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Companies Mentioned
- Aperio Group [27:00]
- Black Diamond [23:30]
- Cerulli Associates [14:04]
- Parametric Portfolio [25:55]
- SMArtX Advisory [05:45]
Topics Covered
- Twenty Years of TAMP
- New TAMP Technology
- Why Switch Technology Providers?
- UMA Trends
- Morningstar Office for Portfolio Accounting
- Morningstar TAMP Roadmap
Episode Transcript
Craig: I’m excited to introduce our guest for this episode, it is Daniel Needham, President of Morningstar Wealth. Daniel, welcome, thanks for being here.
Daniel: Thanks, Craig, it’s great to be here, I’ve listened a lot so I’m thrilled to be participating.
Craig: Glad to have you! We are up in the 150s episodes, so we’re cranking them out, we’ve been doing this for a while, since 2019 so this our third year of podcasting.
Daniel: Right right, so I’ve timed well, so you’ve really nailed it. That’s good.
Craig: You’re in the good time, I’m not experimenting, trying to figure out how it works, it’s all boom boom boom. Like clockwork. So you’re perfect. Where are you calling in from?
Daniel: I’m calling in from Chicago, so 22 West Washington, which is Morningstar’s head office.
Craig: That’s the office with the big deck looking out on the city?
Daniel: That’s right, level 7 we have a patio area, which doesn’t get used about 6 months of the year because we’re in Chicago but the 6 months it does it’s normally packed.
Craig: And 3 of those months it is used, you’re wearing a parka.
Daniel: That’s right. Exactly. It’s more on an igloo out there than it is a place to have a barbecue.
Craig: But now’s the best time, July/August is the best time to be in Chicago.
Daniel: That’s right, the three months that are really good in Chicago.
Craig: Until it snows at the end of September.
Daniel: That’s right.
Craig: Alright, well let’s head into this, we’re talking about the TAMP offering of Morningstar. Can you please give us the 30-second elevator pitch?
Daniel: I think advisors know and trust Morningstar and what we stand for. Our platform is really about bringing the best of Morningstar’s data, research, insights, and tools together for fee-based advisors so that they can spend time doing what they do best which is working with clients to deliver advice and great outcomes that ultimately empowers investor success. Here we’ve got a multi-custodial platform that gives advisors the choice about which custodian or custodians they want to work with and they’re able to see a holistic view at the client level which really gives them the ability to manage their practice the way they want to. Our goal is to put the best of Morningstar at advisors’ fingertips in an easy to use digital, seamless workflow.
Twenty Years of TAMP
Craig: Morningstar obviously is a trusted name in the industry, I think 200,000 advisors using one of your products or services, so the TAMP offering is one they should all be taking a look at. And you’ve had this offering for quite some time.
Daniel: That’s right. We’ve had the TAMP for nearly 20 years in various forms of iterations. But I think we’ve kind of been the best kept secret I think within Morningstar, and you’ve been able to access Morningstar’s research, portfolios and tools. But we’re really focused on investing and expanding out the number of advisors and investors that we serve. And we’re really excited about the path forward.
Craig: What kind of advisors would you say would be in the sweet spot for the TAMP offering?
Daniel: Generally we’re looking at fee-based advisors, they can be within a BD or RIA, but generally we’re going to be serving that $50-$250 million practice. And generally they’re going to be advisors that they really value choice and flexibility. They want to be able to manage the practice the way they want to manage it, but we can serve advisors of pretty much any size.
Craig: And you have, you have advisors of all sizes in with the other products and services as well from the large broker dealers to the individual RIAs.
Daniel: Exactly. I think we’d be one of the we probably have one of the largest footprints within the the advisor market touching them in different ways, whether it’s our advisor workstation, whether it’s Morningstar office, whether it’s using our data or tools in a BD platform or at the wise so, yeah, we’re definitely we’re ubiquitous, I think within the advisor workflow.
