The big news and trends in adviser #FinTech

Welcome to the July issue of the Latest News in Financial Adviser #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 big release of Riskalyze’s new Autopilot platform, which has morphed from “just” a robo-onboarding tool for a TAMP, into a full trading and rebalancing solution that operates as a “Model Marketplace” allowing advisers access to third-party managers and their models for a cost of 10 – 15bps. But the real news is that Riskalyze is also launching a series of its own proprietary “Risk Number Models,” which will be made available for “free” to advisers … because their clients using those models will then be invested at least in part into a series of new Riskalyze “smart beta” proprietary ETFs charging 0.50% to 0.77% expense ratios, as Riskalyze uses its big $20M Series A round to pivot from being “just” a FinTech solution into a proprietary ETF manufacturer that uses its technology to help distribute its own asset management products.

From there, the latest highlights also include a slew of new venture capital announcements, including:

• Advizr financial planning software raises a whopping $7M Series A from Franklin Templeton and SEI, despite having only 400 independent advisory firms (and reporting another 500 firms via enterprise) and what is likely no more than $1M to $2M in estimated annual revenue after 2.5 years of growth (admirable growth for a start-up, but seemingly small for the amount of capital being raised… unless the company is planning a pivot?).

• RightCapital financial planning software raises a second $1.6M seed round, as the upstart gains momentum with 800 advisory firms, a series of new RIA enterprise deals, and positive word of mouth as it earns the top User Rating from the recent T3 Tech Hub Adviser Software survey, and also a TD Ameritrade Adviser Satisfaction Award.

• Addepar raises a monstrous $140M Series D round, as the high-net-worth portfolio accounting and performance reporting tool appears to be making a high-stakes bet that the future of high-net-worth investing will increasingly be a combination of publicly-traded securities and hard-to-value private market stocks.

• Trizic adds another $2.5M seed investment from PEAK6, the owner of Apex Clearing, as Apex secures its third robo-adviser-for-advisers platform as a distribution channel to compete for RIA custody business against Schwab, Fidelity, and TD Ameritrade.

You can view analysis of these announcements and more trends in adviser technology in this month’s column, including Morningstar’s growing focus on incorporating behavioral finance into its software, a new retirement planning software solution that allows advisers to quickly create a Withdrawal Policy Statement for clients, the use of “video performance reports” to humanize the robo-adviser experience, and the news that beginning in 2019 the CFA Institute will be incorporating a wide range of FinTech topics into its CFA exam and curriculum as FinTech begins to change the very nature of financial services jobs themselves!

