#ItzOnWealthTech Ep. 55: Why Investors Are Getting Screwed by AUM Pricing with Anders Jones

“The real issue in this industry is a cost problem, the cost to service clients is just too high. Here you have 8 million people who’ve already opted into working with a human advisor, even though they’re getting screwed. And so for us, this is an enormous readily available market if we can open up high quality financial planning to folks who can’t afford it.”

–Anders Jones, Co-Founder & CEO, Facet Wealth

Anders Jones is the co-founder and CEO of Facet Wealth. Prior to Facet, Anders was a founding partner at Argyle Ventures. Argyle invests in emerging startup markets, with a focus on advertising technology, financial technology, and healthcare IT. Prior to Argyle, Anders was on the early team at LiveRamp (acquired by Acxiom for $310 million), and has been involved as an investor or advisor in many other startups in Silicon Valley.

Anders’ thought leadership has been featured in Barron’s, Inc., Business Insider, CNBC Nightly Business Report, Yahoo! Finance and other national media.

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This episode of Wealth Management Today is brought to you by Ezra Group Consulting. If your firm is evaluating new technology or looking to improve your current wealth platform, you need to contact Ezra Group. Don’t spend another day using technology that doesn’t offer an elegant user experience. Your advisors and clients deserve better and you can deliver it to them with the help of Ezra Group.

Companies Mentioned

Topics Covered in this Episode

  • Facet Wealth Competitors [06:28]
  • Technology Stack [19:49]
  • Schwabitrade [23:37]

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Complete Episode Transcript

Craig: I’d like to welcome my guest on this episode of the Wealth Management Today podcast, Anders Jones, the co-founder and CEO of Facet Wealth. Hey Anders.

Anders: Hey Craig, thanks for having me.

Craig: I’m glad you could make it. It’s been a while since we saw each other, we were just chatting a bit about the last time we were together, which was the last time anyone was together in the industry, it was at a conference last summer.

Anders: Right. I know who would’ve thought that we would all miss conferences as much as we do.

Craig: We wouldn’t miss the food or the crowding or the hotels or the sitting in chairs, listening to people talk all day. We miss all that.

Anders: Yeah. Yeah. It’ll be nice when we can go back to that.

Craig: Now everything’s going virtual. Are you going to be in any virtual conferences?

Anders: Nothing is on the radar right now, although Facet Wealth actually got nominated for a couple of categories of the Wealthies.

Craig: Big friends of our podcast and of our blog. I always go to that, they’re very nice to invite me to that every year. So looking forward to seeing you win in whatever categories you’re in.

Anders: Fingers crossed, we’ll see. We’re in good company amongst the finalists, so certainly happy to just be considered.

Craig: I would hope so. Can you do a quick 30-second elevator pitch for Facet Wealth?

Anders: Absolutely. So Facet is a financial services company that is very focused on holistic financial planning for the mass affluent market. So we really see a need for folks who have enough nuance and complexity in their financial life that they need to speak with a human, they need to work with an expert. All of our clients work with a dedicated, certified financial planner, but the flip side is they don’t have the asset level that traditional advisors really get excited about or that falls into the traditional wealth management wheelhouse. So it’s an enormous market, it’s about 33 million households in the US and we really try to solve the problem by building great technology so that our planners are way more efficient, can work with a higher number of clients and that drives the overall cost down to the end client. The other thing that’s a bit unique about us is that we charge an annual subscription. We don’t charge based on assets, all of our revenue is generated through a recurring subscription model. It makes us I think a bit unique, and really tries to align value with costs instead of what for us is essentially an arbitrary number, which is how much money you have.

Craig: And it’s also what we call scalable where it doesn’t grow with your client’s assets, which is not scalable. It’s a flat charge that as they grow, they keep playing that same fixed price.

