#ItzOnWealthTech Ep. 56: Unlocking the Secrets of Tax Optimization with Mark Hoffman

“The trends that we’re seeing right now is that the younger generation wants things to be a lot more personalized. They really don’t want to be educated. They don’t want to know how a Monte Carlo works and what’s a capital market assumption. They just want an answer. Like, do I have enough money? Am I safe? How much can I spend?”

–Mark Hoffman, Co-Founder & CEO, LifeYield

Mark is Chairman, CEO and co-founder of LifeYield, a provider of software that improves the tax efficiency of portfolio management. LifeYield is used by some of the biggest names in the industry including Morgan Stanley, Envestnet, Franklin Templeton, Allianz, Merrill Lynch, SunTrust, New York Life, Jackson National, and Personal Capital.  Their first product was a tool for optimizing the sale of assets to generate retirement income, which is sometimes referred to as “decumulation”. They have since launched a suite of complimentary tools that improve the tax efficiency of pre-retirement portfolios as well as a social security optimizer called Social Security Advantage.

Previously, he was the CEO and co-founder of Upstream Technologies, a portfolio manufacturing and trading solutions vendor, which was sold to CheckFree Investment Services in 2007 (itself later purchased by Fiserv, now Tegra118). Upstream delivered highly scalable and complementary capabilities to its industry leading separately managed account portfolio accounting platform.

Before Upstream, Mark co-founded Lattice Trading, a highly scalable advanced Alternative Trading System that integrates order-matching with order-routing. Upon Lattice’s acquisition by State Street Global Advisors (SSGA) in 1996, Mark became the Director of Electronic Trading for SSGA where he increased the Lattice Division client base to over 100 asset management institutions and led a financial engineering team that built trading algorithms for its clients. Prior to co-founding Lattice, Mark developed equity trading, financial analysis, stock selection and fund management systems for Colonial Management and EDS, among others. Mark has a B.S. in Computer Science from the University of Wisconsin.

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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

  • History of LifeYield [03:20]
  • Decumulation [11:24]
  • Taxficient Score [17:25]
  • Next Best Actions [23:23]
  • The Impetus of App Reunification [26:30]
  • Disintermediation [28:00]

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portfolio management software

Complete Episode Transcript

Craig: 30 years ago, Mark Hoffman’s first startup was an alternative trading and execution platform. This was a daunting task considering that even the fastest supercomputers in the world, then couldn’t run an Xbox game today. But he and his partners leveraged that technology to implement one of the world’s first electronic trading networks. They sold that company back in 1996, but a valuable lesson learned was always ensure that your systems are able to provide an answer to your client’s most important questions. Mark carried that mindset forward to his current company LifeYield, where their cloud based software is available 24/7 to answer clients questions about optimizing income in retirement. I spoke to Mark about his career before LifeYield, how gamification helps improve client behavior and much, much more on this episode of the Wealth Management Today podcast.

Thanks for joining me here in the wonderful world of wealthtech. This is the Wealth Management Today podcast, and I’m your host Craig Iskowitz. I run a consulting company called Ezra Group. We help wealth management firms and wealth tech vendors make better business and technology decisions through our advice and research. On this podcast, I speak with some of the smartest people in the industry who are on the leading edge of technology and innovation.

On this episode of the Wealth Management Today podcast, I’m happy to announce I’m speaking with Mark Hoffman, the co-founder and CEO of LifeYield. Good morning, Mark.

Mark: Good morning. Very nice for you to have me.

Craig: I’m glad you could make it. I’m glad we worked out our technical difficulties. It’s interesting, this is something that we’re going through before trying to figure out what video conferencing technology will work with everyone, with your VPN, with our systems. As a consultant, we work with a lot of different companies and we’re always cycling through, Join.me, and WebEx, and we use Zoom and Uber Conference and there’s always someone with something that doesn’t work. It’s always a problem, I don’t know if you guys have that same problem within your company.

