Welcome to the November 2019 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!
This month's edition kicks off with the news that Schwab will allow fractional share trading in its retail accounts, in what is widely viewed as another jab at Robinhood in the competition for young new investors (who literally might not have enough saved to buy even a single share of Amazon at nearly $1,800/share)… but what may ultimately be laying the groundwork for Schwab to launch its own Direct Indexing 2.0 solution and compete more directly with mutual fund and ETF providers (and the robo-advisor Wealthfront that pioneered the approach for the mass market but never managed to scale it as Schwab may with its national brand reach).
From there, the latest highlights also include a number of other interesting advisor technology announcements, including:
- Riskalyze expands further beyond risk tolerance assessment towards becoming an Envestnet competitor by launching Connected Trading to implement third-party models in its Model Marketplace
- Broadridge acquires Fi360 in a strong statement that it anticipates the future of financial advice, even in broker-dealers, will be fiduciary
- Galileo raises a massive $77M Series A to expand its white-labeled savings, checking, and debit/credit card services (including for advisors)
- Cetera launches a new fee-for-service 401(k) offering powered by AdvicePay to allow 401(k) advisors to get paid directly when providing individual financial planning advice to plan participants
Read the analysis about these announcements in this month's column and a discussion of more trends in advisor technology, including the launch of yet another ‘digital’ RIA custodian (Velox Clearing), more tools from Fidelity and Pershing to choose or customize model portfolios, Timeline's integration with Black Diamond and ByAllAccounts to facilitate real-time updated sustainable withdrawal rate projections for retirees, and Whealthcare's announcement of a fundraising initiative to expand its tools for serving aging clients just as regulators increasingly focus on how advisors can better help prevent elder financial abuse.
And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map” as well.
I hope you're continuing to find this new column on financial advisor technology to be helpful. Please share your comments at the end and let me know what you think!
*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!
Schwab Rolls Out Fractional Trading To Compete With Robinhood But The Real End Game May Be Direct Indexing Disruption? The big industry news last month was the announcement by Interactive Brokers, then Schwab, then TD Ameritrade, E-Trade, and finally Fidelity, that they would be cutting trading commissions all the way to $0 on stock and ETF transactions, culminating what has long been rumored as a “Race To Zero” in the world of brokerage platforms, especially as pressure has grown from zero-trading-cost startups like Robinhood, which has rapidly grown to 4 million investors in recent years. This month, Schwab followed up the zero-trading-commission announcement with another that Schwab would now allow trading in fractional shares, taking another stab back at the popular Robinhood feature that makes it feasible for younger investors to buy individual stock trades without needing to worry about whether they had enough dollars (or the right dollar amount) to buy high-nominal-priced stocks like Amazon (currently trading near $1,800/share). But the real significance of Schwab’s rollout of fractional share trading may not just be an attempt to challenge Robinhood for young small-dollar-amount investors, but to eventually roll out a new Direct Indexing 2.0 solution that attempts to disrupt the entire mutual fund and ETF complex (where fractional shares are a key element of implementing the strategy and ensuring investors’ holdings are optimally aligned to the underlying index they’re tracking). Which would not only give Schwab an opportunity to compete even more directly for mutual fund and ETF assets by turning those invested assets into direct indexing managed accounts on Schwab’s own platform, but also help the company replace its lost revenue stream, by not only charging for the direct indexing services, but also for the potential additional securities-based lending revenue and payments for order flow that are substantially better if Schwab investors regularly trade in hundreds or thousands of individual shares (in small odd-lot transactions) than “just” a single consolidated ETF or mutual fund. Though with tepid adoption of direct indexing thus far in the advisor community – at least when offered from third-party managed account providers – Schwab may opt to bolt on a Direct Indexing option to its Schwab Intelligent Portfolios retail “robo-advisor” solution first, and either roll it out to advisors later, or simply let them implement it themselves through advisor software solutions like Orion’s ASTRO. Which, ironically, would mean that Schwab’s next major play for industry disruption of mutual funds and ETFs with direct indexing will be taking a page directly from the playbook of robo-advisor Wealthfront, which originally pioneered mass market direct indexing in a now-failed attempt to disrupt Schwab itself… a striking reminder that in the financial services industry ‘disruption’ isn’t just a matter of coming up with a unique idea, but also having the platform and brand reach to actually distribute it effectively in the marketplace.
