFA, etc., that make up the overwhelming majority of fund assets, and a Pro Search for a small $45 fee that opens up a list of more than 250 fund families).

In practice, the Blackrock tool will probably be more appealing for advisors who have client portfolios with a wide range of holdings, while CapGainsValet is a more straightforward solution for those who have standardized models and just want quick and easy access to get the estimates for a few specific funds/holdings that all of their clients own. (Though notably, CapGainsValet also has a “Delivery” service for a small additional fee, where advisors can provide a longer list of funds/tickers, and receive a weekly updated list of distribution estimates, that becomes fully populated over time as each/all the fund companies eventually release their distribution estimates.)

In the long run, arguably these types of capital gains estimates should be captured directly by portfolio performance reporting and trading solutions, which would gather the data together and display it to advisors directly in their performance reports for clients, and their trading tools (to avoid the risk of ‘accidentally’ buying a new fund right before it makes a distribution). But until the capabilities are integrated more directly, solutions like Blackrock’s Tax Evaluator and CapGainsValet do at least make it easier for advisors to gather (and monitor) the information they need for end-of-year tax planning and investment decisions.

FP Alpha Launches ‘Prospect Accelerator’ To Quickly Spot Opportunities To Add Financial Planning Value.

From its earliest days, financial planning was a form of ‘consultative selling’, where advisors would explore a wide range of potential financial issues and needs that a prospect might face, and then deliver a comprehensive financial plan to identify their gaps… that could subsequently be filled with the sale of the financial advisor’s products. Relative to the alternative at the time – having a single product that would be pitched to every prospect until someone said yes – financial planning was a resounding success, uncovering a wider range of business development opportunities (than just what a single product could fill), while at the same time providing genuinely better solutions and outcomes to clients (who actually got more of what they needed, and not just the one thing that the financial salesperson had to sell).

The challenge, though, is that training a new financial advisor on the features, benefits, and sales scripts of a single product was relatively straightforward to teach… while doing more comprehensive financial planning had a much more challenging learning curve, requiring more education, more training, and more practice and experience with clients. Such that in practice, financial planning was something financial salespeople were only allowed to graduate ‘up’ to after they achieved many years of financial success going the single-product-sales route.

In more recent years, financial products have become increasingly accessible to consumers (directly) thanks to the internet, and financial advisors are being driven even further in the direction of providing financial planning as their primary value proposition… with the caveat that it hasn’t gotten any easier to progress through the training and development curve of learning to do financial planning. And if anything, advisors have increasingly tried to become more comprehensive in the depth and breadth of their financial plans – in order to show differentiated value from all the other financial advisors also offering financial plans – making it even more challenging for any one financial planner to learn ‘everything’ there is to know. In other words, even well-trained financial planners can still struggle to think of all the financial possibilities and planning scenarios that might exist with any one prospect.

In this context, it’s notable that this month, FP Alpha launched a new “Prospect Accelerator”, specifically designed to take in information from prospects, and help financial advisors identify potential planning opportunities that may be on the table.

In essence, FP Alpha can function as a form of internal checklist – taking in a wide range of prospect data through a questionnaire the advisor embeds on their website, ‘checking it’ against a long list of potential planning ideas, and surfacing back to the financial advisor (and prospect) the areas where the financial advisor may be able to add value (or at least should dig deeper in a follow-up conversation with the prospect).

In addition, FP Alpha’s Prospect Accelerator will evaluate the prospect’s overall financial health, and provide a “Financial Wellness” score… which serves as the basis to create a “Financial Planning Proposal”, which can demonstrate how the prospect, in working with the advisor to implement recommendations, will be able to increase their Financial Wellness score (and allow the advisor to show, over time, how their client’s score has increased).

In the future, anticipate that FP Alpha will be able to not just gather information via prospect questionnaires, but have prospects upload primary documents – e.g., tax returns and estate planning documents – for the software to scan and identify further planning opportunities (building on FP Alpha’s existing core capabilities as a financial advice support tool after prospects have already become clients).

Ultimately, it’s not clear whether FP Alpha will realistically be able to find planning opportunities that any skilled financial advisor couldn’t identify on their own (though at the point it can scan dozens of pages of primary documents in seconds, FP Alpha really may be far more time-efficient than an advisor reading the client’s documents themselves). Instead, the appeal of a tool like Prospect Accelerator is in part as a de facto Planning Checklist (instantly reviewing far more potential planning ideas and scenarios than any one advisor might be able to recall offhand), in part a consistency tool (e.g., a multi-advisor firm might be concerned that not all advisors will spot the same planning opportunities… but FP Alpha will do so the exact same way every time), and in part simply a prospect engagement tool to help advisors demonstrate value (by surfacing a Financial Wellness score for prospects… which inevitably won’t be perfect, and show an opportunity for the financial advisor to be hired to improve the prospect’s financial scenario).

