Come on in, sit back, relax and enjoy episode 136 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, the founder and CEO of Ezra Group Consulting. Over the past 17 years, we’ve worked with hundreds of FinTech vendors and enterprise wealth management firms to guide them towards making better business and technology decisions.
The WealthTech Today podcast features interviews news and analysis on the trends and best practices in technology for wealth management, asset management, and other areas of financial services. This is our April News Roundup, where we cover the top wealth management technology news stories.
- Clearlake Capital and Motive Partners Agree to acquire BETA, Maxit, and Digital Investor from LSEG
- YieldX Joins Schwab Advisor Services’ Provider Listings Program
- Schwab Plans April Debut of ‘Personalized Indexing’
- April 2022 AdvisorTech Map
- Charles Schwab [21:17]
- Cerulli Associates [22:42]
- Clearlake Capital [01:12]
- Envestnet [18:12]
- InvestCloud [03:09]
- London Stock Exchange Group [01:21]
- LPL Financial [03:32]
- Motive Partners [01:15]
- Pershing [07:20]
- Refinitiv [02:18]
- Wells Fargo Advisors [03:32]
- YieldX [13:30]
Clearlake Capital and Motive Partners Agree to acquire BETA, Maxit, and Digital Investor from LSEG for $1.1 Billion
Craig: Our first story in the April News Roundup, private equity firms Clearlake Capital and Motive Partners acquire Beta+ from London Stock Exchange Group for $1.1 billion in cash. This is our biggest story this month. It’s a huge story. It’s really a titanic shift in the wealth management market for a number of reasons, but let’s roll it back a little bit. What is Beta+, what is the software that is being bought? How did the London Stock Exchange get it? Really quick story, Beta+ was owned by Reuters, which then merged that business with Thompson Financial. So Beta+’s been kind of bounced around for a while. It’s technology that allows broker dealers to become self clearing. It provides securities processing, custody clearing asset servicing technology, it’s a securities processing engine. It’s very old technology, it’s been around quite some time, and I think it was on the market for a while and I think the Refinitiv acquisition just accelerated that need to divest themselves of it. So this is a good deal for them. They move on, Refinitiv dumps this technology that they weren’t really interested in in the first place, since they want to be more a data provider. And it also includes a couple other pieces that Refinitiv owned a software called Maxit, which is cost basis tax reporting software, and what they’re calling a digital investor client facing trading portal, which used to be called Wealth Scope. Those are both formally from a company called Scivantage, which was acquired by Refinitiv in 2020. So they’ve packaged all those three tools up into one deal, handed those off to Motive and Clearlake, and they’re most likely going to roll that under the InvestCloud umbrella.
Craig: Now they call this Beta+, which is Beta plus Maxit and Digital Investor together. It’s got some good numbers: $300 million in annual revenue, $6 trillion in total assets under advisement on the platform. Some great logos come along with this, Wells Fargo Advisors, LPL Financial, Vanguard, and Assetmark all use Beta for their self-clearing business. Now, $6 trillion sounds huge, but it’s AUA, assets under advisement, not assets under management. So they’re processing accounts with that value and vendors love throwing these huge numbers around, but they don’t directly relate to the amount of work that they’re doing. Like cost basis reporting. You can be running reporting on a trillion dollars. Okay. That’s nice, but it’s really more account-based. The AUM has nothing to do with the work you’re doing on reporting, but it sounds good. Investors love it. So they keep throwing these numbers around.
Craig: But rolling it back a bit, there’s two types of clearing firms. There’s independent and self-clearing broker-dealers. So independent clearing firms, which we commonly refer to as custodians, charge fees to their broker-dealer clients for their custody services. And they have more scale, you know, trillions of dollars in assets that enable them to manage this business. And they make money on the RIA side through corresponding clearing. That’s how they monetize Schwab, TD RBC, Wells Fargo, First Clearing. They monetize their back office by RIA and corresponding clearing channels.
