The Latest In Financial #AdvisorTech (September 2020)

Authors:

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.

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Craig Iskowitz

Guest Contributor

Craig Iskowitz is CEO and founder of Ezra Group, a management consulting firm providing advice to the financial services industry on marketing and technology strategy. Ezra Group works with RIA’s, broker-dealers and banks to help them make sound technology decisions, identify growth opportunities and energize their marketing.  Craig is also the publisher of the blog Wealth Management Today, which provides in-depth analysis of trends and issues facing the wealth management industry. Craig can be reached at [email protected].

Read more of Craig’s articles here.

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Schwab Launches Free Access To MoneyGuide Financial Planning Software For Self-Directed Clients. In the early days of financial planning, one of the key benefits of working with a financial advisor was that they had access to sophisticated tools – known as financial planning software – that could analyze and project a client’s financial planning situation more effectively than they could possibly do on their own with graph paper, a calculator, or a homegrown spreadsheet. The end result of this planning-software-as-advanced-calculator approach was that clients would pay a financial planning fee for the advisor to gather their data, input it into the software, and present them with the software output (i.e., the “Financial Plan”). And in fact, our latest Kitces Research on How Financial Planners Actually Do Financial Planning finds that a plurality (49%) of financial advisors still deliver financial planning primarily by delivering the Comprehensive financial planning software output to their clients. However, the reality is that in the internet age, there is an ever-growing abundance of increasingly sophisticated software available on the internet… and often available for free, because anything valuable enough for consumers to engage with around their finances can often be used to attract or retain prospective clients with a traditional financial services firm. In point of fact, this has been the entire growth story of Personal Capital, which developed a Personal Financial Management (PFM) solution for consumers, and gives it away for ‘free’ because user growth of the app forms the lead generation funnel they need to gather what is now more than $12B of assets under management! And now the latest in the world of giving away planning software tools for ‘free’ to attract and deepen relationships with current clients is Schwab, which announced this month a new offering that will provide direct access to financial planning software for all existing Schwab clients (though notably, only for clients, while prospects get a more generalized “Financial Planning Hub” with a series of simpler calculator tools). And as the advisor community quickly noticed, the software that Schwab highlights as its new Schwab Plan offering is none other than the popular MoneyGuide solution (specifically, a customized version of its MoneyGuide One product)… and putting into sharp relief the contrast that financial advisors are still charging an average of $2,400 for the output of comprehensive financial planning software that Schwab is now giving away to its clients entirely for free. Of course, a key distinction of the new Schwab Plan is that the software is being made available directly to clients – in other words, as a self-directed solution – while financial advisors typically input data on behalf of their clients and walk through the results together. Yet the reality is that Schwab is also growing its own human financial planner offering as well, with the Schwab Intelligent Portfolios Premium offering that includes access to a human CFP professional for a $25,000 miniminum or as little as $300 upfront plus $30/month. Which on the one hand emphasizes that even Schwab recognizes that there’s a value to human financial advisors (and that consumers are willing to pay for human financial advisors) above and beyond what they can get from the use of self-directed technology alone. But on the other hand, Schwab rolling out a free version of MoneyGuide One to all of its own clients emphasizes how increasingly the value of financial planning will no longer be in the planning software and its output (where Schwab is setting a new price point of ‘free’), or in inputting the data into the planning software on behalf of clients (because advisors will not be able to sustain $2,400 planning fees to be doing outsourced data input for clients alone!), but in the planning conversations that emerge between the advisor and the client (for which planning software is increasingly becoming the collaborative conversation tool that helps advisors go deeper instead!). Nonetheless, when a plurality (49%) of advisors charge thousands of dollars to deliver financial planning software output as “The Plan” that Schwab is now providing access to for free, Schwab’s ongoing shift into financial planning as a lead generation tool for its managed accounts, and proprietary ETFs, and direct-to-consumer brokerage business, will continue to put pressure on independent advisors to move upmarket (beyond Schwab’s mass affluent offering), into niches (more differentiated than what Schwab can focus on given its size and need for a mass reach), or find new ways to deliver financial planning itself that focuses on the collaborative experience and the conversations over ‘just’ the output of even sophisticated planning software alone.

LPL Meeting Manager Aims To Tackle The Biggest Financial Advisor Time Waste: Meeting Prep. The mantra of most financial services firms is that financial advisors should maximize the time they spend meeting with clients and prospects – the advisor’s essential 'front-office' work – and either delegate, outsource, or automate the rest. Yet the latest Kitces Research on “How Financial Advisors Actually Do Financial Planning” finds that in reality, the average advisor spends less than 20% of their time actually meeting with existing clients, but spends 24% of their time prepping for those client meetings and doing the client servicing follow-up work! And of course, the irony is that the more advisors try to increase their meeting time with clients, the more meeting preparation work that has to be done, the more post-meeting client servicing tasks there are, and the worse the problem gets! Accordingly, this month independent broker-dealer LPL announced at its annual Focus conference that it is launching a new “Meeting Manager” tool, that aims specifically to tackle the meeting preparation blues (after having been previewed at its Focus 2019 event). At its core, LPL’s Meeting Manager is a series of meeting template tools, for everything from crafting an agenda to pulling together the client’s investment reports, and coalescing it into a single PDF document, similar to the recently launched Pulse360 for independent advisors. Of course, the reality is that advisors can already create their own PDFs of a meeting report, but according to LPL’s own research the average advisor goes into 6 different applications to prepare for a meeting (and one advisor went into as many as 23!)… which LPL is aiming to solve by integrating all the key meeting preparation data into Meeting Manager, so advisors can prepare for the entire meeting in one place (and largely automate much of the meeting preparation process along the way). In addition, Meeting Manager also has an Outlook-integrated meeting scheduler to set up the meeting time for clients, a centralized dashboard for all members of the team to interact with and support the meeting preparation process, and automatically verifies that the advisor has met the associated compliance requirements in communication with clients. LPL’s Meeting Manager is currently in Alpha phase, with a full-scale rollout aimed for later this year, and the company has already announced further plans to integrate MoneyGuide financial plan updates for existing clients and AdvisoryWorld proposals for prospect meetings. The significance of tools like LPL Meeting Manager (and emerging competitors like Pulse360) is that top advisor productivity is really a game of inches… where leading advisors spend ‘just’ an average of 4 hours/week more in client meetings than the rest, as that cumulatively amounts to 150+ additional client meetings over the span of a year! And with a typical burden of 24% of an advisor’s time – adding up to 9-10 hours per week – handling meeting preparation and follow-up client servicing, tools that focus on the seemingly mundane efficiency opportunities around meeting preparation and client servicing actually have the potential for a very material impact on advisor productivity!