Craig: What people don’t realize is that your coverage of products and services you’re clearly one of the largest data vendors and everyone knows Morningstar data, Morningstar research, but I interviewed your head of software a while back, and if you just pulled out the software part of your business, you’d be one of the largest software providers in the industry.
Daniel: That’s right. That’s right. You’d be surprised where Morningstar software and tools turn up. And so we definitely observed a lot of advisors. But we think about technology as an enabler as well for for us and and that’s really where we’re investing is to be able to enable the adviser workflow. We’re really excited and I’d say our best days are ahead of us.
New TAMP Technology
Craig: Recently, you announced switching your back end technology to a new provider. Can you talk about that and what was the primary factors in that decision?
Daniel: Yes, I mentioned, we’ve had a platform for quite some time. And we’ve seen the the needs of advisors evolve, and the ability to deliver flexibility and choice we think is more important than ever, and we’ve had great partnerships supporting the TAMP and, but but we felt from a technology perspective, we needed to enhance the underlying platform, especially from a UMA perspective, we have multi strategy accounts, UMAs now, but but we really felt like we needed to partner with an API first provider, and we have Morningstar Office, which has its own portfolio accounting engine. So we’ve got some back end capabilities that we were really leveraging a third party for, so we’ve made the decision to overhaul the the middle and back office of the TAMP. And so we’re using Office as our sole portfolio accounting and performance calculation engine. And we’re working with SMArtX to be our UMA and middle office provider. So working with them, API based connections. There’ll be pairing out how you ma Model Manager, or rebalance. And so really excited, Evan Rapoport, and John Pincus, just great partners. I think they’re they’re really focused on innovating, leading with technology, disrupting maybe the market a little and with Aaron and Alex as well, their head of tech and head of product, they’re just a great team to work with so like minded organizations, and we just couldn’t be happier with the partnership.
Craig: Yes, we’ve been talking about SMArtX for a while long before they kind of popped up on the radar with everyone else, and 2020 or 2021 when they started grabbing a lot of assets, but for years no one was really talking about them but I’d seen what they were doing. I like their technology and we’re experts in new UMA and managed accounts so when I see a vendor with a new take on new UMA and sort of, as you said technology first provider. I want to talk about it, so we’ve been talking about SMArtX, so we’re really happy you guys are working with them. We don’t have any relationship with SMArtX and in terms of monetary relationship, but we’re just happy to see vendors that we like, work together and doing cool stuff.
Daniel: We’re excited about it. And we think the collective strengths of the organization so we really come together. That’s the great approach with their API. First approach is that you can really build something that’s right for your workflow. And we’re going to be bringing some some really cool features and functionality out and I think the SMArtX guys are a 10 year overnight success. They’ve been building that tech for for some time, and it’s super exciting.
Craig: Yeah, they came from other tech, they started out in the hedge fund world, which is a very, it’s very, it’s a lot more pressure right here. When you’re in the hedge fund, things are changing. Of course, Wealth Management, is pressure as well. You gotta be right and correct. You can’t be bad data or inaccurate but hedge fund is at a different level so I think coming from that tech background, that client segment gave them a good base for moving into wealth management.
Daniel: Yeah, couldn’t agree more. And we see that in their ability to calculate performance real time and it’s precision that you need, I think, and that’s the way that the industry is going and I think they’re leading it.
Why Switch Technology Providers?
Craig: Indeed. I’d like to kind of dig a little bit more into how you make this decision because we work with a lot of firms like Morningstar. On the tech side, we work with a lot of your clients, broker dealers, enterprise RIAs, and it’s often an issue for for for CXOs, presidents of companies like yourself, when do you switch? How do you know that it’s time to switch? So you mentioned UMA need, you mentioned API’s, but how did you know that? Hey, now’s the time. We have to switch, what was your decision point?
Daniel: I don’t know that there’s an easy answer to that question. I think strategically, we could just see the way the industry was going, and we could see that with advisors, expectations aren’t declining, I would say so, advisors, they’re humans. They spend a lot of time in modern apps and and using different sort of digital applications. And I think when they move into the sort of the finance, tech space, they don’t change their expectations, they just get disappointed.
