#ItzOnWealthTech Ep. 34: Best of 2019 from the WMToday Podcast

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Full Best of 2019 Podcast Episodes

• #ItzOnWealthTech Ep 1: Joel Bruckenstein’s highlights from the T3 Advisor Conference
• #ItzOnWealthTech Ep 19: Why The “Slap Your Logo On My Robo” Business Model Doesn’t Work Any Longer with Simon Roy from Jemstep
• #ItzOnWealthTech Ep 8: Trends in Portfolio Rebalancing from Orion Advisor Services
• #ItzOnWealthTech Ep 7: Best Practices in Broker-Dealer Technology with Aaron Spradlin & Billy Oliverio from United Planners
• #ItzOnWealthTech Bonus Episode: A Maniacal Focus on Advisor Convenience at LPL Financial
• #ItzOnWealthTech Ep 12: How Morningstar Quietly Built One of the Biggest Financial Technology Businesses

Complete Episode Transcript

Craig: Starting off the highlights is a clip from my very first episode with the great Joel Bruckenstein, producer of the T3 Advisor and Enterprise Conferences, which by the way, the Advisor Conference is coming up soon, next month on February 16th-20th in San Diego. I recommend that everyone attend if you can. So in this clip I’m asking Joel what he thinks of the trend of technology vendors focusing more on the client experience and emotional intelligence in their latest releases. Let’s listen to his response.

Technology Tools for Today

Joel: I think it’s a little more difficult to be innovative in our industry strictly because it’s such a regulated industry. And so that’s been holding us back to some extent, but I do think we’re starting to see a change. You’re seeing firms hire people that have a lot of experience and the UI, you see big firms in our industry, hiring data scientists and behavioral finance people. So they’re moving in the right direction, but because we’re such a regulated industry and because advisors as a rule tend to be a little bit more resistant to change than some some other industries and certainly the retail industry, it just takes a little bit longer.

Craig: True. Another trend I saw, which I’ve been waiting for for a while, is there’s more products that are actually taking advantage of artificial intelligence, different components of it, rather than just talking about it, they’re actually putting them into, into real products. A specific product I want to talk about was the Inviso facial recognition. Do you see that as the goal? Will more products be copying this and using different aspects of AI to enhance the advisor experience?

Joel: It’s pretty funny. I wrote about them, I want to say about three years ago when I first came across them, and I was very impressed with what they were doing. But clearly they’ve matured a bit, and I think they are just one of a number of products that are looking to incorporate both biometrics and artificial intelligence in creative ways. So there’s a lot of products out there and a lot of firms that are experimenting with artificial intelligence, from some of the biggest custodians down to the startups. But I think again, we’re just at really the tip of the iceberg there. I think over the next 12 to 18 months you’ll see a lot more of that. You know, you have things like chatbots, TD has them built into both some of their retail and their advisor facing things. And there’s a number of startups that are looking to incorporate artificial intelligence into the end user experience.

Jemstep

Craig: And this next clip is from my interview with Simon Roy, President and CEO of Jemstep. Jemstep makes some great digital advice solutions, they have done very well in the banking space and they recently announced the acquisition of RedBlack Software, makers of some fantastic portfolio rebalancing software. My question to Simon was about digital advice and whether it’s going to be more integrated with core banking processes or will it remain a separate silo?

Simon: The digital advice with banks and digital advice in general has gone through a number of phases. Obviously the direct to consumers that the barbarians at the gate essentially went out and said, digital line is the path to providing wealth management to the mass affluent, broad swath of the market. And they quickly discovered two things, one, the cost of acquisition, very expensive establishing a brand. Secondly, they discovered that in most cases, and for most segments, clients want to know that they have access to an advisor. They have access to advice when needed. And that pivoted to what I would call a model, which is a B to B to C model, which is a slap your logo on my robo, I’ll take care of your clients. That was for a few firms that wanted to get out quickly, but not a sustainable model that truly added value to the banking institutions. And what Jemstep is essentially focused on is a model where we provide a technology service to the banks to help bring their value proposition to life, to ensure that they control, their clients, their client experience, data models, and other elements such that we are helping them add value through a digital platform in making wealth management accessible to a broad swath of their client base.