Craig: The other part of these firms that aren’t independent are the self clearing broker dealers. So they are firms that only clear for themselves, they don’t offer services to other brokers usually. They will buy technology from Beta+ or BPS are the two biggest providers. Sunguard used to have something called Phase 3, and when Sunguard was purchased by FIS, that kind of disappeared. I don’t think anyone’s really using it anymore. So it’s just BPS and Beta+ at the moment, but it was usually the biggest broker dealers that went self clearing because you need some scale. You really need that in order to make it work, and it was expensive, there’s a lot of work required. There’s a lot of you need a lot of people to handle the regulatory issues being a custodian, you need more assets as a self clearing broker than a broker dealer that uses a custodian. And there’s a lot of factors that go into deciding whether you want to become self clearing or not.
Craig: So that’s one of the reasons why firms will go and bring in BPS or bring in Beta+, they want to have that, that those capabilities. And one of the biggest reasons for broker deals going self clearing is money. They want the revenue stream that custodians have and custodians have a number of revenue streams that broker dealers do not. Things like cash float or the proprietary money market funds. They make money on that. They make money on lending, whether it’s margin or securities lending, those are all revenue streams. There’s a lot of mutual fund fees from the NTF funds, no transaction fee funds, that’s like 25 to 40 bps, sub TA fees, 5-15 bps or so, payments for order flow. So there’s a lot of revenue coming in when you are self clearing when you are an independent clearing firm.
Craig: So that’s very tempting to a lot of broker dealers. And especially now it’s paid off, firms like Raymond James is self clearing and they have a lot of ways that RIAs can work with them because they don’t care which way you work with us, right? If you have advisors who go independent, as long as they stick with Raymond James for custody, they still get the money. So it’s good for them. If you’re not, if you’re a broker dealer and you clear through say Pershing, if a bunch of your advisors jump ship and start an independent RIA, you get blown up, right? You lose those assets that are coming through your platform. You lose the money you’re making on the front end when you charge for your platform, you’re charging for shelf space and other things, it all disappears. But if you are self clearing, you can then keep that if the assets stay on your platform. So that’s really the main reason.
Craig: We hear from firms saying, Hey, self clearing gives us a central location, it centralizes things, eliminates third parties, reduces costs. That’s the pitch they give to advisors, but it’s really about money from what I’ve seen, from what we’ve seen in the business. It’s all about bringing more revenue. Now there is some ability, there is some flexibility as well. Things like you can make up your own margin rules since you’re the custodian. You’re taking the financial risk so you can decide who becomes a client, your compliance team decides whether a firm can be a client or not, you can decide your minimum account size because you’re the custodian. So there is more flexibility there.
Craig: We’re expecting Motive and Clearlake to merge this business under InvestCloud. Now they recapitalized InvestCloud in 2021, beginning of 2021 injecting $500 million into InvestCloud, merging it with Tegra118, which is the former Fiserv APL business, as well as Finantix, which is based in Europe and is more in the private banking space. So they’re building out a suite of products into a much larger organization that can provide overlapping services. And I imagine that they want to connect them, of course, looking for some economies of scale, but also be able to offer to larger firms that have multiple lines of business, all these different services, which makes a lot of sense. You want to be horizontally and vertically integrated.
Craig: Many years ago, this is my next thing I want to talk about, I worked at automatic data processing when they had brokerage information services group. So they were in the business, they owned BPS, which they eventually spun off the back office into what’s now Broadridge, that used to be ADP brokerage group, and BPS, we worked with it back that this was long time ago, decades ago. And BPS was old back then. So it’s really old now, and so is Beta+, these are really old technologies, but they just keep plugging away. They just keep cranking out. Custody is a lot like plumbing. You don’t notice it until it stops working. And another reason why custody, so profitable is it all runs on mainframes, really big computers they were fully depreciated decades ago. So all the revenue falls right to the bottom line. I don’t have the data in front of me, but I know I looked at BONY’s, Bank of New York Mellon’s annual report a few years back and they owned Pershing and I believe Pershing, someone fact check me on this, Pershing was too 10% of the gross revenue, but 20% of the profit. So really profitable business Pershing is for Bank of New York. And the same thing goes for custodians everywhere.
