Technology issues test RIAs and custodians

Figuring out robo-advisers and fiduciary are among top concerns for financial planners

Nov 4, 2017 @ 6:00 am

By Evan Cooper

+ Zoom

Gather the technology leaders of competing custodians and registered investment advisers of various sizes, and there are sure to be some disagreements about whether robo-advisers are a blessing or a curse and which are the greatest cybersecurity threats.

This InvestmentNews Technology Think Tank roundtable in New York on Sept. 13, began with an adviser taking aim at digital advice providers. The challenge of robo-advisers is a topic that's "completely boring and mundane," said Josh Brown, chief executive at Ritholtz Wealth Management.

The prolific blogger, who writes as The Reformed Broker, said robos are "essentially lifecycle mutual funds that have been disentangled from their wrapper and put into a new user interface."

(More: Broker-dealers debate big data and other technology promises)

Mr. Brown said robo-advisers' investment strategy — heavy on equity when the investor is young, with a shift to fixed income as the investor ages — is "nothing new," and if robos "get people who wouldn't otherwise be dollar-cost-averaging into the markets, it's great. But other than that, robos are just a tool that every adviser will have and use."

Perhaps the greatest impact robos have had on traditional providers of advice is that they have brought the "Amazon experience" to brokerage and financial planning, said David Edwards, founder of advisory firm Heron Wealth.

"They allow the investor to open and fund an account in five minutes, not in a few days," he said.

It's the technology-enabled user experience of having easy access when, where and how the client wants that is the hallmark of robos and that traditional advice firms will have to adopt and incorporate, participants said.

Along with robo-advice's impact on the user experience, its lower cost is driving traditional firms to become more efficient in order to compete.

For robo-providers, the lower price point means they have to have many more clients to sustain a viable business. In addition, competition in that space is heating up and leading many providers to seek out larger partners.

"There's going to be huge consolidation because robos cannot survive by providing robo-advice alone. They either will expand their offering or they will merge," said Ram Nagappan, chief information officer at BNY Mellon's Pershing.

What robos did well, observed Tom McCarthy, head of platform technology for Fidelity Institutional, was "punch us in the nose with an elegant, simple solution that looks at things from the client's point of view. So I thank them for it."

The issue, as Mr. McCarthy pointed out, is that while traditional firms now can easily add robo-capabilities — and are doing that broadly — most firms don't know what to do with the capabilities once they have them.

"When we asked firms, 'What's your pricing?' 'What's your brand?' 'Is your brand the same?' we got very few answers," he said.

In time, participants said, elements of robo-service will be incorporated into traditional firms' operations, but the core value provided won't much change.

"The people we are dealing with are at the higher end, and they want human contact," said Paul Metzger, chief technology officer at Dynasty Financial Partners. "We have to use automation at the top end to create great client experiences that aren't devoid of human interactions but which facilitate transactions and easy client access to information."


If there is a word to describe the way advisory firms and custodians feel about cybersecurity, it's "paranoid." Hacks can and do occur all the time, roundtable participants said, although many believe that large banks and other institutions are more likely subjects of attack than small advisories — even if an instance of cyberfraud at a small firm could put it out of business.

"Cybercriminals don't need to hack us; our biggest threat comes from an adviser walking out of the office and dropping an important piece of paper," said Matthew Regan, chief operating officer at Wescott Financial Advisory Group, who doesn't shirk from cybersecurity responsibilities even though he believes the greatest vulnerabilities are at the custodial level.

Custodians recognize the threat all too keenly.