Helios Estate Planning Announces It Is Shutting Down As Financial Advisors Continue To De-Emphasize Estate Planning?

For most of its history, estate planning has been one of the foundational domains of financial planning. In part, this is simply because having one’s financial house in order – including clarity about what happens to their assets after death or in the event of incapacitation – is simply “good planning” in the first place. But estate planning has also long been a part of financial planning because, in the early decades of financial planning, the Federal estate tax exemption was so low (at ‘just’ $60,000 up to 1976, and ranging from $120,000 to $600,000 from 1977 to 1997) that simply having a prudent amount of life insurance to protect a family would cause an ‘estate tax problem’ (which mean advisors needed to do ‘estate planning’ with vehicles like Irrevocable Life Insurance Trusts to mitigate that estate tax exposure).

But that dynamic began to change in 2001, when President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which ‘immediately’ increased the estate tax exemption from $675,000 at the time up to $1,000,000, and set it on a path to rise as high as $3.5M by the end of that decade, which with subsequent adjustments has risen today to $11.7M (per person, doubled for a married couple), far outpacing the general level of inflation. The end result is that exposure to the Federal estate tax has plummeted, from more than 50,000 taxable estates in 2001 to recent IRS data showing just 1,275 families paying a Federal estate tax in 2020 (a decrease in Federal estate tax exposure of nearly 98%).

And as exposure to the Federal estate tax has declined, so too has the estate planning focus in financial planning, with the weighting on estate planning in the CFP Board Principal Knowledge Topics decreasing to just 10% in the latest Job Task Analysis. As estate planning itself increasingly shifts from estate tax planning, to the (non-tax) planning issues surrounding the estate itself, including who will inherit assets, and under what terms, along with the provisions for who will be responsible for making financial and other decisions on behalf of heirs (i.e., Guardians, and trustees of assets held in trust) or the individual themselves (i.e., in the event of disability/incapacitation).

Accordingly, in recent years, a number of new providers have emerged, aiming to support financial advisors in their ‘modern’ estate planning, which is less about estate tax planning strategies, and more about simply ensuring that clients have the estate planning documents they need in the first place. Leading to a new category of estate planning ‘service providers’, such as Helios Estate Planning, Trust & Will, and Vanilla, in addition to longer-standing ‘online legal documents’ solutions like LegalZoom.

But now this month, Helios abruptly stated that it was shutting down, with an immediate cessation of new clients as of the November 15^th announcement, a short wind-down of existing estate planning clients over the subsequent week (which was feasible as Helios tended to focus on ‘simpler’ clients who documents could be prepared relatively quickly), and a refund of any unused credits that advisors already had paid into the system for future clients who hadn’t actually completed their documents yet. And leaving a lot of advisors wondering… “What just happened!?”

In the short term, the wind-down of Helios will likely be a boon for its competitors, as the competitive landscape itself shrinks (with Helios no longer a player), and as the advisors who were already using Helios look for alternatives – most likely, Trust & Will for their ‘smaller’ clients, and Vanilla for their more affluent ultra-HNW clients (where Vanilla really excels).

From the broader perspective, though, the demise of Helios raises the question of whether estate planning itself is becoming so de-emphasized in modern financial planning that it’s simply not a viable service at all to offer to financial advisors (at least, outside of the ultra-HNW domain where there is still a high-value Federal estate tax problem to plan around?).

In the end, though, it appears that Helios may have struggled with its particular level of estate planning being offered, and not necessarily that advisors don’t want to engage around estate planning issues at all. As in practice, Helios was positioned as a firm that wasn’t “just” a pure technology-driven document generator, but one staffed by human attorneys drafting and reviewing documents. Except because Helios was focused on ‘simpler’ estate planning documents for less affluent clients, it was often forced to compete at the lower end of the pricing scale where more purely tech-driven solutions like LegalZoom and Trust & Will operated. And the cost of humans at the price of automated technology may simply have not been a viable business model, or at least not viable to scale without capital (as Helios was not known to have taken any outside investors, and instead was being funded as a bootstrapped extension of its separate-but-related Helios Asset Management business).

Still, Helios’ woes do help emphasize that when it comes to estate planning, two branches are emerging: 1) those clients who do still have bona fide Federal (or in some cases, state) estate tax problems, who have significant dollars at stake, significant complexity, and a willingness to pay substantial fees for estate planning help (where advisors and attorneys can be highly engaged, and rewarded well for their time spent); and 2) “everyone else”, who does not have an estate tax problem, and ‘just’ needs to get their estate planning documents in place, who are significantly more fee-sensitive and where human advisors and attorneys will struggle to be profitable, where advisors can simply refer out to technology-driven document preparation services for clients to get what they need?

