Automated Investments Platforms: Build or Buy?

Will Trout

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Oct 29th, 2014

I recently wrote about the entrance of broker custodian Charles Schwab into the automated investments business. Here I examine Schwab’s decision to build a platform on its own, rather than buy a start-up (or partner with one, as Fidelity has done with Betterment). In case you hadn’t seen the news, Schwab has named its zero-cost platform “Schwab Intelligent Investor” and has put up a placeholder site to announce it.

I am also adding here to my commentary on this blog and in Investment News by addressing more broadly the implications of the “build vs. buy” question for online brokerage firms. Price pressure from shrinking trading commissions plus the quest for differentiation in an increasingly commoditized business is encouraging these firms to consider rolling out their own advice platforms. Indeed, one firm, TradeKing, has already done so, and other firms are quietly working on their own.

For online brokerage firms, the “build” option now is clearly more in vogue than the “buy”. It is tempting to link this trend to the sky high valuations (which are frighteningly reminiscent of the boom) held by the current batch of automated investment advisors. Yet the decision process around “build vs buy” (or partner) is more complex and to some degree rests with one’s vision of the future. Given the downward pressure on fees (from platforms like Schwab’s) and low barriers to entry, it may not be very long before some of today’s gilded start-ups are on the auction block.

At the end of the day, a firm like Schwab may decide to build for a number of reasons. First of all, implementing solutions “in house” versus buying (or even using a vendor, which can be expensive and confining) may simply be part of its DNA. Schwab also may feel that building in house will allow it to move faster to market, and retain the ability (i.e. the code) to innovate or build out the platform at a later date. Acquisition or even partnering (including via a white label solution) can pose some sticky integration problems.

On the other hand, the purchase of a B2C start-up would seem to be an obvious way to do an end-run against the limitations that have held back other online brokerages and custodians so far. These limitations center on legacy technology (systems dating back to the early 2000s that are in dire need of updates), and culture (the automated investment managers are mostly software engineers, while the discount brokerages are a mix of techies and investments folk). One might ask if a large custodian based outside the Bay area might even be able to attract enough talented software engineers to do a build-out quickly and right.

Schwab, which is based in San Francisco and presumably has ample budget for hiring, may still be challenged in constructing what should be a massive platform offering potentially dozens of portfolio models (compare this to the TradeKing Advisory platform, which offers 10). Already more than six months of concentrated effort has gone into building it. Time will tell if the Schwab approach will be a winning strategy. Certainly Schwab CEO Walt Bettinger’s brash predictions for the success of his platform have raised (at least in terms of expectations) the proverbial bar—not to mention the hackles of his many start-up competitors.

The Custodians Enter the Automated Advice Wars

Will Trout

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Oct 28th, 2014

Broker-custodian Charles Schwab’s eagerness to share details on its zero cost automated investments platform reflects the fact that it has essentially been trumped by arch rival Fidelity, which announced last week it was partnering with Betterment to distribute automated investments advice to clients via its RIA network. Unlike the Fidelity offer, the Schwab platform will be offered direct to consumers, with a white label version to be offered later to Schwab’s network of advisors. The Schwab announcement follows what has essentially been radio silence since Schwab CEO Walt Bettinger revealed plans to launch an automated platform last summer.

Some thoughts:

  • The automated investments business is fundamentally a software play (if you can write the code, you can start up an automated advisor) with low barriers to entry, and Schwab’s decision to offer algorithm-driven portfolio management services for free is a troubling sign for an industry already offering door buster fees. We may be seeing the acceleration of a race to the bottom in terms of pricing. The end result: curtains or at least consolidation for many of today’s crop of automated advisors.
  • Schwab’s decision to offer its platform to consumers for free is unlikely to go over well with its captive network of advisors (i.e. those who use Schwab for custody purposes), who will feel undercut by their custodian. The advisors will be even less happy if they have to pay fees (for example, for the branding of their web sites) for a platform that their customers can access for free. The most important thing to note, however, is that the Schwab move puts downward pressure on the RIAs’ high fees, even if the RIAs claim they are offering a better, more personalized service than the automated advisors.

From a strategic standpoint, Fidelity’s ability to get a leg up on arch-rival broker-custodian Schwab speaks to the challenges custodians and online brokers face once they decide to launch an automated advice platform. Should they build their own, as Schwab is seeking to do, buy a startup automated advisor, or partner a la Fidelity?

I’ll share some of the thinking around these considerations in a subsequent blog post.

