wealthtech trends

Q&A: WealthTech at the 2020 Crossroads

Talking to a lot of thought leaders in the wealth management industry, most seem to be in a state of evolution, searching for new ideas to maintain revenue while the economy suffers under COVID-19.  I recently sat down for a Q&A with some of our biggest clients to discuss current trends behind marketplace disruption, the future of wealthtech and changes coming in how firms are dealing with changes undercutting their business models.

Cross Selling 

The old adage – it’s cheaper to sell to an existing client than a new one – has become more relevant in the face of Coronavirus. We’re seeing firms building or acquiring new products so they can cross sell them to existing clients. Orion Advisor Tech has purchased three companies in the past two years (FTJ FundChoice, Advizr, and Brinker Capital) to expand the products and services they can sell.

At Ezra Group, we’re seeing more companies come to us with new ideas they want to turn into products. We have a research arm that allows us to deep dive into questions like: what do the decision makers in a target client’s segment look for? What product features are most attractive to categories of target firms? 

Asset Managers Buying Tech

The COVID-19 climate has created an interesting situation for tech providers, many of whom will be swept up in a wave of mergers and acquisitions. Weaker vendors will be pressured to sell for a lot less than they would have gotten at the start of the year. They may be seeking survival strategies, or ways to win in spite of the situation. Fortunately, very few companies go out of business in the vendor space, but acquisitions are definitely happening rapidly. 

A third of the asset management industry could disappear over the next five years, as mounting fee pressures and rising costs spur more closures and consolidation, according to Invesco’s CEO.

This has driven some asset managers to look for ways to stay relevant with advisors by acquiring technology providers. This includes Franklin Templeton buying AdvisorEngine or Invesco grabbing Jemstep and then Redblack SoftwareState Street wrote the biggest check, $2.6 billion to purchase Charles River Development, which is already used a large percentage of asset manager’s and mutual fund providers for their trading desk software and has been expanding into core wealth management platforms.

Everyone seems to be chasing BlackRock, who has been investing significantly into advisor-facing technology to drive assets into their proprietary ETFs and funds.  Not only have they built out an impressive suite of tools, including iRetire for financial planning and portfolio construction but they purchased 5% of Envestnet. This gives them a seat on the board and a partnership with the largest TAMP and managed accounts technology provider with 100,000 financial advisors.  (See Envestnet is Transforming into The Alibaba of Wealth Management)

The Future for Tech Providerswealthtech trends

I don’t anticipate any big changes on the horizon. Big disruptions are too rare in our industry since it’s not dynamic enough and there’s too much friction for any new product to grab too much market share too quickly.

However, the landscape will continue to shift as more firms realize they need a full stack offering. They need onboarding, modeling, rebalancing…the whole enchilada. Firms that don’t have end-to-end platforms will react to this by buying key pieces, fleshing out their offerings.

Once a client has acquired one of those pieces, they’re in it for the long haul. It’s hard to swap out any component of the system that’s already been integrated, whether it’s onboarding, portfolio management, CRM or something else. 

There are also transition costs to consider. Replacing a portfolio management systems can cost a mid-sized broker-dealer anywhere from one to three million dollars. Consider all the soft labor costs, the set-up and conversation time. Since it’s hard to get rid of software, tech providers who have already locked in a certain offering with a client will be at an advantage in selling additional pieces of an end-to-end platform. 

What About Financial Planning?

As wealthtech vendors continue to expand their offerings, financial planning trends are cropping up, and we ought to pay attention. For years, I’ve been saying that advisors need to stop being investment oriented and take a more holistic approach. XY Planning Network is one firm to watch as they’re really taking advantage of this. They focus exclusively on fee-based financial planners who don’t manage assets. Instead, they charge a flat monthly subscription fee for planning services. This makes them more holistic, as they focus on understanding client’s goals, but leave the investment management to someone else.wealthtech trends

Without understanding a clients’ needs by looking at more than just their investments, advisors risk losing business to mobile apps or robo-advisors. Advisors need to continuously move up the value chain. You see this in every industry; admins don’t just take stenography anymore, they take on more tasks to add value instead of being replaced by Microsoft Word. For advisors to stay in business, they need to find new ways of offering advice and expand into areas like financial planning.

We expect financial planning vendors to expand their software platforms to add complexity and depth to their analytics and reporting.  The top vendors have been steadily adding features to their already complicated applications. 

And while this layering on of functionality increases the initial learning curve and time required to create a plan, it is actually making their software more attractive to advisors. As Michael Kitces noted:

In theory, the repeatable nature of the financial planning process would be highly conducive to technology – i.e., financial planning software – simplifying the process, and making it more efficient and less time-consuming. Except as it turns out, there actually is no apparent relationship between the use of (more efficient) financial planning software and time-savings in the financial planning process.

We’re even seeing advisors turn to non planning tools such as Riskalyze, which is mostly known for risk assessment, as their primary financial planning software since their Timelines functionality can help clients with basic retirement needs. These advisors are build their workflows around it. (See RightCapital Financial Planning Software Review – Tax-Sensitive Decumulation Planning And A Collaborative Planning Interface)

So, what can financial planning applications add to address the changing demands of customers? Enterprise firms want to see all data displayed on a “single pane of glass” and/or they want their advisors to work in just one system through the entire process. A lot of advisory firms hire us to look at their advisor experience, and one thing they constantly complain about is all the modules. They have to jump back and forth between different programs and it isn’t efficient. I’d say integration is one of the most important things to keep in mind: how can applications be integrated into advisor and client workflows, so that they don’t have to switch between browser tabs? Is there a way to open an insurance and a wealth account in a seamless manner and on the same platform? If so, let’s make it happen.

