The latest in financial adviser #FinTech (August 2017)

Welcome to the August issue – where we look at the big news, announcements and underlying trends

Aug 9, 2017 @ 11:13 am

By Michael Kitces

This month's edition kicks off with a look at Morgan Stanley's rapid pace of reinvention as a tech-savvy wirehouse since hiring away Schwab's Naureen Hassan to become the firm's chief digital officer in early 2016. Since then, the company seems to be rapidly overcoming the traditional "Not Invented Here" mentality of wirehouses, forging partnerships with a number of outside providers, even as they build a fascinating vision of a robust tech-augmented human adviser platform, where the software continuously monitors and analyzes the situation for all clients and nudges the adviser with "Next Best Action" ideas that the adviser can take to the client (queued up with pre-written communication templates that the adviser can easily modify and adapt to individual client circumstances).

From there, the latest highlights also include a slew of companies announcing new "platform" initiatives, including:

• FinFolio launches Wealthlab.io, a standalone REST API back-end platform for account openings, trading and rebalancing, and data feeds, that should provide an expedited foundation for new robo startups (or even large advisory firms that want their own custom-created wealth management solution).

• FinMason launches a new FinTech accelerator program, allowing startups to build on their FinRiver data analytics to create and rapidly deploy solutions to advisers (or consumers).

• Pershing continues to try to expand its open API platform to compete with TD Ameritrade's VEO open architecture (and provide new adviser FinTech startups an alternative to building for "just" TD Ameritrade alone).

• Apex Clearing strikes yet another deal with a "robo" middleware solution to help it gain distribution to the independent RIA marketplace and compete against the likes of Schwab, Fidelity, TD Ameritrade and Pershing Advisor Solutions.

You can view analysis of these announcements and more trends in adviser technology in this month's column, including "robo"-401(k) provider Vestwell partnering with Fiserv, Advisor Software launching a new "Behavioral IQ" solution that aims to go beyond just risk tolerance and risk capacity, RobustWealth partners with Roofstock to allow advisers and their clients to invest directly into rental real estate and have the results aggregated with the rest of the portfolio, Morningstar acquiring a 40% stake in Sustainalytics as it doubles down on its commitment to its Morningstar Sustainability Globes, AdvisorHub launching a platform called "AssetLink" to re-define how advisers engage with wholesalers, and more.

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 TechNews@kitces.com.

Is Morgan Stanley Emerging As The Tech-Savvy Wirehouse? In early 2016, Morgan Stanley made FinTech waves by hiring away Naureen Hassan from Charles Schwab, where she had led the buildout of Schwab Intelligent Portfolios, to become the wirehouse's new "Chief Digital Officer" responsible for the strategy and marketing of digital tools and platforms to Morgan Stanley advisers and clients. And now with 18 months of effort, Morgan Stanley appears to be achieving substantial momentum in adopting and rolling out new technology, including a substantial shift away from the traditional "Not Invented Here" mentality that tends to pervade wirehouses. Accordingly, Morgan Stanley has announced everything from a major deal with Addepar for their HNW portfolio performance reporting solution, to text message archiving and other (compliance-friendly) digital community tools for Morgan Stanley advisers via Twilio, and a new FinTech Innovation Lab (with a particular focus on multicultural and women founders). And the company also has a strategy in place to support adoption – given the infamous challenge of teaching veteran brokers and advisers to adopt new tools and technology – by pairing experienced advisers with new "digital adviser associates" who can support tech adoption behind the scenes. What's even more notable, though, is where Morgan Stanley appears to be heading, as it scales up a new digital initiative dubbed "Next Best Action", which aims to centralize all the available data about a client household to identify everything from investment to life event opportunities where the software can offer suggestions and nudges to advisers about new strategies or recommendations that could be introduced next for the client (with templated communication that the adviser can quickly personalize to the client's circumstances). In fact, the Next Best Action initiative was recently featured in a brief Harvard Business Review article about how machine learning can be paired with human advice delivery. After years of independent advisers enjoying the cutting edge of adviser technology, while major firms have lagged behind while struggling with legacy software, is Morgan Stanley under Naureen Hassan beginning to swing the pendulum back the other way, showing the true power of integrated technology leveraging Big Data through one centralized platform?