Anders: That’s right. And we really think about it in terms of when we onboard a client, we look at all the things that we’re going to be helping them with and then we back into essentially an amount of time and resources that we’re expanding on our end. We expect that we’re going to spend X number of hours per year with you. Sometimes we’ll spend more sometimes to spend less, and we’ve identified the 9-10 different things that will really help you get your financial life to the next step or the next level. The other thing is that planning evolves over time for each client, right? So a set of issues that you have today are very different than the set of issues that you’re going to have two years from now, so we think it just sets us up nicely to touch in every year, check in on the different things that we’re helping you with and making sure that we’re very aligned with your needs.

Craig: I like that, planning evolves for each client.

Anders: Yeah.

Facet Wealth Competitors

Craig: So how do you compare yourself, what other firms do you compare yourself to? I know you’re probably saying, well, we’re unique in the industry, but people are going to compare you. You’re an RIA platform in effect, so there’s lots of them out there, who do you normally get compared against?financial advisor technology

Anders: I wouldn’t be an entrepreneur worth my salt if I said that we’re totally unique. I think that there are a number of companies doing bits and pieces of what we do, but no one has really put it together in the same way that we have. Some of our core focuses are full planning. There are a number of companies out there that are doing full financial planning for clients, Personal Capital comes to mind. But they charge a basis point fee and there are limits from an asset standpoint before you get access to a dedicated CFP. Subscription-based, well, you could make the argument that XYPN even though it’s a different business model, XYPN advisers are subscription-based, but the big difference there is that the XYPN advisors are running their own shops. Facet, all of our advisors are W-2 employees we are the company that has the client relationship and has the planner working for us. And then you can look at a place like Vanguard that has big focus on low costs, they have what I would call planning-lite. We’ve looked extensively at the PIS model and tried to understand what they’re providing. I think they’re great for asset allocation and some retirement planning, but once you get beyond that, there’s a lot of stuff that those advisors are really empowered to help you with. So like I said, there’s a lot of different companies out there doing bits and pieces, but I feel like we’ve put it together in a fairly unique way.

Craig: It’s interesting you mentioned Personal Capital and Vanguard. Do you see your firm as a robo-advisor or a robo-platform?

Anders: No, no, not at all. I mean, we actually only manage money for maybe 50% of our clients. So the value that our clients get is in the financial planning. We’re happy to manage money, we do a great job of it. Our offering looks very similar to a robo in that it’s probably diversified, it’s low cost, it’s pretty simple, and we don’t try and do anything fancy, like Adalpha or Benchmark or anything like that. In some cases, clients come to us and they’re in high fee products and we can move them over to our models and save them a lot of money, and that’s the only reason why we do it. So now our focus is very much planning first human first, not DIY-robo.

Craig: So I want to go back in time a little bit. You were at a VC firm called Argyle Ventures, right. What stuck out in the industry and your research that gave you the impetus to start Facet?

Anders: A couple of things. So this is in 2014-2015 timeframe. This is right around the time when the robos were getting a lot of initial funding and initial attention. It was clear there was a lot of value shifting around in the industry, and there were a lot of next generation product companies that were coming to life. And then I think the real aha-moment for the founding team actually, it has roots in the DOL Rule, was when basically the DOL rule was published and the industry pushback was, if you do this, you’re going to have 8 million households that lose their advisor relationship because they can’t afford to both service the client and act in their best interest.

That was when a light bulb went off and said the real issue in this industry is a cost problem. The cost to service clients is too high, and it’s a big enough market that the industry can naturally gravitate towards the high net worth clients. There’s plenty of money to be made up there, but there’s an enormous need, here you have 8 million people who’ve already opted into working with a human advisor, even though they’re getting screwed. And so for us, it was like, okay, there’s an enormous readily available market, but then there’s a much bigger market. If we can lower the costs and increase access, we can open up high quality financial planning to folks who either can’t afford it right now, or don’t think they can afford it right now.

Craig: When you’re talking to people, when you raise money, you raised $40 million, what was your pitch? What was your combination of things that they’d know about to understand the concept?

