The Under-Tow in the Data Lake

The word on the street is big data, data lakes leading to insight, uncovering the hidden opportunities within your massive trunks of data. All true but the majority of the buy side, asset managers, asset owners are still desperately struggling with getting their fundamental data in order.

Over 80% of AMs are $100billion AuM and below and 60% are $50 billion AuM and below, many of these AMs are progressing on solidifying their IBOR (Investment Book of Record) foundations. IBOR and the IBOR Services Matrix (see Inside the Matrix: The Future of IBOR) is still the architectural goal but not yet a necessity for all levels of the asset managers.

Many are not yet up to an IBOR level architecture and still dealing with more basic EDM (Enterprise Data Management) realities. A significant number of AMs are dealing with implementing solid data management and data governance across their portfolios and funds, don’t yet demand millisecond real-time but are operating in a near-time environment, that is operationally sound and cost sustainable.

Now the good news is that as AMs and increasingly institutional asset owners can take advantage of superior vendor solutions and bypass non-differentiating EDM issues. There is certainly little reason, in this day and age, for AMs to attempt to build their own EDM structures. Vendor products can provide core ETL (Extract Transform Load) processes and perform the core standardization, editing and cleansing of the data. Eventually this will all become utilities but for now it is still needs to be dealt with firm by firm.

Data lakes are phenomenal but before the majority of the buy side AMs and asset owners are primarily utilizing their data lakes they are feverishly executing the initial layers of data management and governance to stay market competitive.

Asset managers turn up the volume

There are two ways to make net profits – maintain a high margin and/or sell more volume at lower operating costs.

Asset managers find themselves in a low margin environment so the tactical and perhaps strategic path forward is to find volume at lower operating costs. The recent buy of Honest Dollar out of Austin, Texas by the Investment Management Division of Goldman Sachs is the continued direction of purchasing volume by buy side asset managers.

Overall asset managers are buying up robo advisors, not because they are overly threatened, but to expand the AMs existing client base. With automation AMs can add new clients at a relatively low operating cost and find an expanded demand side for their collective funds and ETFs. Look behind the scenes on any of the nascent robos and you’ll see all AMs product supply.

So the purchase of Honest Dollar is an early indicator that increased volume is in play. As Goldman stated, over 45 million Americans do not have access to employer-sponsored retirement plans. With targeting small businesses with less than 100 employees, utilizing automation and AM supplied ETFs and other funds a volume growing profit base is viable.

A major play of the automation of investment advice is increasing the total addressable market of investment consumers. The democratization of investing is being made a reality by the ready access to technology, but it must also be said that there is no correlation between democracy and actual wealth accumulation.

The rise of private capital, disintermediation, and the advice premium

private capital Five observations and a final takeaway from my latest report, Private Capital on the Rise: The UHNW, Private Securities, and the Hunt for Non-Correlated Assets.
  1. The digital revolution, the requirements of a behaviorally distinct Millennial generation of investors, and the bloating of the IPO market post crisis have driven enthusiasm for non-bank or alternative sources of capital, with private equity (and venture capital) funds at the fore.
  2. Recently, direct investment (i.e. the deployment of private capital into closely held companies) has emerged as an intriguing alternative to private equity, particularly among family offices.
  3. As per the figure above, direct investment represents the “fat middle” of the traditional funding hierarchy. It assumes the disintermediation of the private equity fund manager, and is more discreet and flexible than equity crowdfunding, which has a distinctly retail orientation.
  4. On the down side, accounting system limitations make it difficult to value and account for private holdings in any scalable way. The inability to capture pricing and position information on a regular basis presents risks and opportunity costs for the direct investor.
  5. The good news is that technology vendors are developing systems to track and reflect percentages, cash outlays, and other categories relevant to private capital investment, as opposed to systems that view the world solely through the lens of unitary shares.
To point 5 above, a takeaway: While next-generation technology will be instrumental to success in the short term, portfolio management systems with the firepower to support the market for private securities will eventually be the rule. A more level technology playing field means that competitive advantage will come less from tools or even capital and more from insight and intellectual reach. The advisor able to provide these will be able to command a premium.

The future is here

The pressures are well known in banking and the capital markets. Each month there are front page articles of scaling back, overhauling, reorganizing, or closing major bank lines. A continued reworking, a forging of a new business is occurring. Old models are shrinking and being replaced by new business models or being cast aside. Since the 2008 crisis, wave after wave of pressure has made this perfectly clear. Capital constraints, on-going regulatory pressures, and an ultra-low interest rate environment have all struck hard at the existing banking & broker/dealer system. Nearly all players-big and small- are rethinking the very core of their businesses. And this is a multi-threaded problem across all businesses: equities, FX, fixed income, and derivatives. Banks and broker/dealers are trying to balance their existing franchises against the pressures they are facing to create a lean profitable business that supports their clients. There are no easy answers, given the strong interdependence between the wealth, asset management, and capital markets businesses across all products. Many of the solutions are moving from efficiency, or cost-cutting to effectiveness. Costs are being cut-there are improvements in risk, compliance, processing. The cost side is getting better but the challenge remains on the revenue side. This drive for effectiveness is driving business models that support internal and external clients from a compliance, transparency, regulatory, fairness and cost perspective are driving more automation and electronic trading solutions. Celent will be discussing the evolving landscape of innovation in automation and technology at two upcoming roundtables. On September 15th in London we will be looking at changes in the US and European fixed income markets and how new technologies are driving change. Then on September 22nd in Zurich, we will be looking at wealth management and the capital markets and the many changes that are occurring in Swiss banking.