Mark: Apparently my CTO doesn’t like Zoom, unfortunately. So I’m glad you could accommodate by getting on Teams.

Unlocking The Secrets of Tax Management

Craig: Yeah. We’re going to give a plug to Microsoft Teams. No, no, no sponsorship here. Just giving a plug, we’re using Teams here. Great. So Mark, can you give us the 30 second elevator pitch for LifeYield?financial advisor technology

Mark: Yes. So LifeYield was something that started over 10 years ago with my partners. We’d always been in the investment management or the electronic trading side of things, but then we scratched our heads, wanted to come up with a new idea and we said, well, we’ve been in the growth and accumulation phase and operational phase. What are we going to do with all these different accounts we have? And how do you go about figuring out what to do when you decide that you want a retirement paycheck? Surely there must be a lot of people that have that question. So we did a bunch of research and found that, yes, indeed, it’s a complex problem made complex also by the rules and regulations. And then of course, how our industry goes about selling and packaging products. So one of my partners, Paul Samuelson ran simulations and found that if you could connect things and sort of connect insurance with investment with figuring out what’s your safe income threshold with what can you be a little more risky with, that you could actually save 30% in retirement income from taxes and an efficient management.

So we went out and had Ernst & Young review those algorithms so that we could get our first client on board, and it’s been working really well ever since. I would say that after the 10 years that we’ve been doing this or a little over 10 years, we’ve learned a few other things along the way, too. We certainly, I won’t say we were smart enough to foresee everything at all, the trends that we see right now, we had seen even at the end of last year, are being accelerated by what you and I are going through with this COVID crisis. And that’s the fact that the younger generation coming in wants things to be a lot more personalized.

And so advisors like me are getting older, and the younger folks want to communicate in a much more personal way as they are with all their retail oriented technology. They want things, even the customers that we’ve had with advisors, now we’ve found that they really don’t want to be educated. They don’t want to know how does Monte Carlo work? What’s a capital market assumption, forward-looking. They just want an answer, like, do I have enough money? Am I safe? Now that the market went down, now it’s coming back up. How much can I spend? And so we’ve been trying to bite size our technology so that it can answer specific questions, wherever the demographic of that client is for that advisor. That’s probably some of the announcements you’ve seen Craig, we’ve been doing a number of different things to improve our platform and to have the platform have a wider audience. So we have a number of insurance firms that we’re just delighted to have on board with the platform, some new ones like Jackson National and Allianz, as well as some big wealth managers that are at scale like Morgan Stanley and Merrill Lynch.

And then we opened up a channel direct to advisor where you see Steve a lot and we go to T3 and all the important conferences that hopefully will open up again at some point here, and the RIAs are a very bright target market. They really dive into the details and they’re very discerning and not afraid to share things with you. So I’m going to say that that’s really improved our product because it’s made us fill in some of the gaps that we needed to. It’s a so long winded way of me explaining what it is we do, longer than 30 seconds. I apologize.

The Life of a Serial Entrepreneur

Craig: Not a problem. I’m really interested in the story of how you founded LifeYield. So before LifeYield, you founded another tech firm, you’re a serial entrepreneur, you founded Upstream Technologies, which was more traditional portfolio manufacturing trading. So what made you found Upstream?financial advisor technology

Mark: So Upstream was founded, like many of these firms, you start out doing one thing and then the market speaks to you. I started Upstream with the thought in mind to put portfolio management on top of trading. At the time, a lot of these electronic trading systems were getting popular, and much to my surprise, being in the institutional trading side of the business at the time you as a retail client in the early in the late nineties could actually pay less than commission than an institutional client. It really was amazing. So we thought, let’s build a portfolio management system that can scale. What it ended up becoming was a UMA platform. While we could scale and manage many portfolios individually, it really turned into an operational system that an asset manager would use and connect to sponsors. Because as part of our other conversation, many individual investors don’t want to know how the inside of the watch works. They would like it to be done for them, but they’d like to trust who’s doing it for them.

