Ep. 123: Best of WealthTech Today 2021 Roundup

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The WealthTech Today podcast features interviews, news, and analysis on the trends and best practices in wealth and technology for wealth management, asset management, and related areas. A quick shoutout to our sponsor, the Invest in Others Foundation, please go to InvestInOthers.org, and be sure to subscribe to our show wherever you listen to podcasts so you don’t miss future episodes.

Companies Mentioned

Episodes Mentioned

  • Ep. 86: Behind the Scenes of the Cetera-Voya Deal, with Lori Hardwick
  • Ep. 90: How Merrill Lynch Drives Digital Adoption with April Rudin
  • Ep. 112: Focusing on the Voice of the Client with Julie Littlechild, Absolute Engagement
  • Ep. 85: Reddit Targets Robinhood And The GameStop Débâcle with Aaron Klein, Riskalyze
  • Ep. 102: The Rise of Alternate Marketplaces with Jason Broder, SIMON Markets
  • Ep. 110: How the Risk Ecosystem Helps Clients Invest Differently with Jeff Schwantz, Morningstar

Ep. 86: Behind the Scenes of the Cetera-Voya Deal, with Lori Hardwick

Insurance Company Trends

Craig: How do you see this as part of a trend of insurance companies, which 20 years ago, seemed to be swarming into the IBD space cross selling products, and now are sort of backing out? MetLife sold their business and IMG so theirs and now here’s Voya selling. What is that trend and what do you think is driving that?

Lori: You know it’s a great question Craig, I think that a lot of firms realize that they have assets as part of their total package within these insurance companies and banking companies and, you could add to that list BMO Harris sold their broker dealer as well. So I think that as they look at the multiples they can get for some of these divisions within their larger entity, it’s hard to say no, it’s easy to say what could we get for that asset and where are we today.

Lori: I also think that the changing risk metrics on these businesses definitely play into that discussion as to whether or not with the new change in political sides here I know that there’s a lot of expectation that there will be more potentially rigid rules, regulations that are put in place against our industry. And I think some of them are like, hey if we can get that money for it and we don’t have to take on more risk or worry about getting penalized for XYZ, who knows what it’ll be, will will dump the assets. So, you know, people firms like Cetera and certainly Genstar at that level, at the private equity level we see a lot of value there because we are already a well oiled engine inside Cetera so we know that when we bring on this number of advisors and these number of assets that we’re going to be able to help them run better, faster, stronger, and more efficiently, which one is the most important part.

Craig: All those things are important.

Lori: I mean, building them into the scale of the bigger engine, we have that on our side right now at Cetera. We’re a big engine and it’s well oiled.

Craig: And scale is really becoming the name of the game. If you look at all the competitors, the top broker dealers are getting bigger and bigger whether it’s LPL has 17,000 advisors, Advisor Group, I think is over 10,000 advisors. And now, Cetera is approaching 10,000 year at 9,000 now, and that there’s someone who said that’s a key threshold for going public. Do you think one of Cetera’s goals is to go public?

Lori: You know that’s not on our radar right now. I wouldn’t rule anything out, but that is not on our radar right now. Our radar is pretty clear as to what our directives are and how to continue to grow the business under Genstar’s umbrella.

Craig: There’s been a lot of PE firms moving in and acquiring broker dealers, or acquiring parts of broker dealers. What is it about the broker dealer business model that PE firms see as so attractive?

Lori: I think that you would see two sides of the coin here. In the private equity world there’s some that actually do not believe in the broker dealer world and the ability to continue to grow a BD because there’s a lot of metrics out there showing that RIAs are kind of the wave of the future and that that’s the way the puck is moving. I think that whenever someone’s looking at a broker dealer obviously they’re looking at scale, they’re looking at the stability of that firm of course, but they’re also looking for how to either stop the attrition out into RIA world or into other firms, or they’re looking for ways to grab market share outside of where they currently are. So you don’t buy a firm just to kind of keep it as is, it’s always it’s always to grow and to fortify with something else.