Daniel: And we could see that and, and, and so for us, we really felt like we needed to improve the digital experience for advisors. And that was the key. Jeff Bezos talks about embracing external trends and that generally if it’s a strong external trend, and you don’t embrace it, you’re probably going to be left behind. For us, we could see that and and so that was really the catalyst we needed to improve the experience the workflows on our platform. We looked at all of the major providers, we went through a comprehensive due diligence and evaluation process, and we signed confidentiality agreements with all the vendors and they were great and we were very this was a bonafide a search, we wanted to look for the best partner. And there’s a lot of great providers out there, I’d say so it was not an easy decision, but but we felt on balance. SMArtX were good because we liked where they were in their, in their business lifecycle, they’re still in that sort of innovator sort of pilot stage and, and that’s great, because we want to build something that’s really well suited to our advisors, and our clients. We want to innovate together.
Daniel: I think when firms get really large they turn into large professional services firms that have cookie cutter playbooks. And so and we felt like, SMArtX wasn’t that and so it was it was a comprehensive process. It’s it’s a risky, moving back end and middle office. It’s risky. It’s a lot of work, but we’ve got a great team and we’ve got some experience doing some pretty complex projects of this kind of nature and so I feel really confident we’re really on track things going well, and our goal is just make sure there’s no disruption for our for our advisors and their clients and we feel good about that.
Craig: We’ve seen that as well working with a lot of different vendors from large to small that success breeds lack of innovation. You tend to innovate less as you get larger. And once you be in order to get that level of success. You have to become a legacy provider. It takes it takes a number of years to do that. And now your technology becomes old, your you become beholden to your biggest clients legacy clients, and they start to drive your roadmap rather than innovative ideas driving your roadmap.
Daniel: Yeah, that’s right. The engineers that are closest to the the pain point or the problem that’s where the innovation comes from solving real problems, but once they get to a certain scale the engineers move out and the MBAs move in and then it’s about scaling and turning into a software product.
UMA Trends
Craig: Can we talk about trends around UMA, so we’re experts in UMA technology, UMA programs and platforms, but since I’ve been in the industry, I’ve been in financial services over 30 years, and specifically wealth management 17 years, ever since I started doing wealth management UMAs have been the next big thing. UMA is going to take off, but sort of been a very slow, methodical process, but you saw that as a need that you had to have right now. Why is that? What trends are you seeing around UMA?
Daniel: I think advisors are managing more clients and more assets and their businesses are becoming more complex. And they want to be able to personalize portfolios for their clients, make them appropriate those that are leaning more on planning, maybe it’s more geared towards the the financial plan and the outcome or those that are more investment oriented, they want to be able to bring some insight, but they want to be able to do it at scale. They don’t want to be building bespoke portfolios for every client, but they also they don’t just want to take a single sort of ETF manage portfolio, push it out to every client.
Daniel: We think UMA being able to manage multiple slaves in a single account, and UMH being able to manage multiple accounts towards a single household allocation. We just think that’s the direction of travel advisors can add a lot of value at that level for their clients. And allowing them the ability to have a few levers to pull at the at the account level, or at the household level can allow them to deliver the right solution for their client but it also means not bogged down in having to build bespoke portfolios and rebalance portfolios and that’s what we see with UMA.
Daniel: We have a UMA on our platform now it’s called a multi strategy account. That’s what we call it. And that’s by far our largest growing, fastest growing strategy on our platform. Daylight second and we’ve only, I think it’s about two years now that we’ve had that sort of functional and I would say that we’ve got a pretty basic MSA sort of UMA capability now and it’s very popular. And we don’t expect that to decline. If you look at the Cerulli data, which I guess it’s probably the most the most tortured data that the industry has, but we wouldn’t be surprised to see you UMA and SMAs be by far the largest category in the managed account area in the next decade. It’s just it really works well for advisors.