Craig: Indeed. And then you were fortunate enough to attract attention from what then was CheckFree Investment Services, which is now Tegra118. Then you cashed out and started LifeYield. That’s already 12 years ago.

Mark: Yes. And fortunate, that we got into the wealth management business. So shifting 15 degrees in the wealth management business, as you know, is really grown a lot in our sector compared to some of the other places of sectorm so to speak.

Craig: Before that you were running Lattice Trading, alternative trading systems. Has that experience changed the way you approach the business?

Mark: Absolutely. The way is that it’s changed how we approach the business, Craig, that’s really a very insightful question I don’t get asked often. Even with all three companies that I’ve built and been part of, we ended up wanting to have an answer for implementation. So even with LifeYield, even though we’re trying to answer higher level questions, like how much can I spend and how long will my money last? We still operationally will have an answer. One of the new features that the system has in the last six months is what we call target assignment. So we can help an advisor, answer some of those kinds of questions, but then behind the scenes, we can say, here’s a compliant advised model that you can put into your UMA program to satisfy the investments for your client. You can talk to them about it if you want or not, but we’re actually going to give you something that you can go execute and implement. after all the discussions you’ve had with your client, you’re going to actually going to be able to do what you say you’re going to do. So that trading and execution background has always been with me and several of my partners that we actually want to do what we say we can do.

Craig: Yeah. That jumped out at me, and I’ve actually been wanting to talk to you about that for a while, because it changes the way you think about the business. Depending on where you come from, some people come from the VC world, some people come from the RIA world, some people come from, from the business side. So coming from the trading side, I think would change the way you approach anything. Whether it’s the portfolio management business or the business of analyzing retirement income, or other streams are doing this type of deep thinking, it kind of changes the way you approach a problem.

Mark: Absolutely.

Why Start with Decumulation?

Craig: With your current product, when it was announced, it seemed to me like it’s such a narrow focus. You’re really just focusing on the decumulation. Did you see that as something you always were planning on expanding, or you thought that was just something you really wanted to dive into?

Mark: So we did. You’re absolutely right. We did start on decumulation. One could argue that that was the hardest part of the problem to solve. When we first went into production in about mid 2009, that’s what we did. We did tax smart withdrawals for clients that were in distribution or close to distribution. And because it was complex, it was hard for the advisor to tell their story, to say, I’m doing all these things to benefit you, Mr. Client. So in working with advisors and some of their clients who wanted to provide feedback, we started to build a second part of the system, which was really a sales tool. We called it the illustrator at the time. But the challenge with the decumulating illustrator is that sort of competes a little bit with planning, so you’ve got that conflict and we didn’t really want to conflict with the planning portions of our clients’ technology base.

Because we were really looking at things after tax and all the planning tools are pretax. And it also told too many chapters in a story that the advisor wasn’t comfortable with. So we started to break out components of what we had built, and that’s what allowed us to create our social security tool. Again, client driven with a firm called Franklin Templeton, who just wanted to start with social security. Let’s let the advisor build a trusted relationship by helping have absolute great filing instructions and can also talk to the client about the trade off or waiting from full retirement to 70 and a half, which hopefully will lead to a trusted conversation about, Oh, you do have enough money, let’s put it in these investments so that you can delay and get more. And we just started through the years, building different components to tell the chapter of the story, depending on what demographic that client was in that allowed us to do portfolio advantage, which is really the accumulation piece where we can go to a young client and say, look, if you organize your 401k or your IRA like this and your taxable account like that, you can save thousands and thousands of dollars in taxes by the time you retire, you’ll have more.

We’ve learned to sort of really try to get a chapter solidified, to answer an important question. And then one of our advisor clients can decide which chapter of the book, depending on his client will need to hear. And it doesn’t have to go away. You can build on that story through time.

Invest In Others

Craig: I notice you used the word “story”, a number of times, “helping advisors tell their stories”. That’s something a lot of tech firms don’t see, that that’s really important for marketing. What made you realize that?

