Jason Wenk and Dani Fava offer up about some significant changes we can expect in the planning ecosystem in the next 3-5 years.
Every once in a while you see a presentation that just “clicks,” and the audience walks away having been entertained and also enlightened. We recently had that experience with a keynote Insider’s Forum (virtual) presentation, featuring Dani Fava, newly-named Director of Strategic Development at Envestnet, and Jason Wenk, founder and CEO of Altruist, which is both a custodial platform and also an asset management platform. They were there to talk about “seeking innovation everywhere”—observations about potential disrupters, interesting developments at the edges of the profession that you might not be aware of, and speculation about possible shifts in the wind that all of us might have to cope with before long.
Fava started with something relatively prosaic: what she called the “involuntary tech revolution,” where everybody—advisors and clients—have been forced to interact remotely via Zoom or some Zoom equivalent. The revolution also includes consumers grocery shopping online, custodians becoming more receptive to automated e-signature account opening and advisory firms allowing their clients to process check requests rather than doing it for them. It includes TikTok short-form videos and more generally what Fava called “the Age of the Creator,” where we tend to read video and blog content from our peers instead of a newspaper or network television show. (Advisors, too, are increasingly becoming creators on video and in blogs.)
Fava may have also given a preview of her own aspirations at her new employer. “No one company has yet produced the all-in-one tech solution,” she said. “No company has proven that they can have best-of-breed solutions in every single vertical. But I think we might end up in the future seeing a company that could combine the best solutions together in one ecosystem, kind of like Amazon does with their sellers, creating a virtuous growth cycle by bringing together sellers and buyers in one place.”
Wenk thinks that the all-in-one solution might be a platform or ecosystem that ties programs together, rather than a single provider of different programs. “You can make it easy to have a single place where you can operate all the parts of your business, and easy from a client perspective,” he said, adding: “Clients should never have to log into more than one place when working with their advisor.”
Wenk also predicts that the individual software providers will accelerate the process of making their products more seamless and easy to use. The alternative would not be pretty. “Over the last ten years, we’ve seen consumer-facing products get WAY better,” he said. “But we see very little innovation in terms of scale for advisors. I have a feeling that some of the vendors won’t be around much longer as a result, because there is not enough money to go around.”
Then Wenk pivoted to some recent changes in the custodial landscape. “Trading commissions have been eliminated for most RIA firms, and credit interest has also been cut in half,” he said. “But the flip side is that trading revenues are through the roof. Robinhood had second quarter revenue doubling from Q1, and it is really substantial now.” He noted that Robinhood sells its trading data, and the larger custodians might do that as well to make up for lost revenues.
The custodians may also decide to cut back or eliminate soft dollars that they’ve been allocating to their larger RIA customers, to pay for their software suite. “The bigger tech vendors get maybe 30-50 percent of their revenue directly by custodians,” said Wenk. “If advisors are paying out of their own pockets, those tech firms might have to change their pricing models.”
This has implications for advisory firms as well. “For a large RIA,” said Wenk, “as much as thirty percent of their profit might have been the money they saved via soft dollars. If you were a large RIA that had $5 million of EBITDA, you were probably getting a million dollars a year in soft dollars,” he added. Take that money out of the balance sheet, and the firm might need to make some financial adjustments.” Meanwhile, smaller firms would become more competitive—at least in terms of financial efficiency—with their larger peers.
Fava added that, once the large checks are no longer written by the custodians to certain software companies that have a big market share, it could make room for more competition. “If Jason is right and soft dollars do start to dissipate,” she said, “then advisors will pick their own technology with an eye to hyper personalization.”
An eye to what? “Advisors will need to approach their clients with increasingly personalized insights and touchpoints,” said Fava. “And the advisor herself wants a hyper-personalized experience, that meets her own specific needs. We all want to create our own solution that is completely differentiated from anyone else, and one of the easiest ways to do that is to find that little niche technology from so many that are popping up.”