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 #AdviserTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Riskalyze Pivots Into Proprietary ETF Distribution As Autopilot Goes Live. Back in February, a slew of companies serving financial advisers all suddenly announced the launch of “Model Marketplaces”. The idea of the Model Marketplace is that advisers can select from a series of third-party-managed portfolios, but rather than delegating discretionary authority to those managers, instead the managers send their (typically ETF) model updates to the adviser, who can then implement the trades themselves using rebalancing software — thus allowing the adviser to outsource the construction of the models, while otherwise retaining control to execute them, presenting a substantial threat to today’s TAMP platforms. First TD Ameritrade announced their Model Marketplace through iRebal at their national conference, then Riskalyze announced they were adding a Model Marketplace to their Autopilot platform a week later, and subsequently Orion also announced a form of Model Marketplace (dubbed Eclipse Communities) that would be available on an adviser peer-to-peer basis as a part of its upcoming Eclipse rebalancing solution. And a month later, Morningstar announced that it was planning a Model Marketplace in 2018 as well. But notwithstanding all the announcements — and the rumor that TD Ameritrade “pre-announced” their Model Marketplace before it was ready just to scoop Riskalyze — it is Riskalyze’s Autopilot that has succeeded in being the first to market. The solution, which effectively is a “robo” onboarding tool plus a built in rebalancer that allocates portfolios based on the client’s self-assessed “Risk Number”, is launching with 10 third-party managers, dubbed its “Autopilot Partner Store”, including CLS Investments (who was part of the original Autopilot offering back when it was just a conduit for their TAMP alone), LikeFolio (as its co-founder Andy Swan is also a member of the Riskalyze advisory board), other TAMPs like SEI and Morningstar Managed Portfolios, and ETF manufacturers like Blackrock and First Trust. Pricing starts at 15bps, reduced to 10bps for advisers who make a $5M AUM commitment, which is potentially challenging given that competing custodial platforms will likely offer their Model Marketplaces for free (since they profit from the underlying trades already). To stay competitive, though, Riskalyze is offering a “free” (up to $100M of AUM) option for those advisers who are willing to use one of 21 pre-constructed “Risk Number Models”, built in partnership with ETF manufacturer First Trust. Of particular note, though — and apparently missed by all the other media coverage on Riskalyze! — is that the available First Trust ETFs include several newly launched “smart beta” ETFs​ developed and sponsored by Riskalyze. In other words, Riskalyze isn’t giving away its Risk Number Models for “free” — instead, they’re executing the same “robo” strategy as Blackrock (which bought FutureAdviser) and Schwab (with its Intelligent Portfolios), which use their robo channels to distribute their own proprietary ETF products, charging little to nothing for the “managed portfolio” wrapper, as they make their margins on the underlying ETF products themselves. In the case of the Riskalyze ETFs, they are priced at a “healthy” 0.50% to 0.77% expense ratio, which should allow ample room for profits, though ultimately their “smart beta” overlay appears to be little more than using Nasdaq market-cap-weighted indices and screening out stocks that don’t pay a dividend. And ironically, the pricing on Riskalyze’s ETFs means their “free” Risk Number Models may actually be substantially more expensive than simply paying Riskalyze the 10bps Autopilot fee to use other third-party managed portfolio models like Blackrock’s (which ostensibly will be comprised of ultra-low-cost iShares ETFs). Nonetheless, the point remains that with the launch of its Autopilot platform, packaged into “free” models comprised of its own proprietary ETFs (and likely a revenue-sharing or shelf-space agreement on the other non-Riskalyze First Trust ETFs), Riskalyze is using its recent $20M Series A to attempt to pivot from simply being a “FinTech” company providing risk tolerance software tools, into a manufacturer of proprietary ETFs (that happen to be distributed, along with other ETFs, through its robo platform).

Advizr Financial Planning Software Raises $7M In Series A. Advizr is one of the recent crop of new financial planning software companies to hit the adviser marketplace in recent years. Co-founded by a former financial adviser, Advizr aimed to compete with existing incumbents by building an easier-to-use solution on more modern architecture (as “legacy” players MoneyGuidePro, eMoney Adviser, and NaviPlan are now all burdened with a decade or more of legacy layers of old code). Unfortunately, though, competition for financial advisers is fierce, and because no financial planning software data is portable, it’s very difficult to persuade advisers to switch platforms, particularly since Advizr doesn’t have a distinguishing differentiator to attract advisers beyond just trying to be “easier” (which all software strives to be). As a result, Advizr first went live at the end of 2014, but after 2.5 years of growth, still only reports about 400 independent advisory firms on the platform (a large portion of which are attributable to a single enterprise deal with XY Planning Network from 2016), which at pricing of less than $1,000/year would amount to no more than $400,000/year of annual revenue. Fortunately, Advizr is reportedly starting to gain momentum in the enterprise broker-dealer channels, and claims 500+ additional advisory firms there (some of which are likely multi-adviser firms), which could at least lift its revenue well above $1M/year. Nonetheless, Advizr has announced a blockbuster-sized Series A round of $7M (which after 4 prior “seed” rounds, implies what is likely a $15M to $30M valuation), led by strategic investor Franklin Templeton, with mega-TAMP SEI participating as well (along with VC firms IA Capital and Fenway Summer Ventures). The outsized valuation (relative to current revenue) signals the sheer hunger for new financial planning software companies in a marketplace dominated by just a few, especially given that Envestnet bought FinanceLogix (with a much larger user and revenue base) for “only” an estimated $30M just two years ago. Though investors likely see the upside potential of when Fidelity bought eMoney Adviser for $250M (yet eMoney was rumored to have upwards of $60M/year in revenue at the time to justify that valuation!). For Franklin Templeton (and SEI), the investment appears to be a big bet on the ongoing growth of financial planning, and the potential that Advizr can finally figure out how to get advisers to start switching over en masse … aided, perhaps, by the distribution potential for Franklin Templeton’s Private Wealth division, and a planned deep integration to the SEI Wealth Platform (and all the advisers who currently use it). Though ultimately, Advizr will still need to rapidly accelerate its penetration to independent advisers or the pace of its enterprise deals to obtain the growth it needs… or come up with an alternative way to pivot and monetize the software!