FinFolio 2.0 Launches WealthLab.io API For Custom Trading Tools And "Robo" Interfaces. FinFolio is a portfolio accounting and trading platform that competes with the likes of Orion Advisor Services, Black Diamond and Advent, and Tamarac. Founded by Matt Abar – who was previously CEO of the portfolio accounting solution TechFi before it was acquired by Advent in 2002 – FinFolio provides the standard "suite" of solutions for comprehensive portfolio management software for advisers, but according to the latest Advisor Tech Survey, has struggled to gain material market share adoption. Now, however, Abar has announced a major pivot for the company, with the launch of "Wealthlab.io", which will make all of the inner workings of portfolio management tools available via REST APIs, including everything from custodial interfaces for data feeds and trading and rebalancing to performance reporting analytics for report building. In other words, it's the framework that any new portfolio accounting and trading solution, or a private/white-labeled "robo-adviser," would need to quickly get up and running with adviser and consumer-facing tools (without needing to do all the raw building of the performance reporting engine or custodial interfaces in the first place)… which may be appealing for anyone from new robo-adviser-for-advisers startups, to large broker-dealers or RIAs that want to create their own customized tools and adviser/client experience. And unlike some competitors – that have REST APIs, but only tied to their overall portfolio accounting and trading tools – Abar states that Wealthlab.io will be available on a standalone basis for those who just want to use their REST APIs to build their own solution.

FinMason Launches "FinSpring", A FinTech Accelerator Allowing Startups To Leverage Its Investment Analytics. For FinTech startups focused on portfolio trading, reporting, and analytics, one of the greatest (or at least, most costly) challenges is simply getting access to institutional-grade data in the first place. Accordingly, FinMason has announced a new six-month "FinSpring" accelerator program for startups that have been in operation for less than two years with under $500,000 in revenue (and no more than $1M in funding). Selected companies gain access to all of FinMason's analytics through its API (a product called FinRiver), with AlphaStreet (using FinMason data to give self-directed investors better tools to analyze and make investment decisions) announced as its first participant. From the FinTech perspective, the FinSpring accelerator will be a nice opportunity for investment/trading platforms that want to focus on building a product around their consumer interface (and don't want to be responsible for the under-the-hood analytics and number crunching). From the broader perspective, though, FinMason's effort is yet another example of technology companies trying to make themselves an entire platform ecosystem that market participants plug into (akin to FinFolio's Wealthlab.io)… although ultimately, it appears that FinMason may simply be engaging in a strategy of giving FinRiver away for free to startups, in the hopes that any successful ones will have so deeply integrated the FinRiver API that they'll remain paying customers long after the six-month accelerator program is over.

Pershing Continues Trying To Build On Its Open API Strategy. Over the past several years, TD Ameritrade has made substantial headway in growing its ranks of independent RIAs through its decision to build VEO as an open architecture system with robust APIs, which in turn has attracted the bulk of new adviser FinTech startups to TD Ameritrade in recent years as an initial/launch integration partner. In 2015 at its INSITE conference, Pershing announced that it, too, would launch an open "API store" for integrations, in what appeared to be part of its "robo" strategy (to create APIs and allow third-party robos to design for building on the Pershing platform, starting at the time with Marstone). The initiative was expanded in 2016, when Pershing formally launched its NetXServices API store (built on its NEXEN platform). However, Pershing appears to have only gained limited traction with its API store thus far, in part because it is geared more towards single sign-on capabilities and sharing data feeds than the kind of full-scale depth (and potential customization capabilities) with TD Ameritrade's VEO. Accordingly, at this year's INSITE conference Pershing announced a further expansion in its enterprise and third-party APIs in the NetXServices API store, with a stated goal of eventually offering a full "App Store" where advisers can mix-and-match components as they wish (as can be done at TD Ameritrade). On the one hand, the slow struggles of Pershing to fully open its API capabilities speaks to the unfortunate struggles of pivoting such a large institution (including its BNY Mellon parent company) with legacy technology. On the other hand, as Fidelity and Schwab increasingly build around their own proprietary solutions, arguably the adviser FinTech ecosystem would be much healthier if FinTech startups had more choices on partners and distribution than just TD Ameritrade. Otherwise, in a world where TD Ameritrade is the only robust open architecture API platform, the reality is that startups designed to integrate with VEO aren't really engaging in TD-Ameritrade-first distribution… they're just building "proprietary" solutions for TD Ameritrade (when there are no available alternatives!) and saving TD Ameritrade the time and trouble and dollars of building it themselves!