Meanwhile, the larger custodians appear to be moving downscale, starting to compete for the business of smaller advisory firms. “In the past, they only wanted the $250 million (AUM) or larger firms,” said Wenk. “Now they say they’re willing to take on smaller advisory firms, but with a different service model—and it will be fascinating to see whether this will force custodians to start charging advisors basis points. Already,” he added, “there are reports about custodians forcing the advisors into certain money market products or cash accounts, as a way to compensate for some of their lost revenue.”
A lot has been written about firms like Orion, Riskalyze and Envestnet evolving from software vendors to platforms—potentially competing with the custodians to be the full service back office (or back office interface) for advisory firms. But Fava says that may be some years in the future. “The margins at custodians are being squeezed today,” she said, “and when margins get squeezed, the only way to make it out alive is to have massive scale.”
Beyond that, she said, consumers might prefer having their advisor work with trusted household names that they are familiar with. “I think that will change, and IS changing,” Fava said. “But in the present moment, that is a major hurdle that companies would have to overcome if they were to build a custodial platform.”
Wenk thinks that, longer-term, custodians will absolutely have to fend off competition from the comprehensive software platforms. “I think Orion would be a great example of someone who might have a lot to gain from doing that, now that they have a large TAMP [Brinker Capital],” he said. “They have the assets, and it is not rocket science to form an introducing broker-dealer to connect with a clearing partner, and now all of a sudden you’re generating revenue by introducing the brokerage in addition to asset management and software.”
The platform invaders would have the advantage of creating their own systems with modern technology, instead of having to retrofit antiquated legacy software infrastructures. “They can offer services more elegantly than the incumbents,” said Wenk. “Most of the back offices of the incumbents are old. It’s hard for them to do things like digital account opening, digital ACATs, things that really should not be hard.”
Wenk has seen the same kind of disruption taking place in the consumer space. “SoFi started off with student loans,” he said, “and then they were offering personal loans, and then banking services. Now they’re into investing, stocks, crypto, automated investing like robo advice solutions and a whole bunch more.” He noted that the firm didn’t have to build all these solutions independently. “Some of their banking services are through partner banks,” Wenk told the audience. “Their brokerage services are through a partner clearing firm. A lot of the tools that they built, they were leveraging their large ecosystem, many millions of users, and they bring in tech and service partners and let them participate in the revenues.”
The same disruption is being built, as you read this, into the Altruist platform. “The long-term plan is to have a fully-integrated bank into the platform: bill pay, access to loans and refinancing, elegantly inside the custodial application and a mobile app,” Wenk said. “The journey is starting with savings accounts. Our first account will be a high-interest savings account feature, that will then offer a checking account, then bill pay, and you will see this evolution over the next year or two.”
Could the larger advisory firms, looking to make up the revenues they would lose when soft dollar compensation goes away, eliminate the broker-dealers, make direct clearing arrangements and maybe offer a platform to their smaller peers at discounted prices?
Wenk’s answer was a strong ‘maybe.’ “There are new players like APEX and DriveWealth that offer an introducing clearing model,” he said. “There are places like RBC offering custodial services for omnibus self-clearing broker-dealers. The $20 million RIA would have the ability to build in a lot of these integrated services and collect other forms of revenue.”
However, Wenk knows from personal experience that this would entail a significant investment in infrastructure. “As somebody who has been down this road, I can tell you that it is hard and it is expensive,” he said. “If people think they can just spin out their own broker-dealer and plug into some clearing platform with APIs, they should be prepared to spend $10-20 million and take a year or two to build it.”
Wenk added that only two totally self-clearing custodians have been built in the last 30 years: Vanguard and Robinhood. “There’s a reason for that,” he said. “It takes a long time, and it’s very expensive.”
One theme, so far, was the idea that the firms who have a relationship with customers are able to put traditional vendors like banks and custodians in the background, and create their own custom-branded service menu. Fava wondered about the future of banking if custodians and firms like SoFi continue to take them on as silent partners. “The many services that a bank provides are getting pulled apart and delivered in other ways as point solutions,” she said. “We have apps for loans, apps for debit and bill pay, and now you can do your bill pay through a custodian that has a bank in the background.”