Mark: I’m getting beat up by clients, and really it’s important to be humbled. Just because you’re interested in the algorithms and the math and the technology doesn’t mean everybody is. So to reach that extra level where you want to make sure you have somebody like Steve or some of our other sales and marketing folks that want to make articulate easy, and tell that story. That’s really how we learned to do that. I would have to give credit to the marketplace and then us recognize that we needed to hire those kinds of people to go with our math and technology people.

Craig: Personally, I would give credit to you and the senior team seeing that because I work with a lot of other firms and you and I both have computer science degrees, but a lot of people I know who have computer science degrees or engineering degrees, they only think in that box, the tech box, and it’s hard for them to break out into a marketing box or into a customer focused box. So I think it’s an advantage that you and Paul and Michael have, in the serial success you’ve seen in starting and selling companies, you’ve managed to build up that talent stack of understanding how it’s important to help your customers tell their stories.

Taxficient Score

Mark: Yes.

Craig: Speaking of marketing, one thing I really like that’s not recent anymore, but the Taxficient Score, I think that came out two years ago, that was a really a really good idea. Everyone does similar things, but you were the first to come out with a brand name for that bit of your system. Can you talk a bit about how that came about?financial advisor technology

Mark: Well, we had been doing the asset location and really trying to find a way to get advisors to want to speak about it. They’d known quite a bit about asset allocation, and sometimes would get confused. The more senior type of advisors, whether they’re in the RIA channel or the wirehouse channel, did understand it and were doing it, but they could never show the benefit of doing it to their clients. So we picked folks that were clients of ours that really wanted to go back to their client base and say, Hey, I’ve told you, I’ve saved you 90 basis points a year on asset location, and now I can quantify the benefit. And we can show them the dollar benefit by having it with a score, it’s kind of a little bit of a gamification. People understand that if they have a low score, they might want to improve the score, kind of like the FICO score, and it worked well for us. In fact, Craig, we see that scoring is going to be an industry trend. We envisioned there being a wealth score that can measure and score different components and that can help connect some of these different products together in sort of a smart household, personalized way for each individual client.

Craig: That would really be interesting, especially if it was really useful, not just a number to say we got a number, but it actually could be something that would help clients in a gamified way, pick up better behaviors in order to improve their score. Especially when you’ve got so many different things that can impact a household score, even my household, I have three daughters and each one had a 529, each one had a Roth IRA, we have rollovers and taxable and nontaxable. So we might have 15 different accounts and that makes it very complicated to figure out so we need a very complicated algorithm to take all that information in. Was that something you were thinking of building?

Mark: Well, we’ve had discussions, I can’t really talk about it now, but we’ve had discussions. As you know, one of my partners, Paul Samuelson is a very good in the calculus side of things, and we’ve learned through the Taxficient Score that you asked about that people automatically get it and it calls them to action to it, calls them to want to have an improvement made, which as you’re suggesting is important. You don’t want to just have a conversation and then do nothing about it. You actually want to do something about it and then a year later and say, Wow, it just worked, I’ve got an improvement. And that’s where we see the industry going.

Craig: So what I like about the Taxficient Score is that you want to increase it. Higher is better, which to most people it’s intuitive that a higher score is better. When you’re in school, you get a test, the higher number’s better. Which is different than a risk score. Higher isn’t necessarily better in a risk score. There’s no goal in a risk score. It’s just, what is your risk tolerance? So there’s no real end game of that score is a useful number, but the Taxficient Score sounds like it’s something that is an ongoing conversation advisors can have with their clients to improve their behavior. Would that be a fair statement?

Mark: Yes, yes, absolutely.

Craig: What are the tools that you’re building to help them do that?