Anders: No, it’s a good question, and actually our fundraising story is a little bit unique. So we raised the $33 million Series A from Warburg Pincus and two things that are unique about that. One is companies outside of the biotech space, typically don’t raise Series A’s that large and Warburg Pincus typically doesn’t do Series A’s at all. So for us, it was really a meeting of the minds. They’re a very thesis driven investor and I had a casual conversation with one of the principals there, and he said, look, we’ve got this, this deck on the future of wealth management that I have 60 slides and you guys hit 58 out of the 60 slides. And then I was like, Oh, well, we should talk. And so they were actually willing to basically flex outside of their typical area of investment and write what for them is a very small check into a company that was very early stage at that point.

I wouldn’t say that there was any one specific pitch where we said, okay this is how we’re going to sell Facet, it was more like, Hey, here’s what we’re doing, and they say, Man, we think this is the future of wealth management for the mass affluent. And they have a history, right? I mean, they were in the mutual fund store and then they stayed in Financial Engines when Engines bought them. They have a history of trying to figure out how to work with the mass affluent and I think we were a natural extension of that.

Invest In Others

Craig: That’s what you’d like to hear. You want to hear you hit 58 of our 60 points.

Anders: Exactly. Yeah.

Craig: Can’t hit much more than that, unless it was 99 out of 100 points.

Anders: They they’ve been awesome to work with. And even though it was a strange a strange marriage, it was definitely the right one for us.

Craig: So one of the points you were raising earlier was about how the pandemic has validated the Facet Wealth business model. Can you talk about why that is?

Anders: I think there’s a couple of key points. So one is we close our office on a Thursday, and Friday morning it was business as usual. One of the things I don’t think I mentioned in my elevator pitch just now is that we’re a virtual company. All of our CFPs worked from home and all of our client meetings are done via Zoom and we’ve been doing that since 2016, since day one. So 80% of our team, we’re about 120 people now, but 80% of our team worked from home to begin with. So it wasn’t that big of a deal for us to close our office, and we moved to purely virtual. Then you look at some stories about some of the larger legacy companies, I won’t name any names, but that have really struggled to adapt to that virtual virtual environment.

I think in that sense where we are is sort of where the puck is going from a “how the future of work is going to happen” standpoint. And I think the second point is that still staying in March, you look at, you had two weeks of insane volatility no one really knew what was going on. Our onboarding rate basically doubled. We went from adding about 50 new clients a week to adding 100 new clients a week, because you had a lot of people who were staying at home saying, Oh my God, I don’t know what to do with my financial life. We’re the only firm that was ready to go virtually that can say, Hey we were built for a virtual world, so we’re easy to work with.

And in that setup, those two weeks, most portfolios had lost 30% of their value. Those folks were a lot less interesting to traditional advisors and perfect for us in our fee models. We certainly saw an increase in demand there, and I think our existing clients really appreciated the fact that we were there and ready to work with them without a hiccup. What’s been interesting is that that pace of growth has stayed the same for us since then. It’s hard to say the world’s back to normal now, but even as things are starting to return to where they once were, the demand has not slowed down

Craig: 100 clients a week. That’s impressive. That’s a pretty good clip.

Anders: I mean, it’s hard to know inside numbers for all the firms, but we would have to be in the top 1% of fastest growing RIAs in the country right now, I would think.

Craig: Yeah, you’d think. It seems that way, I mean I’ve been talking to a lot of RIAs the past couple of weeks and no one’s adding that many new clients. Although how many actual advisors are on your platform?

Anders: We’ve got 43 currently.

Craig: For only 43 advisors, that’s each advisor adding, adding two and a half new clients per week.