Craig: Now how will this be combined? They’re gonna put Beta+ and the other little bits and pieces under the InvestCloud umbrella. It makes sense. They all target similar client segments, broker dealers from very large ones., the warehouses like Wells Fargo to the mids, to the regionals. They’re looking to sell them the suite of products, whether it’s APL portfolio accounting, rebalancing, reporting, billing, the entire end to end process and now self clearing. And that gives them a lot of bigger hooks into Wells Fargo, which is one of the APL business’ largest clients. They just signed a big deal there, and now they also own the self clearing part makes Wells Fargo a really big client of theirs. Makes them stickier, harder leave when you’ve got so many pieces.
Craig: Makes the offering more robust because they have these different businesses and these different services they can sell, different pieces of tech that they can offer and they should link together better. You know, they can take Beta+ and connect it better to the APL platform, make it smoother, make it more STP, more straight through processing that will benefit clients. If they also can make it cheaper, if they can figure out ways to offer more services, wrap it around Beta that will make it more attractive to smaller broker dealers to go self clearing that could open up all new possibilities for that business where it’s kind of stagnated the last number of years, we haven’t heard a lot of new clients go self clearing on Beta or BPS it’s really been smaller firms. So if they can do that big win for Motive and Clearlake and InvestCloud.
Craig: And then all these numbers they’re adding these bigger clients Wells Fargo they already had. They’re adding about 40,000 more advisors, which is good. So all these numbers look great for investors and look great if you’re going public, which I think InvestCloud is planning to do, or the rather Clearlake and Motive are planning to do. I would expect them to look for like a $4 billion valuation. I mean, they’re, they’re already a billion before the Beta acquisition, which was for $1.1 billion. So they gotta double that if they’re gonna go public. So look for that coming soon and just you to see what these guys are doing and how they manage to integrate and, and what the next offerings are for the InvestCloud platform.
YieldX Joins Schwab Advisor Services’ Provider Listings Program
Craig: Story number two, YieldX, the FinTech company providing fixed income trading and portfolio analysis tools announced that is now participating in the Schwab Advisor Services Provider listing program. The program launched in 2013 is dedicated space for RIAs to research third party technology providers and the solutions they offer that integrate with Schwab.
Craig: Now, Schwab is the largest RIA custodian with over 4 trillion in retail assets. They also have 279 vendors listed in their provider directory, which is a decent number. It’s almost as many as we have in the Kitces advisortech map that I partner with Michael Kitces on, you can find on Kitces.com. The other major RIA, custodians, Fidelity and Pershing also have similar directories of providers that they integrate with. What’s so special about YieldX integrating with Schwab? The reason why we’re covering it is we think YieldX’s product is unique in the marketplace and I’m gonna tell you why.
Craig: Even with the recent decline in bond prices, a significant portion of investor assets was still invested in fixed income. Now that’s mostly ETFs and mutual funds with not so many individual bonds, especially in the managed accounts world, the reason is on managed side at least, of evaluating investor needs and building a portfolio of securities is time consuming, labor intensive. And it’s assuming you have the data to find the right bonds and the right sources of liquidity in the managed account world. Everything’s moved to model based, and it’s very difficult to make a model of bonds because there’s just so many bonds out there and the IBM itself, just looking them up, they’ve got almost over a hundred issues currently outstanding. It just can’t build a model with so many securities.
Craig: So what we’ve been striving for, what I call the holy grail of fixed income and managed accounts and UMA is the characteristic based models. That’s where you enter a group of parameters, such as the target yield, the duration, the minimum ratings of the bonds. And then the system goes out and searches the market and returns the list of bonds that meet that criteria. Then you’ve got sort of dynamic model that meets the client’s requirements.
