Should Asset Managers Pay for Shelf Space?

Last week a wealth management firm announced it would stop selling Vanguard mutual funds, though clients of the firm can still add money to existing Vanguard investments through 1Q18 and purchase Vanguard ETFs. Like many in the investment industry, my first thought was that this firm did this because Vanguard does not pay for the distribution of its funds (aka “shelf space”). 

This week that same firm told InvetmentNews that they decided to stop selling Vanguard mutual funds because they are trying to treat all asset managers the same.  In this case, the argument is that all other asset managers are paying for shelf space, so to eliminate a conflict of interest it makes sense for them to stop selling the funds that do not pay for shelf space.  Personally, I think there would be less of a conflict of interest if asset managers did away with the tradition of paying for shelf space.  

For those wealth management firms looking to pair down the products that they offer clients, there are solutions available to help them prune out the bad funds – those that may be stale or that charge unnecessarily high loads. I discuss these solutions in my latest report Regulation as an Impetus or Change: Technology Solutions for Fiduciary Responsibility.

Exploring “Real World Fintech” at the Temenos Community Forum (“TCF”) 2017

I had the honor of attending this year’s Temenos Community Forum (“TCF”) where the theme was “Real World Fintech”.  Throughout the event, we “explored real-world examples of the latest advancements in Fintech, including blockchain, artificial intelligence, virtual reality and advanced data and analytics”.  The conference was meticulously organised and executed across three days for over 1,200 attendees.

My experience most notably consisted of attending the main conference sections in the mornings and the wealth management breakout streams (most applicable to my research were “Leveraging Technology to Navigate through Regulatory Change” and “The Future of Digital Advice in Wealth Management”) in the afternoons. I had the pleasure to meet some of Temenos’ senior management (ranging from the Heads of North America and APAC, and cloud infrastructure) through the “Senior Management Speed Dating” rotation and had the unique opportunity to attend a press/analyst lunch with Temenos’ CEO, David Arnott, as well as Ben Robinson, Chief Strategy Officer, and Mark Gunning, Global Business Solutions Director where they discussed the evolution of the Temenos solution and the components of their forward-looking strategy. One of my favourite segments of the conference was the Temenos “Innovation Jam”, where 5 finalists from across the world showcase their fintech start-up with the hope to win the final at TCF. The winner of this year’s competition was “Paykey”, the world's first payment keyboard. “PayKey uses patent-pending payment technology that works with popular messenger apps. Users just tap the "$" key to unlock payment mode directly within the app to transfer funds”. The theme across each of the finalists was: financial planning (particularly for younger investors), customer segmentation, front office efficiency (for advisors and clients), and data management and privacy. 

Of particular interest to my research (Serving NextGen Investors: Innovative Technologies and Platforms ) was the wealth management stream “The Future of Digital Advice in Wealth Management” as Temenos explained how they are shaping their platform to meet the needs of digital clients:

  • A channel agnostic environment (single-source, omni-channel, multi-user role);
  • Automated support is welcomed (Temenos’ robo-advisor, self-service in real-time on multiple devices);
  • Personalization at each stage of life (goal-based planning, younger investors, accumulating wealth for customized purpose);
  • Data as a new AuM capability;
  • The GAFA model (Digital engagement, contextual relevance to the user);
  • Digital signing and document management;
  • Chatbot / Digital assistants;
  • Digital communications (collaborations, screen, video and document-sharing);
  • Integrated market data;
  • Risk analysis and compliance.

Overall, I found the action-packed event a highly valuable learning and networking experience and I very much look forward to attending next year’s TCF. 

Re-tweets, Re-posts and Likes are Subject to FINRA’s Digital Communication Rules

FINRA recently released their third regulatory notice around social media and digital communicationsThe notice “provides guidance regarding the application of FINRA rules governing communications with the public to digital communications, in light of emerging technologies and communications innovations.”

A couple of the Q&A responses listed in the latest regulation notice are particularly interesting to me.  The first two listed below explain that if an advisor shares or likes content from an independent third party, the advisor is in turn, subject to the same regulation as if the advisor had created the content themselves.

The last Q&A response I found noteworthy is in regards to native advertising. Not surprisingly, firms that engage in native advertising must make sure it is clear to the consumer that the native advertising is advertising material.  Therefore, the advertising firm must make sure that their name is prominently displayed and that the relationship between the firm and other entities is evident.