Is The AdvisorTech Pendulum Swinging Back Proprietary As Merrill Lynch Builds Their Own FP Software? In the 1980s and 1990s, traditional wirehouses had the best advisor software, because of their vast resources and willingness to use them, and the tremendous advisor headcount over which they could amortize their development costs (relative to the tiny nascent independent advisor movement). Yet in the early 2000s, that pendulum swung back the other way, as the independent market grew rapidly, and so did the independent advisor software ecosystem around it, in a virtuous cycle where a growing addressable market of independent advisors led to more technology tools, and more technology solutions for independent advisors attracted even more from the industry’s traditional employee channels. To the point that eventually, even wirehouses themselves decided that it wasn’t worthwhile to spend a ton of money to build and maintain their own software stacks, and instead started partnering with the independent software vendors to deliver great experiences for their brokers. Yet as financial planning increasingly becomes the heartbeat of the client relationship, it is becoming apparent that, for the largest firms, financial planning software is too important to outsource, and instead is something worth owning and building as a proprietary solution for the opportunities it can open up. And in this context, natively integrated software is becoming the name of the game. Natively integrated software is what allows Uber to process credit cards, let drivers navigate riders to their destinations, and make phone calls and send text messages; Uber doesn’t build all of those underlying features from the ground up (they partner with other organizations to do that), but the workflows themselves are integrated perfectly into Uber’s proprietary app. Which is notable, because the depth of integrations (or rather, the lack thereof) is a well-documented challenge for AdvisorTech solutions today, especially the most well-adopted ones that were built 15-20 years ago before APIs took the market by storm and have been slow to adapt. Accordingly, last year Merrill launched a tool called Advisor Insights which, similar to Morgan Stanley’s Next Best Action solution, analyzes client data and provides recommendations to the advisor that they can then bring to the client as a suggested next conversation. In other words, it surfaces the next opportunity to provide quality advice or find a new solution to implement with the client. But such tools, which rely on pulling together investment, CRM, and financial planning information into one central location to analyze and trigger action items, are only half baked without native integration to the financial planning software (i.e., no matter how much account data is analyzed, how can you provide the best recommendation for a client if you aren’t hooked into the most current financial plan?). And so now, large wirehouses like Merrill Lynch (and Morgan Stanley) are leveraging the key advantage they do have – an employee base that are all required to use the same technology suite, enabling the firm to build a single integrated tool that it knows all its brokers will (and must) use – and taking the financial planning software and the recommendation actions it generates back into their own hands. This means, in essence, that the ongoing integration woes of the independent AdvisorTech ecosystem are becoming the key trigger swinging the AdvisorTech pendulum away from the independents and back to the large-scale proprietary platforms.

Timeline Retirement Planning Software Raises $2.3M Seed Round To Better Scale Digital Retirement Drawdown Software. It’s always exciting to adopt innovative, new AdvisorTech solutions, but using the brightest newest tech usually comes with the downside of being tethered to a potentially underfunded startup. This means if the company runs out of money, the advisor could end up out in the cold with a giant hole in their process. Advisors who are using the Timeline App no longer need to worry about this occurrence, as the young firm has just scored $2.3M in a new funding round. Timeline App is a specialized financial planning tool focused specifically on the distribution (i.e., deculmulation) side of retirement. The goal of the software is to give prospective retirees a better understanding of the sustainability of their retirement distribution strategy given the uncertainties of market volatility; in essence, Timeline is a tool to model 'safe withdrawal rates' and other portfolio-based retirement spending strategies. The CEO of Timeline, Abraham Okusanya, was interested in the research that has been done around retirement distribution, starting with Bill Bengen’s famous safe withdrawal rate study more than 25 years ago, the two decades of additional withdrawal research since, and how to optimize it under different conditions. Accordingly, the core of Timeline App is calculating a probability of a client outliving their portfolio based on a projected withdrawal rate, which is presented as a percent probability of success. In addition, Timeline can transform longevity data into a visual story of retirement income sustainability that is relatively easy for clients to visually see and understand (as dynamic visualization is quickly becoming table stakes in retirement planning), along with the option to adjust input parameters interactively on the fly, including the impact of changing asset allocations, rebalancing, glidepaths, fees, and taxes. While this added functionality might increase the difficulty when using Timeline, as Kitces Research has shown, the most highly-rated financial planning software amongst advisors is the software that takes the longest to use and is the most customizable, because more comprehensive software is most able to adapt to the needs of the client, and therefore the most effective at helping the advisor to fully demonstrate their value. Timeline delivers this specialized, advisor-supportive approach via some of their unique abilities, such as a real-time monitoring capability that alerts the advisor when a client drifts off target as well as the ability to display a series of rolling 30-year retirement periods and how much money is left at the end of each.  For a startup tech company trying to change the retirement decumulation side of the advisory industry, $2.3 million still isn’t a lot of money, but what’s more important than the amount invested is who did the investing. The round was led by global wealth management technology vendor FNZ (pronounced 'FN-Zed' for Americans), who took a minority ownership stake. The New Zealand-based company has a large customer base spread across Europe and Asia and is planning to include Timeline in their own app store. This opportunity could greatly increase Timeline’s user base, beyond ‘just’ what is already a sizable opportunity in the US advisor marketplace, and the new capital will be used to enhance Timeline App’s enterprise capabilities to scale delivery of its retirement decumulation planning experience. Enterprise features are a gap many startups have trouble closing since they require significant resource investments to develop, including enterprise dashboards, administration tools, and compliance reporting to support centralized management across a large firm’s user base. Having been focused solely on selling to individual advisors and RIAs, this additional functionality will be critical if they expect to sell to broker-dealers, RIA aggregators, or other large firms. From the industry perspective, the limitations of increasingly specialized advisors using ‘generalist’ financial planning software has driven the growth of specialized software tools, with 20% of firms using separate Social Security software (such as Covisum), 18% using special tax planning software (such as LifeYield), and 9% using standalone retirement income tools (such as Timeline App or IncomeConductor). This growing subset of advisors believes that it’s better to do one thing extremely well than to do everything mediocrely, since true retirement distribution planning is still largely a gap for established financial planning software players (even as the leading financial planning platforms, such as MoneyGuidePro, eMoneyAdvisor, RightCapital, and NaviPlan continue to add new features and functionality). We expect new apps will continue to take advantage of the trend towards making financial planning software more comprehensive and specialized, to boost advisors’ ability to express their value-add in increasingly sophisticated ways, as ‘generalist’ financial planners (and the financial planning software itself) becomes increasingly accessible to consumers at a low (or zero) price point. Though in the long term, the real question is no longer whether or not advisors need to differentiate themselves in order to survive, but how many separate apps can they implement before their workflows and daily processes become too difficult to manage?