RightCapital Financial Planning Software Raises (Second) Seed Round Of $1.6M. Continuing the theme of “upstart” financial planning software companies, RightCapital also announced that it had raised a $1.6M seed round (led by Indian financial consulting and VC firm Camellia), to supplement its prior $1M seed round 11 months ago. Similar to Advizr, RightCapital is also aiming to compete in the general financial planning software marketplace (without a specific differentiator), though the software has gained a reputation for doing tax-savvy retirement planning (e.g., illustrating systematic partial Roth conversions) and being especially fast to iterate and deploy new developments. In addition, RightCapital scored #1 in user ratings amongst financial advisers in the 2017 T3 Tech Hub Adviser Software survey, and recently received TD Ameritrade’s Adviser Satisfaction Award as well… all of which appears to be helping RightCapital’s word-of-mouth growth, as the company now boasts more than 800 advisory firms on the platform (more than double Advizr’s penetration amongst the independent RIA community) since launching less than 2 years ago at the XY Planning Network annual conference, including a string of large-RIA enterprise deals in recent months. Ultimately, RightCapital will also still struggle to unseat the large financial planning software incumbents, given the lack of data portability amongst platforms, but as one of the only existing/remaining independent financial planning software companies even available to buy, there is a strong possibility that RightCapital will be strategically acquired in the coming few years as more and more companies aim to create holistic financial adviser platforms including portfolio accounting and trading tools, CRM, and financial planning software.

Addepar Raises $140M Series D Betting On Ongoing Shift Of HNW Investing In Private Markets. Addepar first came onto the scene in 2009 as a competitor to portfolio accounting solutions like Advent APX (Portfolio Exchange), specifically targeted towards financial advisers, wealth managers, and (multi-)family offices serving ultra-high net worth clientele. Their distinguishing feature was the ability to more effectively aggregate and report performance on a wide range of illiquid “alternatives” and private equity investments, which do not fit well into the “traditional” portfolio performance reporting tools like Orion, Tamarac, or Advent’s Black Diamond. For the “typical” RIA that holds a portfolio of predominantly market-traded securities that are reasonably liquid and easily priced, the available solutions in the marketplace work fine. But Addepar appears to be rapidly gaining momentum in its targeted ultra-HNW segment, announcing last fall that it had passed $500B of assets on its platform (up almost 100% of a year earlier), and landing its first major wirehouse agreement earlier this year with Morgan Stanley. And a few months ago, Addepar acquired AltX, an alternative investments reporting platform, to further deeper its aggregation and reporting capabilities for “non-traditional” alternative assets. But the sheer size of Addepar’s recent capital raise still has some commentators scratching their heads about what, exactly, Addepar has in mind. Yet as a company that has its roots in Silicon Valley, with co-founder Joe Lonsdale (who also co-founded Palantir with Peter Thiel), it appears that Addepar may simply be betting that wealth creation will continue its recent trend of occurring less in public markets (as the number of publicly traded stocks reaches multi-decade lows) and more in private markets (e.g., Uber, Dropbox, Stripe, and Palantir itself), where Addepar is uniquely positioned to become a leading portfolio accounting solution for high-net-worth investors who may increasingly be investing in a combination of publicly and privately traded companies.