Q&As from the latest regulatory notice:

“Q3: If a firm shares or links to specific content posted by an independent third-party such as an article or video, has the firm adopted the content?

A: By sharing or linking to specific content, the firm has adopted the content and would be responsible for ensuring that, when read in context with the statements in the originating post, the content complies with the same standards as communications created by, or on behalf of, the firm.

Q9: A third party may post unsolicited favorable comments about a registered representative on the representative’s business-use social media website. The representative may then like or share the comments. Under these circumstances, are the third-party comments deemed to be a communication of the representative and, therefore, subject to FINRA’s communications rules?

A: By liking or sharing the favorable comments, the representative has adopted them and they are subject to the communications rules, including the prohibition on misleading or incomplete statements or claims, the testimonial requirements noted above, and the supervision and recordkeeping rules.[1]

Q6: Native advertising has been defined as content that bears a similarity to the news, feature articles, product reviews, entertainment and other material that surrounds it online. For example, native advertising may be a video or article posted by an advertiser on an independent third party publisher’s site that is presented alongside, and in a manner similar to, content posted by the publisher. Is native advertising inherently misleading under FINRA’s communications rules?

A: Firms may use native advertising that complies with the applicable provisions of FINRA Rule 2210, including the requirements that firms’ communications be fair, balanced and not misleading. In particular, native advertising must prominently disclose the firm’s name, reflect accurately any relationship between the firm and any other entity or individual who is also named, and reflect whether mentioned products or services are offered by the firm as required by Rule 2210(d)(3).[2]

 

 


[1] In Regulatory Notice 11-39, FINRA stated: “The fact that the firm has a policy of routinely blocking or deleting certain types of content in order to ensure the content is appropriate would not mean that the firm had adopted the content of the posts left on the site. For example, most firms using social media sites block or screen offensive material. Such a policy would not indicate that the firm has adopted the remaining third-party content.”

 

The DoL Fiduciary Rule: A State of Confusion

A month ago, on April 4, 2017, less than a week prior to the scheduled implementation date for the first phase of Department of Labor (DoL) Fiduciary Rule to go into effect, the DoL filed to delay the regulation by 60 days.  Therefore, as of now, the DoL Fiduciary Rule is scheduled to go into effect June 9, 2017. The DoL has also said that all requirements except for the Impartial Conduct Standards will be deferred until January 1, 2018.

Simultaneously, the DoL is undertaking a review of the rule to determine whether or not the regulation as it stands now could hurt Americans ability to get retirement advice. This review is expected to be completed by January 1, 2018. 

The chain of events has generated uncertainty for financial institutions who provide advice to retirement plans, plan sponsors, fiduciaries, beneficiaries, individual retirement accounts (IRAs), and IRA owners.  For the past year, these financial institutions, which include firms of all sizes, have been forced to rethink their technology that supports their compliance efforts, including but not limited to how advisors justify recommendations and document those recommendations. 

This effort has not gone to waste.  The compliance tools and training packages that have come out of this effort to quickly comply with the DoL Fiduciary Rule will have lasting impact and use cases for a much larger audience, including anyone in the field of delivering investment advice or investment products, regardless of what happens with the DoL Fiduciary Rule. 

In my latest report, Regulation as an Impetus for Change: Technology Solutions for Fiduciary Responsibility, I study products that make compliance with the DoL Fiduciary Rule simpler and more efficient.  Vendors covered in this report include: Broadridge, Fi360, InvestCloud, Morningstar and SEI .  Solutions include product shelf assessment services, refined education and training programs and dashboards, and products that help advisors prove that they are working in the best interest of their clients.