Apex Continues String Of Digital Advice Partnerships With InvestCloud Deal. Over the past year, Apex Clearing – best known for being the ultra-tech-efficient-and-low-cost custody and clearing platform that powered most of the founding robo-advisers, including Betterment, Wealthfront, Stash, and Robinhood – has been announcing a steady string of deals with various robo-adviser-for-advisers (i.e., "digital advice") platforms as an apparent strategy to move into the independent RIA space via third-party "robo" interface providers. First it was Vanare | Nest Egg (now AdvisorEngine), then a deal with RobustWealth's BaseCAMP, then an investment into Trizic last month, and now with InvestCloud, which provides technology overlays and interfaces for multiple channels in the investment management and advisory business (including to other robo-advisers like the UK's Nutmeg). For advisers who have interest in using Apex, InvestCloud gives them another technology platform to use to leverage Apex's ultra-low-cost custody and clearing solutions; for InvestCloud, offering their overlay on the Apex platform makes them an appealing option for both advisory firms looking for new RIA alternatives, and new "robo" startups that want to go to market quickly and not build out all the core infrastructure that earlier players like Betterment and Wealthfront had to build; and for Apex itself, it appears that InvestCloud simply becomes yet another distribution channel and horse in their race to gain some traction with independent RIAs. Though it remains to be seen whether any of the middleware digital advice platforms, from AdvisorEngine to RobustWealth to Trizic and now InvestCloud, can effectively wholesale the Apex platform to RIAs that are unfamiliar with the Apex brand.

Vestwell Partners With FiServ To Bring 401(k) Distribution To The Bank Channel? – Although the FiServ name is not well known to most financial advisers, they are a massive "FinTech" company with numerous lines of business into everything from ACH and credit card payment and billing solutions to software that assists with financial/accounting controls and anti-money-laundering (AML) compliance as well as account aggregation (the old CashEdge solution). They are also a major provider of software solutions for bank and trust companies in the wealth management business, though… an area they appear to be increasingly interested in ramping up to compete with FIS, a competitor in the bank-and-trust-company channel that recently did a deal with bank-focused robo-adviser Trizic. Accordingly, FiServ is firing back with a newly announced deal with Vestwell, a high-tech new provider of 401(k) plans built by FolioDynamix founder Aaron Schumm. The deal makes sense in a world where banks are increasingly focused on using "wealth management" services as a means of cross-selling to expand wallet share of existing clients, but most banks themselves are not well equipped to set up and service small business 401(k) plans. Though as with other recent "distribution" deals of this nature, it remains to be seen whether the retail advisers working in the banks using FiServ will actually be ready and willing to sell a third-party 401(k) solution to their end clients.

Betterment Raises Another $70M In Funding At An Increased Valuation Of "Just" $800M. With its AUM up 150% from $4B to nearly $10B in the past 18 months, robo-adviser Betterment announced this month a new $70M round of venture capital, at a valuation of $800M. Notably, though, Betterment founder Jon Stein emphasized that the new funding would go heavily towards expanding Betterment's human advice solution, which the company had announced earlier this year in a major pivot away from being a pure robo-adviser. Shortly thereafter, Betterment also announced that it would be consolidating its tiers of human advice, from its original three-tier solution of Digital (online-only for 0.25%), Plus (with once-per-year access to a human adviser for 0.40%) and Premium (with unlimited access to human CFPs for 0.50%), into just Digital and Premium (but with the unlimited-CFP Premium solution offered at the prior 0.40% Plus pricing, and consumers who want even-more-in-depth support can also seek out an independent RIA partner through Betterment's Schwab-styled Advisor Network). Yet as Betterment pivots increasingly towards human advice, it remains unclear whether the company is doing so based on a major uptick of interest from its own clients (given that the firm currently reports only 12 CFPs staffing its advice team for over 200,000 clients), or whether the firm is being pushed to chase a human advice solution as Vanguard Personal Advisor Services continues to grow at the stunning pace of nearly $5B per month. In fact, arguably the new Betterment valuation of just $800M is a sign that the company is just barely managing to keep up with its existing growth expectations, as even growing from $4B to $10B in just 18 months only lifted its valuation $100M (from the prior $700M valuation in early 2016), despite the fact it launched Betterment for Business (its 401(k) solution), and expanded and rebranded Betterment for Advisors, and launched its Plus and Premium human advice solutions, just to reach the current milestone. Which means, combined with its recent rebrand, and a shifting business model towards just trying to scrape a 0.25% platform fee regardless of which business line clients engage with, Betterment's end game now appears to be pivoting away from its "robo-adviser" roots to eventually IPO as a human-powered-and-tech-augmented diversified financial services company.