More Direct-To-Consumer Robo-Advisors Turn Hybrid Or Shut Down As Even ‘Free’ Offerings Fail To Gather Assets. Robo-advisors first set out nearly a decade ago to disrupt the human financial advisor and the traditional industry brokerage model by offering an easy all-in-one managed account solution for a single low fee. Yet while the early robo-advisors like Betterment and Wealthfront gained at least some traction, most follow-ons since have struggled, at least and especially with a “pure” robo solution that is difficult to differentiate from other competing robo-advisors (and the national brands of industry incumbents like Schwab and Vanguard). Which in turn led subsequent robo-advisors to try to compete on price, epitomized by WiseBanyan, that in 2013 launched a free robo-advisor service with a subsequent upsell to a paid tax-loss-harvesting offering). Yet earlier this year, WiseBanyan was acquired by Axos Financial (which provides lending for single- and multi-family residential properties and small businesses), with what was reportedly only $153M of AUM after offering its services for free for nearly 6 years, in a transaction that Axos itself is characterizing as more of an “acqui-hire” for the talent (as it rebrands the prior WiseBanyan service to Axos Invest, but still projects an operating loss of $3M+ in the coming year). For robo-advisors that didn’t want to compete on an (admittedly already-low-and-difficult-to-be-profitable) price point, the alternative was to pursue a more targeted niche (e.g., Kindur, a robo-advisor focused on generating a ‘retirement paycheck’ for retirees). Yet this month, Kindur announced that it will roll out a human financial advisor service to support its robo-offering (in addition to rolling out a monthly subscription fee for its “SmartDraw” tax-efficient retirement drawdown solution) as the company tries to both increase its price point and pivot into a more traditional human-advisor-based offering. All of which emphasizes how, despite the robo-advisor movement having been originally positioned as a ‘disruption’ of the traditional financial advisor business model, is instead increasingly pivoting into a traditional financial advisor business model that in turn is being increasingly dominated by large brands (e.g., Vanguard and Schwab) that have the brand reach and marketing distribution to attract a large volume of consumer assets. Or stated more simply, robo-advisors appear to have brought an operational efficiency solution to what is ultimately a challenge of marketing and distribution in a crowded marketplace… where technology alone doesn’t make the sale, and even a price point of “free” just attracts more skepticism than actual assets to manage.
Principal Launches SimpleInvest Hybrid Robo As RobustWealth B2B Robo Acquisition Is Turned Back To B2C. The popularity of the first wave of “robo-advisor” startups like Betterment and Wealthfront, and their eye-popping valuations just a few years later, led to a giant wave of competing direct-to-consumer robo-advisor startups seeking similar startup riches… only to find that most were unable to compete in a crowded marketplace, especially when industry incumbents like Schwab and Vanguard entered the fray, and leading to a slew of robo-advisor pivots from FutureAdvisor to SigFig, LearnVest to JemStep, into the B2B industry channel instead. The enthusiastic rise of a new B2B channel for robo-advisor in turn led to another wave of B2B-based startups, including Marstone, Trizic, eMotomy, DriveWealth, and RobustWealth, in the hopes that the B2B robo-advisor channel would be more feasible for new entrants. Yet in practice, while most financial advisors are certainly eager for better and more efficient technology, few actually want to implement a “robo” themselves (which undermines the advisor’s own perceived value proposition), and simply want their existing broker-dealer and RIA custodial platforms to get better instead (not to offer them third-party ‘robo’ solutions for their clients). Accordingly, the ongoing wave of B2B robo-advisors appears to be struggling now as well, with Trizic rebranding and shifting away from financial advisors towards banks, SigFig narrowing in on a select few wirehouse contracts, LearnVest fading into the background, and few other previously-popular players being heard from at all. And now, B2B robo-advisor RobustWealth – which was acquired last year by Principal in what at the time was anticipated to be a strategy for Principal to distribute its solutions to the RIA community through RobustWealth’s B2B robo technology – has now been pivoted from the B2B channel back to B2C, powering a new “SimpleInvest” hybrid robo-advisor offering that Principal is offering to capture IRA and 401(k) rollovers (ostensibly in no small part from its own $700B+ in AUM that includes an immense base of 401(k) plan assets that are being rolled out as Baby Boomers retire). The key distinction of the pivot of the robo movement back to B2C, though, is that it’s no longer about being a ‘cheap’ or innovative startup – as in practice, most robo-advisor services are not well differentiated from each other, and SimpleInvest will reportedly charge a more traditional-advisor-like 85bps for its hybrid human-advisor-available solution – but instead about using the technology to leverage the existing Principal brand and reach. In other words, as the robo-advisor technology itself fades into the background, becoming ubiquitously available in some form or another to all advisory firms, standalone providers offering such ‘robo’ tools are fading into the background, and instead the industry is simply reverting back to large financial services firms leveraging technology to be efficient while using their brands and marketing distribution efforts to attract and grow market share (where at best their ‘robo’ offering is just one feature) in both the B2B and B2C channels.