So, I think that a lot of the firms see broker dealers as these firms that haven’t had a lot of resources in the past or maybe they haven’t been able to put a lot more money into the infrastructure of the firm to make them run cleaner and faster. I know that the way that technology has changed everything like Jiffy.ai, for example, run by Babu Sivadasan, who is a longtime friend and we worked together at Envestnet for 15 years, he just started a few new firms like that that are doing business process automation at the home office level. And that is where I think these private equity firms as they think about getting into these large institution BD businesses, say how do we streamline it and make it faster and be able to continue to, obviously, thrill and delight the advisors and their clients, but also run faster on the back end and more efficiently.

And so scale, just can’t be scale anymore. It has to actually reduce your cost to serve eventually. So you can’t be touching every piece of data like we used to be able to. But now that these new technologies have come out it’s allowed you to build in a lot more efficiencies and be able to do work, not just faster but at a much lesser expense than it used to cost.

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Ep. 90: How Merrill Lynch Drives Digital Adoption with April Rudin

Resistance to Digital Adoption

Craig: You’d have to ask them, they’re still there, they haven’t quit yet, so they must be appreciative of something, but yeah everyone’s different everyone approaches their lives differently, approaches their wealth differently, everyone approaches the use of technology differently. And one thing you mentioned in your article was resistance to digital adoption. Can you keep talking about that, how you’re overcoming that? It’s the opposite of which ones are doing the best. which ones are resisting and how to overcome that.financial advisor marketing

April: So I think that the resistance to digital adoption really has come from the financial advisory world, and come from the enterprise firms rather than from the end users. In this article we really explore that it was the clients pushing up on the firms to really gain access to their accounts online, because they wanted to have real time information. And I think the pandemic really drove a lot of that also in terms of adoption. It’s unfortunate that of course the pandemic has been so awful and a tragedy for so many people around the world, but it took a pandemic to actually drive digital adoption and for firms to actually get over their security concerns, get over some of the concerns that they might have in terms of digital and really just embrace it because there was no other alternative. So, you know, you could be just as insecure as people say, you can have a bunch of files and leave them in a taxi, right, files can come from all over. But I think now that we’ve taken this big strong leap to digital I don’t think there’s ever going to be any going back. Even those financial advisors and firms that believe that it’s a relationship business which of course it is, they can just think about digital as freeing them up from routine and repetitive tasks so they have more time to build relationships. I think the resistance has really been a part of the industry, not on the part of clients.

Craig: The article is something we’ve been talking about for a while, it’s how Merrill Lynch seems to be leading the industry and they’re one of the largest firms that’s a wirehouse and usually the largest firms tend to be slower and sluggish and can’t innovate. Yet Merrill with their Merrill One product, and other technology first initiatives, seems to be doing the opposite. Do you have any insight into how they’re doing that and how they’re beating what’s called the innovator’s dilemma?

April: I think that Merrill embraces that opportunity which has multiple entry points, Merrill Edge, Merrill One. They have something that they announced last year called the customer experience workstation. So in other words, they’re thinking about it from a more client centric point of view, which is what needs to happen instead of from the advisor point of view. And I think that that’s been a real sea change and all of that is led by Kabir Sethi so under him and his teams. He’s been a leader in recognizing that it’s all about the client, and it’s not so much about the advisor. Everything they do is more about serving clients better, developing stickier relationships, and hyper personalizing as much as they can their offerings to clients rather than going with a one size fits all. So, I think some firms are still stuck in that, but I think you’re right, Merrill’s done a great job of breaking that down with the multiple entry points.

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Ep. 112: Focusing on the Voice of the Client with Julie Littlechild, Absolute Engagement

How Do You Define Client Experience?

Craig: I’m thrilled about that because you guys are going places. So this episode is part of our September focus which is client experience. Rolling it back a bit, before we just jump in, what is your definition of client experience?client experience financial advisor

Julie: That’s a great question, because we talk about it so much, and to some extent it reminds me of practice management, it was everything. I think client experience is a catchall for all that we do for our clients. So we think of it as incorporating the services we provide, how we deliver what we deliver. Everything from how a meeting is booked how our review is held. What the communications process is, just everything to do with service. It is also about the offer provided, the scope of the offer. And I think increasingly, we tend to focus on not just the experience itself but what are advisors and what are firms doing to support deeper engagement with their clients, which I think is part of client experience but maybe goes a little deeper.

