Ep. 160: September WealthTech News Roundup

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Topics Covered

Episode Transcript

UBS and Wealthfront Mutually Agree to Terminate Merger Agreement

Craig: First story in the September News episode is UBS and Wealthfront scrapped their deal to merge. And the $1.4 billion deal was announced back in January, and has now been scrapped. Now I wrote a LinkedIn post about this with some of my thoughts that went viral. So in case you missed it, I’m gonna do a quick review of it now. I also wrote a rather to podcast back in February about the deal. And who asked actually, I think the whole News episode In February it was just about this deal. So you can go back and listen to that as well. I’ll just do a quick overview. I’ve written a lot about Wealthfront over the years, none of it really good. And not that there was anything I have anything against Wealthfront just that in general, it was sort of a reaction to the whole hype around robo advisors, in that there’s nothing really different about a robo advisor in terms of all the technology, most of it or the back end is all exactly the same as any other advisory firm. They have to still do onboarding models to account opening funding, trading, rebalancing, reporting, billing, blah, blah, all those things, right. The only thing different, they just got rid of the visors, and they have sold off. It’s true that they did electronic onboarding, so totally paperless onboarding, the robos were the first to do that. We were started doing projects, about six or seven years ago, when broker dealers and large RAS realized they needed that too. So we started doing projects for them to help build out those technologies. They played catch up for a couple years. But now that’s ubiquitous. Everyone’s got completely electronic onboarding police, most firms do. So that’s no longer a differentiator. So what are they going to do? How

Craig: are these firms going to differentiate themselves? And we saw Wealthfront scramble over the years. If you look at the things I wrote, they really kept pivoting and pivoting because you just can’t build a business with the the fees that were charged with 25 basis points in the first 10,000 Free it’s not going to be a profitable endeavor for them without a tremendous well over well over $100 billion in assets just to break even. And that just has been happening. They were doing okay, they I think there were 27 billion when they announced the merger with with with UBS, but still, that’s nowhere near breakeven. Now what I what I wrote about what I will talked about mostly notched was not just the technology, whether it’s good or bad, and why they were buying it. But it was more the the culture clash. And that big culture clash between these two completely opposite firms was going to sink this deal. Or make it just go away.

Craig: We don’t see a lot of deals explode. Like we saw this one sort of crash and burn usually, when the firm is acquired, small firm was acquired by a large firm. In many cases, unfortunately, things just disappear, right? It’s a lot of fanfare, a lot of hype about how this new acquisition is going to revolutionize things is going to be innovative is going to change the way they do. Business and allow them to gain new market share. Yada yada yada. And it just never does. The initiate the the founders or the startup employees stay on for their contract, get paid and they leave to go do what they do best, which is startup new companies that don’t want to work for a legacy firm and push paper and being stuck in bureaucracy. And usually that is the end of that product innovation lifecycle. And it just gets renamed or rebranded or disappears. We’ve seen this time and time again. So didn’t have a lot of hope for this particular merger. And mainly because of how vocal their CEO Andy Ratcliffe has been about banks. And he had talked a lot about basically how banks suck. I mean, I turned him at conferences. I wrote about it on my blog, that he said that really, banks are terrible. All their customers want to leave, we’re gonna steal all their customers, because we know how to do things right. And that was with a couple of their pivots and a new Wealthfront is pivoted at least six times and nothing wrong with pivoting by the way. That’s how most startups work. They have an idea and they pivot says, Okay, well, I’m pivoting is just that. At some point. You got to stop pivoting. You got to find something that’s going to stick and the things that are pivoting to word nothing innovative. They were just copying what other firms were doing, whether it was high interest accounts, or very expensive models of alternative investments, or basically just pure up straight of banking, retail banking, checking account, direct deposit, what Andy Rackleff liked to call self driving money, which is a great idea. I love the idea of self driving money where your accounts is handled themselves. If that was the case, if they could really do that, which they never really could. So it just it wasn’t going to work. And it is it has failed. And even the deal amount was kind of fake. They were they were touting how it was a $1.4 billion deal because everyone wants the billion dollar deal. Every firm wants to have that. And they’ll do anything they can to make it a billion dollars. With all kinds of financial sleight of hand. This deal was no different. It was actually a $700 million deal, which is a lot of money. I like to sell accounted for $700 million, personally, but that’s not a billion install 1.4 billion they had 700 million on top of that in incentives which they may or may not have achieved.