Anders: We have a whole model we’ve worked out around how our advisors onboard clients and what that flow looks like when there has to be some method to the madness or else it gets out of control very quickly. So we have a model where there’s heavy onboarding weeks and then there’s the client catch up weeks where you spend time with your existing clients and you go back to heavy onboarding and all that. So it’s an imperfect science for sure, but I think we’ve done a reasonably good job of figuring out how to meter that flow on an advisor level.

Craig: And do you have a completely digital onboarding?

Anders: So yes and no. It’s 100% virtual, but we actually have a pretty hands-on onboarding process. We have a team of, we call them client success managers, but they’ll take a prospect from initial inquiry up through understanding what their goals are and how we can help and making sure that it’s a mutual good fit, and then introducing them to their planners. So in one sense, it’s actually quite hands-on so we don’t have our clients serving themselves. and we’re really digging in to make sure that we’re going to be a good fit for the client. On the other hand, we don’t actually ask any of our planners to do any selling or business development on their own.

Craig: But your onboarding, does it require any paperwork, any actual paper to be signed?

Anders: No, no, no physical papers. The one caveat to that is depending on various investment accounts and the product company that we’re working with, they might have some paper requirements, but from a Facet standpoint, everything is digital.

Technology Stack

Craig: And did you build all of your own technology or are you built on top of something else? Did you build it all from scratch? How’s that work?financial advisor technology

Anders: For the most part it’s all homemade. Our CRM, our financial planning tools, all of our client deliverables, various workflow automation, and we have some light AI right now that’s working on our database, that’s all internally built. We have a we use Plaid for account linking. Those types already exist, we don’t need to rebuild them, and we use Box for secure file storage, but I think those are the only two. And then obviously we use them for, for video conferencing.

Craig: You didn’t build your own video conferencing platform?

Anders: No, building a company is all about making trade offs and that did not feel right when we had Zoom sitting right there.

Craig: So why build your own CRM? Why not use Salesforce, Redtail, one of the other apps, there’s lots of CRMs out there.

Anders: So if you take a step back and think about what our tech really is meant to do, it’s enabling advisors to work with a higher number of clients, well, the way you get there is you don’t want to skimp on client facing time so it’s really the prep and wrap up time that an advisor spends, getting ready for a meeting or following up after a meeting, that’s where the bulk of the the planning work gets done. And if you look at what that time is spent doing, it’s actually quite low value admin work from a human standpoint, it’s all moving data around and normalizing reports and putting things into nice looking deliverables and doing calculations and that thing.

And so what our tech really tries to do is eliminate all of that. And to do that, you basically have to start with that with a database that enables that easy transfer of data, and it also allows us to take different looks at our data to see if there are similarities between clients, if there’s similarities between financial planning cases where we can create smart suggestions. If we see a set of variables and we see a recommendation that an advisor made, and then we see the same set of variables, we can actually give a smart recommendation there. Of course we anonymize all that stuff, so we’re not actually exposing client data or anything like that. But having that CRM backbone and database backbone for us is actually is a competitive advantage I think.

Craig: How about the investment management piece? Do you have a portfolio rebalancer, your portfolio management tools?

Anders: We work with Vestmark and we outsource all that to them. So we’re not, again, trying to think about the highest and best use of our tech dollars, that is a problem that’s been solved many times over and there’s some great vendors out there. The way that we’re really gonna add value as a company and grow our value is to focus on how we enable our advisors to be more productive, and that’s one that is an easy one, an easy solve off the shelf.

Craig: Indeed. So why Vestmark, did you look at other vendors? What were their strengths that made you pick them?

Anders: We have an investment ops team that made that choice, and I think in general there was a very hands-on component where there was an ease of use on our part where we didn’t have to hire a huge number of bodies to do all the stuff, we’re multi custodian right now as well, so we work across four different custodians and so Vestmark enabled us to get rid of some of the complexity associated with that internally.


Craig: When you say the four, is that the big four? Big four. All right. So you work with all four of them.

Anders: Yeah, big four. About to be the big three, I guess.