Riskalyze Selects Rowboat Advisors To Add “Intelligent Tax Optimization” To AutoPilot Rebalancing Technology. It was Benjamin Franklin who said, “In this world, nothing can be said to be certain except death and taxes.” And while no current technology can make death less painful, there are a lot of advisor software programs geared towards reducing clients’ tax burdens. In fact, at this point, almost every portfolio rebalancing engine has at least a basic level of tax awareness, including avoiding short-term capital gains, tax loss harvesting, and avoiding wash sales. Yet in practice, these should now be considered as mere table stakes for any portfolio management system; the next level up from tax-aware is tax management, and usually includes features such as asset location (placing tax efficient securities in taxable accounts and tax inefficient ones in non-taxable accounts) and tax transition (selling down low cost basis positions over multiple years to spread out the capital gains hit). The highest level of functionality, though, is tax optimization of the entire portfolio, effectively the “Holy Grail” of portfolio rebalancing. As with the journey for the actual Holy Grail, though, this has, historically at least, been impossible to achieve because most portfolio rebalancers are rules-based, which means that they evaluate each account based on a pre-set list of rules (such as 'don’t generate any sell orders that result in short-term capital gains') that run in prioritized order and only check each position once. Portfolio tax optimization, however, requires checking each account dozens or hundreds of times to determine the optimized set of orders that provide the best results amongst a series of possible rules and strategies that intersect one another. And portfolio optimization is what Riskalyze is aiming to deliver to clients who use their Autopilot Trading platform… to be done via their recently announced partnership with Rowboat Advisors, makers of a new generation of automated (and very tax-savvy) portfolio rebalancing software that will power Riskalyze’s “Intelligent Tax Optimization”. The distinction is that, rather than the rigid rules-based framework of a traditional rebalancers, Rowboat’s portfolio tax optimizer will allow an advisor to run tax-aware trade scenarios while also setting parameters around a capital gains budget based on a client’s risk metric from Riskalyze. This kind of tax-efficient portfolio rebalancing, which includes evaluating the tradeoffs between efficiency and tracking error, is only offered by a few vendors in the RIA space (another being Softpak Financial Systems). In addition, Riskalyze also announced automated tax-loss harvesting (again powered by Rowboat Advisors), which provides a recommended list of positions sorted by estimated capital losses and (hopefully) with an interface that shows the advisor how the client’s tax budget is impacted by each harvest order. Of course, advisors cannot use this software unless their custodians support selling shares out of specific tax lots, but Charles Schwab, Fidelity, TD Ameritrade, and RBC currently support this, and Riskalyze is reportedly nudging LPL Financial and Pershing to offer it as well. From Riskalyze’s perspective, adding these 'tax alpha' features is one way for the firm to stand out as it continues its evolution from its 'risk tolerance assessment' roots and towards an increasingly crowded market for portfolio management software that has at least fifty products, most of which look more and more similar as they all try to sell to the same group of independent advisors. Especially since, up until now, Riskalyze has been focusing on the lower end of the market with solutions that have fewer options and configurations, making them easier to use and manage for smaller RIAs, but with this announcement, Riskalyze takes the next step to start moving upstream towards bigger firms, which disproportionately have the clients with larger and more complicated portfolios and tax issues. These tax efficient tools should also be a nice compliment to Riskalyze’s recent collaboration with order management system provider FIX Flyer on Connected Trading, which automates trading by eliminating the need for manual account allocations at each custodian, and combines order files for different asset classes and automates block trading. When Riskalyze launched AutoPilot in 2015, it was a big step, as they were stepping out of their comfort zone of risk assessment and butting up against a new class of competitors. The good news of their Rowboat integration is that Riskalyze takes a big step forward in differentiating its portfolio management solution with the latest ‘tax alpha’ capabilities in a crowded marketplace. The bad news, though, is that there are arguably still too many portfolio management systems to survive, and Riskalyze will likely need to continue to expand their functionality to keep pace with the rest of the industry across multiple categories of wealth management technology.