Craig: So I want to talk about deeper engagement, deeper conversations. I’m gonna skip over the, the second question, what kind of client input do you recommend or have you gathered or helped advisors gather, that drives those deeper conversations?

Julie: It’s interesting because our focus is broadly on gathering input, and input can work in a business in a very strategic way, it can help you understand the offer that you should deliver, the needs of clients, how often you should meet all of those things. But I’ve been really interested in this question that you asked which is more about how do you drive a deeper conversation. And the way that I think about it is, that a deep conversation needs to reflect what is on the mind of the client in the moment. What are they concerned about, what are they inspired by, what’s their level of confidence. All of that, in my mind, informs the best possible conversation. But those things are really fluid, I don’t know about you, maybe it’s just me but I feel different right this moment than I did yesterday, at this time. Things change, the context changes. And so I think that this has really raised kind of an interesting challenge for advisors is, how do I how do I gather data from my clients that is in the moment, and can support a deeper conversation so. So we’ve been focusing a lot of attention on what what information can I gather for example, that allows me to co create the review agenda so that as an advisor I’m not just focused on the 10 things I had on my standard agenda, I’m actually focused on, where’s my client at, how are they feeling what’s going on, what are they concerned about and using that to change the conversation.

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Ep. 85: Reddit Targets Robinhood And The GameStop Débâcle with Aaron Klein, Riskalyze

WallStreetBets is a Crowd-Sourced Hedge Fund

Craig: I want to go back to the WallStreetBets guys. If you read the WallStreetBets forum before this happened they do a lot of fundamental analysis, they do a lot of reviews and research on these companies to find their targets. And it’s very similar to how a hedge fund works, right, they look for opportunities to make money to arbitrage and to find even areas where it’s like a crowdsource hedge fund. But people want to say, oh this is terrible that these guys are doing this, but it’s exactly the same as rich hedge fund guys in the Hamptons at a party saying, oh, here’s what we’re doing, you want to get in on it, they’re just doing out in the open they’re being complete transparent about it.

Aaron: Just at tremendous scale, at tremendous scale. I think that’s a very very great point. And that’s why, man, now you think about the political leaders who chimed in on this.

Craig: Warning, political discussion. Warning, Will Robinson, danger!

Aaron: Well, the strange bedfellows that this created right I don’t know if I’ve ever agreed with AOC on anything, and yet she comes out and says there’s something wrong when you know this brokerage firm comes in and says you can’t buy more of this security. You’re taking sides on a trade, in effect, right and and you know and then she’s in the same in the same boat as Ted Cruz. I tend to look at the world that way. I think that, I just had to laugh at Elizabeth Warren parachuting in and going oh my goodness, people are making money, we must stop this!

Aaron: Her approach of saying something to the effect of “this can’t be right, the market values have to reflect the underlying fundamentals of the companies that they represent or something is wrong and this is manipulation”. Well, that’s not what the stock market is. That’s not what the stock market is at all. And thanks to her, there’s some hedge fund guys who probably are not going to have to sell their second yachts, so congratulations Elizabeth Warren, you save some yachts.

Aaron: But it also just speaks to where we’re at as a country and I don’t mean to sound pessimistic, I’m an optimist at heart, but man, we have got to do something about the fact that politicians don’t actually know a whole heck of a lot about what they claim to be experts in. I was talking with a friend of mine who worked for years in the Chicago option pits. And he’s like, man, I would go talk to different congressional committees in Washington DC, talking about representing the CME and some of the different options traders in Chicago. And he goes, the people who get appointed to these committees just happen to represent New York and Chicago, because the exchanges are in New York and Chicago, they don’t actually have any expertise, necessarily, and understanding what the heck it is that they are supposedly regulating, and it’s a fascinating problem, it’s one that I think our country has worked through for a while and it’s not quite solved yet but it sure needs to be.

