The latest in financial adviser #FinTech

Welcome to the June issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements and underlying trends and developments that are emerging in the world of technology solutions for financial advisers and wealth management.

This month’s edition kicks off with the not-so-surprising news that robo-advisers are increasingly pivoting toward offering human advisers and pursuing a more affluent, and not necessarily millennial, clientele; and the somewhat-more-surprising news that one new robo-platform, BrightPlan, has decided to enter the marketplace by raising $25 million of capital and using it to buy an existing $3.6 billion life-planning-oriented (and human-adviser-based) independent RIA, raising the question of whether adviser tech companies could become an entirely new buyer category in the world of adviser M&A and whether existing RIAs may actually be a superior way to distribute new technology – rather than trying to compete with them!

From there, the latest highlights also include:

• Envestnet is beginning to reveal how it intends to leverage its Yodlee acquisition, by building out client-facing PFM (personal financial management) solutions that help clients track not only their long-term financial plans, but their shorter-term cash flow and spending as well.

• Apex Clearing appears to be making a move into the independent RIA community to compete against Schwab, Fidelity and TD Ameritrade, leveraging “robo-adviser-for-adviser” software solutions like RobustWealth and AdvisorEngine to reach financial advisers, even as Wealthfront pivots away from building on Apex.

• Morningstar appears to be working on its own financial planning software tools, though it’s not yet clear if those tools will be for financial advisers, or self-directed consumer tools offered to retirement plan sponsors.

• Following on the heels of popular Social Security software for advisers, a number of providers are now building Medicare planning software solutions for advisers who want to further differentiate their expertise with retirees and justify their value proposition beyond the portfolio alone.

You can view analyses of these announcements and more trends in adviser technology in this month’s column, including a fascinating look at why, exactly, performance-reporting software for advisers is so expensive (the answer: a lack of quality data and poor data standards in the data feeds from custodians); whether Amazon’s Alexa may become a new communication channel for financial advisers to reach their clients; and news that XY Planning Network is running its second annual FinTech competition for adviser technology startups (deadline for those who wish to enter: June 15).

I hope you’re continuing to find this new column on financial adviser technology to be helpful. Please share your comments at the end and let me know what you think.

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected].

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Robo-advisers pivoting toward more human advisers, and more affluent clients.

Earlier this year, the original robo-adviser, Betterment, made the stunning pivot away from a “pure” robo-solution, launching Betterment Plus and Premium tiers that would offer access to human CFP professionals, in addition to the Betterment technology itself. Now, as Betterment reaches its 7-year anniversary, the company is introducing a new look, intended to make it appear and feel less like an upstart and more like an established player — one that can attract more affluent investors (after the company raised its fees on its most affluent clientele by 66% earlier this year, from 15 basis points to 25 basis points). And as Betterment continues to pivot upmarket, it has also indicated it may start offering a wider range of investments, including access to more alternative investments. Notably, though, these pivots aren’t unique to Betterment. Sallie Krawcheck’s robo-adviser for women, Ellevest, has quietly rolled out Ellevest Prime, incorporating human financial advisers who will provide personal financial planning advice to affluent Ellevest clients, who will pay an advisory fee that starts at 0.90% with a $500,000 minimum. And student-loan-refinancing platform, SoFi, also announced a launch into wealth management, again by adding human financial planners to offer advice to the above-average-income, upwardly mobile customers already using the SoFi platform. In other words, both leading and newcomer robo-advisers are no longer focusing on being a technology-based investment solution for millennials, but are becoming tech-augmented human “cyborg” advice platforms that are raising their prices, expanding their product line and service offerings and trying to serve an increasingly affluent clientele regardless of generation — just like every other financial services firm in the crowded marketplace.

Upstart robo-platform, Prumentum, takes 40% stake in legacy $3.6B independent RIA PlanCorp.

One of the fundamental challenges for most robo-advisers is that at their start, they’re unknown and therefore untrusted brands, which leads to higher client acquisition costs (to establish a brand and overcome the trust barrier) that can, and has, buried many robo-advisers in their nascent stages. As a result, I’ve long noted the irony that so many robo-advisers take their tens of millions of venture capital, and instead of investing into, and building upon, an existing RIA that already has a strong brand and existing asset and revenue base, they continue to try to build from scratch. Well, now a new robo-adviser has crossed the line, as Prumentum announced that it has raised $25 million in venture funding, and is using the proceeds to buy a 40% stake in PlanCorp, a life-planning-oriented independent RIA in the St. Louis area with $3.6 billion in AUM (with an option to buy the remaining 60% of shares in the future as well). Prumentum’s vision is to pair together, and scale up, the existing human-adviser capabilities of PlanCorp, with an account-aggregation-based robo-platform it’s been building called BrightPlan, effectively using the technology to scale up and expand the reach of PlanCorp’s historically-high-net-worth clientele. The acquisition is important, in many ways. First and foremost, it’s the first time a robo-adviser has tried to enter the market by scaling up an existing and already profitable firm, rather than trying to acquire clients and build a brand from scratch. Second, it’s potentially a far more effective way for robo-technology to be monetized — in a world where financial advisers will pay only “so much” for technology solutions from their available budget for overhead. A technology solution that buys an RIA and then powers margin expansion within that RIA, through its technology, can even-more-rapidly generate enterprise value, at least for a sizable RIA. And for large independent advisory firms looking for ways to exit, or to attract growth capital, the idea of technology firms buying RIAs is an entirely new channel of potential M&A activity with unique strategic value opportunities.