Simon: With that as a goal, we can’t build an effective platform that doesn’t integrate with a core banking portal. That doesn’t integrate with the mobile apps that the banks have and have great success in penetration. And so the Jemstep solution, with our primary bank clients, will have single sign on straight through to the banking portal. So our client logging in to see their checking account or credit card can access their wealth management accounts there, but more importantly can view and click on advertisements within the portal to go through a goal-based flows so that they can access the bank’s wealth management service. So access to the bank portal. Secondly, we want to make sure that the client, when they go through the flow, it doesn’t feel like they being handed off to a different institution. It needs to feel as if it is a straight handle from the from the portal to the wealth management service.

Simon: And so the branding look and feel, et cetera, is very similar and aligned with the branding of the bank. Secondly, we implement mechanism where we will take the data from the bank, and make sure that that data is pre-filled through the Jemstep flow. So the client coming through goes, Oh, they have my address, they know my name, they know my age, I just need to verify and then add information about my retirement goal or my risk tolerance. And so it’s low friction to go from the portal to the wealth management flow and a feeling, sort of a natural view of the service in terms of branding. But probably more importantly, they feel as if they are known and the bank is building on the relationship as opposed to handing them off to essentially a new relationship.

Simon: And so that really eases that transition, increases conversion, and helps not just in the profiling but also in the onboarding because the onboarding is made all the simpler with information including address, including spouse, including partner, including social security and other information, that essentially makes it a quick and seamless experience to sign up for wealth management. So that’s the bank portal side. The mobile app side, we take a very similar approach. We offer choice to the bank institution, as to how they want to implement mobile. And there are a few critical pieces. First is if they want to create a native Jemstep integration to their mobile app, we offer APIs, which they can use to build a client experience, which is essentially the same as the client experience for the other bank apps. And so through API, they access the full Jemstep infrastructure, and they can do it in a way that the client experience and the flow on the mobile is consistent with the webflow. And so a client can go from a mobile initiation to the web and back or a web initiation of a relationship to a mobile experience where they can perhaps confirm that the account is open or that a rebalance has occurred. And so that’s part of our strategy of making sure that the Jemstep solution is embedded within the bank’s existing processes and infrastructure as opposed to a bolt on on the side of the business.

Orion Advisor Tech

Craig: We’re going to move away from bank processes and talk about portfolio rebalancing. In this clip from my interview with Ryan Donovan, VP of Business Development at Orion AdvisorTech, we were talking a lot about rebalancing best practices, tax management and efficiency with their new Eclipse Rebalancer that they launched a couple of years back, which I covered on my blog. In this clip, I asked Ryan about the difference between household level rebalancing and single account rebalancing.

Ryan: It really comes back to the tax efficient rules that need to be established. So within an account it’s very straightforward. I have an account and we’re going to target these asset classes or we’re going to target these securities at defined weights and we’re going to give tolerance bands that’ll tell me when I need to trade that client’s portfolio to stay aligned with that target allocation. Adding the complexity of grouping several accounts together really is going to require the type of logic an advisor might run through on their own if they were manually deciding which assets should be held in which accounts. So for example, if I had wanted to target my income producing investments in a tax deferred or a tax exempt account, I can make that prioritization. So in our system on the buy or the sell side, we have a prioritization between taxable, tax exempt, and tax deferred. So for each asset class, each subclass and asset category, we do give our advisors the ability to add one, two, three or none in each of those account types. So as the system looking at the securities that should be held in a model, they know where to prioritize income producing securities. If the tax deferred account is prioritized to hold income producing securities, we’re going to invest in that first. But if it has insufficient cash to hold the full allocation of an asset class, like fixed income for example, we’re going to then look to the second priority account type. And that type of logic, when structured at a firm level can be pushed down to all of the client’s portfolios to make rebalancing and scale very efficient. One of the things that we’ve built in in the preferences is the ability to use that logic and apply it either at the firm level or at the portfolio level. So they do have the ability to add customization for individual clients, which is one of the things that some advisors push back on when they hear the word “rebalance”. They feel that they lose client level customization there, and so when we built our tax preferences into account, we wanted to have that portfolio level capability.

Craig: That makes a lot of sense. Among the 1800 RIA clients, can you share how many are using Eclipse?

Ryan: I don’t have a good statistic on that today. I know the number is over a hundred. But I’ll have to get somebody else to reply on that.