Craig: So the numbers of the deal didn’t even add up. Either way, and I talked a lot about this in the February news and you can look up the transcript and see what we split I talked about there. So basically, the there’s also seem to be a vanity project by the previous CEO at UBS. And then that was Ralph hammers, who was the UBS CEO before and he apparently is out and there’s a new CEO at at UBS so he decided basically look what I’m just gonna Canvas because it’s not a great idea. And also the key architect of the deal at UBS Tom and rattle also left the bank of who had been there for two years. So once he left and the previous CEO left, that was the the end of this deal they managed to get out of it. And for a for pennies for pennies on the dollar, right? They had they had committed 700 million in cash, and they got out of this deal. And all they have to pay is $70 million in investment. Basically, they’re investing in Wealthfront. To get out of the deal. That’s a great, great deal for UBS. They don’t have to have this. spend that money. And also it’s not just the money to $700 million, but it’s also the distraction of having to figure out what to do with this, to have to deal with the any future merger. Bring on all these employees who are who are not going to fit in with the UBS culture. They’re all Silicon Valley people. They’re not going to fill it fit in with a Swiss bank or even the banks in New York office. It’s not going to work. The tech people at UBS like any any wirehouse have a very different mindset than Silicon Valley. tech people do. So that whole distraction is gone. They’ve just can’t it there was no explanation as to why the deal was closed and I didn’t see a lot of people speculating. So I just did my own speculation. And that’s really the end of it. Now that the the bad part is that what is UBS going to do? Will they still try to come up with this type of digital advice they tried a couple times they’d partner with sigfig and that didn’t work very well. They tried to build something on the road. That didn’t work very well. So where are they will go from here? I don’t know. A Wall Street Journal reporter reached out to me and asked me some of my thoughts about it nice and she asked, is it still a viable business model to have digital advice at a wealth management firm? And I answered Of course it is. Even at a wirehouses some form of digital advice or some sort of centralized advice where you have a call center, which is similar to how well from my work you’ll have a call center type of advice, where you don’t know which advisor you’re getting, but you still you pay a lot smaller fee works at Merrill Lynch with Merrill Edge, so there’s no reason why they couldn’t make it work, but I don’t know how they’re going to do it. Now, the other aspect of this is what happens to Wealthfront so they’re in big trouble, right? They they were trying to get someone to buy them for at least six months. I know. RBC was being courted by them, and they took a look under the hood and walked away. A number of other firms also did the same. And most likely because they it’s very difficult to make money, right? They’re basically just an electronic Ria. They’re a digital raa nothing wrong with it. It’s perfectly fine business. But when you’ve got over $100 million in VC money, you got to pay back. All of a sudden, any deal has got to be hugely astronomical way out of your price range in order to pay people back. So they’re gonna either have to they’re gonna have to take a loss, or just keep struggling on until some point where they realize this just isn’t working. Unless Andy Rackleff got some another pivot up his sleeve. There’s not much that’s going to happen and you’ll probably see them quietly get sold for a lot less money to another firm at some point, unfortunately. But that’s just the way these things happen. If you can’t innovate, you can’t come up with a new idea that’s going to excite people use taking old ideas and trying to make them new again. It’s just not really going to work.

Envestnet and YieldX Announce Strategic Partnership, Expanding Access to Solutions for Simplifying Investment in Income and Protection Products