Craig: About to be the big three. Yes, exactly. Is there any issue with that, do you see that changing the business at all, or is that just going to be another step in the road towards one custodian?

Anders: So it’s an interesting question. I mean, looking into my crystal ball for what it’s worth, the custodial business model is certainly changing, I think at a much more rapid pace than than any of us expected would happen 12 months ago. And so if you think about, I have this whole thesis around the wealth tech landscape and how there are a lot of companies out there, there’s a saying in Silicon Valley, that this is a feature masquerading as a product masquerading as a company. I think there are a lot of wealthtech companies out there that sell into advisors with something that would make a great feature in a bigger suite of tools or a bigger standalone product.

And if you look at the landscape, distribution to advisors, especially on the tech side, it’s really, really hard to do because you’re basically selling to small business owners who need a number of tech solutions, but don’t necessarily have the sophistication or the experience to string together five different tools and make them all work together. Each advisor has a unique planning process and trying to build tech to sell to that market is really difficult. So then it begs the question, how does that landscape evolve, right? Because advisors need technology. Who has the ability to help design a standardized process, pull a bunch of technology together, and make it all work together in an off the shelf way, and already has the distribution of your advisors well, it’s custodians. And so my non-obvious five-year thesis is that five years from now, one of the big custodians will actually look a lot more like a SaaS business than a custody platform.

Craig: Okay. You don’t say which one though, you just think one of them.

Anders: I don’t know. I don’t know enough about the inner workings. I mean Fidelity has been making the biggest moves with their acquisitions of various tech companies, so that would be the front runner, but I don’t certainly don’t have any inside knowledge there.

Craig: Yeah. And Schwab is doing the opposite, but they sold off the Portfolio Center to Envestnet There’s rumors they’re going to trash Veo, that’s not gonna last very long. So they seem to be banking on the fact that advisors don’t want tech from their custodians.

Anders: That’s right. You can imagine a crazy world in which Envestnet becomes a custodian. And then there’s Apex out there too. I don’t know a ton about their business, but they also seem to be one of the more tech forward firms out there as well. So yeah, there’s a lot of really interesting strategic moves that could be made over the course of the next the next few years.

Craig: Let’s talk more about the subscription model, which I think is really interesting, and I feel that this is the future of wealth. Once people realize that there’s not that much more work involved in managing a $100,000 account versus the $200,000 account and so on, but they’re paying twice as much. I think more customers are going to start demanding a subscription model, so I see you as being ahead of the curve. And when were last in the same room together, was at the conference, where you were talking about subscription models with Alan Moore from XYPN, and I just wanted to throw out a couple of things you had said from my notes during that panel. So you said, “the AUM model makes no sense given the commoditization of asset management and how little value advisors add in this area”.

Anders: Yeah, I still very much agree with that. If you go back 20 years, you could make the argument that advisors actually did add value through asset management. And some of them probably destroyed a lot of value as well. But that was the core value prop that went to their clients, it was just, Hey if you give me your money, I will do my best to make you more money from that money. Today, we’re moving to a world where the smart thing for the vast majority of investors is market exposure. You participate in the markets through cheap index funds, you get broad diversification, you’re set. And the way that advisors add a lot of value is through financial planning, and there’s that great Vanguard study around behavioral alpha, right? That has nothing to do with touching your money, tt’s all about managing your behavior, managing your spending, etc. And so I think it’s a foregone conclusion that the world is moving in that direction and that the consumer of tomorrow is much more interested in the non-asset management aspects of financial planning. So given that the pricing model, the way that advisors charge has to update, it has to evolve with it. And so in any market where you have an inefficient pricing model, at some point, it will converge on aligning value with costs. I think we’re doing it and walking the walk by charging a subscription price, which by the way it doesn’t come without its challenges, right?

