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   Regardless of whether the DoL rule is delayed, changed, or repealed, advisors need to know how to clearly communicate their offering to clients as it relates to the fiduciary standard.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.  

Proof of artificial intelligence exponentiality

Proof of artificial intelligence exponentiality

I have been studying Artificial Intelligence (AI) for Capital Markets for ten months now and I am shocked everyday by the speed of evolution of this technology. When I started researching this last year I was looking for the Holy Grail trading tools and could not find them, hence I settled for other parts of the trade lifecycle where AI solutions already existed.

Yesterday, as I was preparing for a speech on AI at a conference, one of my colleagues in Tokyo forwarded me an Asian newswire mentioning that Nomura securities, after two years of research, would be launching an AI enabled HFT equity tool for its brokerage institutional clients in May –  here it is: the Holy Grail exists, and not only at Nomura. Other brokers have been shyly speaking about their customizable smart brokerage, e.g. how to use technology so that tier5 clients feel they are being served like a tier1. Some IBs are working on that, they just don’t publicly talk about it.

Talking to Eurekahedge last week I realized that they are tracking 15 funds that use AI in their strategy, I would argue there are even more than that because none of those were based in Japan (or Korea where apparently Fintech is exploding as we speak).

All this to reiterate that AI is an exponential technology, ten months ago there were no HFT trading solutions using AI, and we thought they were a few years away but no, here they are NOW. And the same with sentiment analysis, ten months ago they were just a marketing tool, now they are working on millions of documents every day at GSAM. Did I forget to mention smart TCA that’s coming to an EMS near you soon?

Stay tuned for more in my upcoming buy side AI tools report.

The time is now for bank brokerage

The time is now for bank brokerage
happy businessman and money on a white background. vector. flat illustration As a follow up to my last post, I want to provide a little context on the challenges facing bank brokerages. Banks and their brokerage arms represent a wild card in terms of the adoption of automated investments platforms. Still wedded to a product push mentality, they could benefit greatly by rolling out self-serve advisory options. On both the loan and deposit side of the balance sheet, banks have broad (but rarely deep) relationships with clients, whose investment needs they serve via rival trust, advisory, and brokerage channels. Historically, brokerage has lagged other bank channels in technology and service terms. Automated advisory (or robo) platforms offer an opportunity to escape this defensive posture and give bank and nonbank clients a reason to bring assets into the brokerage. A robo advisory offer also represents a forward-looking investment in infrastructure. An online advisory platform may neatly substitute for a burdensome legacy RIA, or serve as a template for creating a more customer-centric investments platform that integrates trust and brokerage functions. At a minimum, implementation of an automated investments platform should help reduce overhead, drive fee income, and serve as a sweetener for Millennials disinclined to do business with a bank. For bank brokerages, it’s time to drop outmoded segmentation strategies and a focus on high commission products in favor of a model aligned with client interests.

Robo alert: The banks are coming!

Robo alert: The banks are coming!
robot carry money bag Given their mass market and mass affluent orientation, banks would seem obvious candidates to deploy automated investment platforms. After all, fee income remains the holy grail for banks, and robo-led delivery represents a way around antiquated systems, channel conflict and other bank shortcomings. Yet banks have stayed on the sidelines to date. Several rumored bank robo tie ups (SigFig and Bank of the West; Motif Advisors and U.S. Bank) have foundered in their hype, and Trizic, the much vaunted provider of robo technology to banks, has gone silent. Indeed, the cautious mindset of US banks has allowed a Canadian institution (BMO Bank of Montreal) to introduce the first bank robo in North America. In this context, the BBVA Compass partnership with FutureAdvisor, the BlackRock owned automated investment advisor, is significant. Note that this deal is strictly a commercial agreement, not an investment (like the one made in 2014 in Personal Capital by BBVA Ventures, the venture arm of the parent company BBVA Group). In many ways, it calls to mind the short lived alliance between Fidelity and Betterment. Does the BBVA Group (whose chairman Francisco Gonzalez, has stated that he views the future of his bank as a software company) want to learn the robo ropes, in order to build one on its own? The bank certainly has the resources to do so. Or is this a synergy driven move like the BBVA Compass tie up with payments provider Dwolla? Time will tell. Clearly, the bank must find way to reconcile its digital ambitions with its trust heavy wealth management operations. While adding a low cost robo option to its full service brokerage menu gives the customer more choice, plugging in FutureAdvisor is just a first step. I’ll talk about the challenges banks face in integrating automated investment platforms in my next post.

Invesco buys Jemstep: why asset managers are driving robo consolidation

Invesco buys Jemstep: why asset managers are driving robo consolidation
First BlackRock buys FutureAdvisor, now Invesco snaps up Jemstep. Consolidation of the robo advisor space is heating up, with asset managers leading the way. Why asset managers? Simply put, they are keen on improving distribution and reversing the erosion of pricing power caused by:
  • Their distance from the end consumer of their product (i.e. the retail investor), which has given them limited pricing leverage as well as something of a tin ear for investor needs
  • Brutal price competition in the ETF space itself
Note that this deal, as with the BlackRock purchase, is first and foremost a B2B play. Invesco wants to secure distribution for its flagship PowerShares product by harnessing Jemstep’s robust  onboarding and aggregation capabilities. These capabilities have been a differentiator for Jemstep in the robo space since it first targeted RIAs and brokerages via the launch of its AdvisorPro platform in 2014. Time to Cash Out? Jemstep’s motivations are more obvious. Despite some success in the RIA space (in part due to its partnership with portfolio reporting system provider Orion Advisor Services), the firm has been burning cash and under pressure. Furthermore, all the hype around the B2B model (as opposed to the B2C model with its high costs of customer acquisition) cannot disguise the fact that the use of digital distribution by real life advisors is a model still untested. Fundamental questions remain at play: Should robo function as a feeder system (i.e. a means of serving younger and less affluent clients? How does one integrate automated distribution with a value proposition centered on access to a real life advisor? Also, what happens when the client ages and accrues enough assets to merit face to face consultation. Is he likely to forswear digital channels and “graduate” to the (more expensive) real life advisor? It will be interesting to see what Invesco paid for Jemstep. I’m guessing in the $100 million range, but it could well be less. Schwab was able to launch its own robo advisor, and Fidelity, Merrill Lynch and others plan to do the same. Invesco may have decided to buy, but momentum is on the side of “build”. That’s among the reasons why Personal Capital hasn’t found takers for its $400 million asking price.