Will Fidelity’s Bond Beacon Satisfy Advisors’ Newfound Desire To Trade Individual Bonds? Fixed income has always been an integral part of portfolio construction. Traditionally, it is a way to provide stability to an investor’s portfolio… and as a result, it’s often just viewed as the ‘other part’ that completes the client’s less-stable-and-more-opportunities-to-invest equity allocation. Yet in reality, 2020 has been anything but stable, for both equities and the fixed income market as well, and the combination of rates going to zero and the news that the Fed would be buying corporate bonds in large volume both creates new opportunities to add alpha with active management of bonds… and stokes fears that the Fed’s intervention will spawn inflation, causing bond rates to rise, and leading advisors to be increasingly interested in strategies like bond ladders that can be held to maturity in a potentially rising interest rate environment. However, in practice actively trading bonds is a balance of art and science, due to a lack of market transparency, potentially high markups, and often poor liquidity. In other words, lack of real-time insight makes trading bonds directly less favorable for the typical advisor than using bond mutual funds or ETFs (which themselves are more straightforward to trade and implement, and have full-time professionals monitoring for effective execution of the funds’ underlying bond funds. Enter Bond Beacon from Fidelity, which aims to bring real-time insight of institutional bond market desks directly into an advisor’s hands. From the advisor perspective, the appeal of Bond Beacon is relatively straightforward: more transparent information about pricing and markups allows advisors to obtain better execution for their clients, reducing the cost drag of bond trading and/or allowing advisory firms to find new or more bond alpha opportunities for clients. From the Fidelity perspective, one might ask “Why is Fidelity launching this now?” with interest rates being as low as they are, and more and more advisors seeking alternatives (literally, into the Alternative Investments realm) to their bond allocations (spawning the recent explosive growth of platforms like CAIS and iCapital). But in the end, bonds remain an anchor to most advisors’ portfolios for some material allocation (especially given the concentration of advisors working with retirees who tend to hold more conservative portfolios), and the markups on individual bond trading are a great source of revenue for Fidelity (especially relative to the ZeroCom alternative they earn when an advisor buys a bond mutual fund or ETF!). In other words, a slick new tool like Bond Beacon may help convince at least a few Fidelity advisors to eschew ZeroCom bond ETFs and mutual funds and instead engage in more fixed income trades for Fidelity-traded bond markup revenue. (Incentives matter!)  Of course, the irony is that the transparency and trading capabilities of Bond Beacon may cut the markup potential that Fidelity might have otherwise earned. Yet in today’s environment, where most sizeable independent advisory firms are multi-custodial, it is a daily war between custodians to offer better features that entice advisors to transact on their platform as opposed to their competitors! This means a lower markup for Fidelity, thanks to Bond Beacon, is still better than no markup because the advisory firm trades the bond through one of their other custodial relationships instead. (Competition matters, too!)  Though ultimately, it remains to be seen whether advisors – particularly multi-custodial advisors with choices of where to trade their bonds – will be willing to rely on Fidelity’s Bond Beacon, or instead opt for newer even-more-independent bond trading solutions such as Bond Navigator or 280CapMarkets. On the other hand, the reality may simply be that Fidelity saw the emerging success of those platforms and others like them, and that’s why they decided they could offer a similar solution to serve their clients directly (and hope to retain more bond business) in the first place?

Apex Clearing Selects Marstone As Partner To Launch A Pay-For-Custody Platform. Custody is like plumbing: you don’t really think about it until it stops working. Apex Clearing is trying to shift custody into the forefront of advisors’ business minds, by merging their innovative, digitally-based custody functions with Marstone’s digital advice platform. By offering a combination of custody plus digital-first tools directly to RIAs, they’re trying to position themselves as the most digitally-savvy RIA custodian that’s the talk of the town. Apex Clearing has always been lumped in with the smaller, 'second-tier' custodians, but they differentiated themselves with their fintech-friendly platform which was designed as a lattice-work of application programming interfaces (APIs) that exposed their custody and middle-office services, but required firms to build their own user access layer. Which was appealing to a wave of 'robo-advisors', as Betterment, Wealthfront, Stash, Robinhood, Acorns, and more, all built at least their first-generation platforms on Apex. However, when it comes to the RIA marketplace, at best, only the top 10% of RIAs have a technology budget that can afford to hire developers to build such an interface on top of a digital-but-raw RIA custodian. Accordingly, Apex has pursued the other 90% of independent RIAs through an intermediary provider that creates the advisor dashboard that most other RIA custodians already offer, partnering with so-called “B2B Robos” like RobustWealth, AdvisorEngine, or InvestCloud. However, advisors have largely resisted paying an ‘intermediary’ technology layer on top of an RIA custodian. Still, a tech-only solution that mostly served robo-advisors and other FinTechs wasn’t the model that Apex’s CEO, Bill Capuzzi, was planning to continue with. And so if RIAs won’t pay for a technology layer on top of a custodian, Capuzzi appears to be structuring partnerships that would allow Apex to be the all-in-one technology-plus-custodian solution, ostensibly in the hopes of being able to charge software-company fees for providing RIA custodian (as distinguished from the Big-Four-soon-to-be-Big-Three custodial firms – Pershing, TD Ameritrade, Schwab, and Fidelity – which have no platform fees and instead make their profits on the backend in areas like spreads on money markets, shareholder servicing, and sub-TA fees of mutual funds and ETFs). To create this solution, Apex tapped Marstone, a firm that has flown under the radar for the past few years after making a splash by being one of the first digital providers to partner with Pershing in 2016 and announcing in 2018 that HSBC USA would begin white labeling their software for their consumer self-directed offering. They also partnered with Tegra118 (formerly Fiserv Investment Services), a provider of portfolio accounting/portfolio management enterprise solutions. Apex is also not the first custodian to partner with Marstone either, after Interactive Brokers announced their integration back in January 2019 to build a fully-integrated, turnkey solution (and more recently Interactive Brokers announced a tech-plus-custodian partnership with TradingFront that is intended to justify IB continuing to charge trading commissions in a ZeroCom world). In the case of Apex and Marstone, though, it is expected that they will be selling their new combined digital offering and custody solution for an outright platform/technology fee, rather than trying to generate trading commissions, or otherwise giving it away as a loss leader (and making all their money on the back end) as other custodians are doing. As of yet, pricing has not been publicly announced, but with Schwab apparently doubling down on its “no minimums, no platform fees” pledge, the big question will be whether Apex can identify a combination of technology and price point that is palatable to advisors used to paying nothing for custody and limited fixed-fee costs for AdvisorTech software, and whether all of these deals and products can attract enough new revenue from RIAs, broker-dealers, and other wealth management firms given that ever more technology vendors are crowding into the space at ever-more-competitive pricing.