Mark: So one of the things that we’re doing is when we talked about the evolution of LifeYield, how we built our illustrator function that had multiple capabilities, it could do Roth conversion, it could do social security, it could convert an annuity into an income stream. But really hard for the advisor to understand, really hard to explain really hard, to put together reports that really illuminated things. So as we chopped things apart and really worked on making one chapter of the story really good, like social security, for instance, we now have three or four very interesting chapters that are well understood and sold in the marketplace by thousands of advisors. What we would like to do now, ironically, is combine all those chapters into a story. Maybe the ending can be told differently for each end client by the advisor, but we’d like to combine the different chapters and I think we need a couple more chapters.

And that way we can be used more broadly and it actually takes firms that are focused on different things. So Jackson National for instance, really well known, very successful insurance firm. They’ve got a new product out Investment Only Variable Annuities, IOVA’s, and they’re transparent vehicles that can have investments in them, but if you have the right kind of demographic, the right kind of client really can benefit from much more tax sheltering than they could get from having it in their IRA or 401k, you can really provide a benefit. So that’s a chapter. And how else does an insurance company fit in with say a large scale firm like Morgan Stanley, where yes, they might have some of their client base that wants an insurance product that fit that, but they have every type of client you can ever imagine. I think connecting chapters of the book and maybe having a way to show the next best action is where we’re going with our technology, but it’s a way to combine firms with different points of view. They can all provide some benefit to a client.

Next Best Actions

Craig: So you mentioned next best actions that because you’re talking about Morgan Stanley, or is that something that you’re also working on?

Mark: So Morgan does call it next best action. Back to the discussion we had, of how we view the world. You know, it’s either executing a trade, or filing social security instructions, or deciding you want to be into in IOVA, or deciding I need an annuity to have more safe income above social security. So it’s an action that will improve the client’s situation, and we want an answer to be in our software that will allow for that to happen. I mean, the scoring is wonderful, telling the chapter so that the investor understands it is great. But if the advisor actually doesn’t go do something, what good has been done?

Craig: If you haven’t changed the client’s behavior, if they’re still doing the wrong thing, your advice is basically wasted. So they’re paying you for your advice, but they’re not taking it. So your yelling at them and berating them isn’t really helpful. You need to find ways to nudge them to improve their behavior.

Mark: Yes. And I think that sometimes, not all the time, there’s some advisors that are terrific at putting together planning as part of their practice, but there are a number of advisors where it takes a lot of time to put together a proper plan. And then you have to know what to talk to about the client and a year goes by, and you actually don’t have a next best action after you did the plan other than that now, you know more about your client’s assets. And I’m sure that wasn’t satisfactory for a number of investors or advisors or the firms who spent the money on the technology. We found that having these simple little proposals for like I’ve been saying, a chapter in a book, seemed to work best, they’re less confusing. Now, combining them, it will be a challenge for us again, because we know it was complex in the past, but we like challenges and that’s what we’re going to try to do.

Craig: Well that’s an interesting comment because you know, as you’ve seen, you’ve been in the industry as long as I’ve been, that there’s a constant cycle of breaking things apart then recombining. And that’s that’s happens in many industries, it’s not just our industry. You see it in cable and in media where they’re breaking apart many different channels and they combine them into a package, and it’s a constant cycle. So you’ve broken up your products into, you can call them chapters, somebody might call them widgets or applications, that all work together. There’s lots of these out there, and we’re seeing in our business, working with broker dealers, banks, and other firms that they’re kind of overwhelmed with apps, whether it’s risk apps or account opening apps or tax management apps or social security apps, income management apps. There’s so many different apps that the desktop of their computer at work looks like their phone with a million icons. So is that one of the reasons why you’re combining things or what was the impetus behind bringing everything together again?