 

Celent’s Innovation and Insight Day: Wealth and Asset Management Stream

We are only weeks away from Celent's 2017 Innovation and Insight Day where we will explore how players in the financial services market are leveraging technology in innovative ways in order to differentiate themselves in an increasingly competitive and challenging marketplace. We will be featuring a number of case studies, discussions, and deep-dives into topic areas surrounding innovation and focusing on themes, such as:

  • Customer Experience
  • Products
  • Emerging Innovation
  • Operation and Risk
  • Legacy Transformation

This is the first year we will have a Wealth and Asset Management (WAM) breakout session where we will cover a range of topics around innovative solutions and trends in WAM.  The agenda can be found here: Wealth and Asset Management (WAM) Program and will be presented by analysts from the Celent Securities & Investments and Wealth & Asset Management teams:

  • David Easthope, Senior Vice President, Securities & Investments
  • Brad Bailey, Research Director, Securities & Investments
  • Kelley Byrnes, Analyst, Wealth & Asset Management
  • John Dwyer, Senior Analyst, Securities & Investments
  • Ashley Globerman, Analyst, Wealth & Asset Management
  • Arin Ray, Analyst, Securities & Investments
  • William Trout, Senior Analyst, Wealth Management
  • James Wolstenholme, Senior Analyst, Wealth & Asset Management

I particularly look forward to sharing research around the evolving wealth management landscape as the core client base shifts from baby boomers to millennials. While much ground has been covered from the perspective of wealth managers to meet the digital needs of nextgen clients, wealth managers continue to be behind the curve in their digital offerings.

How are wealth managers and vendors responding to the paradigm shift in the development and execution of services and products to meet millennials’ distinct expectations?

This is just one example of the many topics that we will discuss at I&I day – we hope to see you there!

 

FinTechStage Luxembourg

This week I attended the conference, FinTechStage Luxembourg, which brings together FinTech start-ups, investors, financial institutions, technology partners, and regulators to discuss the evolving financial market ecosystem. Some of the key takeaways from the day-long discussion among industry experts included:

  • Luxembourg is aiming to attract UK FinTechs post-Brexit by becoming a hub to access the EU
  • Artificial intelligence
  • Digital identities
  • Banking the underbanked in developed countries
  • RegTech
  • Data protection

For the purpose of this blog post, I will focus on the RegTech component of the conference as that subject stood out to me as one of the more thought-provoking topics as the financial services industry transitions into a technology industry and the effect this has on the entire value chain across all industry players. Lázaro Campos, co-founder of FinTechStage, introduced RegTech (and RiskTech) as "recent risk-centric regulations require firms to be more coordinated and streamlined in terms of information production and delivery for trading, risk, compliance, and financial reporting".  One of the major points within this theme was that the application of new technologies will aid in making processes more efficient, and importantly, democratise opportunities by opening the market to previously unprofitable and underbanked client segments. 

While "incumbents and technology vendors have invested in regulatory solutions for years, the theme of RegTech is an interesting investment theme that has emerged over the past year and has since become mainstream" (Matteo Rizzi, co-founder of FinTechStage). It was made clear that regulators are as encumbered with the increase in regulations as are financial market players. 

Nadia Manzari, Head of Innovation, Payments, Markets Infrastructure and Governance for the Commission de Surveillance du Secteur Financier, commented that regulators need to be innovative in order to foster a healthy FinTech ecosystem. The subject of FinTech sandboxes was at the heart of much of the discussion – does each regulator need to offer such an environment? Regulators from the UK, Singapore, Hong Kong, Malaysia, Indonesia, Australia, and Thailand have been coming forth with plans to establish FinTech sandboxes, which enable financial institutions and start-ups to experiment with financial technology solutions that may not yet comply with new regulations. The benefits of sandboxes (versus piloting, for example) emerged as a debatable topic, but it is evident that regulators' evolving perspective on FinTech is indicative of a larger theme that is occurring in the regulatory space: the centralised banking system with which we are familiar will change in the near future.

Technology, Training & Compliance in Light of the Fiduciary Standard

Technology, Training & Compliance in Light of the Fiduciary Standard
Capturing retirement assets is paramount for brokerages. When thinking about the word saving, it is hard not to think about retirement.  Brokerages are constantly looking for rollover assets, and as baby boomers retire, this search has never been more significant — which is why, when the DoL Fiduciary Rule was proposed, brokerages quickly reacted.

  April 10, 2017, when Phase 1 of the DoL Fiduciary Rule goes into effect, is quickly approaching.