BlackRock’s vision for the Future(Advisor)

BlackRock’s vision for the Future(Advisor)
Since my last post, there has been a lot of speculation as to why BlackRock would pay what is said to be more than $150 million for FutureAdvisor. One thing is clear: it’s not to market algorithm-created portfolios to retail investors. Rather, BlackRock seeks to build out its B2B business and secure distribution for its flagship iShares product. Providing institutional customers such as RIAs and brokerages with snazzy, built in onboarding and aggregation capabilities will help the asset manager more effectively sell its ETF wares. This goal explains why the firm is retrofitting its Aladdin Risk Management system to support the independent advisor market. Securing distribution makes sense given industry price pressures and the emergence of potentially disruptive strategies such as direct indexing. The strategy also speaks to BlackRock’s recognition of the dangers faced by pure play product manufacturers (this category includes insurers as well as asset managers) who become too far removed from the end consumer of their product. These dangers include the development of a tin ear for investor needs and the gradual erosion of pricing power.

Equity market upheaval in China

Equity market upheaval in China
The recent restrictions being placed by the Chinese government on trading in the Chinese market are creating an artificial barrier to the normal and efficient functioning of the market. The equity market is mainly a reflection of the structural economic underpinnings of the economy. If the economy and the firms in it are doing well, then the stock market would also perform well. If not, then it would be normal to expect a downswing in the market. By focusing on the equity market and not on the economy itself, the Chinese government might be ignoring some of the structural weaknesses in its economy that are creating the downward pressures in the markets. Creating an artificial bubble is normally not in anyone’s interest, although an argument might be made that it has become more de riguer after the spate of quantitive easings and similar regulatory interventions in the aftermath of the financial crisis. Another issue that has been pointed out by some observers is that the weighting and role of Chinese stocks in leading global indices also becomes unrepresentative due to such interventions, and the index managers have to then weigh the balance of having such stocks against the imbalance created by having them in the index. Furthermore there is less incentive for the market participants to pick stocks on the basis of firm and industry performance, since the intervention seems to be keeping up the prices of stocks that would otherwise have been expected to not perform as well. Hence, there are several issues that can arise from such an action and it might be in the interest of Chinese regulators and the markets as a whole to reduce the level of intervention.

The ascendance of the B2B robo

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.

Finance meets fashion: #wearables in wealth management

Finance meets fashion: #wearables in wealth management
In my upcoming report, due out in the next several days, I take a look at wearable technology and the wealth management industry. What is wearable technology? Who are the possible users of wearable technology in the wealth management industry? What is the future for wearables in wealth management? Wearable technology is quickly gaining interest and momentum among consumers and enterprises. Wearables are digital devices that can be worn on the body (i.e., glasses, watches, cameras, clips), can be controlled with minimal manual input, and offer real time access to and the collection of data. This data can ultimately be used to influence real world decisions and behavior; wearables have the potential to alter the way we go about our daily lives. Wearables span multiple categories, including, but not limited to health, finance, and lifestyle. Achieving the “quantitative self” has never been easier. In this report, Celent will explore the role of wearables in wealth management and assess if wearables have the potential to move beyond the mass affluent and serve the HNW by, for example, integrating with an advisor’s CRM system.  Celent will provide an overview of the wearables market, examine the drivers for adoption, study the potential impact of wearables on the retail investor and wealth managers, and conclude with a prospective look on wearables in the wealth management industry.  

Are Traditional Providers Finally Taking the Robos Seriously?

Are Traditional Providers Finally Taking the Robos Seriously?
A recent article in the trade press about RIAs creating (and even seeking to white label) their own “robo” platforms underscored concerns I’ve had about around the automated investments business for some time. I see three major headwinds facing the automated advisors, particularly those primarily serving investors directly (my editorial commentary in italics).
  • Costs of customer acquisition are high. At what point are the venture capital backers going to want their more half billion dollars back?
  • Revenue models are low. It’s hard to make money when you are charging less than 25 bps on assets.
  • Barriers to entry are few. Combine the ability to code and decent investments savvy and you have got the skeleton of a robo. Then it’s off the see the deep pocketed panjandrums of Silicon Valley.
I’ve said before that consolidation is around the corner, be that from a market correction or escalating pressure on fees. In the meantime, it would not surprise me at all to see one of the larger automated advisors seek to cash out and sell to a wirehouse or major custodian. Granted, a buyer might find the price tag hard to stomach, but for the first mover, strategic concerns may trump financial. To the bold go the spoils, and the traditional high cost advisor based model is becoming increasingly unsustainable. The desire to efficiently serve a less affluent market is one reason Charles Schwab built its Intelligent Portfolios platform. Why wouldn’t a broker/custodian take a cue from Schwab and buy a high profile robo that it can plug directly into its advisor network?