Blooom eliminates enterprise solution, pivots solely B2C.

In a world where most robo-adviser platforms are struggling to gain and sustain traction in the B2C marketplace, leading to the rollout of human advice solutions, pivots to work with financial advisers, or both, Blooom is unique in recently announcing that it was eliminating its division to offer services via enterprise channels (in their case, employer retirement plan sponsors), and instead focus purely on its B2C offering. For those who aren’t familiar, Blooom is unique even in the robo-adviser space, in that the company doesn’t require consumers to move or consolidate assets with them. Instead, Blooom serves as an overlay on top of existing employer retirement plans, obtaining 401(k) and 403(b) login credentials and using them to analyze and make improvements to existing investment selections, monitor the accounts over time and conduct periodic rebalancing, with a simple pricing structure of $10 per month per account. Earlier this year, Blooom announced a $9 million Series B round, and that at the time it already had 6,000 clients (with a goal of 10x growth this year), and has now noted just two months later that it’s already up to 7,500 clients. Notably, other robo-platforms have tried the approach of overlaying analytics on other platforms, but without actually taking discretionary control (e.g., Jemstep). Blooom seems to have figured out that the real secret was not just using account aggregation and login credentials to analyze outside accounts, but using the technology to actually automate trading those accounts, which effectively allows Blooom to get paid to manage retirement accounts while reducing buyer friction, by eliminating any need to move or consolidate those accounts first, which is especially important when managing employer retirement plan dollars, which may not be available to move in the first place.

Morningstar is building its own financial planning software?

A growing number of financial services platforms are trying to create a holistic financial technology stack, blending together both investment (portfolio accounting and trading), financial planning (advice and engagement), and client relationship management (CRM) tools. Yet with Envestnet purchasing FinanceLogix, and Fidelity buying eMoney Advisor, there are suddenly very few established financial planning software companies even available on the market (though Advicent is reportedly still up for sale). For a company like Morningstar, which is increasingly expanding from “just” its data-and-research-service roots into a provider of various investment solutions and technology, the lack of financial planning software has been a substantial gap in its offering as the entire industry shifts from an investment-centric value proposition to an advice-centric one instead. But now, there’s a public indication that Morningstar is working on some kind of financial planning software solution, with a job opportunity on LinkedIn for a “Senior Quantitative Analyst, Financial Planning Methodology.” Notably, the position would entail building financial planning methodologies into Morningstar’s Wealth Forecasting Engine (which historically was used to let retirement plan participants do their own basic financial/retirement planning projections), and its new automated portfolio construction (APC) services, which means it’s not entirely clear whether the new planning tools will simply be an expansion of the services it already offers to plan sponsors, or an expansion into the competitive marketplace of financial planning software for advisers that is deeply integrated into Morningstar’s other tools — somewhat akin to how MyMoneyGuide is integrated to Schwab Intelligent Advisory, or eMoney Advisor is being built into Fidelity AMP. Stay tuned for more announcements from Morningstar on financial planning in the coming year.

Envestnet Is Using Yodlee To Finally Build the Real Future Of Financial Advice Software.

For most of its history, the primary purpose of financial planning software has been to illustrate the accumulation and decumulation of assets throughout the client’s lifetime. Over the years, various modules have come and gone that illustrate a subset of related products, from a capital needs analysis (for life insurance) to tax projections (when selling tax shelters or tax credits) to estate planning flowcharts (to fit life insurance into an ILIT). But the core purpose has always remained projecting the accumulation of wealth for retirement, and the longevity of that wealth throughout retirement, which makes sense, given that financial advisers are increasingly focused on managing their clients’ assets. But the caveat is that long-term retirement projections don’t change very much from year to year, and certainly not month to month or day to day. This means that financial planning software doesn’t actually have much to say in the client relationship after the initial plan, except for occasional and infrequent “plan updates” after several years has passed (or a major life event has occurred). By contrast, personal financial management (PFM) software like Mint.com has a highly engaged user base, that logs in monthly, weekly, or even daily, to track their ongoing financial lives, which means it was only a matter of time before a good PFM solution — one that focused on cash flow and spending as the financial lifeblood of a household — would emerge for financial advisers. And after having acquired Yodlee back in 2015, Envestnet revealed at its Advisor Summit last month that it is finally building out a cash-flow-oriented PFM solution for financial advisers. The initial version will help clients budget monthly bills and show them trends in net worth over time; next year the app will help clients see where all their spending is going every month, followed by basic artificial intelligence capabilities to send clients chatbot messages providing tips on how to improve their financial situation, such as tips on refinancing credit card debt, or alerting the client that it’s time to call their adviser if the software detects they may have been laid off from their job. Given how asset-centric most advisers are today, giving advice on household cash flow may seem like a stretch, but the reality is that cash flow and spending guidance actually has the potential to provide a more immediate and tangible positive result for clients, allowing advisers to more effectively communicate not just their long-term value in accumulating toward retirement, but their ongoing year-to-year value proposition, too.