Craig: It’s been growing I think, I think you hit a trillion in assets. I think you only hit a trillion in assets two or three years ago.
Daniel: That’s right.
Craig: I’ll double check, but it’s Rep-as-PM is still growing as well, which I’m still shocked about because as you mentioned more advisors really should be looking to bring insight at scale personalization at scale, and you can’t do that in Rep-as-PM.
Daniel: Yeah, that’s right. I mean, I do think the popularity of Rep-as-PM really speaks to that durable need that advisors have of flexibility and choice. As it relates to asset allocation and investment selection. And if you look at the historic sort of managed account programs, the advisory programs they just didn’t have that you took it off the shelf and that was it. I do think UMA has the potential to kind of maybe take some of the the share from Rep-as-PM for certain advisors, but there’s also no reason why you can’t have a advisor managed sleeve within a UMA I mean, I think that’s the future where, certain advisors they’ve got insights large cap US equities, maybe they want to build that portfolio. There’s a they’ve got an edge that they want to scratch and if they’re good at it, and they and they know it, there’s no reason they can’t do that in a kind of scalable, risk controlled way. That’s kind of the direction we see things going.
Craig: We’ve seen that as well. A number of a couple of larger broker dealers are also offering advisor managed sleeves in their UMA so it’s becoming more popular sort of a hybrid where you’re saying, Look, we don’t want to do Rep-as-PM but we’ll give you something to play with.
Daniel: That’s right. That’s right. And Rep-as-PM, they’re the firm, they’re the practice and they they do it themselves. But technology is getting to the point where I think direct indexing and some of the technology that underpins that, I think as the industry matures, I think the ability for sort of a merging of Rep-as-PM and scalable portfolio construction, I could see that on the horizon.
Craig: That’s a good future trend to come back and check in a few years.
Daniel: Yeah, that’s right.
Morningstar Office for Portfolio Accounting
Craig: Something you mentioned earlier about technology that with your current provider, they’re offering portfolio accounting and performance calculation. But when you bring SMArtX in and integrate that SMArtX is going to be the rebalancer, and then Morningstar office is going to do portfolio accounting and performance calculation. Why did you do that and how’s it going to benefit you in the long run?
Daniel: We’ve been using Morningstar office to do a lot of the performance calculations for our TAMP. Historically, just the way things have played out Morningstar office was kind of a key back end provider to the TAMP in early days. But the portfolio accounting engine is really a critical, essential service of the platform. Having the client data, owning that underlying capability we think is really important, not for everybody, obviously, I don’t think you’d want to build it from scratch today if you didn’t have one. But if you’ve got one and you know, we serve over 2300 firms, RIA firm’s for Office. So we felt like we think, you know, we think the portfolio accounting portfolio management, offerings is really critical for RIAs. I don’t buy the commodity story and that there’s going to be these kind of upstarts disrupting, it’s a tough game, getting the data, right, getting the performance calculations right. That takes decades of knowledge and experience and innovation. But we have that and we definitely want to see that grow. So it made a lot of sense for us to invest in both. And startups can focus on what they do best, which is that UMA, rebalancing, using automation to save save advisors time to save us time. And so we felt that that was good mix and also, as Morningstar says to build out as we build out more and more data new insights, being able to plug that straight into our accounting engine and integrate things in a way where we don’t have to get on somebody else’s roadmap, we think is really important. If you talk to Kunal, our CEO, he’ll always talk about there are certain things you got to control your own destiny, and we think we think the portfolio accounting spaces is one of them for us.
Craig: Good decision, we have worked with other startup vendors who have built portfolio accounting engines from scratch in just the past five years with a couple, at least at least two of those projects. And yeah, it’s not easy. They always think it is. Then we kind of lay it out for them their eyes kind of get really wide like they didn’t realize because there’s so much going on especially with all different security types and the different custodians and having to manage all that and t plus one, and all the complexities of the different security types.