Craig: You brought another thing that bothered me for a long time was with the CFTC and these are guys who are regulating agricultural products, and someone had the idea let’s give them commodity derivatives because commodities are agricultural products, let’s just put them together, and you’re thinking, what do they have to do with each other? Why would you give these people this gigantic market, and now they’ve got incredible control and as you said, they don’t really understand what it is they’re regulating and if you remember the Facebook hearings couple years ago.

Aaron: Yeah, there’s a slight difference between hog futures and actually taking delivery of a lot of hogs.

Craig: Running a hog farm is not an easy process but it’s very different from trading hog futures or trading cattle futures, if you know what I mean. But some of the victims in this GameStop thing, just don’t look good. Gabe Plotkin who co-founded Melvin Capital and suffered that 50% loss, which is $4.5 billion in value was in the middle of upgrading his $44 million Miami beach house, and might have to stop that expansion so you know these people just don’t look sympathetic.

Aaron: I wonder if he’s gonna make a campaign contribution to Elizabeth Warren next year. You just never know, you never know, because she may have saved that Miami beach house.

Craig: Without going down the political rabbit hole too quickly, if you just Google who gets the most Wall Street hedge fund money you’ll be surprised as which is which candidates get that.

Aaron: It’s a fascinating world and I think that’s the thing, is that if we do this right in the markets there’s nobody putting their finger on the scale, and tilting the game, one way or the other. And the WallStreetBets guys have just as much right to be in the markets as Melvin Capital does Melvin Capital has just as much right to be in the markets as WallStreetBets does. For markets to work there have to be winners and losers, that’s how markets work. And so you look at that and again, to be in a position where we change the rules of the game and effectively turn off one side of the trade, it’s not a good look, it’s not a good look. We’ve talked about it about Robinhood but frankly it’s not a good look for DTCC, it’s not a good look for any of the prime brokers, it’s not a good look for any of the firms the intermediaries, the market makers the exchangers, it’s not a good look for anybody because markets need to have consistent rules to operate well. And if the rules are changing in the middle of game, that’s a problem.

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Ep. 102: The Rise of Alternate Marketplaces with Jason Broder, SIMON Markets

Alternative Marketplace Trends

Craig: So we’ve seen a lot of trends, we have a research division, and we’ve been doing a fair amount of research in different marketplaces, not just structured products but annuities and other insurance, as well as credit and lending, there’s lots of different marketplaces coming out. So what are some trends that you’re seeing and how is SIMON adjusting to those trends?wealth management technology

Jason: Financial advisors are looking for ways to differentiate the value they add to their clients. I think we are on the precipice of the largest wealth transfer in history, and I think the playbooks for the next 5, 10, 20 years in the financial advice business will most likely be different than the playbooks for the last 10, 20, 30 years.

I think a part of that is breaking away from the 60/40 portfolio, and really helping investors understand using technology, what else is out there that can better help them achieve their goals? Maybe the answer is 60/40 is right for a particular investor, but having access and tools for not only the financial advisor but that they can then share with the end clients to really showcase the value they bring to the relationship, and this is above and beyond obviously the trust that they built over the years, I think is very important.

And I think that’s where SIMON’s focused to really take these complex products or alternative solutions if you will, and provide tools to the financial advisors to help them not only educate themselves and their clients, analyze these products within the portfolio, and ultimately track them if they do purchase them for clients and understand, are they up are they down, and why. If it’s an annuity contract, do I need to service it. If it’s a structured investment, what are the lifecycle components and how do I need to be thoughtful about conversations that I have upcoming with the client and how they may want to adjust the portfolio using these products.

Craig: Okay Jason I’m going to put you on the spot, but when it comes to the marketplaces where do you see the puck going? So, obviously you’ve got a very strong foothold, when it comes to risk managed and structured products, but what’s the next step for SIMON and where do you see yourself going and why?

Jason: We view SIMON as being the go-to marketplace for all alternative solutions, and that’s risk managed solutions, private investments, digital assets. To your point about the swivel chair earlier, what we really want to do for the financial advisor community is have them have one marketplace integrated within their existing ecosystem, and also working with partners in the wealth management space and when we have a lot of them, they’re fantastic. But what we’ve done is, and we’ve been fortunate, we’ve focused on the complex asset classes for the last eight years, and so the way we think about modeling them from a data architecture standpoint, which is key. And once you have standardized data, you can for the first time, build consistent analytics and services on top of that. And when you power that, combined with very elegant user experience and UI, you can illustrate how these products should be used or how to think about these products in ways that it just hasn’t been done before. And so we view that as a massive opportunity set for the entire US wealth management industry, and we want to be at the forefront of it.