  My latest report, The Quest for Retirement Assets: When the Light Shines on the Fiduciary Standard, explores ways that brokerages are reacting to the DoL rule. Brokerages continue to rethink their operating model. Brokerages are questioning their existing technology: Can it support a new business model? How should training be embedded and amended to support compliance with the DoL Rule? In my report I lay out some of the challenges facing brokerages, as well as best practices for compliance and training.   Regardless of whether the DoL rule is delayed, changed, or repealed, advisors need to know how to clearly communicate their offering to clients as it relates to the fiduciary standard. Investors are more aware than ever of the fiduciary standard. Even if the DoL relaxes its stance, there is no doubt that investors will continue to pressure advisors to act as fiduciaries. It won’t be long before clients ask for proof that portfolio transactions and ideas are made in their best interest.  

Roll over, don’t play dead

In my most recent report, Wings of a Butterfly: Regulation, Rollovers and a Wave of Optimization Software, I discuss the challenges the DoL conflict of interest rule poses to the $7 trillion IRA rollover business. These challenges center on the need for advisors to break down 401k plan costs and make apples-to-apples comparisons of proposed rollover solutions.   Why focus on the rollover? First, the rollover decision serves as a touchstone in the relationship between client and advisor. Trust sits at the center of recommendation to roll over, and seldom are the vulnerabilities of the client so exposed. The importance of the  rollover decision is further magnified by timing. It often takes place at the apex of client wealth, where the consequences of missteps for the investor can be severe. For the advisor, the rollover offers a unique opportunity to capture assets, or at least advise on their disposition, as well as present a coherent strategy for drawdown.   The implications of the decision to roll over extend beyond the client advisor relationship to firm strategy, of course. They are particularly relevant to product development and distribution. I’ll discuss these implications in a later post.

New Year New Tech New Research

In your new year resolutions, did you pledge to understand more the technology that scares you? Or at least the one that some people (aka analysts like me) claim will replace you? If the answer is “No” and you are working in the field of Investment Research, whether producing, consuming or distributing it, then you may want to read our latest report Start Coding Investment Research: How to Implement MiFID II with Robots and AI.

I get paid to write research on fintech so theoretically I am not the tech scared type though I am the first one to control screen time at home. I know we have more and more competition from free research you can all find at your fingertips on the internet, and from cheaper research that leverages outsourced resources crunching a lot of data, but so far we are keeping up probably because our clients think we provide insight that those competitors do not provide yet.

I know however that we have competitors that have technological platforms that distribute their technology in a more user-friendly way with podcasts and fancy databases, that write their research in a more automated way and that you can consume easily because you pull the information with selective search technology that knows what you want and how much you can pay for it.

So before the holiday season, to make sure we were all going to start this new year with the right information in hand, I did look into what artificial intelligence and robotic process automation tools will be doing to research; not exactly my kind of markets fintech research, but more specifically to Investment Research, those written recommendations about equity or bonds or macroeconomic environments to help the buy side make investments.

The result is very honestly scary and exciting at the same time. These new  technologies are maturing at a time of big regulatory change in Europe, MiFID2 is finally kicking in and that means the unbundling of investment research cost from the execution costs the brokers and banks charge their buy side clients. Some buy side will keep using them and be happy to pay that fee, some clearly will start looking at other solutions that will have to propose a different business model provided by banks or by new market players, based on technology.

In our recent report we do look exactly at that: new business models and live case studies that have already been implemented in investment research production, distribution and consumption. Enjoy.

Wells Fargo rides herd on DoL

It’s no coincidence that Merrill Lynch launched its new robo platform the same week it decided to exclude commission based product from IRAs. Likewise, the decision by Wells Fargo to announce a robo partnership with SigFig suggests that despite the pronouncements of pundits and industry lobbyists, DOL is hardly DOA.

It takes a brave man to guess how the Trump administration will balance populist tendencies with free market rhetoric. In this case, as I note in a previous post, the inauguration of the new president precedes DoL implementation by less than three months. The regulatory ship has left port, and in any event, it's not clear that President Trump will want to spend valuable political capital undoing DoL.

I’ll discuss Wells Fargo’s motivations in a later post. For now, I’ll note the degree to which a robo offer aligns well with the principles of transparency, low cost and accessibility at the heart of DoL. At the same time, I caution the reader to consider the challenges that any bank faces in rolling out a robo platform, a few of which I underscore in this column by Financial Planning’s Suleman Din.