Advisor Software Launches Behavioral Finance Profiling Tool For Client Assessments. As the world of risk tolerance assessment tools continues to heat up, Advisor Software (which provides a wide range of wealth management software solutions, including financial planning software, rebalancing tools, and a "robo" offering), has launched Behavioral IQ, which aims to create a more holistic profile of a client's investment behaviors and attitudes. Rather than just attempting to assess tolerance alone, Behavioral IQ measures clients across six domains – Objective Knowledge, Subjective Knowledge, Subjective Attitudes, Present Biases, Decision Approaches, and Loss Aversion – to create a composite understanding of the client's preferences. Ironically, founder Andrew Rudd contrasts the approach as being superior to "the current psychometric risk assessment landscape…" which he claims "have a high probability of producing flawed results…" even as he claims that Behavioral IQ is "backed by research" (which would require a psychometric approach to affirm that Behavioral IQ's own results are valid and reliable!). Nonetheless, the point remains that while most risk tolerance assessment tools focus on various ways to evaluate "just" the two dimensions of a client's attitudes toward risk and/or their financial capacity to take risk, while Behavioral IQ is at least trying to craft a more holistic perspective, with output in the form of a "Myers-Briggs-type" of typical client behavioral profiles (roughly akin to Hugh Massie's Financial DNA solution). For advisers who are curious to try out and demo the assessment for themselves, it requires about 15 minutes to complete, and can be taken here.

RobustWealth Provides Direct Access To Real Estate "Alternative Investing" Via Roofstock. With current low yields for bonds, coupled with a high-valuation outlook for equities, advisers have increasingly been allocating dollars towards a wide range of alternative investments. Yet the caveat of most "alternatives" in adviser portfolios is that they're still packaged as market-traded securities (e.g., REITs, exchange-traded notes, etc.), which means they're still potentially subject to rapid selling pressure in a market downturn. And the "alternative" – such as non-traded REITs – have had substantial problems of their own, to the extent that regulators have had to issue repeated consumer warnings. Yet there's a new alternative emerging for accessing alternative investments like real estate – technology companies like Roofstock, that pull together investor dollars to buy and manage direct real estate properties, using the scale of technology to solve otherwise-thorny problems like allocating cash flows amongst dozens or hundreds of investors in small fractional shares. Yet once such alternative investments become converted to a technology platform, it quickly becomes feasible for them to integrate with adviser wealth management tools – just as NSR Invest has done with peer-to-peer lending, and MaxMyInterest has done with managing cash for better yield across multiple banks. Accordingly, Roofstock has announced an integration with upstart robo-adviser-for-advisers RobustWealth, where RobustWealth will be able to allocate dollars to Roofstock for direct real estate investing, and then oversee and report on RoofStock investment allocations within the client's investment household on the RobustWealth platform. Which, notably, not only makes it easier for clients to invest into direct real estate as a portfolio diversifier, but also makes it more feasible for advisers to proactively make such allocations part of their client portfolios – to both manage, and bill, accordingly.

Morningstar Acquires 40% Stake In Sustainalytics As SRI Investing Ramps Up. Back in 2015, Morningstar first announced a partnership with ESG ratings provider Sustainalytics to craft its own mutual fund and ETF scoring system, which culminated in the 2016 release of Morningstar Sustainability Ratings, which assigns funds between 1 and 5 "globes" based on various ESG factors, and the subsequent release of Morningstar's "Global Sustainability Indexes". And now, Morningstar has announced that they are acquiring a 40% stake in Sustainalytics, effectively deepening their commitment to continue to pursue the SRI space by deepening their hold on what has become a key partner in their process. The move comes as Sustainable, Responsible, and Impact (SRI) investing becomes increasingly popular, as everyone from financial advisers to robo-advisers like Betterment and Wealthfront to direct consumer investors (especially among millennials) are allocating more dollars to funds that explicitly or implicitly achieve various SRI and ESG mandates. And the growing interest in SRI investing is notable, as while historically SRI has been contrasted as an "alternative" to simply investing maximally for return, the more that investors allocate dollars via SRI mandates, the more that SRI investing actually becomes the market, reducing or potentially eliminating any potential performance gap. Although in point of fact, a growing volume of data is already finding that at a minimum, SRI portfolios don't appear to underperform broader market portfolios, and merely "equal" performance, plus achieving non-investment goals, may itself be enough to further increase adoption of sustainable investing as a core to portfolio management (or at least, a differentiator for advisers who do, over those who don't!).