PEAK6 Investments Adds $2.5M To Trizic Seed As Apex Ramps Up RIA Custodial Competition. Back in March, early B2B robo-adviser Trizic announced that it was “back” with a $3.3M round of capital, a new CEO, and a big enterprise deal with John Hancock. And following another big enterprise agreement with FIS last month — which gives Trizic a strong distribution and technology partner to reach its primary target market of banks and trust companies — Trizic has announced a ‘supplemental’ $2.5M round of seed investment from PEAK6. What’s notable about the PEAK6 investment, though, is that it’s also the owner of Apex Clearing, the back-end custody and clearing platform that powered most of the early B2C robo-advisers, including Betterment, Wealthfront, Personal Capital, Stash, and Robinhood, and now appears intent on pivoting towards becoming a B2B player that competes with major RIA custodians like Schwab, Fidelity, and TD Ameritrade. Apex’s unique value proposition to RIAs is that its back-end technology is far more modern than its RIA custodian competitors, allowing it to better facilitate straight-through processing (this is how most robo-advisers can open brokerage accounts digitally from a smartphone!), and offer ultra-low trading costs (which is why all the B2C robos use Apex to reach investors with small account balances). The caveat, however, is that Apex’s strength is just the back-end technology of custody and clearing, and not the front-end interfaces to advisers and clients, which means its go-to-market strategy for advisers necessitates a layer of middleware providers who can create the necessary interfaces and adviser/client experience. Which is where the robo-adviser-for-advisers platforms come in, and explains why Apex partnered last year with Vanare | NestEgg (now AdviserEngine), again more recently with RobustWealth, and is now making a capital investment into Trizic. In other words, Apex is using robo-adviser-for-advisers technology solutions as a way to distribute its own back-end solution to RIAs, allowing those robo-adviser-for-advisers platforms to differentiate themselves by creating a potentially better adviser/client technology experience (on the Apex chassis), while giving advisers access to a competing lower-cost custody and clearing solution.

Morningstar Flips HelloWallet Software But Retains Its Behavioral Finance Talent Core. HelloWallet was founded in 2009 by Matt Fellowes, as a Personal Financial Management (PFM) software solution for employers to use as part of a financial wellness program (in essence, Mint.com-for-enterprise). After just over 5 years, Morningstar acquired the company for more than $52M (having previously been a lead in the Series B round), bringing both the software and its behavioral-finance-focused team in house. However, two years later, founder Matt Fellowes had left the company to start a new venture (a retirement income solution platform still in the development phase, called United Income), and now Morningstar is (re-)selling HelloWallet to KeyCorp (for an undisclosed amount), as its deployment within KeyBank was already HelloWallet’s largest customer (with reportedly hundreds of thousands of users). The acquisition will likely turn HelloWallet into a standalone proprietary product for KeyBank, as PFM solutions become increasingly popular as a value-add, retention, and wallet-share cross-selling tool for banks, and the 36 employees that power HelloWallet’s software will go along with the deal. Notably, though, HelloWallet had a substantial focus on incorporating behavioral finance research and insights into its software, and much of its behavioral finance team, including leaders Steve Wendel and Sarah Newcomb, will remain behind at Morningstar. Which means even though HelloWallet is gone, its behavioral-finance-driven DNA seems to have been infused into Morningstar, in a manner that will likely shape much of the future software design (and its client experience) at the company.

Timeline App Launches Retirement Withdrawal Policy Statements. Despite the popularity of Bengen’s 4% rule as an educational approach for explaining “reasonable” retirement spending rates to clients, up until recently none of the leading financial planning software solutions could actually illustrate the approach and how it would have fared in various historical scenarios. But in recent months, several new illustration tools have appeared, including the Big Picture App and Timeline, which can not only illustrate the 4% rule itself, but also how it would have fared under various time horizons and asset allocations. Last month, Timeline then went a step further, and launched a version of its software that will illustrate the impact various dynamic spending rules, and then (automatically) codify them into a “Withdrawal Policy Statement” that clients can sign. The idea of a Withdrawal Policy Statement, or WPS, was first pioneered by financial planner and retirement researcher Jon Guyton in a 2006 Journal of Financial Planning article, as a means of getting clients to agree upfront to how they will manage their retirement distributions, and dynamically adjust them as future market returns unfold (akin to how an Investment Policy Statement is used to agree on how a portfolio will be managed, and subsequently adjusted as future market returns unfold). Though Timeline is the first to ever bring together a WPS illustration software solution and then output an actual Withdrawal Policy Statement for the client to sign on the spot!