Craig: Of course, the platform itself would also have to either connect with some liquidity provider or trading system to find the bonds where you could buy them at liquidity sources, execute the trades and allocate them back to the correct accounts, which is a lot of work. But no wealthtech vendors, at least in the managed account side, have been able to build this kind of characteristic based modeling for fixed income. That is until I saw a demo of YieldX. Now YieldX was founded in April 2019 focusing on fixed and investing and they’ve got a suite of products that they believe can support all wealth managers, both RIAs and broker dealers, provide better outcomes, optimizing yield portfolios, driving trade ideas. They can do portfolio optimization at scale. They can offer white label direct indexing of fixed income technology, which is unique. And from what I’ve seen, of course, we all see direct indexing of equities, but haven’t seen any direct indexing of fixed income with customized value based investment solutions and then an API first approach that can integrate with other fintechs to build in these different, fixed income operations into their platforms.
Craig: Almost every broker deal, at least all the biggest broker dealers have a fixed income trading desk or outsource fixed income. It’s a bit inefficient, YieldX believes that they can do it better leveraging their quantitative analytics. So they’ve got five fixed income tools and technologies that they have built into this YieldX suite one will target a specific yield risk of dollar distribution and build a portfolio. Another one’s an optimizer where you can put in a portfolio or thousands of portfolios, it analyzes them and returns actionable trade recommendations to either increase the return or maintain the return with lower risk. That’s what they believe their tools can do. They have an asset explorer which can search through over 2 million fixed income securities. They have a best fit tool that does personalized corporate bond portfolios. And finally, a ladder builder, which as the name implies creates bond ladder portfolios.
Craig: YieldX recently closed it’s Series A funding backed by a substantial investment from a new partner, Envestnet, this is a big deal for YieldX in that it gives them access to Envestnet’s client base of all the top broker dealers and RIAs in the country.
Craig: So Envestnet got the biggest market share. So it was a big big win for YieldX to partner with them and get an investment. So that shows Envestnet’s belief that YieldX’s technology or their team is going somewhere. If they’re not only willing to partner with them, but make an investment. One of the things I find that YieldX has, that’s gonna give them an advantage is the data they’re bringing in.
Craig: Many years ago I was working as a head of operations for a software company that made fixed income trading tools. So understanding liquidity providers and how the street works, you see how, how difficult it’s to get the data where the bonds are trading. And looks like YieldX has got that sewed up where they have over a dozen sources to understand where the liquidity is moving across the market and the best places buy the particular bonds you’re looking for.
Craig: They also have three ways that they can deliver their services and technology. One is a SaaS product, which is like everyone has cloud-based UIUX interface with it directly you can touch the five different modules we mentioned earlier. The second way is through APIs. They have an API first open architecture with over 300 APIs where you can integrate specific research or make calls to any of their modules to search for bonds, to send a portfolio and get the actions back to, do any of the things that we just mentioned before, all via APIs. And I did ask them this, that they eat their own dog food as we like to say, meaning they use their own APIs in their system. So it’s not just an external tool, they write the code, the custom code themselves, and they make APIs for everyone else. They use their own APIs, which I thought is really a requirement for an API, being a robust and well tested and well managed platform.
Craig: And the third way that they work with firms is through custom products. I know they said they’re working with some vendors to build custom ETFs that are white labeled, that are powered by the YieldX technology. And they’re also building out a model marketplace for fixed income SMAs. That should be very interesting. They recently announced that all Envestnet enterprise clients, what we used to call the ENV2 platform, but I think Envestnet calls it the enterprise platform, now have single sign on access to YieldX, which is great news for them. And they said Tamarac clients will get SSO sometime in the third or fourth quarter of this year. So you can find out more about YieldX by going to their website Yieldx.app.