Craig: Our next story YieldX integration with Envestnet model center. YieldX is a startup company in our space. They provide some very unique technology and services all around fixed income investing. Check them out at YieldX.app. So they basically transformed how wealth management firms can interact with fixed income can deal with fixed income buy and sell optimizer portfolios. I worked in for fixed income technology provider will a long time ago back in 2007. And really got a deep dive knowledge or other education about fixed income investing by working with this software. And trying to figure out the best way to get fixed income trades done and fixed income trades modeled and bought and sold. So seeing YieldX when they came out, I was pretty excited to buy it. So they’ve got some some really cool technology that can do a couple of things. One is well first of all, it’s all API based. So that’s what I liked about it, that everything they have is, is available through an API. We have a couple different a suite of tools. One is called impasse, which allows you to build portfolios targeting specific yield risk, one for income, if you have an optimizer tool where you can, it’ll go through hundreds of 1000s of portfolios and optimize them and provide you with other bonds you could buy that deliver the same income with the same maturity, same yield with the same risk. So were the better yield but the same risk. They have something called asset Explorer, which is a filter search tool where you can look through millions of yield driven securities, and they have a ladder builder to build bond ladders. So a lot of very cool tools for anyone in fixed income investing.

Craig: Now they are partnering with Envestnet, Envestnet made an investment in YieldX about $30 million last year. So they are partnering. And now they are doing some work to better integrate their technologies into the Envestnet ecosystem. So one of the things with una unified managed accounts is fixed income is always a problem. There’s never been a good way to build models of fixed income securities, like you can build models of equities. It’s what it means with a unified managed account. You send a model to provider if you’re an asset manager, an SMA manager, for example, you just send a model over to the sponsor saying here’s my equity model, my large cap, my small cap, mid cap, international or sector model, and then the sponsor trades it and whatever those equities might be, it’s a list of securities with weights. That’s really all the model is and that’ll be just over time. You really can’t do that with bonds because of the sheer number of bonds out there. You can’t say well buy an IBM bond for everyone because it may be there’s 100 Different IBM bonds out different maturities, different yields, different interest rates. And that goes with it with all major companies. So you can’t build the same kind of model with fixed income. Now, so basically all models every end user may that puts a fixed income sleeve. I believe 99% of the time, the fixed income manager has to trade that sleeve directly, which is more expensive. It’s not as scalable. And it doesn’t give as much control to the sponsor. But it’s just the way we’ve always had to do it. Because it’s very difficult to trade fix that you can’t build a model. There has been something called characteristic based trading, which has been a technology that’s been talked about a long time, more than 10 or 15 years, at least, and never really works. Well. I’ve I don’t I don’t know any vendor that is doing it. Well, today. I heard vendors talking about it. I’ve tried to build it. It just doesn’t really work. And that’s where you say the advisor could say or the home office could say here is a sleeve and the EMA and we want it to be this maturity, this risk this yield now go find us under this quality and other types of characteristics around that. So you basically feed in the characteristics of the bond portfolio you want, and then the software will go out and do that. For you find liquidity, find the different bonds and build the model. No one’s ever been able to do it because it is complicated.

Craig: But YieldX has this technology you can feed in these parameters, and it will go out and build you a model because they’ve got the combination of technology to search through the database of all the all the bonds out there but also the access to liquidity sources where they can find out if those bonds actually exist for sale somewhere and point you in the right direction to get those bonds. Now be able to partner now doing that is great, but you need to have that capability to plug that into a UMA seamlessly. And that wasn’t available before you could build your own. Since yield X has everything available via API’s, but that’s still not a trivial task. So they did it for you by plugging into their partner investment. Investment has probably the largest model universe in the wealth management industry with I believe over 400 managers someone fact checking on this I don’t have the website up and at least a couple 1000 Different SMA models as many strategies available on their on their platform. So with this integration as an advisor if you are on Envestnet, you can now or home office on Envestnet, you can now build a una add a fixed income sleeve and then switch over into the Inpasse, the name of the YieldX tool and it will build a custom fixed income sleeve and then import that data back into your UMA. So it’s a bit of a of a tap switch to do a little bit a little bit of task switching but the data moves right back into your mat and you can build your own fixed income models on the fly. It’s a very cool technology. You should take a look at it of course you can go to Envestnet.com or you can go to YieldX.app to learn more about this.