Daniel: And if you look at those the new entrants, even the one new entrant, in the amount of capital they’ve raised in their investing, and are doing a great job. It just highlights how challenging it is to do it well, especially as the security master list expands that life doesn’t get easier. It gets harder on the edges in the corners.
Craig: Especially we get into things like fixed income, and how bonds work and coupon payments and how they’re all different types of preferred stock and other even with all those things, how they’re handled and the complexities are intense. So yeah, good explanation about how you made this strategic decision to not build a portfolio accounting from scratch but also not be beholden to others. You want to control that. So that’s a decision sometimes something’s you saying, Hey, we’re going to partner with SMArtX and the rebalancer, but we’re going to keep some of these things for ourselves.
Daniel: Yeah, and I think that’s picking the spots where you’ve got the capability and you think it’s important where you see your strengths and then be willing to partner and I know you as a firm and you use an individual very focused on making sure that there’s seamless integrations of third party so you can bring best of breed trying to be the best that everything is it’s a losing strategy.
Craig: Oh, yes and no, I mean, that we get this question a lot which is better, best of breed or all in one. And the answer is, it depends on you, right, your firm, if it’s a broker dealer, or if a FinTech firm, how much effort do you want to expend on integrations? Because if every vendor’s integration worked half as well as they claimed, we’d be out of business. They wouldn’t need us so they don’t really work well. There’s always a lot of problems. And a best of breed solution, if you have the capabilities like Morningstar does, you’ve got a huge bench, you’ve got developers, you’re a developing shop, so you understand how to do that. It’s within your capability to pick and choose and be able to build out the connectivity between those, other firms may not. They may not have that ability to do that as best fit so that they’re best to do an all in one where they don’t necessarily get the best everything but having everything on one platform one data store is immensely valuable.
Daniel: Yeah, that’s a choice around how important is that sort of seamless end to end versus having the best component or capability within each of the elements of the workflow so you had a good points.
Craig: But also, you made the point, back to making decisions you made that strategic decision we want to own portfolio accounting, we don’t need to own rebalancing because you saw that as core to your other other applications because you’ve got this portfolio of tools, technologies that can feed into portfolio accounting, other firms may not have that. So portfolio accounting may not be as important to them, but we always recommend look for your value add and where your value add is, that’s the things you want to keep everything else you want to outsource.
Daniel: Yeah, makes sense.
Craig: So back to Morningstar office. What will be the advisor experience? Will the TAMP be integrated into Morningstar office in the front end, where the advisors who are using Office can say, hey, I want the TAMP, boom, click here and it just flows right through. Is that something you’re thinking about?
Daniel: We’re exploring different ways of building the integration. You know, our vision for the group is an integrated suite of wealth offerings, that allow advisors to leverage our unique Morningstar insights in a way that works for their practice. And so our ideal state is we have a set of core capabilities that are able to be configured for the client workflow, whether it’s an RIA or a fee based advisor with a broker dealer, but we’re still working through exactly how the two are going to be connected. Right now we’re focused on back end integration and connections and then over time, we’ll be working through the front end but we hired Bjorn Peterstead from Black Diamond, I think they’ve done a tremendous job at Black Diamond with their portfolio accounting reporting, service and just the advisor client engagement tools that they’ve got there we think a really good and so if you want is very focused on how we could bring different elements of our TAMP workflow together for RIAs and so but I would say watch this space.
Morningstar TAMP Roadmap
Craig: Keep your eyes on this. Talking about the TAMP so we’ve got the new technology on the back end, we’ve got integration with Morningstar office, we’ve got plans for the front end. Are there any roadmap items you can share specifically around the TAMP?