Schwab Plans April Debut of ‘Personalized Indexing’
Craig: Story number three, Charles Schwab launches direct indexing, Charles Schwab and company announced the launch of a direct indexing platform that gives advisors and retail investors the ability to directly own baskets of individual stocks. Direct indexing allows advisors to trade weighted baskets of stocks on client’s behalf and gives them the ability to directly own a portfolio of stocks. Designed to mimic the holdings of an ETF, the direct ownership of securities can involve a greater level of tax management for investors. So we’re seeing direct indexing all over, seeing a lot of vendors being snapped up by all the big players, everyone wants to get a piece of the action, get into the direct indexing game. Schwab’s platform comes with an account minimum of just $100,000 which is lower than most direct indexing offerings on the market, which typically start at $250,000.
Craig: I think Goldman dropped their minimum from $10 million to $250,000. So $100,000 is pretty cheap. Schwa is giving the clients access to three indexed based strategies that can be customized, including indexes based on traditional US large cap, small cap, and ESG. Direct indexing currently makes up only about 22% of the SMA industry’s total assets, but the growth potential is huge, according to data from Cerulli. Now there’s different numbers I’ve seen on the total direct indexing which here says 362, but that doesn’t seem right to me, because I know that Parametric has 400 and something billion, 420 billion already. So 362 can’t be right, but let’s say it’s 500 billion or something around that area with a projected five year growth rate of 12%, according Cerulli.
Craig: There’s some other research of institutional investors that show 62% of pension funds and other institutional investors expect to increase their focus on ESG, which is one of the biggest pushers and directions of of direct indexing is ESG requirements. And that’s being increased over the next 3 years. So we’re seeing a couple of reasons why firms like direct indexing and one is ESG, as I just mentioned, second is a real time tax lost harvesting, especially with the drop of commissions and other technology, the ability to customize the portfolios as needed and exclusions. So excluding particular stocks for different reasons.
Craig: Now there are some firms that are concerned that launching these direct indexing products are going to cannibalize their ETF products, which they probably will, but if you don’t launch it and do the cannibalizing, someone else will. It’s the old HP business model, keep coming out with new printers that cannibalize the old ones because you’d rather get the revenue than someone else.
Craig: Now with ESG, another survey showed that 43% of institutional investors said that the environmental factor, the E is the most important to them, about 33% chose S or social, and 26% chose G or governance. Since 2020, there was a real rash of, of acquisitions a run on acquisitions and run on vendors, companies buying up stuff. Schwab bought robo-advisor Motif, which they may have built this technology off of because Motif was one of the first providers, if not the first, of direct indexing solutions with both the consumer were facing and an advisor delivered business model. And this is before commissions were dropped, so they were managing direct indexing with fractional shares, with, you know, paying for ticket charges. So Motif was sort of doing it with an anchor around their neck without commission free trading, but probably one of the reasons why they went under.
Craig: Last July Vanguard acquired, Just Invest with about a billion in assets, couple weeks later BlackRock paid a billion to acquire Aperio in 2020. That was just a few weeks after Morgan Stanley bought Eaton Vance who owned Parametric who had, here’s the notes, 300 billion at the time they were acquired, which was almost 75% of the market, and now they’re up to 428 billion, a 43% increase. We’ve seen Charles Schwab, Goldman, CI Financial, JP Morgan, Franklin Templeton, Prudential, Pershing, and UBS have all bought some sort of FinTech with direct indexing capabilities. And finally Fidelity is beta testing a new product that will provide direct indexing to retail investors for just a $5,000 minimum. Are you kidding me? There’s so many vendors out there doing DI now it’s unbelievable. I just talked to someone today about a company I hadn’t heard of called Partipris, they leveraged Northfield, their tax optimizer and the Mars optimization engine to design direct indexing capabilities. They’re a platform and process firm. They offer consulting to help firms build out their own direct indexing and portfolio customizations. And one of the reasons why firms want to do this is basically to save money. A lot of vendors charge 40 basis points to do DI for them, so if they can do it themselves, they get to keep those 40 bps for themselves.