AdvisorHub Launches AssetLink To Rebalance The Adviser-Wholesaler Relationship. As financial advisers increasingly shift away from their product-centric roots, to focus on actual advice, the nature of the adviser-wholesaler relationship is changing. The days of wholesalers trying to pitch hot sales ideas (for which their products are conveniently suited) are on the decline, as advisers increasingly research and analyze their own investment strategies and ideas and say "Don't call us, we'll call you if we have questions about your product." And the phenomenon even spans existing industry channels, causing the traditional segmentation of financial advisers to break down. Yet this shift leaves a potential gap – if advisers increasingly want to go "outbound" to call on investment wholesaler resources when needed, how do you know who has what resources when the time actually comes? Aiming to fill the void, upstart trade publication AdvisorHub has announced the launch of a new platform called "AssetLink", which is intended to help serve as a form of "matchmaking" service between advisers and wholesalers. On the AssetLink platform, advisers can post a request – such as a need for information about a particular type of fund, or that they are seeking ideas for a marketing seminar – and the software will match the request to wholesalers who can fulfill it, who then respond through the platform to the adviser. For wholesalers seeking a new way to get their foot in the door, making themselves accessible on AssetLink for advisers who submit an inquiry may be very appealing; and for advisers, the upside of a platform like AssetLink is a way to put out a request to wholesalers for help, without the risk that your firm will then be bombarded with inbound phone calls and a never-ending junk mail. Of course, the challenge with any "marketplace" platform is that it's hard to get started – advisers may not want to adopt until there are more wholesaler solutions, and wholesalers may be wary until there's more of an adviser presence. Nonetheless, given how the wholesaler lines are being rapidly redrawn in the industry, arguably it's time for some new solution to better connect advisers and wholesalers. Will AssetLink find traction?

InsurTech: The "Robo" Onboarding Movement In Insurance Applications Is Cutting The Cost Of Insurance, Too!In recent years, the "robo-adviser" movement has highlighted the mediocre onboarding process of the typical advisory firm, mired in a paper-based ACAT system in a world where it's easier to e-sign the sale of physical real estate than to open up a purely digital brokerage account. When robo-advisers showed up, with their speedy e-signature mobile-based onboarding process that could have an account created, funded, and invested, in less than half an hour, the investment industry took notice, leading to the birth of various "robo-adviser-for-advisers" digital onboarding solutions like AdvisorEngine, JemStep, RobustWealth, and more. But the phenomenon is not limited to the investment space; the world of insurance, which similarly has its roots in a paper-intensive application process, is also undergoing an "InsurTech" digital transformation. In the world of life insurance, this includes direct-to-consumer solutions like Haven Life (a Mass Mutual subsidiary) and Ladder Life as well as B2B adviser solutions like Covr, while in long-term care insurance, it's "LTC e-app" solutions from companies like Mutual of Omaha, Genworth, Transamerica, and OneAmerica, which allow​ the insurance agent to quote and illustrate policies electronically on the spot via a mobile app, and even for client to apply for insurance entirely electronically. What's notable about this, though, is not merely the expedited processing of applications electronically, but the fact that – at least with life insurance – the physical process of handling applications is so labor intensive that with the cost savings of digital applications, insurance companies are actually expediting the process of underwriting and approving insurance (particularly in the realm of term life insurance). In other words, the companies save so much on digital life insurance applications that they can "afford" to be less stringent in underwriting and still have financial success! Which raises the question of whether digital insurance applications could be the next wave of price competition for life insurance – and perhaps eventually long-term care insurance as well – reducing the cost of coverage not through better underwriting and product pricing, but simply by reducing the cost and friction of applying for insurance coverage in the first place! Perhaps when applying for insurance is easy (and cheap) enough through technology, it really will become a product that is bought, not just one that is sold?

So what do you think? Is Morgan Stanley really taking the lead as the new tech-savvy digital wirehouse? Will Apex Clearing gain traction amongst independent RIAs with its middleware partnerships? Would you help clients invest in direct real estate if it easily aggregated into your existing portfolio management software through RobustWealth? Will advisers really want to engage with wholesalers via a platform like AssetLink? Please share your thoughts in the comments below!

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.


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