Daniel: Yeah, probably the biggest one is direct indexing, personalization at scale. That’s being able to, you know, allow an advisor to pick a reference index portfolio, elicit preferences from the client, including ESG, preferences, exclusions, inclusions, to be able to optimize that and include tax then be able to report on that, including impact and tax alpha. So that’s a big area of focus for us. We’ve just launched a pilot program on the TAMP. So we launched that at the beginning of July. We’ve got a subset of advisors that are interested in it and it’s not about signing up thousands of advisors, it’s about getting some early adopters, to give us feedback and iterate around the solution. We’ve got some really great feedback from our pilot advisors at the moment, and we’re working towards a full launch in early Q4. And as we iterate so we’re kind of in a continuous release cycle at the moment. So looking to continually improve that but that’s probably the big one that’s going to allow us to bring personalization, certainly within an equity portfolio single account initially, and then moving it into a UMA account so you can manage that a UMA sleeve that gives us tax real proper tax management capability. So you can run that over and active equity SMA and so that’s going to be a key feature for us on the TAMP that we’ll be rolling out this year.
Daniel: We’re building it in a modular way as well, so that the components could be potentially used by an enterprise or in different configurations for an RIA, maybe a large RIA that wants to be able to use certain components, maybe they want to bring their own indexes in. Maybe they have their own ESG data. Maybe they have a particular way of trading, or reporting. So we’re building with sort of an API first as we’re rolling that out. So that’s exciting. That’s a big one for us, I think there’s a lot of lot of talk about direct indexing in the press and across the industry. So we’re hoping to be able to have a compelling solution in market this year.
Craig: I like how you’re building it through API. So would you call this a TAMP as a service?
Daniel: I mean, I think we’ve been kicking around this idea o direct indexing as a service just kind of in and then we have, you know, our CTO and Head of Product saying, Well, you know, is that the right term? James is very knowledgeable in the space but, but yeah, we’re looking at it as a way so that we could potentially work with broker dealers or large RIA firms that really want a solution. They like Morningstar. We’re very much focused on ease of use. And I think there’s some really great firms like Parametric have done a tremendous job delivering especially focusing on tax optimization, and then Aperio very focused on values based investing and generally they’ve tended to serve larger firms. And then you’ve got your kind of smaller D2C where they’re going direct to consumer, which is more that smaller end and we think there’s a middle area, which let’s call it sort of mass affluent, smaller sort of low single digit millionaire households, where advisors running those practices, they need to be able to do it easily. And if you look at how complex direct indexing is, it’s hard for advisors to manage lots of accounts. Our goal is to solve that and to make it really easy for advisors to manage lots of accounts in a really seamless way, in a more automated way. And so that’s the pain point we’re going after. We’ve the feedback so far has been good. But as they say the proof of the pudding is in the eating so we’ll find out later in the year,
Craig: That could have implications that would be a great idea if you could do direct indexing as a service where a vendor who doesn’t use any Morningstar products, rather a broker dealer without any Morningstar products, I can’t imagine there is one, but if there was one, they could plug it into some or if they had another to the platform. They could plug your service as an API into whatever portfolio management you have a management platform that they have running and it would just be another option on their on their existing platform.
Daniel: That’s right. That’s what we’re exploring. And I think there’s within the equity SMA segment of the Managed Account industry, we expect along with you ma we expect equity, we expect SMAs to start to take off again and potentially at the expense of ETF managed portfolios, but the idea that personalized equity SMAs and and also manager traded fixed income SMAs, we think they’re going to become more and more important and so, it’s an exciting area. I wouldn’t be surprised if it increased substantially in the next five to 10 years. And so we think there’s going to be a lot of broker dealers and RIAs that are going to be looking for solutions and partners and we’re definitely looking forward to exploring those options.
Craig: Daniel, we’ve run out of time. You said everything there was to say, where can people find more information about Morningstar’s TAMP?
Daniel: Yeah, I mean, go to our website. We’ll share that as a part of the podcast but np.morningstar.com and check our website out. You can reach out to our our relationship managers, drop me an email. Happy to reach back out but we got a lot of great things happening. We’ve got a really exciting roadmap for the next 12 to 18 months and really looking forward to being able to serve more advisors and help more investors.
Craig: Excellent Daniel, thanks so much for being on the program.
Daniel: Yeah, thanks, Craig. Really appreciate it. A lot of fun.