We are basically saying, we’re going to prove our value as a financial planner to you, our client on a monthly basis, because we’re charging you on a monthly basis. And so that’s a perennial challenge for us to make sure that, Hey, maybe it’s not a planning meeting that you’re having this month, but how do we give you value in some other way, whether it’s information that you got about your financial situation by logging into our platform, whether it’s by content that’s customized to you, whatever it might be. But there’s a challenge to continue to add value to the client, which I think by the way, is at the end of the day is really good for the client because it pushes the service level and the expectation of what you’re getting from a financial planner to a different level. So I think all of this is going to end up being beneficial, to the end consumer. But all that is to say is that I think we’re in this weird moment in time where the vast majority of the industry is charging one way, but the way that they’re delivering value is actually a very different way. And at some point that’s going to change.

Craig: One other thing you had mentioned was over the past decade advisor average margin has risen 30%, but productivity has remained flat. Why is that? What was the data and why is that? Why has productivity remained flat?

Anders: I’m not sure which study exactly I was quoting, I think McKinsey’s done a fair amount of work around this. But if you look at advisor productivity and measure it by clients per advisor, in 2009 it was about 75, and today it’s about 75. So that implies that maybe advisors more productive, but then they’re working less or whatever it might be, but they’re servicing roughly the same number of clients per advisor. Then you look at advisor margins and they have actually risen. I think there’s a ton of work out there. Like I think like Echelon and DeVoe do a fair amount of research published around this. And so basically if you say, okay, well there’s two ways you can increase your margins. One is operational efficiency and cost reduction, or two is you basically grow your revenue on the same cost structure.

And since we all know how advisors grow their revenue, which is through additional AUM, it means that basically they’ve been making a lot more margin on market movement, and the market up until a few months ago was on a ten year tear. And so that’s where that margin expansion was coming from. It’s been really interesting to watch over the last couple of months, it’s COVID has hit we’re at a point in April or May, whenever the market hit bottom where I thought for sure there was going to be a huge amount of consolidation in the industry. And I think there is going to be a lot of revisiting assumptions around what running a profitable advisor practice actually means. The market is now rebounded, and so there was a momentary dip, but now it seems like for the moment, anyways things are back to where they were. Who who knows what’s going to happen in the next few months. But my thesis around like, alright, when the market crashes, there’s the fact that no one has invested in operational efficiency is going to come back to haunt folks. The market did not crash in the way that I thought that it would, so that remains to be seen, I guess.

Craig: One thing that is absolutely true is no one knows what’s going to happen.

Anders: Yeah, exactly. Right, exactly.

Craig: And one last thing I wanted to bring up that you mentioned, which I thought was funny, something from your comments from the panel, “a nonsignificant percentage of clients think their financial advisor provides advice for free”.

Anders: Yeah. Well, I think this gets back to, again, the pricing model of the industry. And I would say, I would imagine that most AUM based, fee-only clients understand that they’re paying their advisor a fee. I think a lot of product first advisors like the insurance and annuity world, I think there are a lot of consumers that don’t understand that they just bought something from their advisor and got a financial plan and that they actually just got hammered on the commission. And so I think that’s a legacy of a product sales heavy industry, which is fortunately I think it’s disappearing. I think it’s going to take a long time, but I think that the future is pretty clear that financial planning as a profession, much like being a lawyer or an accountant or a doctor. The days of stock jocks and bond brokers I think are coming to end. But it’s gonna take a while to get there for sure.

Craig: Everything takes a while. Inertia is a powerful force.

Anders: It really is, especially when the amount of money that this industry makes is what it is, right? Like in absolute dollars the profit margins in this industry are insane, and that definitely slows down innovation and change.

Craig: Anders. I really appreciate your time where we’ve run to the end of this segment, this episode. I want to thank you for appearing here and wish you the best of luck and hopefully I’ll be seeing you again soon at the next conference when we can have conferences.

Anders: Awesome. Great. Thanks for having me. I’m looking forward to doing this in person one day.

Craig: Absolutely.



The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com