DAY 1: RIA & CUSTODIAN ROUNDTABLEAndrew Altfest, managing director, Altfest Personal Wealth ManagementJosh Brown, chief executive, Ritholtz Wealth ManagementChristine Cataldo, chief operations and technology officer, Edelman Financial ServicesDavid Edwards, founder, Heron WealthRaef Lee, managing director and head of new services and strategic partnerships, SEITom McCarthy, head of platform technology, Fidelity InstitutionalSam McIngvale, head of strategy, Apex Clearing Corp.Paul Metzger, chief technology officer, Dynasty Financial PartnersGabe Muller, chief operating officer, Glassman WealthRam Nagappan, chief information officer, BNY Mellon's PershingRyan Payne, president, Payne Capital ManagementMatthew Regan, chief operating officer, Wescott Financial Advisory GroupChris Valleley, director of technology solutions, TD Ameritrade Institutional

"This space is totally broken in terms of everybody being hacked. We just don't know when that happens," Mr. Nagappan of Pershing said.

Cybersecurity will improve only when data become "desensitized," or require a factor in addition to a password, such as a PIN or a biometric element, to ensure that the person accessing the data is authorized to do so, he said.

But instilling an awareness of cybersecurity among advisers and encouraging old-fashioned, human-based cautionary measures still are vital to protect clients at the advisory firm level, many participants said.

(More: Do financial advisers need mandatory technology adoption?)

"We have phone requests coming in all the time from people impersonating our clients, and while we rely on our custodians to offer great technology solutions and controls and safeguards, our advisers still have the responsibility to really know who their clients are and how they communicate with us — and when something doesn't look right," said Andrew Altfest, managing director at Altfest Personal Wealth Management. "That's why we call our clients, which is our own two-factor process, before we do anything with a phone or email request, to keep our clients safe. So far, though we've seen many fraudulent requests, to our knowledge nothing has been successful."

One organization that can be helpful in staying abreast of cybersecurity issues is the Financial Services Information Sharing and Analysis Center, or FI-ISAC, a member-owned nonprofit launched in 1999 that acts as a resource for cyber and physical threat intelligence analysis and sharing. Members receive early notification of security threats and attacks and participate in anonymous information sharing and biweekly conference calls, said Christine Cataldo, chief operations and technology officer at Edelman Financial Services.

"If you're not part of it," she said, "someone in your organization should be."​

Tech spending trends

In addition to advisory firms' spending on cybersecurity, participants in the Technology Think Tank roundtable noted an increase in spending on marketing-related technology and tech training.

"We spend a lot of money on automation within marketing in order to mass personalize things," said Gabe Muller, chief operating officer at Glassman Wealth.

He's a fan of HubSpot, which acts as a marketing dashboard and tracks leads. His firm also uses VideoWhizz to personalize the many videos it sends to its clients.

But participants agreed that most firms are not maximizing the software they already have, whether it's marketing technology or the tech tools used in investment management and planning.

(More: America's digital financial habits disappoint)

"We found that a lot of advisers spend all their money on technology and do nothing around the process or the people. In fact, in a lot of cases our businesses have as much technology as anyone, but we're only using a very small percentage of it," said Raef Lee, managing director and head of new services and strategic partnerships at SEI Advisor Network. "We're putting a lot of effort into training advisers to maximize what they already have, and we're starting to see the benefits."

Altfest Personal Wealth Management also is spending more on technology implementation.

"If you want to use tech tools properly and get the most out of them, you have to assign a guru to drive the technology and customize it to the firm," Mr. Altfest said. "Just think about workflow. How much time does it take to build out workflow and make sure the systems are fully adopted? Someone has to make sure that people are accountable."

Meanwhile, spending on technology that affects all firms continues at custodians.

Mr. Nagappan said Pershing's expenses fall into three broad categories: risk, resiliency and regulation.

"Our themes at Fidelity are similar," Mr. McCarthy said. "We start with meeting regulatory requirements, then cybersecurity and then infrastructure."

For firms looking to control tech spending, one comment may be worth remembering.

"Most of the stuff that's out there is pretty lousy," said Ryan Payne, president of Payne Capital Management. "Very little is really applicable, with lots of bells and whistles I can't use."

Evan Cooper is a contributing editor at InvestmentNews.


What do you think?

View comments

Recommended next


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print