The Impetus of App Reunification

Mark: The impetus of bringing things together again is that we have more clients it seems in transition than ever before. More folks that are taking a look at retirement and even in the events of this year, some folks probably, if they’re on the cusp of deciding, I’m going to take social security, or I want to retire, or if I’ve had enough, are going to be doing that. So you have to do multiple chapters when you’re preparing for getting your retirement paycheck from your investments, deciding what your safe income level is. But a more technical answer back to some of the discussion we were having. One of the things that we’ve done that was different than in the past is LifeYield is not going to force any of our clients to have to use our user interface. So we have our user interface where we’re going to try to put together our story with our chapters, but everything we have is accessible through an API. So a large firm that wants to put their own chapters together, however they want and add a few of their own in like Morgan Stanley, always use our APIs which are highly scalable. And not every firm can afford to do that. But for those that want to, or even platform providers that we’re connecting to like AdvisorPeak and Orion, we’re happy to let them use whatever part of our algorithms they want to buy.

Craig: So that’s another good point. We’re seeing that on the banking side where it’s banking as a service. Where banking is no longer a monolithic function, it’s now just a service you plug in with an API, an API being an application programming interface, right. So it’s basically tools that allow one program, programmatically to call functions in another program and pass data back and forth. Some firms might see that as disintermediating themselves, that now they don’t have that interaction with the client, but you saw that as the opposite, you saw it as a way to be able to bring your tools to more people. So why did you see that? How do you avoid being disintermediated and having them just unplug your API and plugin another vendor’s API?


Mark: Well, absolutely somebody can do that, but I guess philosophically we’ve always wanted to be a software firm. So we haven’t wanted to get registered and be controlled by FINRA or the SEC. We really want to be a software firm and we’re going to let our clients do those kinds of things, we didn’t want them to feel we were competing with them for AUM or any of that stuff. You know, some of the firms that are out there have hybrid models where they might have an RIA and they’re trying to raise AUM and whatnot. We’re a software firm. We know what we are, we know what we’re good at. And we don’t really look at it as disintermediation so much as we want to get as many clients as possible to have a broad client base and there are clients that do different things with our algorithms, that’s fine with us.

Craig: That’s a good answer. So going back to something you said earlier, which I thought was really interesting, you said that trends are being accelerated with the pandemic. And one of them is a younger generation wants more personalized interactions, but they don’t want to be educated, they just want the answers. Can you explain that a little more, why don’t they want to be educated? Is it because they don’t want enough time? They’re not interested, or a combination of those?

Mark: Well, so back to you, you had shared you have three daughters, I have three kids and they they learn in some ways similar to me, but in many ways very differently. And they have their ways of collecting their information and they have their ways of going and validating that information, whether it’s with their network or things. They all behave differently. I’m missing going out and seeing clients and going to dinner and talking, and I’m kind of old school when it’s like that. I miss that, but fortunately we’ve been around 10 years so we have really good relationships with our clients. I can’t imagine starting a firm and and only being a year or two into it in this kind of time. I feel bad for those entrepreneurs, it’s going to be a bad experience potentially for some of them. So I think to answer your question, it’s a way of thinking and maybe some of the way that they’ve been taught. A friend of mine told me just the other day, he said, I used to say to my son, you don’t have it nearly as hard as I do. He goes, after this COVID thing, I apologized to him and said, the anxiety and all this stuff that you guys have to face, you’ve got some real challenges too.

Craig: That’s the first time in probably a hundred years where you say, you’ve got it worse than we had it.

Mark: Yeah. I don’t want to be negative and say we got it worse, but they certainly have a lot of challenges, and I think they’ll find ways to solve problems in a good way.

Craig: Well, they have a lot more tools than we had. I mean, imagine if this pandemic had happened just 10 years ago, you wouldn’t have the ability to work from home, the broadband access, the sharing collaboration tools that didn’t exist back then, even just one short decade ago. Well, let alone 20 or 30 years ago.

Craig: Right. It would have been a totally different situation, Craig. I agree.

Craig: Well, Mark, I really want to thank you for your time. It’s very, very interesting. We didn’t even get through a third of the stuff we wanted to talk about, but we’ll save it for the next time.

Mark: Well, again, thank you for having me. Really good questions. Pleasure.

Craig: Take care, Mark.


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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