Which means there’s arguably room for both HNW solutions like Vanilla to succeed (competing with expertise at the top end of the market), along with simpler document-generation alternatives like Trust & Will for the ‘average’ client (competing on cost and convenience at the low end of the market)… and Helios may have unfortunately just gotten caught in the messy middle?

“Unicorn” $1B+ Valuations For Betterment And Wealthfront Reflect Results Far Short Of Early Expectations?

When the early robo-advisors like Betterment, Wealthfront, and FutureAdvisor first hit the scene nearly a decade ago, they staked their value proposition on the idea that all financial advisors did was gather basic data about client ages/time horizons and risk tolerance, in order to construct a diversified asset-allocated portfolio… and that technology could gather the same information to construct the same portfolio for a small fraction of the cost, aiming to ratchet the ‘traditional’ 1% AUM fee down to just 0.25% instead.

And as robo-advisors garnered their initial assets, expectations grew… rather dramatically. In the span of just 5 years from 2012 to 2017, Betterment raised $272M in capital over 5 rounds of funding as it grew from $50M of AUM to $10B, and Wealthfront similarly raised $194M from 2013 to 2018 and grew from $250M of AUM to nearly $10B of AUM as well, with Wealthfront rumored to have received a $700M valuation in late 2014 and Betterment similarly receiving a $730M valuation in 2016. An A.T. Kearney study predicted that pure-technology robo-advisors would begin to rapidly displace human financial advisors, projecting $2 trillion of robo-advisor AUM by 2020.

Yet, in practice, Betterment today manages ‘just’ $28B of AUM (though at 1/4^th of the typical advisor fee, from a revenue perspective they are more akin to a $7B advisory firm), and Wealthfront is at $24B of AUM (akin to a $6B traditional advisory firm)… both of which are very sizable advisory firms, but at a combined ~$50B of AUM, have captured barely 1/40^th of their predicted assets.

Accordingly, it was notable that last month, Betterment raised a fresh round of capital at a valuation of ‘just’ $1.3B, while Wealthfront is reportedly trying but struggling to find a buyer at a ‘list price’ of $1.5B. Both transactions place the robo-advisors in the vaunted territory of “unicorns” (tech firms that have garnered a >$1B valuation)… but also represent an astonishing stumble from their ‘take over the world’ implied valuations during their early years.

As while it is notable that both firms have managed to garner valuations of nearly double where they were 5-7 years ago… markets themselves are up nearly 130% over that time period (and an 80/20 portfolio of a typically-younger-and-more-aggressive robo-advisor client) would be up more than 100% over the years since their last capital rounds. Which means that while robo-advisor AUM is up 2X to 3X from where it was, robo-advisor valuations today haven’t even kept pace with the passive growth of the markets!

Ultimately, the fact that growth in robo-advisor valuations hasn’t even kept up with market growth – even as the two leading platforms have each added an average of several billion of new AUM per year – helps to highlight just how much growth was already priced into the early valuations (though commentary at the time had suggested that their growth expectations seemed ‘unrealistic’), and signals just how difficult it is to rapidly scale an advisory business given the incredibly high client acquisition costs. As financial services – being a low-trust industry trying to command high-stakes decisions about one’s life savings – is quite unforgiving with an ‘if you build it, they will come’ approach to growth.

On the other hand, in the end, the leading robo-advisors that survived are still on track to have built substantively valuable ($1B+ valuation) businesses, and while robo-advisors fundamentally misunderstood what financial advisors are paid for – which is driven much more by acquisition of clients, and the ongoing advice relationship to establish trust in a low-trust industry – they have helped to drive a massive retooling of the back-office of advisory firms (e.g., the rise of e-signature and digital onboarding) that is driving increases in staff productivity.

So for all those who were skeptics of the eye-popping valuations of robo-advisors during the height of the robo ‘craze’, the recent rounds of capital and prospective sales of the early robo-advisors simultaneously highlights that expectations of robo-advisors were substantively overstated… but that robo-advisors, and the technology they represent, are here to stay. Even if the benefits of that technology didn’t exactly play out in the ways that the robo-advisor founders had hoped.

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In the meantime, we’ve updated the latest version of our Financial AdvisorTech 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? Can Geowealth gain market share in the hyper-competitive TAMP environment? Will TIFIN Group be able to weave together its tech components into a cohesive whole that advisors will use? Can Pershing X finally succeed in creating an all-in-one solution (that advisors will pay basis points for)? Will more advisors continue to adopt structured notes and annuities to manage growing concerns of reduced equity returns in the years to come? Let us know your thoughts by sharing in the comments below!

Disclosure: Michael Kitces is a co-founder of AdvicePay, and Kyle Van Pelt is the Executive Vice President of Sales at Skience, both of which were mentioned in this article.