Wealthfront Expands Its Indexing 2.0 Solution Into Smart Beta. One of the underappreciated opportunities of robo-adviser technology is that, with sophisticated software to manage a large number of holdings, it becomes feasible to do index investing without using an index mutual fund or ETF. For instance, with this kind of “Indexing 2.0” solution, an investor wouldn’t need to buy an S&P 500 index fund, and instead could simply use portfolio trading tools to individually buy the 500 stocks in the S&P 500 index… with the added benefit that by owning them individually, it’s possible to tax-loss harvest each stock individually, providing the Indexing 2.0 solution a tax-preferencing tailwind that is not available to index funds themselves. Notably, the kind of tax-efficiency core indexing strategy isn’t new – companies like Parametric have offered a “Custom Core” solution to HNW investors for years. But what Parametric does only for affluent investors, Wealthfront brought to far smaller accounts (as little as “just” $100,000 account balances) with its “Direct Indexing” 2.0 solution in late 2014. However, the reality is that once the technology is built to manage “an index” from its component stocks, there’s no reason to just do the standard indexing solutions like the S&P 500; instead, the platform could adjust the weightings of the underlying stocks to favor anything from certain SRI/ESG mandates, to various types of underlying smart-beta investment factors like value and small-cap. Which is exactly what Wealthfront has announced its now adding, with a new “Advanced Indexing” solution — combining factor loading allocations with its Direct Indexing core, in a solution being dubbed “PassivePlus”. And given that smart beta ETFs have an average expense ratio of close to 50bps, there is arguably even more room for Wealthfront’s Indexing 2.0 solution to challenge smart beta ETFs (at a lower cost and with more favorable tax-loss harvesting) than traditional ETFs. Although ironically, Wealthfront’s shift to not-purely-market-cap-weighted passive indices put its Chief Investment Officer Burton Malkiel in an awkward position, as the legendary “index-fund evangelist” and author of “A Random Walk Down Wall Street” now finds himself operating as a smart beta manager … which he now insists is actually a reasonable approach, as he suggests that Wealthfront can execute the strategy at a low enough cost to work.

TD Ameritrade Infuses Its Robo-Adviser Solutions With Human-Delivered Performance Videos. One of the fundamental challenges of today’s robo-adviser solutions is that human beings are hard-wired to establish trust with other human beings, more so than with “robots” and technology alone. Yet the whole point of a “robo-adviser” is to drive down costs by not including a human financial adviser as part of the solution. Accordingly, TD Ameritrade is attempting to infuse some human-ness into its “robo” automated investing platform Essential Portfolios (and also its Selective Portfolios human-tech “cyborg” solution) by providing quarterly performance “statements” in the form videos, delivered by human beings, who talk through the latest quarter’s market activity and investment results. Notably, the video performance report solution (a sample of which is shown below) was originally created by the BluGiant Adviser Studios (a subsidiary of NorthStar Financial, which also owns Orion Adviser Services), and the video performance reports are already available to independent RIAs using Orion (a feature it called “Engage”). Yet while the video performance reports are a nice “add-on” for independent human advisers, it arguably is even more appealing for a robo-adviser as a way to infuse a “human” connection into an otherwise-purely-robo experience. Or alternatively, some advisers may now choose to leverage the Orion Engage solution specifically to compete with TD Ameritrade’s version (or to supplement the humanness of their own adviser-driven “robo” platforms).