Beyond Budgeting: The New Generation of Personal Finance Tools

Oct 27th, 2014

Beyond Budgeting: The New Generation of Personal Finance Tools is the second of a series of reports focusing on the delivery of online financial advice. This study focuses on the North American market and examines a range of firms. Celent’s research on the PFM space includes, but is not limited to, the following vendors:

  • BillGuard
  • Finovera
  • Geezeo
  • HelloWallet
  • Level Money
  • Mint
  • MX (formerly MoneyDesktop)
  • Moneytree
  • Prism (formerly Mobilligy)
  • Yodlee

This list is by no means exhaustive, but it does portray an array of relevant wealth management players. A broader overview of PFM players is provided in an earlier Celent report, Personal Financial Management: The Devil Is in the Details. The goal is to focus on those adding value from a broader wealth management perspective.

Celent defines PFM as a platform of online money management tools offered at a low cost that aim to allow the retail investor to control his or her financial future through account tracking and budgeting features. The core features of a PFM solution include: consolidation of accounts, bill payment reminders, credit score checks, and short-term cash flow management. In more complex PFM solutions, an even more holistic view is offered through investment tracking, data visualization, social capabilities, financial goal planning, and advanced analytical capabilities. In short, PFM solutions provide the retail investor with a relatively independent, transparent, and holistic view of his or her financial position at any given point in time, thereby facilitating the financial management process.

Celent focuses more on the segment’s position within the advice continuum, which extends from PFM to investment management to financial planning, and less on the functional aspects of PFM, which are closely aligned with online banking.

“This macro-level approach is designed to highlight the utility of PFM as a starting point for the delivery of advice generally, and financial planning advice in particular,” says William Trout, a senior analyst with Celent’s Securities & Investments practice and coauthor of the report.

Over the past several years, PFM providers have worked to alter their images and perceptions from a simple budgeting tool to a forward-looking, actionable financial planning tool. Celent considers modern PFM solutions as a steppingstone to financial planning, particularly given its transformation from a reactive, backwards-looking tool to a predictive instrument capable of providing cash flow projections and actionable recommendations around spending and saving. Celent explores drivers for PFM tools, charts the evolution of their functionality, and examines the challenges and opportunities these firms pose to the traditional wealth management industry.

“There has been a surge in the number online financial advice providers to the US retail investor market,” says Ashley Globerman, an analyst with Celent’s Wealth Management practice and coauthor of the report. “The target client is tech-savvy, cost-sensitive, skeptical of financial institutions, and willing to use nontraditional wealth management services that speak to their digital lifestyles.”


Towards a Technology Based Delivery Model for Investing

Will Trout

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Oct 27th, 2014

The commoditization of the portfolio construction process has created fertile ground for the emergence of automated advisers providing investment management services at very low cost. But how real are these virtual advisors and what do their technology based delivery models mean for the traditional advisor?

These were some of the questions put forth at a recent Celent Executive Roundtable in London. Senior strategy, technology, and innovation leaders from UK and European financial institutions joined several market “disruptors’ for the discussion, which sought to capture emerging trends and highlight innovation within both wealth and asset management.

The topic of automated advice served as a starting point for a discussion of the broader transformation of the investment management ecosystem. As traditional advisors with their high cost service models move upmarket to defend their profit margins, automated providers are filling the gap. To date, algorithm driven portfolios have appealed largely to younger and NextGen investors, but as one Roundtable participant noted, these investors will not stay young and cash-poor forever.

Indeed, the aspirations and behavioral characteristics of the large NextGen population offer a window into the future of wealth management, as London based analyst Ashley Globerman suggested. Goal focused, idealistic and entrepreneurial, NextGen investors want low fees and control of their financial lives. They value the transparency, personalization and tax management offered by the automated investment advisors.

For these advisors, the ability to deliver both customization and scale is not just a strategic advantage; it represents something a holy grail. Certainly, it meets the Celent criteria for disruption in that it breaks existing trade-offs. But as Celent Senior Analyst Jay Wolstenholme noted, innovation must also be judged by the results it delivers. The automated investment managers have not yet been faced with a major financial crisis, nor have they suffered a data breach that might call their model into question. Traditional advisors meanwhile have recognized the threat to their model and have started to respond. To borrow a British expression, it’s still early days.