RIA in a Box and LinkedIn: Official Partners in Compliance

Craig: Social media is a compliance minefield for advisors, LinkedIn, and RIA-in-a-Box want to help? Our next story is a partnership between our compliance vendor, our IA in a box and social media site, LinkedIn. This is kind of a cool deal. So RIA-in-a-Box is one of the biggest compliance vendors in the space for RIAs of course. Now we’ve got a fair number of vendors if you go to the Kitsis as regroup, advisor tech map, which you can find Kitces.com We currently have 10 logos on the map. Now if you go to the advisor tech database, which are the the visor tech directory, which you can also access through Kitces.com. There are 18 vendors that claim to have some sort of compliance functionality. Now, the functionality we’re talking about here with this RIA-in-a-Box and linked in partnership is content compliance. So taking content and making it regulatory compliant is an important aspect of any marketing campaign for advisors. Since everything’s got to go through compliance. You can’t just as an advisor, you can’t just send out articles that haven’t been approved. So there’s a number of firms that have done content deployment that’s usually around a content distribution. Those firms or those vendors are usually more along the lines of digital marketing. And they have some sort of compliance plugin. So that’s a bit different. There are firms like Advisor Stream that was putting out content that was regulatory compliant, Hearsay Social, FMG Suite. A lot of these firms do that as part of their offering, but they’re not specifically compliance products.

Craig: RIA-in-a-Box is specifically a compliance product. So now with this new connection, you can go to LinkedIn, and there’ll be a plug in that you can you upload your accounts directly into this and connect somehow. And then you’re the content things that you do post on LinkedIn will be all of the monitoring will happen. And you will have up compliant content available to you for whatever posts you’re making. So it’s pretty cool. If this works, as they say it works since many advisors see LinkedIn as a valuable source of leads. Since it’s different than going to Facebook or other other tools. You get more of a more of a business and professional look. And it’s become very popular. So having a tool that’s plugged right in to LinkedIn will make it easier for these types of advisors who are looking for that to be able to archive and discover other information, whatever compliant articles or compliant content they want. And then the posted on LinkedIn should make easy I haven’t seen demo of this yet. Hope to get a demo soon and then I’ll give you the update but right now check out RIA-in-a-Box. Of course everyone knows where LinkedIn is. And we’ll hear more about this solution.

SMArtX Advisory Solutions Announces Partnership with Flyer Financial Technologies

Craig: All right. All right. All right. Next up in the news. SMArtX Advisory solutions announces partnership with Flyer Financial Technologies. This one is a cool story. I’m really excited about this one. So who is SMArtX Advisory? You can look them up. They are a company that’s more and more in the news as is Flyer Financial technologies. SMArtX just was in the news recently and our podcasts as well. They got a $30 million investment from Morningstar and Morningstar also switched over their tamp technology partner from the old Pfizer of APL now Investcloud APL onto SMArtX Technology. So it’s a big coup for SMArtX, and they are powering a number of other tamps as well with their technology. And flyer is one of the sort of under the radar firm offering a very powerful order management system. So SMArtX is going to be using flyers order management system to power as connected to their you will make platform. So SMArtX offers a tap technology platform, and they offer UMA, unified managed accounts. And one of the big issues with any managed account program is trading and how do you handle the trading and especially when it gets very complicated when you have very large orders and you’re blocking up a lot of trades? Having a strong order management platform is really important. Flyer has become sort of the Intel inside for a lot of firms, order management with their managed account programs, whether it is the aforementioned Morningstar, or Riskalyze, or Envestnet, or another number of other firms have all moved their order management to flyer fetch technologies. And there’s a couple of reasons why. So well, there’s three three main reasons one, enhanced visibility to more complex order management, and three is speed to market.

Craig: So I’m gonna go through these in order here. So what is enhanced visibility, while if you’re trading across multiple brokers, multiple custodians, as well as block trading, that gets very complicated if you’re on the trading desk and you’re trying to manage all of this. You want it on a single blotter. So flyer can do that. They can handle all these different trades going to all these different locations on a single blotter. They also can allocate to any configuration of accounts while the order is executed over multiple trading sessions, rather than simply allocating a partial execution, pro rata. And that gets complicated with allocations, especially with the UMA or other managed accounts. You’re trading across hundreds or even 1000s or even 10s of 1000s. If you’re big enough company 10s of 1000s of accounts. So if you do a model, for example, model update might require 1000s of accounts to be traded. You want to block those up into much larger trades to save money, but then you have to reallocate all the trades to the right accounts. That’s very complicated. Flyer can handle that.