Craig: No worries. With the ones that are using Eclipse, how often are they rebalancing in general, and do most of them do calendar-based rebalancing? Where they say, Well, every quarter we’re going to rebalance, or every year we’re going to rebalance, or is it mostly drift based?

Ryan: Yeah, I think coming back to what I was mentioning about going from more account level rebalancing and trading to household level trading, that’s also where we’ve seen a trend. As technology has really evolved and made trading more scalable on a more frequent basis, we’ve seen people go from quarterly rebalancing to drift based alerts that drive the rebalancing timeline. So we do have both as an option. We have both the calendar based settings, if an advisor wants to have an auto rebalance on a quarterly basis, they can program that in. But the overwhelming majority of our clients are using drift based alerts to notify them when portfolios will need to be rebalanced.

Craig: Are there some rebalancing best practices you’ve noticed that when clients are coming to you and saying, Hey, we love Eclipse, but what’s the best way to use it? What do you recommend?

Ryan: So we have an extensive training library that’s available for our clients. We also have an onboarding that goes into training them on all of the features available, whether that’s going to be portfolio construction, model construction and maintenance, cash settings, and preferences. In terms of the best practice practices, the majority of clients that work with our rebalancer aren’t just looking to get their client portfolios back within the asset allocation targets. They’re looking for the trading system to help them with their daily workflows. And so they’re looking for the rebalancer to help them to fund distributions in a tax efficient way. They’re looking to spend new money and allocate into their model. They’re looking for any portfolios that could have tax loss harvesting opportunities and have the system automatically identify those. And with one of the preferences that we’ve given them, they can have an all tax loss harvesting alternative automatically proposed. So they build the cell and they have the offsetting by. So in terms of the features or the best practices, it’s really implementing the rebalancer not just for an automated rebalance, it’s implementing it in a way that it’ll help you build scale around those workflows.

United Planners

Craig: In this next clip I talk to two of the executives from United Planners, which is a unique broker dealer, based out in Arizona and they are a majority advisor owned. I really like these guys, they’ve got some innovative thinking and they’ve got a great technology platform. I spoke to Aaron Spradlin, the Chief Information Officer and Billy Oliverio, the Chief Marketing Officer. Again, both for United Planners and what I liked about their platform is it’s open architecture built on top of a lot of the best of breed applications. It’s built on top of Orion Advisor, they integrate with MoneyGuidePro, eMoney, Redtail, all the big applications, but they’ve customized a lot of the interfaces. They went completely paperless way before most firms were even thinking about it. They created their own data store and accustomed document management overlay that provides their advisors, I think with an extra edge over their competitors, which is what it’s all about. And in this clip I asked them, what’s the biggest challenge that they had to overcome when developing their United Planner’s platform?

Aaron: Well, I would say the biggest challenge was in the early days, we made the right decision architecturally, which is decision number one. Number two, we built a minimum viable products and that was a really great decision also. But as you know, over time you have to start to decide where you’re going to continue to invest and where you’re not. That was a big challenge. You know, you can do anything, you can’t do everything. We can’t do everything, right? And so we had to start deciding where we’re going to invest and not invest. And those are very difficult decisions. So we got to a point, we said, let’s go ahead and build something we call the critical initiative process. About three years ago, we started to engage internally and saying, Okay, we’ve got to make some really important decisions going forward now, we’ve got a lot of infrastructure, we’ve got a lot of built in supply chain. But complexities emerged, stabilities emerged as a challenge and now you’ve got reinvesting in that infrastructure because it’s been many years. So let’s start building into our DNA how we’re going to make decisions. Let’s build a process for making decisions that we can all agree upon. We started something called the critical initiative process, which then was tied into the business plan and we would meet monthly as a leadership team and really talk about where is the investment this month? Where’s the investment next month? Where’s the investment next quarter? And how are we tracking against what’s going on in the market? Having a process to do that, and really the process was about saying no. The hardest thing is how you build a process to say no, not how you build a process to say yes. Bill, you want to speak to that?

Billy: I was just nodding my head over here Craig, saying yes, we have a problem saying no.