Apex expanding into RIA custody, even as wealthfront ditches the platform.

The world of independent RIA custody and clearing is dominated by a handful of major players — Schwab, Fidelity, TD Ameritrade and Pershing Adviser Solutions — followed by a handful of smaller second-tier custodians like SSG, TradePMR, Trust Company of America and Scottrade Advisor Services. Yet the reality is that there’s another significant player, smaller than the largest but larger than most other second-tier players: Apex Clearing. While not known in the RIA adviser community, Apex Clearing and its robust set of APIs allows most investment functions to occur entirely digitally, and has thus formed the backbone of nearly the entire early robo-adviser movement, variously counting Betterment, Wealthfront, Personal Capital, Stash, Robinhood and more, as builders on their platform. In fact, a key caveat of Apex Clearing is that while the company is known for being especially good and efficient, and low-cost, with regard to its core custody and clearing capabilities, it doesn’t have the sophisticated modern interface of other RIA custodians, which means that it must have an intermediary/middleware layer to fully bring its capabilities to market. But now, Apex is starting to appear as a new RIA custody option in the emergence of digital “robo-adviser-for-advisers” platforms, with the latest RobustWealth “BaseCAMP” solution offering Apex Clearing as an RIA custodian (along with Schwab and TD Ameritrade), after Vanare | Nest Egg, now AdvisorEngine, announced an Apex option last year. All of which means that the competitive landscape for RIA custodians may soon heat up, as the capabilities of new robo- platforms for advisers make it easier than ever to be multicustodial, and for advisers to simply choose the lowest cost and most digitally-capable solution. Apex appears to have an edge, and could give advisers a new way to squeeze their client costs even lower. Ironically though, even as Apex threatens to shake up the existing RIA custodian world with its low-cost digitally-advanced capabilities, Wealthfront recently announced that it was ditching Apex, opting instead to go with their own internally developed solution. Wealthfront suggests that Apex itself is still too reliant on the archaic infrastructure of the financial services system and hasn’t been able to keep up with the evolution of digital investment platforms in the past six years, which makes traditional RIA custodians look even worse by comparison.

Why is portfolio performance reporting software so expensive? Lots of bad data (and no standards).​

Portfolio accounting and performance software is one of the most expensive components of the adviser technology stack, and many advisory firms end up spending three times, five times, or even 10 times the cost for investment software than they do for financial planning software, even for firms that are focused primarily on financial planning. Because if the firm manages or advises on assets, at all, it’s virtually always necessary to provide some kind of performance reporting, and there are just no cheap solutions. Recent newcomer Panoramix is aiming to make its mark by offering a substantially cheaper performance reporting solution — at “just” a $4,000 base fee — and has published an intriguing white paper that shares the intimate details of exactly what it costs to launch performance reporting software, and why it’s so expensive. The answer, in a word, is data, and the fact that every financial institution tracks and reports data differently in its data feeds. As a result, bringing on a new data feed requires a substantial effort in data mapping: taking the custodian’s data feed and manipulating it to fit the format/layout that the performance reporting tools use; handling updates as the data feeds change, as custodians variously change/update their own feeds; and integrating third-party interfaces that help cross-reference and verify security pricing, security classifications, and more. In addition, one of the biggest ongoing challenges of performance reporting is manually fixing errors that don’t reconcile. Even if just 1-in-1,000 accounts has an error every day, and each error costs just $100 of staff time to fix, then an adviser with 500 account downloads that occur 250 trading days per year at a 0.1% error rate will still incur a whopping $12,500 per year in data reconciliation costs. Hence why many performance reporting solutions have $15,000+ minimums. Panoramix is aiming to differentiate itself with a lower cost, by working with a smaller number of ostensibly higher quality financial institutions, and working to better automate the reconciliation process to reduce, in the aggregate, the number of reconciliation errors that require expensive manual fixes. Nonetheless, the fundamental point remains: The reason that performance reporting software is so expensive is that despite the fact that all custodians must fully reconcile their own accounts continuously to ensure proper valuations and account balances, the lack of data standards means there’s no consistent and stable way to transfer that information to third-party performance reporting solutions without incurring what are cumulatively very substantial reconciliation costs for every adviser.