The Perfect WealthTech Platform

When thinking about all of these changes in the wealthtech space, it’s easy to start wondering what the perfect wealth management platform would include. It would need account opening, portfolio construction, model management, and rebalancing, as well as trading, billing and performance reporting. In reality, the question isn’t what do I need for a dream end-to-end platform? The question is, what is the differentiating factor between platforms that will have the biggest impact for our firm?

We all know what components you need to run a broker dealer or RIA, but you don’t need all of your parts from the same vendor. Some people offer high end portfolio rebalancing and some are on top for performance reporting.    

How do you differentiate your software when selling it to a broker dealer? Find your specific niche and act like a politician, tailoring your sales pitch depending on the audience. Emphasize what is important to the executive committee in the room. If you’re talking to an independent broker dealer that’s been on the same technology platform for ten years, you can hype the improvements in usability and flexibility for their advisors. If it’s an insurance broker dealer running on a hybrid platform, you should be able to report on both wealth and insurance products together.  (See 50 Portfolio Management Software Solutions For Advisors Can’t All Survive)

Technology Budgeting During COVID-19

Understandably, firms have been forced to shift financial priorities in 2020. This has impacted purchases of all aspects of technology. If I were to recommend the most important infrastructure component for these firms to prioritize, I’d start with anything related to client experience, particularly video conferencing software. I see advisors struggling to communicate with clients when systems aren’t working, aren’t compliant, or don’t integrate well. (See Tweet-to-Table: Why Building a Social Media Presence is Like Farming & Other Marketing Tips for Advisors)

Second, invest in marketing tools that touch the client, such as social media management software or content curation services. Companies that have built scalable digital communications are booming. 

And third, narrow-focused financial planning tools are on the uptake. That includes advanced tax and retirement income optimization as well as college financial aid planning. These elements will be essential for vendors who are looking to differentiate themselves with a full roster of offerings.

Talking About The Election

I’d be remiss if I didn’t address the elephant in the room: November’s election. It will be a force for major changes that impact advisors and their clients. If a Republican stays in office, there will be less regulation. If a Democrat wins, there will be more. Campaign money will play a role in which industries get slapped with new regulations and which ones skate by. 

A lot of brokers-dealers have already taken the recent DOL rule and incorporated it into their practices.  Depending on whether one party holds both the White House and Congress or just one of the two, the rule will either be addressed by executive order or congressional legislation. We will have to wait and see before taking any action that could be undercut by unexpected results.

Conferences Going Virtual

With the pandemic canceling in-person conferences, vendors need new strategies to reach potential clients. Virtual conferences and summits offer new options, and I recommend a select few. Half of our clients are broker dealers, asset managers, or aggregators, and the other half are vendors. As such, I like the T3 Advisor conference; it’s highly attended and a great for networking. I’ll also be speaking on a virtual panel at the Invest Conference in November. Lastly, If you’re a full service advisor looking into virtual conferences, I’d lean on Michael Kitces. He releases an annual list of best conferences categorized by advisor type. 

Once you’ve found a touchpoint with an interested buyer, then the real need to innovate begins. When pitching an executive committee, catering to the individual personalities in the room helps; they each have different reasons for being interested in a particular piece of software. Companies looking to sell more services to existing clients can focus on areas where they have an advantage over competitors, and use that knowledge to target specific needs.

In Summary

The wealthtech market is on the move as new trends surface, and COVID-19 skews things across the space. My advice – take your existing clients, and sell them more. Look into where you can merge, acquire, or build to develop a full stack of integrated offerings. Make sure you’re taking a holistic, personalized approach to addressing client needs. Once you’ve evaluated these things and are confident in the advantages your platform provides, determine new ways to get in front of broker dealers. Remember to appeal to every member of the executive committee individually, based on their personal preferences. 

Our industry isn’t dynamic enough for groundbreaking change, or to force tech vendors out of business. However, this level of security doesn’t mean you shouldn’t always be thinking: how can I offer more? How can I absorb more services? How can my client services be the most comprehensive, specific and valuable? Continuously ask these questions, and you’ll be set to weather the coming shifts in the market. 



One Response

  1. Nicely done Craig. Who can disagree?

    I particularly enjoy how you have recategorized the “wealth management industry” not as the underlying economic buyer, the sponsor (“more firms realize they need a full stack offering”) but as the buyer of your services, wealth tech (“get in front of broker dealers”). That’s both clever and accurate, indeed it is the essence of the shift.

    My only critique is that I don’t see a crossroads. Crossroads imply a choice of path, Rather – and I truly apologize for the metaphor – I see a single line freeway where larger, and mostly autonomous driving (WealthTech) trucks speed past other traffic (sponsors) many of whom are missing a GPS. Sure, there’s a few very large car carriers (RIAs custodians / advisory shops) up ahead but mostly the freeway looks like a solid line of trucks.

    I’ll sign off here, leaving you with that mangled image. Kudos on your clear sight. Simon



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