Craig: Okay, so it’s something that piqued my interest, you mentioned data. Can you talk about how you are either gathering data, your data model, your data architecture, infrastructure. Having a data standardized enables you to build consistent analytics. Can you talk about why it was a problem before to get standardized data and how you approached and solved that problem?

Jason: Absolutely. Thinking about the world of structured investments, before SIMON. If you took five different issuers, issuers A, B, C, D, E, the way that they would model the same exact payout market link growth note in their risk management systems was different. One issuer would call it a 20% buffer, another would call it an 80% buffer. The way they thought about digital coupons and how they struck them versus at the money or in the money was different. And that’s the data, let alone the nomenclature was different at each of my five issuers in the example.

What we did as part of SIMON when we spun out is we created what we call the SIMON product schema. And so what we’ve been able to do is work hand in hand with all of our issuer partners and standardize the data structure of the structured investment product set, and so we’re now connected with all of the 19 structured investment issuers on our platform via API. And when they put the data on SIMON it all maps to a consistent product schema. So now we have a database of about 65,000 structured investments on our platform, that are all in a consistent standardized data format, regardless of the payout, it can be vanilla or very bespoke.

Having that unique data set was key, because you can’t build consistent analytics like back testing or post trade performance analysis or understanding how they fit in the portfolio, if you’re first trying to wrestle with standardizing data across different payouts from different issuers. We have a fantastic issuer partners, we’ve been very fortunate for everybody to really get together and drive the standardization, but it’s been key. And on the distribution side, our clients love it because it makes their lives so much easier. Between standardized data and analytics that now, you can run in real time, and it’s extremely scalable, and also consistent nomenclature across the product names. It’s been game changing, and it’s a big feather in the cap of, in this example, the structured investment industry and all the stakeholders who have been tremendous and helping do this.

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Ep. 110: How the Risk Ecosystem Helps Clients Invest Differently with Jeff Schwantz, Morningstar

Why Risk IQ is a Better Metric Than Risk Tolerance

Craig: How did you guys make the build versus buy decision to acquire PlanPlus Global and FinaMetrica? Obviously you’ve got a very strong bench of software development, building out your own systems and you started building out Goalbridge, your own financial planning tool, what was the impetus to make you to pull the trigger on that rather than building it yourself?wealth management technology

Jeff: Sure. You know what’s kind of fun in the FinTech space Craig is we can all build really amazing tools right now, but at the end of the day, Morningstar we’re a data company and we’re a research company, and then we expose that to software. And what’s really hard to replicate Craig is 20 years of history and academically validated research that’s really, really hard to replicate in the FinTech space. And part of the acquisition of PlanPlus Global they did some things on the advanced financial planning side that was going to take us a bit to get there. So it helped us accelerate that. And how do we start to take it out of what were those legacy products and make it available into all of our enterprise software solutions.

But what’s really interesting about that acquisition was the acquisition of the IP, and the 20 years of academically validated research on understanding the risk IQ of individuals. And that’s the part that’s really hard to replicate for any FinTech. Any new FinTech that starts today, they don’t have that history to be able to have that research validated through and through, and that’s a part that’s really meaningful part of the acquisition. So it’s not just the software, it’s really the research and the history.

Craig: Got it. So you mentioned this before risk IQ. Can you explain how individual risk tolerance is different from risk IQ or how risk IQ is better than the way firms are doing risk tolerance today?