Will Amazon’s Alexa become a financial adviser communication tool?

Amazon’s Alexa is a small device placed in your home that uses voice recognition to take audio commands, such as asking for the weather forecast, looking up information online or even placing an order for dinner to be delivered. But now, some financial services providers are looking at whether Alexa might be an effective channel for financial advisers to communicate with their clients. The Wall Street Journal notes that in Europe, certain UBS Wealth Management clients will be able to ask Alexa various financial and economic questions, and hear an automated response directly from UBS’ Chief Investment Office. At the recent T3 Advisor Technology conference, eMoney Advisor demonstrated a proof-of-concept integration with Alexa that would allow the client to ask Alexa whether they were on track for retirement, and Alexa would respond with the current health of their financial plan. So far, the Alexa interface is for information only — the WSJ story specifically notes that UBS will not allow trades to be placed via Alexa, at least for now. But the trend, coupled with the rising availability of big data, raises the question of whether tools like Alexa will increasingly become an information delivery and communication tool as a part of the financial adviser’s value proposition. While making investment trades via Alexa may still be far off, it’s not hard to imagine Alexa reporting to a client whether they’re on track for their spending budget, or to schedule or confirm a meeting with the adviser, or even using the Amazon Echo Show as a way to conduct a quick video meeting with a client on a brief but pressing financial issue.

Is Medicare planning the new retiree value-add for advisers?

With growing pressure on financial advisers to both differentiate and justify the value proposition for their advisory fees, more and more financial advisers who work with retirees are looking to expand their retirement advice beyond just the portfolio alone. This has led to a boom in software solutions for making Social Security recommendations, and the rise of companies like SS Analyzer and Covisum’s Social Security Timing — as making the “right” decision on Social Security can have a significant financial impact, and tends to occur just as prospective retirees are looking to transition to retirement and therefore in search of a financial adviser. Now the demand for tools to assist with complex retirement decisions is extending to Medicare planning as well. Raymond James just announced a major partnership with HPOne, which provides tools that help consumers navigate their Medicare choices. Another provider, i65, has developed a standalone tool specifically for financial planners to help them walk their clients through Medicare timing choices. And for advisers who want to go even deeper and bolster their own personal knowledge, Horsesmouth has launched a Savvy Medicare Planning for Boomers educational program. The bottom line: the pressure is on for us as financial advisers to go beyond just retirement portfolios when providing advice to retirees, and technology providers are trying to step up and provide us tools that we can use to bolster those more specialized areas of advice.

Second annual XYPN FinTech Competition announced (with submission deadline closing soon).

Last year, the XY Planning Network announced its inaugural fintech competition, specifically to support and celebrate up-and-coming technology for financial advisers to help us better and more efficiently serve clients (especially younger clients, where leveraging technology is crucial for both efficiency and the adviser value proposition). The first year’s competition featured a wide range of competitors. Finalists included financial planning software provider RightCapital, risk-tolerance assessment tool Totum Wealth, financial assessment provider DataPoints, College Funding analytics provider EFC Plus, all-in-one adviser communication platform Ambitient. The winner: adviser-marketing-automation provider Snappy Kraken. And now, as a part of its XYPN17 conference, the XY Planning Network is again running its second adviser FinTech Competition. Interested tech providers must offer an adviser technology solution that supports financial advisers delivering advice to Gen X and/or Gen Y clientele, and must have either launched in the last 12 months, have less than $1M in gross revenue or be an existing company offering a substantially different and new product line. Finalists will receive a free pass to XYPN17 and a free booth for the conference’s 500+ attendees. The winner will receive further promotion on the XYPN Radio podcast, the Nerd’s Eye View blog, promotional video content from adviser-tech guru Bill Winterberg and additional trade publication media coverage. For those who are interested, the deadline to apply is June 15, and finalists will be notified by June 30, with the competition itself at the XYPN17 Conference in Dallas on Wednesday, Aug. 30. Interested companies can apply directly here.

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For further coverage of AdvisorTech news, be certain to also check out Bill Winterberg’s FPPad, Joel Bruckenstein’s T3TechnologyHub, and Craig Iskowitz’ Wealth Management Today.

And, if you’re an #AdvisorTech company who wants to submit a tech announcement for consideration in future issues, please submit to [email protected].

Michael Kitces is a partner and the director of wealth management for Pinnacle Advisory Group, co-founder of the XY Planning Network, and publisher of a continuing education blog for financial planners, Nerd’s Eye View. You can follow him on Twitter at @MichaelKitces.