Is Cetera Trying To Reinvent Itself As The Most Tech-Innovative Broker-Dealer? Cetera Financial was one of the largest independent broker-dealers that was gobbled up by Nicholas Schorsch’s push into the broker-dealer space in 2013/2014… only to be dragged into bankruptcy less than 2 years later as Schorsch’s non-traded REIT empire collapsed. The end result was that Cetera was spun back off from RCS Capital to stand on its own post-bankruptcy, and put into the unenviable position of needing to rebuild its brand and recruiting efforts tainted by the Schorsch debacle. A year later, Cetera seems to be attempting to reinvent itself as a tech-innovative broker-dealer that can operate as an ecosystem for other tech companies to plug into. And the strategy is now being reflected in a series of recent new tech partnership announcements, including a new facial recognition tool called “Decipher” that aims to assess client risk tolerance by actually showing them risky scenarios and evaluating their facial responses, and a second partnership with Covr Financial that will make it easier to purchase insurance products with electronic applications directly through the Cetera platform. Of course, the challenge is still that weaving together multiple technology systems into a unified core is extremely difficult, especially when Cetera itself is still a “roll-up” of more than half a dozen subsidiary broker-dealers, and AssetMark recently poached Cetera’s “open-API wizard” this spring. Nonetheless, as the pressure mounts on broker-dealers to reinvent themselves anyway in a post-DoL fiduciary future, arguably broker-dealers like Cetera are as well positioned as anyone to create a platform to bring together advisers and technology, and profit from the increased client productivity that can result.

SEC Gearing Up For Exam Sweep On Increasingly Complex Robo-Adviser Offerings. At an SEC compliance forum last month, the regulator indicated that it is preparing to conduct a new exam sweep on robo-advisers and how they are being deployed. The announcement follows on the heels of an SEC Investor Alert and IM Guidance Update earlier this year, cautioning that as robo-advisers operate under an increasingly wide range of platforms and business models, new risks and concerns are emerging, from whether the current disclosures offered by robo-advisers are sufficient (given the nature of their business model), the extent to which robo-advisers are gathering enough information to affirm that they are not simply operating as de facto Investment Companies (i.e., mutual funds) instead, and whether robo-advisers are themselves implementing sufficiently rigorous compliance programs to oversee their own trading algorithms and other processes and procedures. Notably, an “exam sweep” does not itself mean any new rulings or guidance will emerge; it is simply a label for the process where the SEC asks a series of more-in-depth and targeted questions as a part of its normal ongoing investment adviser examination process. Nonetheless, as robo-advisers increasingly morph in new and different directions, introduce new conflicts of interest with the rise of robo-advisers using primarily or solely their own proprietary products (unlike the early founding crop like Betterment and Wealthfront, which used independent third-party funds), and increasingly push for consumers to self-direct the process with automation, the SEC seems to be increasingly concerned that consumers may struggle to understand the differences and nuances from one platform to the next.

CFA Institute To Incorporate “FinTech” Into The CFA Exam In 2019. With the ongoing growth of Financial Technology or “FinTech” permeating into everything from quant-driven hedge funds to blockchain and Bitcoin to robo-advisers and more, the CFA Institute has announced that it will be adjusting the CFA exam beginning in 2019 to include more coverage of a wide range of FinTech topics. In fact, because FinTech touches so much of the financial services industry these days, the CFA Institute has announced that it will include FinTech in several different “groupings” within the exam curriculum, including how FinTech impacts: financial analysis (from big data to artificial intelligence and machine learning, and algorithmic trading); portfolio management and private wealth management (e.g., robo-advisers); capital flows in the financial system (including peer-to-peer lending and tech-driven “shadow banking” and crowdfunding); and market structure and payment systems (from Bitcoin and blockchain to high-frequency trading and even regulators’ own use of FinTech for oversight). Which means on the one hand, the CFA Institute is already clearly acknowledging that the rise of FinTech is beginning to impact the nature of financial analyst jobs; and on the other hand, emphasizes that the future of financial analysis jobs may be managing, overseeing, and implementing those very FinTech tools!

For further coverage of AdviserTech 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 #AdviserTech company who wants to submit a tech announcement for consideration in future issues, please submit to [email protected]!

So what do you think? Will advisers adopt Riskalyze’s proprietary smart beta ETFs, or opt for third-party managers with lower-cost ETFs instead? Will Addepar’s bet on the growing desire for private investing amongst high-net-worth investors work out? Will Apex Clearing be able to mount a competitive threat to Schwab, Fidelity, and TD Ameritrade? Would you use a Withdrawal Policy Statement with your retired clients? 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.