Aaron: Naturally we want to do everything we were so good at building. Our biggest problem was we were saying yes to everything, but then all of a sudden that becomes its own problem. So then you have to decide how you’re going to actually grow healthy once you get to a certain size. And we’ve now become, or they’ve defined us as the smallest large broker dealer in the nation. And now we’re really, our capacity, our size really required a new way of being innovative by learning to say no, which was taking the innovation out of the hands of the innovators and putting it into the hands of the business decision makers and tying it to the finances of the firm, and that became a critical next step to how to tie those two things together and still be innovative. And that’s the process of saying no, which is one of the hardest processes of the company.

Billy: Yeah. You know, I’ll just make one other comment to add to that is, I think if we take a step back and look at this kind of in a layman’s terms, the approach was just as we’ve preached to our advisors. Do what you do best and outsource the rest. That’s right. That’s a quote that one of my colleagues uses. Give him credit. I can’t take credit for that, but it actually makes a lot of sense. Do what you do best and outsource the rest. And so we tell our advisors to do that with their practice so that they could be efficient, scalable, more productive, more profitable. And so we actually practice that too, and that’s where, in the spirit of this very conversation, is how we redesign our system. How we did it in a fashion to partner better with our service providers so that we are actually outsourcing some of those heavy lifts. We’re not trying to build a system that says “build it and they will come”. The advisors will conform to how our system has been designed so that they do it this way. No, we’ve done it in a way that’s flexible and advisor centric, client centric. And it does have that spirit of outsourcing. You know, just like Aaron said, if they use Redtail, we’re not going to build a CRM. We’re not in the market of building a CRM, but we’ll build our system to interact well with a CRM or a financial planning system or a portfolio management system or any of our RIA custodians and so on and so forth. And so I think that’s kind of a good way to summarize the discussion, United Planners as being the biggest yet smallest broker dealer RIA in the industry is because we’ve done it in a way that’s very, I would say, intelligent and with smart use of our time and resources to deepen our relationships with our service providers so that we are outsourcing. And I mean that’s a good example of like our open architecture. I mean if 90% of our business is done away from Pershing LLC, well then our staff here in the home office to open accounts, service accounts, trade accounts did not grow exponentially because we’re leveraging the service teams as well as their technology at TD Ameritrade, which is our largest RIA custodian, almost twice as big as our Pershing LLC clearing firm relationship. So we’ve done this in a very intelligent way to maximize our production by having a minimal amount of resources here at our home office. So I just wanted to kind of add that in there as kind of some color and context for the big picture of everything that we’re talking about.

LPL Financial

Craig: Back last August I was invited to attend the LPL Financial Advisor Conference out in beautiful San Diego, California. And while I was there, I had the privilege of interviewing two of their senior executives at LPL, Rob Pettman, EVP of Product Strategy and Kirby Horan-Adams, EVP of Product Management. Great conversation, a lot of talking about their changes to their ClientWorks platform that 15,000 advisors are using, which is leaps and bounds above in better functionality, better user experience. I’ve got a lot of demos of the different functionality in it. I really like what they’ve done and in this clip we were talking about models and the model management functionality of ClientWorks and how it helps advisors differentiate themselves and do their investment management.

Craig: So you see model hub, how many different model providers do you have?

Rob: I don’t actually know the exact number. It’s a lot. So you’re thinking about like the number of different strategists that we have available, probably 20 different strategists and over a hundred different models.

Craig: Sure, that advisors can pick from and it flows right through into client works.

Rob: That’s right, yeah.

Craig: The model hub concept is something that every vendor has when they’re doing multi-strategy or UMA. They need to have that type of technology to bring the models in and flow that through.

Rob: The difference here though is that when I’m picking strategists, I’m looking at BlackRock, I’m looking at, you know, MFS or whomever, and then I see me.

Craig: Right. Can advisors share their models among each other?

Rob: That’s a feature that we’re introducing later on in the year. So advisors will be able to share it within their firms. So if we’re sort of operating as a team for instance, or if I’m in an institution that would be, not sort of —

Craig: Not a crossroads. I can’t become my own manager. I can’t become a manager on your platform as an advisor, right?

Rob: No.

Craig: So from model hub, into the advisor sleeve, into UMA. When we were talking about MWP, is UMA a subset of MWP or they really parallel systems?

Rob: So MWP is evolving into a UMA. Right now it’s funds to ETFs and it’s just evolved into being able to have an advisor’s portfolio next to a strategist portfolio in the same account.