Craig: Internal research by Schwab found one third of its clients are interested in direct indexing, which I’m shocked. I didn’t even realize that clients even knew what direct indexing was. Anyway, Schwab the largest RIA custodian adding direct indexing is sign to the rest of industry that it is here to stay, it’s table stakes, and they better yet on board or risk being left behind.
Kitces AdvisorTech Map Updates
Craig: And the last story for this month is the Kitces advisor tech map, Michael Kitces and I work on the advisor tech map, which you can find Kitces.com. Also the kitsis.com advisor tech directory, which you can find on the website. There’s a lot going on every month there’s changes new vendors, old vendors wanting new things. So this is a quick summary of what changed in the map in April. So now just a quick note, before I go over the changes, if your company provides services where the technology is really just ancillary or merely supportive your services, you’re not gonna get on the map. This is a map for software providers, software that an advisory firm or a broker dealer can buy directly and use on their own, not as part of a service also there are no TAMPs on this map or at least no TAMPs that are, aren’t providing technology. So if you’re a pure TAMP you don’t provide technology or you’re leveraging other vendors technology, you’re not gonna get onto the map.
Craig: So let’s talk about things we have changed in the map. We added a new category that’s not very common, we don’t add categories very often. If you’ve seen the map, you know, it’s pretty well jam packed, trying to fit in another category is just not easy. Have to give kudos to the graphic designer who’s doing all the work. She did a great job squeezing in proposal generation. If you’re looking at the map, it’s at the very, very top in the middle between client survey and performance reporting. And the reason we did that was there used to be just one vendor that we knew of was Advisory World. We’re not gonna do an entire category just for one vendor, but now a couple new vendors showed up.
Craig: We now have Advisory World, which is owned by LPL Financial. We have a company called Invisia and then there’s two in the 401k proposal space plan professional, which is then a fiduciary works and fiduciary RX. So you can check them out in the map. And of course, as you know, the map is dynamic. You can click on any of the logos and it should take you directly to the company’s website, which is quite handy.
Craig: So changes to this month, mostly additions. We added Advisor Perspectives to the digital marketing section, and they’ve been around for quite some time with a number of different services premium me and subscriptions. And they basically built out this digital marketing tool. They also have newsletters and other types of content available on Advisor Perspectives, that’s AdvisorPerspectives.com.
Craig: We added to the map also Arcons actually, they were already in the advisory fee billing section, but we discovered that they have a lot more functionality, basically so much functionality that they moved into the all in one category. So bill port was their billing tool was moved out and now they exist in the all in one. So you can check them out at Arconstech.com. Next one Clarity.ai was added to investment data analytics, ESG. I mean, ESG is just massive. It’s really growing, it’s gonna be huge. People seem to be really really into it. It’s really generating a lot of traction. I’d mentioned it in the last story, talked about all of the different vendors.
Craig: So this is something that’s gonna be exploding in the map. They might even need its own section. I think we were discussing creating a separate ESG section at some point, but not yet. So it’s still squished into the investment data and analytics section category. Another thing, another note if you are a firm that primarily operates in another country, usually Canada or the UK, we’re not gonna put you on the map unless you have significant US presence. So we have been getting some inbounds from Canadian companies. I’m sorry, we can’t put you on the map unless you have some US customers.
Craig: In lead generation we added InvestmentFirms.com so you can check them out. Then BlackRock, Aladdin, I think we took them out of digital onboarding and they were supposed to be added to wealth management or rather portfolio management with Aladdin wealth.
Craig: But I think we forgot to do it. Yep. I’m looking at them up and I do not see it. That was supposed to be a change this month and it wasn’t added. We’ll have to stick that in next month. So that’s the, the updates from the advisor tech map. So hope you enjoyed this episode of the WealthTech Today podcast. Please go to our website, EzraGroupLLC.com, scroll down to the bottom of the homepage and sign up for our newsletter. Once a month, you’ll receive an email chock full of wealth management goodness, news analysis, links and updates. You will not be disappointed. Thanks for listening. And I’ll talk to you all next time.