Apex Hires Morningstar’s Tricia Rothschild To Compete More Aggressively For RIA Custody. The current world of RIA custody falls into three broad groups: the Big 4 (Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions) who cater primarily to large and mid-sized RIAs; the ‘second-tier’ RIA custodians like SSG, TradePMR, etc., that work with smaller advisors or have formed niches in particular segments of the advisor community; and the B/D-affiliated RIA custodians (e.g., LPL, Raymond James, RBC, Wells Fargo, etc.) that were historically self-clearing brokerage platforms that expanded into the hybrid RIA business and are now trying to grow their RIA platforms (often by capturing their own brokers in the transition to the RIA model). The ultimate challenge is that RIA custody and clearing is a ‘scale’ business – so much that virtually every RIA custodian is ultimately just a division of a larger brokerage offering, from the retail brokerage businesses of Schwab and TD Ameritrade, to the independent broker-dealer clearing businesses of Fidelity and Pershing, to the brokerage self-clearing businesses of LPL and Raymond James, to the ‘overlay’ providers like SSG (which operates on top of the Pershing platform) and TradePMR (which leverages Wells Fargo’s First Clearing platform). Which makes it especially hard for new competitors to enter the RIA custody business. In this context, the story of Apex Clearing has been a unique one – built on a more recent and ‘modern’ API infrastructure, Apex Clearing was the back-end custody and clearing firm of choice for most of the first generation of robo-advisors, including Betterment, Wealthfront, FutureAdvisor, Motif, Stash, Robinhood, Acorns, and more, and has used their growth with FinTechs as the basis for establishing economies of scale to expand further. Yet what was arguably the greatest benefit of Apex Clearing for FinTech platforms – its robust API-driven back-end that allowed 'robo' startups to build whatever front end they wanted – has proven to be its greatest challenge in gaining adoption amongst independent RIAs, who don’t necessarily have the tech-savvy chops to build their own front-end interfaces. In recent years, this led to Apex trying to establish a series of strategic partnerships with other “B2B robo-advisors” that offered their own front-end 'robo' onboarding tools, including AdvisorEngine (née Vanare Nest Egg), Harvest Savings & Wealth (née Trizic), InvestCloud, FolioDynamix, and more. But independent RIAs have shown little interest in paying for an additional layer of robo tools on top of their RIA custodians, leading Apex to announce this summer its own “Apex Extend” front end for independent RIAs to use in a more ‘ready out of the box’ format. And now, Apex has announced the hire of Morningstar’s former Chief Product Officer, Tricia Rothschild, as its new President, along with former Fidelity National Sales SVP Tom Valverde as Apex’s new Head of Advisory, in what appears to be even more of a direct strategic focus on the independent RIA channel, leveraging Rothchild’s experience in building product for advisors and Valverde’s experience selling into the RIA channel. Ultimately, though, the challenge for Apex remains in how it can effectively differentiate in a crowded and increasingly commoditized RIA custody business, where it doesn’t have the scale of Schwab, Fidelity, or Pershing, and its biggest differentiator is the flexibility of technology APIs that the average RIA doesn’t have the means or capabilities to effectively leverage. At the least, Apex can highlight that it doesn’t have a retail business that effectively competes with its own RIAs – as is the case with Schwabitrade and Fidelity – although Apex still powers many of the leading robo-advisor competitors to independent RIAs (e.g., Betterment), and the sheer growth of Schwab, Fidelity, and TD Ameritrade over the past decade suggests that in the end advisory firms are willing to trade off the implied channel conflict with the fact that those firms gain economies of scale to increase services and lower costs to advisors in the process. Still, though, with the custody business facing its own revenue challenges, as ZeroCom eliminated trading commissions just as the pandemic cut interest rates (and net interest income) drastically, the big question now is whether RIA custodians will start to charge basis points or other custody fees to the RIAs they serve. And in the end, the most straightforward way to charge basis points for custody is to build enough technology capabilities to replace other components of the advisor tech stack – effectively turning the custody business into a technology platform with custody as a loss leader – for which Apex and its tech-forward approach may be best positioned to compete. At least, if Rothschild can figure out exactly what technology product Apex should build that advisors will actually be willing to pay basis points for?