Utility Model in Capital Markets

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Oct 24th, 2014

In the aftermath of the financial crisis, the regulatory environment has undergone rapid changes and is still evolving, creating additional obligations for financial institutions, particularly in the areas of risk management, reporting and regulatory compliance. Since many of financial institutions have to make same, or similar, changes to their processes and systems due to new regulations, many of them are looking to “mutualize” the costs – an arrangement where an independent third party provides the technology and services that banks can in turn use on pay per usage basis. This is giving rise to a new utility type of offering that is a step in the outsourcing value chain.
As a consequence of these changes we have observed in last 6-12 months the emergence of shared service-utility mode of offering which is a highly standardized type of offering built by a third party provider and offered to financial institutions on a pay-per use basis. Often these solutions were conceived in direct response to the user communities’ expressed needs for them. Not surprisingly therefore some of the ones being launched in the market are by bank owned or bank backed institutions and have had active involvement of many banks in their design and development processes.
One area that has seen a number of solutions emerge under the utility-shared service model is the know-your-customer (KYC), client on-boarding space. The current practices in managing KYC, on boarding operations are complex and redundant requiring every customer to exchange information with every financial institution they deal with. The utility model on the other hand envisages gathering all customer information at a single space that can in turn be shared with financial institutions.
A recent Celent report discusses the drivers behind the emergence of the utility model and studies four solutions in the KYC, on-boarding space that have been or will soon be launched under the shared service-utility model, including SWIFT KYC Registry, Thomson Reuters Accelus Org ID, Clarient Entity Hub (by DTCC and 6 co-founding banks), and Markit | Genpact KYC Services.

Fintech and the Democratization of Investments

Will Trout

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Sep 29th, 2014

One of the most remarkable characteristics of this September’s FinovateFall 2014 conference in New York was the number of presenters focused on wealth management. Typically only a handful of WM firms dot the PFM and payments landscape, but this year nine of the 70 seven-minute demos concentrated directly on investments and financial planning. Presenters included established WM vendors (eMoney Advisor, which rolled out its EMX platform for advisors), well known disruptors such as Kapitall, and a few companies that seem to have just come out of the woodwork.

The diversity of wealth management platforms and providers speaks to a trend at Finovate that has been gaining traction in the broader market: the democratization of investments. Democratizing firms posit that best-in-class ideas, managers and investments should be accessible to all investors, and not just to the rich alone. Firms such as HedgeCoVest and iBillionaire (platforms that allow investors to mirror the trades of hedge funds and billionaires, respectively) and Loyal3, which offers no fee access to IPOs, embody this line of thinking. So do the strategies of UK based firms like Algomi (bonds) and True Potential (micro payments), which undo trading obstacles for investors, while lowering the bar for entrance.

The democratization of wealth management is also noteworthy in the traditionally advisor-driven financial planning space. While B2B vendors like eMoney Advisor seek to enhance advisor interaction with clients, iQuantifi offers financial planning services directly to individual investors, as does FlexScore, which throws in the added element of gamification or gaming.

The idea here is that planning and investing should be fun. No firm at Finovate represented this quintessentially Millennial ideal more than Kapitall, an online brokerage firm that bills itself as a fusion of investing and gaming.

Indeed, efforts to incorporate gaming into the historically sober wealth management business represent only one of the ways that fintech startups are seeking to capture underserved populations (i.e. democratization), target market inefficiencies (i.e. build a better mousetrap), or in the case of firms like Blooom, do both. The Kansas-based firm won a Best of Show award for its tools-based platform enabling entry level investors to better manage their 401k plans.

Tellingly, while these firms tend to target opportunities created by local market inefficiencies, their ideas may have resonance in other markets as well. Investors in Australia, for example, have just as much a need for advice on their retirement savings as do Americans. The universal appeal of the ideas put forth by the fintech startups, combined with the inherent efficiency and scalability of their business models, suggests that real disruption in WM may have barely gotten started.

Networks > social media

David Easthope

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Sep 3rd, 2014

I have never really liked the term social media. All media has the potential to be social.

What is really changing financial markets is the power of networks. Networks can be highly social (Twitter, Linkedin) somewhat social (lets not forget Bloomberg or even a Squawk Box as a type of network) or even anti-social (private networks).

Financial institutions and financial advisors should be looking for ways to leverage networks, not necessarily media. Content, services, insight, and advice can be delivered and shared among communities of users.

I am sure this is a lonely fight, but we should drop the term social media. Rather, we should emphasize the importance and power of networks to change financial markets.