Craig: Flyer can also handle other workflows that normally are done offline, such as step out trades, and they can handle it. It’s also shown on the centralized blotter. You also don’t need separate trade files for mutual funds, which often happens as well. Another reason why firms will use flyer or firms like Flyer’s order management, is this more sophisticated? It allows for more complex trading. We’ve seen electronic trading take over more and more of the market. I believe I saw a Reuters article. automatic trading is now 75% Of all financial market volume, so you want to be automated as well. Flyer’s OMS is called copilot. It allows for things like trade aways, which are normally done via phone calls or emails and spreadsheets and you sending orders different brokers, so you can do trade aways through copilot automatically. It also offers access to broker algorithms such as VWHAP, volume weighted average price, POV percentage value. So that’s VWHAP. As rather than just TWHAP, which is time weighted average price. And those are ways to to check if you’re getting best execution by looking at the average price of a particular security over time. So the order routing and order handling capabilities are superior when you’re using an order management system, like flyer, so that’s the complexity and sophistication that they’re getting also speed to market.

Craig: Now SMArtX, I’ve known Evan Rapoport, their CEO and founder for many years, really smart guy, he built a company called hedge co vest, which had some very sophisticated technology that tracked that mirrored the trades made by hedge hedge funds that you can then invest in. So it was this cool investing technology didn’t really take off. It was very cool at the time. So you could build a model based on any hedge funds that were participate in the program and you get real time access to their trades. So they’re very good at building technology. But building an order management system is as I said before building anything not trivial in our space, but especially in OMS so smart x basically gets speed to market. They don’t need to build out their own sophisticated OMS they can just plug right into flyers. And flyers been around for more than a decade and they be able to there. They can process orders for some of the largest biocide firms, and tamps on this on the street their technology has tested over time. It’s very solid so those are the three areas that SMArtX gains by partnering with Flyer. So we’re, there’s nothing in the article which was interesting, and which I’ve known for some time, is that SMArtX is looking to build out a complete end to end wealth management platform and having a very strong order management is important for that capability. So I’m expecting to see some news from SMArtX where broker dealers jump off of other platforms, and move on to the SMArtX’s new wealth management platform that they have.

AssetBook Integrates with Softpak’s UREBAL Rebalancer

Craig: Next story. Assetbook integrates with Softpak’s Urebal rebalancer, another integration story, e love integration stories. So Assetbook is a portfolio management is in the portfolio management category of the Kitces-Ezra Group advisortech map, they’ve been around for a while since 2007. They were primarily a performance reporting provider for a long time they started building out more capabilities and eventually built out an entire portfolio management platform. And they launched the third generation of this platform, which is now called Pulse. They launched it at T3 back in 2020. That was a pre pandemic T3. So this platform has been out for a while. I think the majority of their clients are now using it. And they have announced an integration with a company called soft pack financial. You can check them out at Softpak.com And they have a robust rebalancing engine called Urebal.

Craig: This is a very interesting product. It’s for advisory firms. And of course there’s portfolio rebalancing. There’s some interesting capabilities that Urebal offers. One of them is of course, they’ve got the standard rebalancing capabilities. They’ve got tax aware. They’ve got tax loss harvesting. But one of the things that they offer is multi pass iterative rebalancing. So you can put in a lot of different requirements and a different restrictions around your models, and the software will make hundreds of passes to the portfolios to optimize them based on the different goals you have set. So why is this useful? So being able to do multiple passes through a portfolio provides a lot of advantages because rather than just going through once with one set of rules it works kind of like a Monte Carlo simulation, but not quite. It’s similar because they’re both iterative, and it goes through the portfolios many, many times to try to find the best solution.

Craig: Now your software has to be written this way from scratch. You can’t add this capability to a rebalancing engine afterwards. So most rebalances are single pass algebraic, and they’re locked into target weights of the underlying securities but with a multicol rebalancer you can offer the rebalancing tool to modify the target weights of the securities to provide better optimization. Now, not all managers want to do this. They don’t want to give the tool the ability to change the weights of the portfolio. But if you are willing to do that, you can provide a lot of advantages, a lot of capabilities for optimizing the portfolio. So the clients of Assetbook can now connect it to Urebal and use that with the rest of the asset book functionality seamlessly through their integrations.