Her question: “Do banks continue to exist as consumer-facing platforms in the future? Or do banks become something that just sits behind all these other solutions?”
Wenk offered the example of Green Dot, which has a collection of APIs that allows virtually anybody to offer bank-like services within their own app. “So let’s say I have an app that is like SoFi, that is focused on student loans,” he said, “but I want to offer checking and savings accounts, and bill pay services. I can integrate with Green Dot and voila! I am now offering banking services to my customers. In fact,” Wenk added, “most of the leading solutions are built this way. When CashApp wanted to add things like stock trading, they didn’t build their own brokerage firm. They just partnered with a clearing partner.”
Meanwhile, he said, banks are closing their physical locations, which also forces consumers to start using mobile solutions. “These institutions have never won a lot of loyalty,” Wenk said. “When people are polled, and asked if they’d switch if another bank paid them half a percent more, the response has been: for sure!”
How does this relate to financial planners? Wenk said that he thinks advisors will want their platform providers to integrate banking services for their customers. “Most financial advisors still just offer investments,” he told the audience. “People are going to start asking: what other integrated services will make sense? Banking is a huge one. There have been some interesting web apps for things like estate planning and tax planning.” He noted a company called Lemonade, whose AI bot helps consumers evaluate their insurance coverage and offers a 60-90 percent discount over traditionally-sold insurance products. As solutions like that are built into white-labeled apps, advisors could provide insurance coverages to their clients in the same way they would provide automated banking products and services. Financial planning would become a comprehensive financial solution for consumers.
But will clients want advisors to see their total financial picture? After all, many high-net-worth clients have hidden their cash balances from their advisor—and those advisors only learned of this when they started offering services like MaxMyInterest or Flourish Cash.
Fava thinks that consumers are changing their outlook on this privacy issue. “One of the subtle changes that has happened during the pandemic, that has gone largely unnoticed,” she said, “is that we are changing our appetite for sharing our data—out of necessity.” She mentioned contact tracing apps which tell who you interacted with recently, and Robinhood selling its trading data to outside vendors.
“All of a sudden, you’ve broken down that barrier and you are more willing to share your data, which is going to manifest in a lot of different areas,” she said. “When you log into an app and it says, I want to see all of your accounts, there is more of a willingness to trade privacy in return for convenience, due to these subtle psychological changes that have happened over the last six months.”
Wenk said that advisors will need to provide these expanded services because otherwise their future clients—the millennials—will grow accustomed to getting those services independently of their advice relationship. “When I look at the future of the advice ecosystem that advisors present to their clients, there are two aspects,” he told the group. “One is to provide a better overall experience to your clients. But the second,” Wenk added, “is to make sure you’re playing defense. Because they can get all of those services elsewhere, and they’re really good.”
If advisors don’t believe that their future clients will prefer digital to personal services, Wenk offered his own children as examples. “They don’t use banks,” he said. “They use Venmo and Cash App; that’s their form of banking. They don’t have wallets. They are, like, what’s the point of a wallet? They just put a little sleeve for their ID in their phone cases and they’re good to go.”
But he warned that the solutions you adopt have to be easy. “As soon as something is complicated and takes more than five or ten minutes,” said Wenk, “they say it’s not worth their time. They’re chasing tiny fractional amounts of digital interest, but they’re not willing to invest 15 minutes to do it.”
I started losing moderator control of this session when Fava began asking Wenk questions about things she was curious about. The first thing she wondered was whether, with the consumer loyalty being so low with millennials and their app relationships, these apps actually presented a real threat to financial planners. Would millennial consumers stick with the app solutions as they got older and wealthier—and bypass planners for a big part of their financial picture—or, as their lives became more complex, would they then seek out the personal face-to-face services of an advisor?
Wenk offered several observations. First, he suggested that advisory firms were shooting themselves in the foot with their minimums, when the apps and direct-to-consumer services were open to millennials who couldn’t get past the advisory firm’s receptionist.