Craig: Sure.

Rob: And then as we look at the roadmap, we’re expanding the number of the different types of securities that we’re putting in there, so we’re going to go with equities and SMAs next so you’ll see that early next year. That’s when you get into any tax management services and other things, but we’re not going to stop there. We’ll actually add on annuities and alternative investments because in some of those classes that’s a really unique opportunity. Again, if my guiding principle is to make managing money easier, I think about structure products and how that might react with a trading system.

Craig: I think about that all the time. Will you put your annuities into the account? So this is something that’s been tried many times. It’s in a UMA, put an annuity in a sleeve so it can be managed like the other SMAs. Will you be able to do that or will the annuities still sit on the side and then somehow be aggregated in the backend?

Rob: I can’t go into too many details on that just yet, that’s in development.

Craig: Okay. If I can make a suggestion, you want it inside if you can.

Rob: No doubt.

Craig: Cause that’s a lot of problems advisors have, is they have this swivel chair or screen toggle between their annuity screens and their wealth screens or their insurance screens and the wealth screens. And it’s really separate procedure, separate onboarding processes. So the more you can consolidate that and make it one experience, the better.

Rob: And we would agree. Right. Again, if you think about the sort of maniacal focus towards making managing money easier, you want to be able to get it all done in one place, have the most amount of convenience. If it’s not convenient to have it in there, why have it in there?

Craig: A maniacal focus.

Rob: That’s right.

Craig: We’re maniacs.

Rob: We are maniacs.

Craig: So with your account process, how long does it take an advisor to open an account on ClientWorks?

Kirby: Today in the existing system, it’s just over nine minutes on average.

Craig: It sounds good. You would think, I mean nine minutes sounds —

Kirby: It’s not terrible, but of course we want it to be faster. Right, we want to make it even easier for them, especially with things that we can see are pain points for them. Re-keying of data and writing some of those fields that they didn’t need and the way that they go about the process. And so by doing that, we did cut it by about 60% so the test advisors that are in the new tool right now are doing about four.

Craig: Which is crazy fast.

Kirby: Crazy fast.

Craig: And then this gets rolled out to the entire advisor force, it’ll say 4 million minutes.

Kirby: Correct.

Craig: Which is how many years?

Kirby: Eight years.

Craig: That’s eight man years or woman years of time that will be saved. And that’s because time is money and advisors only have so many hours in a day.

Kirby: Right. And we need to help drive the efficiencies so they can go out and focus on growth and focus on additional value propositions for their clients.

Craig: And I have to say that this is definitely a wealth management crowd, because that got applause. They told them, we’re going to cut it from nine to four. *imitates explosion*

Kirby: Right?

Craig: The crowd was going wild, like what will I do with all my free time? It’s true. Cause if they’re coming here to beautiful San Diego and spending a couple of days with you, they want value. They wantm to come away with something.

Kirby: They do, they do. They’re here to learn. They’re here to understand what we’re doing. And I think we’re really excited that we have all these new capabilities to show them and talk to them about what we have today and what the roadmap is for tomorrow to kind of bring them on the journey with us.

Morningstar

Craig: How did Morningstar build one of the biggest financial technology businesses in the country, quietly? They’ve got over 120,000 advisors using their tools one way or another, or data. And that’s quite a bit. I spoke to Dermot O’Mahony, Global Head of Software at Morningstar and I recorded this clip at Morningstar’s annual conference, which was held this year in their hometown of Chicago, one of my favorite cities. So this question I asked Dermot, what were some of the things you learned from the experience and how has your business changed, being such a big technology provider?

Dermot: We use the data for trend analysis, like you said, product improvements and things like that. Unlike some other folks in the space, we don’t mine data.

Craig: Well, you could it to make things better.

Dermot: It’s like basically these advisors are in, they’ve generally quick turnaround, right? So these advisors, it’s like going to the doctor to a certain extent, right? You want to go in, they want to serve a need, they want to move you. They want to go and see their next client. And so having everything available in a very easy to find, easy to navigate type of way is very valuable to these folks. And we’re in the process of actually redesigning the user experience for Advisor Workstation, which is a pretty big deal for us considering the usage. It’s also used in Canada and in India, so it’s actually a global product. And so we’re currently refreshing it using some of our new design standards that we brought to bear in other parts of the business cell. That’s going to be something we’re going to probably start talking about a little bit later in the year.