Craig: The the ability to do this, I think is pretty important. We’re seeing way more integrations across vendors. As we mentioned, just in the news this month, we saw YieldX integrating with Envestnet, RIA-in-a-Box integrated with LinkedIn SMArtX integrating with Flyer Technology, OMS integrations are coming very, very fast. This is going to be a good thing for all advisory firms, broker dealers, everyone in the space. Being able to mix and match different capabilities with different products seamlessly is going to give a lot of flexibility. It’s one of the reasons why we built out our Ezra Group wealthtech integration score to make it easier to understand which vendors connect with other vendors and how strong those capabilities are. So this is going to make it much easier in the future for firms to be able to pick and choose which ones they want to integrate with. So we’re expecting to see a lot more capabilities come out and of course always looking for more integrations, just like Assetbook and Softpak.

AdviceTech Map Updates

Craig: All right, wrapping up our news we’re going to talk about the Ezra Group Wealthtech Integration Score and the Kitces-Ezra Advisortech map. What are the changes, the updates that we’re going to see in the next map? So, the new products that are being added one of them I believe is a company called giveback and they are at giveback.social and they are philanthropic tool that helps advisors manage philanthropy, manage donations, charitable contributions by their clients, that’s going to go into the specialized planning other category. Another company that is going to be added to the map is called Paperclip. And they are@paperclip.com We were joking that reminds me of Clippy that paperclip from Microsoft back in the in the 90s. But that’s not what this is, that was just a joke, but it’s called paperclip.com. I wonder what they spent for that domain name had to be expensive. Anyway, Paperclip is as you imagine paperclip clumping together pages they are document management storage solution. Now they came from outside the industry they’re trying to break into the RIA space seem to have a very good enterprise solution. They also have email compliance, and a number of other capabilities. You can check them at Paperclip.com.

Craig: Something that is not going on to the Kitces-Ezra Group advicetech map are marketplaces. Every month we usually get one or two vendors of tech enabled marketplaces that want to be on the map. And that’s just not what this map is for. This map is software. So unless you can buy it the software as a license, either enterprise license or an individual license, it’s not going to be on this map. At Ezra Group we’re looking at building out another map for marketplaces because there’s so many of them now, whether they’re model marketplaces or insurance marketplaces or a lot of alt marketplaces coming online. We’re going to put them into another map, but they’re not going to go into the Kitces-Ezra Group map.

Craig: I think there were two custodians that were trying to get on the map that may or may not have gotten in. I think we ran short of time. But we may or may not see Apex Clearing added to the map, as well as Entrustody, which is a new custodian, which you may have read in the news. They just hired my good friend Tony Stich. So that’s Entrustody at Entrustody.com. And of course, ApexClearing.com. Everyone knows Apex. They both have custodial platforms. So they will go into the custodial platform category. I’m not sure if they’re going in this month. It’ll either be this month or next month.

Craig: Now, you may or may not be aware of the Ezra Group Integration Score, I hope you are if you’re a regular listener to this podcast you should know of the Ezra Group Integration Score. So we are will be putting these vendors into the score next month we have a one month lag because it takes our team time to go through them. Double check what their capabilities are, make sure we’ve got them scored properly. So we connect to the advisor tech map, but we have a one month lag so we’ll be bringing on you can check us out at EzraGroupllc.com and from the homepage you can find the Integration Score page. And from there you can search any category you want or any specific vendor you want. But these vendors will be available. We’re just bringing online vendors that came on in the August map. So those are companies like CapIntel and Red Capture, Equity Advisor solutions. So those are the new additions that will be in the Ezra Group Integration Score. You’ll see this month on our site. So that’s a wrap for the September News. Thanks for listening. You made it all the way to the end. Before I forget, please go to our website, EzraGroupllc.com, check out the Ezra Group Integration Score. And also scroll to the bottom of the homepage and sign up for our newsletter. Thanks again for listening and talk to you all again next time.

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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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