In addition, he advised advisors not to underestimate the strategic thinking of the direct-to-consumer services that are emerging. “I’ve been able to get close to a number of very talented founders of fintech companies, and the people who work there, and the investors who back them,” said Wenk. “And what I can say is that these are some of the most brilliant people you will ever meet in your lifetime. The way they measure their businesses is so much more sophisticated than what a typical financial advisor is doing, that it is not even really comparable.”
His advice to advisors if they plan to compete for the future wealthy client? “Instead of the advisor being limited to serving 100 to 150 relationships,” he said, “they should be thinking about how they can leverage themselves and expand their capacity to 500 or 1,000, and still provide great service, so they don’t have to worry about diverting somebody else’s client stream. They build their own pipeline to the future.”
Fava followed up by saying that the planning profession needs more scalable and efficient technology. “Advisors need technology that will enable them to serve a wider audience, a more diverse demographic, and I wonder whether that innovation will continue to thrive,” she said. “Will we see those tools available at low cost to advisors so they CAN serve at that scale and create their own path to the future?”
Low cost? Wenk offered some concrete numbers. Suppose an advisor only has capacity to service 100 clients, and an important software solution costs $20,000 a year. That means that, in order to turn a profit large enough to cover just that one solution, the relationship would need to generate at least $200 a year. Layer on five more solutions at that cost and the software aspect of the client relationship, alone, is costing $1,000 a year. Can an advisor profitably service a client with less than $250,000 with that kind of financial wind in his face?
“We’ve not only made the bar ridiculously high,” he said, “but we’ve also made what we have to charge people for the service really difficult for that smaller consumer to get wealthy. We’re putting a lot of friction between their money and its future potential.”
Later, Wenk said: “I would hope advisors would say, there is a percentage of the people that I work with where I don’t care how much money they have; I just want to help them. But they can only do that,” he added, “if they can claw back this specific amount of hours they were spending pushing buttons on inefficient software, or paying really high fees so they can only serve super-wealthy customers.”
Fava was asked about potential audacious innovations in our financial future. She talked about income share agreements (Edly currently offers investments in them), where college students have a lender pay for their college expenses, in return for them giving back a percentage of their paycheck when the get their degree and start on a job. “What I really have come to love about these instruments is that there’s something really different about them,” she said. “They’re based on your future earnings ability, not on your credit history; not on you who you can get to cosign that loan for you.”
She wondered how this concept could be applied to other areas of finance. “I am going to extend credit to you based on your future ability, not what you’ve accumulated so far, your family history or wealth,” said Fava. “The idea seems so transformational to me, and it covers what we’ve been talking about: how do you help clients earlier in their financial lives?” Advisors might agree to, instead of ongoing fees, sharing in their clients’ future success.
Any other transformational ideas? Fava turned to interesting uses of big data, noting that certain hedge funds are beating the market because they’re able to buy trading data from Robinhood. “They know what people are buying and selling, and they can go on social media and see what people are talking about. To me,” Fava said, “that is the future of the public markets. Getting all this data and figuring out exactly how to apply behavioral insights to investing.”
Wenk added that some interesting venture-backed companies are in the early stages of developing trading algorithms around social media data. “One very fascinating company,” he told the audience, “has a huge roster of governments as clients, because they’re able to take all this public data and determine what’s going to happen before the government knows it’s going to happen. So they can get boots on the ground super-fast.” The company is also developing investment trading algorithms.
Are either of our co-presenters worried that Facebook, Apple, Amazon or Google will wade in and disrupt the financial planning profession?
Fava was not concerned. “We may see independent advisors someday representing one of those firms, and I think that’s great,” she said. But she envisions a partnership between a face-to-client advisor and these very efficient solution providers in the background. “This business is very relationship-based,” Fava added. “I don’t think Amazon would be able to get into the financial planning profession without employing planners.”
Wenk took a broader approach. “If anybody looks back 50 years, very few companies 50 years ago are that meaningful today,” he said. “The disruptions that are really going to change the industry,” Wenk continued, “are the things we don’t know yet. The future is still unknown, and that’s the beautiful thing about being a futurist. It is not likely that the key issues of the future will be things we know today. More likely they’ll be things that would have been really difficult to forecast.”