How Automation Is Disrupting the Market for Financial Advice

Will Trout

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Aug 28th, 2014


My most recent report explores the competitive threat that online firms pose to traditional providers of financial advice, particularly in the area of investments. Some observations:

  • The portfolio construction and monitoring process has been commoditized. What a human advisor can do, an algorithm can do at least as well, and at much lower cost (typically under 35 bps). This means that automated investment managers such as Betterment, Wealthfront and SigFig have a built in competitive advantage over traditional (real life advisor) Brokerage and RIA models, especially if they can achieve some sort of engagement or relationship with the client.
  • A further competitive advantage is that because they are data driven, automated investment managers are naturally disposed to using data to improve both the client experience (for example, through better analysis and reporting tools) and portfolio performance. Algorithms can be used to test and develop new investment ideas, for example, as well as to monitor portfolio exposure or risk. Traditional advisors may be able to provide these functionalities but at much higher user cost and friction: that is, their delivery may not be as good, particularly if they have limited digital capabilities.
  • RIAs are under threat but the wirehouses and the discount/online brokerages are in a real pickle. Wirehouses recognize the need for automated advice but fear creating channel conflict with their sales force. The online brokerages also understand that automated advice is valued by clients (a few such as TradeKing are introducing algorithm driven platforms) but they will find it tough to overcome challenges of legacy technology (systems dating back to the early 2000s will need to be updated) and culture (the automated investment managers are mostly software engineers, while the discount brokerages are a mix of techies and investments people).

Given the deepening public embrace of ETFs and passive investment strategies, which enable automated advisors to manage money in a customized and highly efficient way, it may be that the online brokerages emerge as the most natural competitors of Wealthfront, Betterment et al. Most will want to launch their own platforms. The question then is whether to build or buy.

Webinar with Celent & Scivantage, September 18th @ 4:00PM EST

Aug 27th, 2014

Webinar with Celent & Scivantage, September 18th @ 4:00PM EST

The Race for Retail Investor Assets: Leveraging Analytics to Transform the Online Investment Experience

Register here:

The needs of the retail investor are rapidly changing as technological advances continue to push the boundaries of investment transparency, and social interaction.  With increased competition, the race for investor assets has never been more intense and it has financial institutions searching for new and innovative ways to transform their online investment experience.  From advanced portfolio analytics to community-based social investing initiatives, firms that are able to capitalize on this dramatic shift will realize game-changing ROI.

Join Ashley Globerman, Analyst, Celent, and Greg Alves, Senior Vice President, Investment Analytics, Scivantage, as they discuss the evolving expectations of the retail investor and the technology imperatives firms face in order to remain competitive.

In this complimentary webinar, you’ll gain:

  • Insight from Celent’s latest research into the evolving state of the retail investor landscape
  • A focused outlook into technology’s substantial role in connecting firms with their tech-savvy clients
  • Expertise on streamlined processes for delivering premium analytics and reporting solutions to a broader client base
  • An introduction to Scivantage’s new performance reporting platform, sqopeTM

Time for a New Take on Trust

Will Trout

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Aug 26th, 2014

Five years after the end of the financial crisis, bank trust companies are taking steps to update their technology platforms. That’s a good thing as most of the trust accounting systems currently in place were implemented pre-2007, and the ability to track assets quickly, efficiently, and accurately is critical given today’s complex compliance and security requirements. Thinner margins and heightened client service expectations are also driving the push toward modernization. Small wonder that an executive with a leading platform vendor estimates that a third of wealth management firms using legacy trust accounting systems are in discussions with vendors to replace them.

The issue is not solely one of age, however. Trust accounting systems were not designed to manage investments, much less to serve as the backbone of a modern wealth management practice. Over the years, bank trust companies have compensated by deploying a dizzying array of back office systems (in some cases 50 or more), each with their own coding requirements. The result has been “systems spaghetti” and on the front end, old-school client service defined by manual processes and static performance reporting.

Trust platform vendors have ramped up efforts to tackle the technology and service deficit through the delivery of end-to-end solutions that embed onboarding, CRM and reporting tools directly into the trust accounting workflow, or what industry professionals call the “vertical stack”.

These newest trust accounting platforms do offer banks significant operational efficiencies but are for several reasons no panacea. First, efficiency in technology terms does not neatly translate into advisor productivity. Second, most gains are incremental: it is not possible to outsource everything and many of the major efficiencies such as straight through processing have been achieved already. Most critically, these efficiency improvements do not address the fundamental challenge facing the business: misalignment with the client viewpoint and interests.

Clients tend to see investments they hold within an institution as a whole, not in terms of separate brokerage, trust, or bank channels. They want to manage assets across platforms, receive a single statement from their financial institution, and so forth. The point is that while the immediate prospects for efficiency gains rest in the traditional vertical stack, the client’s desired perspective is horizontal.

It’s time to look past existing frames of reference and imagine what could be. Steve Jobs did it with Apple, and Jeff Bezos is doing it with Amazon. Where is the technology leader with a new vision for the bank trust company?