Is Vanguard Competing For RIA Custody With New Digital Advice ‘Robo’ Tools For Advisors? For most of their modern history, asset managers reached most financial advisors and their clients through mutual funds that advisors bought for their clients. Initially, mutual fund business was handled directly, but as advisors began to develop more holistic portfolios and shifted to fee-based models that might hold a wider range of mutual funds and charge a single advisory fee (instead of just receiving trails directly from mutual fund providers), mutual fund portfolios shifted from ‘direct’ to brokerage-based… a shift that brokerage platforms and RIA custodians were quite happy to facilitate, since they got a piece of the action by serving as the Transfer Agent and earning their sub-TA fees. However, the shift from financial advisors as mutual fund salespeople to RIA fiduciaries who represent (and gatekeep for) their clients has led to another shift, where advisors can ‘look good’ in front of their clients by saving them on portfolio costs, which is leading advisors to increasingly use technology to self-manage portfolios, select their own low-cost funds to build client portfolios, and disintermediate mutual fund managers (and their mutual fund expense layer) in the process. The significance of this shift, from the perspective of brokerage firms and RIA custodians, is that advisors are increasingly incentivized to purchase ETFs over mutual funds, in part because ETFs don’t have the additional cost layer of sub-TA fees (which makes them even more likely to be the appealing-less-expensive-alternative for their clients), and especially now that ETFs are free to trade (unlike mutual funds that often still have ticket charges) in the new zero-commission (ZeroCom) world. This helps to explain why ETF providers, and especially low-cost ETF providers like Vanguard and Blackrock, have increasingly been able to dominate the portfolio market share amongst RIAs. Yet the advisor shift from mutual funds to ETFs is also increasing tension between asset managers and RIA custodians, as the latter don’t profit from ETFs the way they did with mutual funds – due to the lack of the sub-TA fee (or any 12b-1 fees) – and therefore are increasingly going directly to asset managers and asking for payments (if not directly for ‘shelf space’ platform access, then indirectly for key information like data about how advisors are using their funds, and/or for the ability to communicate with advisors through the RIA custodian). Which appears to be leading to some asset managers – most notably, Vanguard – to develop their own advisor solutions, in an effort to either win business back from RIA custodians, or at least persuade them to relent on ‘required’ platform payments (or risk having advisors shift entirely to work with the asset manager directly). Accordingly, on a recent webcast to the advisor community, Vanguard announced that it is nearing the rollout stage for a new digital advice software solution for financial advisors (having already been in live beta with two dozen advisors for the past 6 months), effectively threatening to turn advisors using Vanguard back into 'direct' clients of the asset manager – akin to the fund business of the 1990s, albeit with a modern technology wrapper. Of course, the caveat is that the ‘minimum’ standards of advisors for technology trading and portfolio management are very high – thus the challenge of so-many “B2B Robo” platforms that have struggled to gain adoption – and it remains to be seen whether, or how broad, Vanguard’s offering will be (e.g., for only Vanguard ETFs or an open brokerage platform for advisors to use any ETFs, capable of allowing advisors to build their own portfolios or only choose from a pre-selected list of Vanguard model portfolios, etc.). Still, the underlying point remains: as the competitive pricing for brokerage pushes further and further towards zero, advisor platforms are increasingly pressured to find new sources of revenue… which is leading some to explore charging directly for custody, others like Schwab to find new sources of cross-subsidy revenue (e.g., affiliated Bank cash sweeps), and may be creating a new era for asset managers to develop their own direct-to-advisor solutions to win back the direct fund business of 20 years ago. Though whether Vanguard can pull it off – and whether any other asset manager has enough advisor adoption to even try – remains to be seen.

Envestnet Enables Fractional Share Management Capabilities As Direct Indexing Starts To Gain Mainstream Steam. The concept of Direct Indexing – where an investor doesn’t buy an index fund, and instead buys the underlying stocks that comprise the index – has been around since the early 1990s, where separate account managers like Parametric implemented the strategy on behalf of ultra-high-net-worth clients who wanted to take advantage of the tax loss harvesting opportunities of owning each of the individual stocks in the index (as the owner of an S&P 500 index fund can only harvest losses if the fund is down, but an investor owning the underlying 500 stocks of the S&P can harvest 122, 184, 217, or however many of the individual stocks that may be down for the year). The challenge of such direct indexing strategies, though, is that it requires a substantial portfolio to be able to buy that many individual stocks, each in the exact appropriate share quantities necessary to ensure the index itself is tightly replicated (without introducing tracking error)… and thus why, historically, direct indexing was only for ultra-HNW clientele. However, the 2010s witnessed the emergence of fractional shares, where certain investment platforms could facilitate investors owning fractions of an individual share that, in the past, were indivisible from whole units. And while the most common use of fractional shares was simply to allow new investors to start participating in the markets in small bits – e.g., the Robinhood or Acorns investor who wants to buy just $10 worth of Apple or Google shares – one of the indirect benefits of fractional shares was that it suddenly made Direct Indexing feasible for more mass affluent households who were ‘only’ invested hundreds of thousands of dollars (and not millions) but could leverage fractional share investing to buy the exact 10.247 (or however many) shares needed to perfectly replicate the underlying holdings of an index fund. Accordingly, in late 2013, robo-advisor Wealthfront launched its Direct Indexing solution with what was originally a $500,000 and later $100,000 account minimum, effectively ‘democratizing’ direct indexing for the mass affluent investor. However, the significance of direct indexing is not merely that it provides a slightly tax-savvier version of an index fund; it also potentially becomes a less costly alternative to a mutual fund or ETF, or at least a more customizable version of one (for those who want to express their factor, ESG, or other investment preferences directly to the underlying portfolio), which drastically expands the market potential, and has caused one major platform after another in recent years to launch fractional share capabilities and build out the potential for direct indexing. The appeal to direct indexing for technology providers, in particular, is that executing direct indexing both requires technology (to facilitate the large number of trades and individual share holdings in the right allocations), and also creates the potential for technology providers to earn basis points by operating as asset managers (as even if the index providers set the index allocations, the direct-indexing-technology-provider has the opportunity to earn basis points to actually manage the implementation of the direct indexing solution). Accordingly, it is perhaps not surprising that Envestnet – the mother of all platform TAMPs – announced this month that it, too, is working on the capability to implement fractional share trading to expand the reach of direct indexing. In fact, the company noted in its Q2 earnings that demand for its existing (HNW) direct indexing strategies was up a whopping 23%, allowing the company to grow revenue by 5% in the quarter despite the pandemic sell-off… and with fractional share capabilities, Envestnet hopes to further expand the reach of direct indexing to the ‘average’ advisor’s mass affluent clients. Which makes sense for Envestnet, in that already operates one of the largest marketplaces of third-party managers, leaving the company well-positioned to not just facilitate direct indexing of index funds, but to facilitate direct indexing of any and every asset manager’s strategies (which Envestnet can execute in a centralized manner far more easily than each asset manager doing it themselves), and earning Envestnet its platform TAMP fee in the form of a direct indexing implementation fee (while disintermediating traditional asset managers’ mutual funds and ETFs in the process). The irony, of course, is that Envestnet is arguably more than 6 years late to the game of expanding direct indexing to the masses… yet in the end, as Wealthfront demonstrated with its own lackluster success in growing direct indexing adoption, it turns out that the complexity of direct indexing may make it uniquely well suited as a solution that advisors bring to their clients to differentiate their own investment implementation process.