Craig: So what can you share about the size of the technology business?

Dermot: Obviously we’re a publicly traded company, so a lot of the information is online, but you know, at an overall, we hit $1 billion last year. And the Morningstar software businesses is a substantial percentage.

Craig: If that was a standalone business, you might be one of the largest technology providers in wealth management.

Dermot: We’d be pretty close to that as a revenue. It just becomes a revenue, and not even just revenue, number of people served. So as I said, we’ve got desktops, we’ve got over 120 Advisor Workstations at desktops here, in Canada and India is where we’ve rolled it out. And we have Morningstar direct. I think we publish that number, it’s around 15 times our desktops out there. That’s a global product used both within wealth management space and the asset management space. And then we serve an untold number of advisors. Through our development teams, because we don’t know how many are there, or how many are licensed cause we do enterprise level licensing for these folks. And so you know we license to a large firm, everyone ends up using it.

Craig: Gotcha.

Dermot: So we don’t know exactly how many people are using it.

Craig: It could be unlimited.

Dermot: It could be unlimited. We could, we could claim pretty much every advisor in wealth management globally at this point.

Craig: That’s very interesting point that your technology business is really flying below the radar.

Dermot: Well, I think it’s more like the Morningstar Research brand is so strong and it’s so important and rightly so that the software was kind of originally considered just another delivery channel for the research. But if you look at companies like FactSet, I’m not sure what their market cap is now, but it’s pretty substantial. I think it’s more than Morningstar’s, right? They are software desktop delivers, very similar to the Morningstar software business. So if you’re going to want equivalence, that would be a pretty good one. And but we’ve talked a little bit more, for example, you know we’ve got a little bit more outreach in regards to folks like yourself and communicating what we do and how to do it.

Craig: Let’s get the word out.

Dermot: Well I think we do some pretty good stuff like enabling advisors and wealth managers and asset managers to access Morningstar research in a way that is sort of a Morningstar approved matter from a visualization from an analytic reporting perspective I think it has value.

Craig: Let me interrupt you for a second, I’m sorry. So BlackRock wouldn’t be a competitor of yours because they’re an asset manager. But one of their goals is to derive 30% of their revenue from technology.

Dermot: Yeah. Most of Morningstar’s, if you want to call them competitors, are also Morningstar’s customers in other ways.

Craig: There’s a lot of coopetition.

Dermot: A lot of coopetition, and you know this in this space, right? So it doesn’t really matter who you are because of the fact that we are the primary provider of research and data to all of the technology providers in the industry, the reality is that even if we may compete against someone in the morning, we’re partnering in the evening ByAllAccounts is a great example. So ByAllAccounts is our contact location service. I really focused on wealth management and you know, again the industry, all you hear about is someone getting bought, whoever it is. But ByAllAccounts provides aggregation services I would think to the majority of portfolio accounting platforms and directors. But then those portfolio accounting platforms may compete with Office as well. But we’re pretty good at like separating church and state here at Morningstar. Our analysts rate the asset managers, we sell software to asset managers and sell data to asset managers. So we’ve been pretty good at keeping an independence and we don’t play any games with that, and we think it’s very important. So for example, with the model marketplace, we don’t take any fees from asset managers to put their strategies on our platform.

Craig: Which is a differentiator.

Dermot: I think it’s the right thing to do, right? It’s not even a case of it being a business imperative, but if you listen to Kunal Kapoor, our CEOs’ opening remarks, I think this is pretty important. From someone who runs a business, one will think that you’re always looking for to drive additional revenue as a public company. But the reality is you get yourself into sticky situations all the time. And especially given that the Morningstar brand is really built around independence and is built around our research and our data, passing up little revenue opportunities here or there even large revenue opportunities —

Craig: Relative to your overall revenue, it’s small. It’s not going to move the needle very much.

Dermot: Probably not, but it’s not the right thing to do.

Craig: And that’s a wrap. This is Craig Iskowitz again, hope you enjoyed this compilation. Please remember to hit the subscribe button wherever you listen to podcasts, iTunes, Spotify, and give us a five star review. Check out my blog at EzraGroupllc.com. Look forward to seeing you more in 2020. Take care.