Jeff: Sure, so people understand, typically, if you understand an individual’s IQ over their life their IQ really doesn’t change meaningfully over their life. It’s a psychometric trait that you have, it’s something that is in each individual being, and your tolerance for risk is similar. And this is really important, so risk tolerance Craig if done well, it’s going to measure that person’s their psychological trait, their appetite for risk and that does not change over their life. And some of the things that we see today, they don’t have that consistency to be able to understand and measure, and quite frankly, some of the questions that we asked advisors in enterprises is if your risk tolerance is actually changing if markets get a bit choppy, you’re probably not actually measuring risk tolerance because your risk tolerance again, it’s a trait of yourself it’s not going to change regardless. And that is a, that’s a that’s a part of the education that we’re trying to do to help people understand it so your IQ does not change over a lifetime. How you may react to things, that’s a different measure. We’re just trying to get people back to basics Craig of what is risk tolerance, and how does it change or not change over an individual’s life and let’s start there.

Craig: I would think a lot of things change over people’s lives and how they react or interact with the markets or any part of their life especially finances as they get older, you know, when you’re in your 20s, 30s, 40s and may be very different, how you interact with finance, interact with the market than when you’re 40, 50, 60.

Jeff: Correct. But that’s the point is, it’s your tolerance for risk, as a human does not change over your lifetime. But what happens is market events, things like your risk composure well that’s actually something else. So that’s where, again, as an industry we have conflated topics, unfortunately, that we’re bringing these things together and the actual measure of risk tolerance if done correctly and measured correctly, that tolerance does not change over a person’s life. And that’s what we’re trying to make sure that individuals, advisors, clients really understand is that, if done correctly, that doesn’t change. Everything else, we may shift around composure, their risk capacity to be able to take on additional risk or reduce risk to achieve their goals. But the core of that risk tolerance if done correctly, does not change over a person’s life, and that’s where we see again a significant opportunity in the market to help better serve investors, having advisors understand that nature, being able to explain that to the end consumer. And then, how do we start to parlay that into how does it impact their financial goals.

Craig: And then you can link it to Goalbridge.

Jeff: Yeah, exactly it’s linking it to Goalbridge or any of our financial planning capabilities.

Craig: I remember when you first announced that I thought it was a really good idea considering you have a lot of the tools but that’s gonna be a big gap between your portfolio analytics software and data, and Morningstar office your implementation portfolio management tools, there was that gap in between that Goalbridge seemed to fill and now the risk ecosystem, fills even further.

Jeff: Exactly, just fills in so you think about. It’s all about planning to action, to your point, Craig, it’s let’s understand it, let’s understand the trade offs, and then when we agree on, here’s the next best action today, what do we do and so how do we put it into a portfolio, how do we then put that portfolio to action, fund it, be traded, everything else that that exists that we all know takes place next.

Craig: Your software is used by so many advisors, I think the numbers I saw were Advisor Workstation has something like 150,000 users. So what how do you see risk ecosystem, what would be a success in terms of adoption rate of your current user base?

Jeff: Yeah. So, in North America we’ve got actually north of 185,000 members subscribers today.

Craig: You mean I was shortchanging you with only 150,000.

Jeff: No, just wanted to make a point of clarification, we’re a growing company so while we always want to make sure that the facts align two won’t be what we communicate

Craig: Jeff, I appreciate your being precise.

Jeff: So it’s important, and what was interesting Craig is when we launched it within two weeks, we had north of 32,000 member subscribers start to already engage with the morning service ecosystem. One element of that was just a portfolio risk score, running it through, and understanding what’s the risks for the portfolios. When we were communicating with advisors in the very beginning, advisors were really excited to have effectively a Morningstar rating for their portfolio. To sit down with their clients and say hey, Craig, this is the portfolio I built for you and this is the Morningstar risk score that when we ran your portfolio that I built for you custom, here’s a point of view. And advisors were really excited to be able to take what has always been the star rating or the analyst rating and now they can have something that they built and they touched for the consumer, and put in the personalization that they wanted to do to the household that they serve, super excited about it.

I mean, ideally, we’d love to see, and we would expect to reach almost all of that 185,000 members subscribers that we have today using the Morningstar risk ecosystem. So now we are we are almost two months in and we are getting large adoption but it’s also where else can we bring it? We’re bringing into Australia, we’re bringing it to India, now that we’ve got the fundamentals built and we’ve got the processes running so it’s not just relegated to North America, which is our largest footprint but it’s also bringing this globally as well so high adoption expectations. Craig is, Is this the shorter answer.

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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

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