XTiva Raises $10M From Recurring Capital Partners To Accelerate Growth Of SPM Platform. Advisor Compensation Systems have never gotten the same attention as advisor-facing tools like CRM or financial planning or home office platforms, like portfolio management or billing. But compensation software (also referred to as sales performance management) is a critical component of a broker-dealer’s technology infrastructure to facilitate the payment of commissions (from dozens or hundreds of different carriers, to hundreds or thousands of different brokers). And as many broker-dealers struggle to remain relevant by reinventing their business (and revenue) models altogether, these systems are being leaned on to not only calculate compensation accurately, and across an increasingly wide domain of commission- and fee-based offerings, but also provide robust analytics and data management that can be leveraged to improve recruitment, retention, and performance, and drive incentive management across different product lines. Xtiva has been among the top vendors in the space which includes Anaplan, SAP CalladusCloud (acquired in 2018), and Broadridge Advisor Compensation Solutions (also acquired in 2018). But they don’t seem to be resting on their laurels, as XTiva recently raised a $10 million investment from Texas-based Recurring Capital Partners. Two-thirds of the funds will go towards enhancing the pace of their product roadmap, including features to streamline OSJ operations, analytics that improve decisions on revenue and cost allocations, and organizing business intelligence. The remaining third will be used to beef up sales and marketing. The funding couldn’t come at a better time for XTiva, as the level of complexity and diversity of the market has been growing steadily. IBDs (and now increasingly, RIA aggregators) have complex sets of needs to support different compensation models and multi-custodial arrangements. In this context, it is not surprising that XTiva also announced a new partnership with Salesforce, with XTiva’s software now able to read and write core Salesforce objects, enabling out-of-the-box support for sending data to centralized management dashboards. Given that larger enterprise wealth management firms so often design their architecture with Salesforce as a middle layer, Salesforce support is often one of the first things they check when evaluating new technology. From the broader industry perspective, surveys have shown a fairly wide range for advisor compensation across wirehouses, national and regional broker-dealers, all of which seem to be trading a core group of hybrid advisors back and forth between them. These advisors are often swayed by firms that stay ahead of the technology curve, both in the front and middle office. Many of the larger firms are building out their own data lakes that ingest information from external systems to provide a consolidated view across the enterprise, and XTiva needs to match the demands of competing technology offerings to support expanding their client base, which, ironically, is taking a renewed relative focus in the US over other countries because big data analysis and business intelligence tools have become increasingly difficult to deploy elsewhere due to rising regulatory and data privacy issues in the EU and APAC. Fortunately for XTiva, the number of sales management solutions customized for the advisory space remains limited. Still, though, the pressure will be on to deploy its newfound capital and actually accelerate its growth, as the downside of XTiva’s large enterprise marketplace is a longer sales cycle, combined with a complex conversion process, that gets further multiplied for larger firms that are running multiple compensation platforms as the result of mergers, often with heavy technical debt that was never consolidated (and the temptation for broker-dealer executives to continue to kick the can down the road on replacing their legacy advisor compensation systems and choosing to trade higher operations costs now to delay needed software upgrade expenses into the future). For most independent advisory firms, the scope of XTiva’s solutions is most likely beyond their needs. But as more and more RIAs and RIA aggregators pass the $10 billion AUM mark, and as broker-dealers shift from a product-centric to an advice-centric focus and continue to consolidate, XTiva appears to be positioning itself to ride the wave of an in-demand category of enterprise software for financial advisory firms.

InvestCloud Launches End-To-End Wealth Management Platform To Compete For Large-Scale Financial Services Enterprises. There is no shortage of software available for RIAs and broker-dealers to choose from when it comes to advisor technology platforms, from all-in-one solutions to best of breed combinations of standalone applications, to combinations of the two; the choices are seemingly endless. A new option was recently announced by West Hollywood-based InvestCloud, which is combining a number of formerly standalone modules into an end-to-end platform that can be configured to support either asset management or wealth management firms. InvestCloud has been adding to their portfolio of technology solutions since the company was founded in 2010. Their first product offerings were lightweight components that could readily be incorporated by other vendors into their own software, and were primarily deployed through a provider of client portal technology for asset managers called LightPort, which merged with InvestCloud in 2013. At the time of the merger, LightPort had over 700 clients, which is approximately the number that InvestCloud still has seven years later. Which means the LightPort merger made InvestCloud one of the largest providers of clients portals and dashboards, but the company has struggled to grow market share since, and thus has been working hard to expand their capabilities towards the recently realized goal of an end-to-end wealth management platform dubbed InvestCloud White (where “White” is simply in keeping with their branding of different module combinations using primary color names). Their biggest client name is JP Morgan Asset Management, which not only decided to use the InvestCloud technology to build their digital investor tools, but also took an equity stake in the firm. Yet while InvestCloud has signed some small broker-dealers and investment managers to use parts of their broader platform, they are still working on breaking into the top tier of wealth management firms to deploy their full-stack portfolio management system. Still, InvestCloud has raised $54M in funding, primarily from FTV Capital and Kern Whelan Capital, and has already spent $20 million of this to purchase London-based Babel Systems in 2017, which provided InvestCloud with portfolio accounting, rebalancing, and trading engines. Some critics noted that at the time of the acquisition, the CEO of Babel System was Steve Wise, the brother of InvestCloud’s CEO John Wise. Nonetheless, the Babel purchase gave InvestCloud an international presence with clients in the UK, Europe, and APAC, along with multi-currency capabilities. However, while those international capabilities are very complex to build, they are not as highly valued by most US wealth management firms. Nonetheless, InvestCloud has fully joined the race to build a platform that can be everything to all advisory firm clients, aiming to compete with the other ‘full-stack’ vendors such as Envestnet, Orion, and Vestmark (although they’re probably more aligned with firms like Advisor360, Tegra118, and Charles River Development since they are a technology-only vendor with no plans to launch a TAMP offering). The challenge, however, is that the rising demand from financial advisors for better and more natively integrated technology is driving a number of these software providers to build increasingly comprehensive solutions, aiming to compete directly with the often-proprietary platforms of today’s largest broker-dealers and custodians. Accordingly, InvestCloud would be well-positioned if the market shifts from monolithic all-in-one platforms to best-of-breed integrated modules that can be accessed similarly to apps from an App Store like Salesforce App Exchange, building on their success with portals, digital advice, and mobile, as these channels become a higher priority with wealth management firms that have mostly ignored them until the pandemic shifted all digital interactions into high gear. Still, it remains to be seen whether InvestCloud can land a big deal with one of the top 50 broker-dealers or top 100 RIAs, given the immensely complex sales cycle and transition effort it details, and the challenges of differentiating amongst similarly-full-featured competitors. We will be keeping our eye on them.