2015 trends in the CRM market

Celent conducted a study beginning in February 2015 on the European and North American CRM markets for wealth management. These reports examines the leading vendors in the CRM for wealth management market and provides detailed profiles of each vendor, followed by comparisons and rankings using the Celent ABCD Vendor View, which shows at a glance the relative position of vendors in the following categories: Advanced Technology, Breadth of Functionality, Customer Base, and Depth of Client Services on two separate X/Y scales. This report names the winners of the XCelent Awards for CRM systems. Ranking the CRM Technology Vendors for Wealth Management: An Overview of the European Market Ranking the CRM Technology Vendors for Wealth Management: An Overview of the North American Market As part of our ongoing coverage of wealth management, Celent has identified the following trends impacting the wealth management CRM market:
  • Streamlined and improved system usability
  • Improved customer service
  • Spending on CRM systems continues to grow
  • Growing demand for customization
  • Increased focus on self-service
  • Robust mobile and tablet features
  • Social media integration
  • Increased partnerships

Banks must look before they leap on the robo bandwagon

As noted on this blog and that of the WSJ, banks are ready to jump into the robo-advisory business. Like others in the wealth management firmament, they’ve gone in less than a year from “what is this robo stuff?” to “how do I get into the game?” While there is a “me too” element at play, the deployment of automated investment advisory platforms makes sense for most banks. After all, fee income remains the holy grail, and robo-led delivery represents a way around the traditional bank pitfall of channel conflict. I give credit to those banks moving forward, and I don’t want to play the doomsaying role of a Cassandra. But banks need to triple check their assumptions about robo, or risk serious buyer’s remorse. Banks can kick off the internal gut check by asking themselves: Will robo help us reach the underserved customers who are the natural users of this platform? The question is tough but fair. Over the last five years, banks have done an outstanding job of alienating their Millennial customers, who view them in the same pewter light they view airlines and telcos. The older, mass affluent customer is no more likely than the Millennial to swoon before the robo song: he’s less tech savvy and in any event, his natural investments home is in online brokerage. eTrade won’t give him up without a fight. To succeed in this uphill battle, banks need to understand robo for its value in the multi-channel bank context. Bank of America will never be Wealthfront, nor should it try to be. The point is that banks must treat automated investment advisory not as a short-term profit center, but as a long term opportunity built on harnessing data and people resources. I’ll discuss this idea in a later post.

Banks set to jump into robo

In a post early last week, I talked about some of the robos who are providing automated investments services to advisors. Those robos are making inroads in the RIA world with their B2B vision, even if the blending of robo and real life remains largely untested in practice. While sales to independent advisors typically equal small change, matters are about to scale up. The launch of Schwab’s Institutional Intelligent Portfolios means the B2B model is becoming, well, institutionalized. While the platform may face some headwinds (centering mostly on resistance from Schwab advisors), it is massive and here to stay. Schwab has imprinted B2B automation on the advisory map. The banks, meanwhile, have been silent. They won’t be for long, as nearly every decent sized bank worth its wealth management salt is exploring its robo options. A passel of partnerships—and maybe even a buyout or two—is in the air, and next generation robos such as Trizic and Jemstep are egging banks into the fray. Whether these banks truly know what they are getting into is something I’ll discuss in my next post.

Battle of the giants: Wealthfront Vs. Betterment

Wealthfront CEO Adam Nash is at it again. Fresh from poking Schwab in the eye, he’s calling out archrival Betterment for what he calls client-unfriendly practices. Needless to say, Betterment has responded in force. Nash asserts that Betterment is ripping off client minnows (in the form of a $3/month fee) in order to subsidize the whales, i.e. those $100,000+ investors who pay Betterment 15 bps in fees. As he puts it, banks operate in much the same way, by nickel and diming those who can least afford it. Ouch. At the same time, Nash has underscored the difference between his firm and his NYC based rival by lowering the Wealthfront fee paywall from $5,000 to $500 in assets. This head-on approach is classic Nash. Yet as is often the case with Wealthfront, there’s more here than meets the eye. Join me on this blog tomorrow when I explain what this contretemps is really about.

The ascendance of the B2B robo

Automated investment advisory is increasingly a B2B business. The trend towards a B2B model reflects the high cost of customer acquisition inherent in the direct to consumer approach, as well as the increasing seriousness with which RIAs, brokers, and other incumbents take the automated investment phenomenon. I talk about the blending of robo and real life in a past post. Basically, the B2B model has taken three forms:
  1. A build out from an existing non-discretionary platform. See Schwab’s Intelligent Portfolios and TradeKing Advisors as examples.
  2. Automation for the advisor, e.g. Upside Advisor (now part of turnkey asset management provider or TAMP Envestnet), Jemstep Advisor Pro and the institutional arms of Motif and Betterment.
  3. Partnerships, such as the alliance between Betterment and Fidelity, or the Jemstep Advisor Pro and TD Ameritrade integration.
Acquisitions have not been much of the story to date; indeed it’s worth noting that a TAMP, not an financial institution, was the first (and so far only) firm to take the robo plunge. Valuations are just too high. Nor are many institutions bold or foolish enough to build their own automated investment advisory platforms.  As such, most of the B2B action has taken place around item 2 above, i.e. at the robo or vendor level. That’s about to change in a hurry. I’ll explain why in a post I’ll publish next week.