Will New Accredited Investor Rules Expand Advisor Crowdfunding For AdvisorTech? Building new technology for financial advisors takes capital… far more than it takes to build an advisory firm itself because a financial advice business is a service business, where the advisor can start immediately offering advice to the first client they meet… while an AdvisorTech solution requires the entire software to be built before it can be used at all, which means hiring a Product Manager and one or several developers for what might be 6-12 months or more of building before the first paying advisor can sign up. The ‘good’ news in the world of financial advisors is that the advisory business itself is a rather lucrative business… to the point that many financial advisors end out growing their businesses to the point that they can self-fund the development of their own technology in the first place, and then later recover their costs by selling the software to other advisory firms. In fact, these ‘homegrown’ AdvisorTech solutions – where the advisor has a business problem, builds technology to solve the problem, sells technology to other advisors who have a similar problem, and now also owns and runs a technology company – comprise a significant portion of the leading AdvisorTech solutions, from Junxure to Redtail in the CRM category, Orion to Tamarac in Portfolio Management, iRebal to TradeWarrior and RedBlack for standalone Rebalancing, RiskPro and Tolerisk for risk tolerance, Hyperchat Social for social media, Benjamin from Wela for client communication, and our own AdvicePay for advisory fee billing. Yet in reality, only a very small subset of advisors run firms that are large enough, and with enough free cash flow, to ’self-fund’ the entire build of an AdvisorTech solution. And unfortunately, raising ‘outside’ capital from traditional sources – e.g., venture capital firms – is difficult for AdvisorTech solutions, given both the highly fractured advisor marketplace (which makes it very difficult to grow rapidly enough to meet venture capital investor demands) and what is still a ‘limited’ Total Addressable Market of financial advisors (where it’s certainly possible to build successful businesses worth $10s or even $100s of millions, but difficult to build the ‘unicorn’ that VC firms want with a $1B+ market opportunity). The alternative for startup investors is to raise equity capital one person at a time… but soliciting such investments into what is technically a private unregistered security requires working with only Accredited Investors, which makes it difficult for advisors to find enough prospective people to invest (especially given the prospective conflicts of interest for soliciting and rules against commingling assets with advisors’ own clients). But this month, the SEC ‘updated’ its Accredited Investor requirements, which will still include a requirement of $200,000 of income (or $300,000 for couples) over the past 2 years or a net worth of $1,000,000 (outside the primary residence), but will now also have an ‘alternative’ path to qualifying as an Accredited Investor based on certain professional designations or credentials, including those with the Series 7 or Series 65 (or Series 82) licenses. This means the bulk of financial advisors themselves will now qualify as accredited investors… and providing new AdvisorTech startups with a unique pathway to be able to ‘crowdfund’ from the financial advisor community itself – raising capital from the very users who would buy the software. In point of fact, the model for this approach has already been set once – as AdvicePay in 2018 crowdfunded its Seed capital round directly from the Advisor community (albeit from advisors who specifically met the ‘old’ Accredited Investor definition). But with the new Accredited Investor rules now making virtually all Financial Advisors accredited simply by virtue of their Series 7 or Series 65 licenses… the pool for potential AdvisorTech funding from financial advisors themselves just got a whole lot deeper!

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

So what do you think? Will Schwab’s decision to offer financial plans for free to self-directed consumers be a threat to traditional advisors? Will Riskalyze’s new ‘tax alpha’ capabilities allow them to effectively differentiate in a crowded marketplace for portfolio management? Can Envestnet scale a direct indexing solution across its entire range of TAMP strategies? And will financial advisors really become more active AdvisorTech investors now that their Series 7 and 65 licenses alone make them Accredited Investors? Please share your thoughts in the comments below!

Special thanks to Kyle Van Pelt, who wrote the sections "Will Fidelity’s Bond Beacon Satisfy Advisors’ Newfound Desire To Trade Individual Bonds?" and "Is The AdvisorTech Pendulum Swinging Back Proprietary As Merrill Lynch Builds Their Own FP Software?". You can connect with Kyle via LinkedIn or follow him on Twitter at @KyleVanPelt).

Disclosure: Michael Kitces is a co-founder of AdvicePay and is on the advisory board of Timeline, both of which were mentioned in this article.