Velox Clearing Launches As Yet Another RIA ‘Digital’ Custodian But Will Any RIAs Actually Switch? While robo-advisors have struggled to gain material market share over incumbents with their digital client experience, their ability to open, fund, and fully invest a new investment account in minutes from a smartphone put into sharp relief the lagging technology of traditional broker-dealers and RIA custodians… spawning a wave of robo-advisor-for-advisors B2B platforms to fill the void of what the existing incumbent platforms couldn’t accomplish. In the years since, RIA custodians and broker-dealers themselves have substantially reinvested into their own technology to close to gap… yet while the technology has certainly improved, it still generally lags behind their ‘truly next-generation’ robo-advisor competitors. Which is now leading to a new wave of “digital RIA custodian” platforms that are aiming to build their own custody and clearing platforms from scratch with modern technology, in an attempt to leapfrog past incumbents that are still struggling to build new technology on top of sometimes-decades-only legacy systems. The first was Apex Clearing – which itself powered many of the first generation of robo-advisors – followed by competitors like DriveWealth, the more recent Altruist (which is built in part on DriveWealth’s technology), and now the newest player - Velox Clearing – has entered the fray. On the one hand, the opportunity of the new wave of digital custodians is to not only roll out superior technology capabilities to compete for market share, but to do so at a lower cost with systems that aren’t burdened by legacy technology debt, which is especially important in the current environment of collapsing trading commissions and significant pressure on the traditional custody/clearing model. On the other hand, such platforms ultimately require immense scale to be economically viable – thus why RIA custodians typically also have a large retail business (which allows them to more easily achieve the requisite economies of scale) – that it’s not clear the new startup digital custodians will have any realistic chance of gaining sufficient market share. Especially in an environment where changing custodians, re-papering client accounts, and retraining staff into new technology and systems, is a material switching cost for the RIA with limited financial upside for the business after the move (as it’s hard to save on hard dollar or staffing costs when RIA custodians already have a nominal price of ‘free’ for most RIAs). Of course, digital custodians can compete for new RIAs being formed, who face no switching costs if they haven’t yet acquired any clients. But it’s not clear the pace of new RIA formation is sufficient to sustain one – much less several – startup digital RIA custodians either, and there’s a reason that traditional RIA custodians have increasingly moved away from serving new RIAs (hint: there’s still a high failure rate for new RIAs launching from scratch). Which ultimately raises the question of whether the new crop of digital RIA custodians will really be a new threat in the marketplace… or simply a strong nudge to existing incumbents to (finally!) make further improvements on their own systems instead?
Riskalyze Expands Towards Full-Fledged Envestnet Competitor With New Autopilot “Connected Trading” Rebalancing Tools. When Riskalyze first entered the sleepy realm of risk tolerance assessment tools in 2011, it quickly gained market share by converting what was largely still a paper-based risk tolerance questionnaire process into a more engaging experience of selecting amongst investment trade-offs. But arguably the real breakthrough of Riskalyze wasn’t just finding a more visual way to deliver risk tolerance assessment questions, but its ability to help advisors map a relatively abstract risk tolerance score (or in Riskalyze’s case, the client’s “Risk Number”) into a specific portfolio recommendation from the advisor (and usually to also show how the client’s current portfolio was not aligned with their own Risk Number). With the rise of the robo-advisor, Riskalyze then expanded further to help advisory firms not only map a client’s Risk Number to their new portfolio, but expedite the process of opening a new account and onboarding the client into that model with its Autopilot launch in 2015, which further expanded in 2017 to help queue up prospective trades for advisors to implement to allocate clients into their recommended model. And now at its Fearless Investing Summit this month, Riskalyze announced that it is rolling out its new Connected Trading platform (in partnership with FIX Flyer) that will fully queue up and execute the necessary trades for the client’s portfolio, alleviating what is still a very manual trading process for many advisors (especially those at broker-dealers where rebalancing software still has limited adoption). Which means Riskalyze now effectively has an ‘end-to-end’ solution for asset-gathering advisors, who can assess a client’s risk tolerance, recommend a (model) portfolio, open an investment account, and fully trade and implement the client’s portfolio into one of the models queued up by Riskalyze, all from within the Riskalyze platform. Notably, the ability to facilitate trades of recommended models from Riskalyze’s Autopilot Partner Store (of third-party asset managers provided suggested models) with Connected Trading also puts Riskalyze squarely in the realm of being a full-fledged Model Marketplace, and provides the company the ability to participate in the economics of ETF providers and other asset managers trying to distribute their products and model strategies to advisors. Which means Riskalyze’s Connected Trading rollout effectively completes a shift for Riskalyze from ‘risk tolerance software’ into a direct competitor to Envestnet as a distribution channel for asset managers… and arguably leaving it very well-positioned to compete with a built-entirely-from-the-ground-up all-in-one advisor platform that already has substantial penetration in the hybrid broker-dealer community!
Pershing And Fidelity Expand Their Model Portfolio Capabilities For Advisors To Customize, Or Choose. The growth of rebalancing software over the past 15 years has made it increasingly feasible for advisory firms to systemize how client portfolios are allocated, facilitating the development of standard ‘model’ portfolios the advisor uses (rather than simply implementing whatever funds happen to be popular or of interest at the time the client comes in). From an efficiency perspective, model portfolios allow advisory firms to not only standardize their trading process across clients (reducing the need for trading staff), but also to systematize the research process in selecting what will go into those model portfolios in the first place (e.g., with a centralized Investment Committee). However, in practice, not all advisory firms are adopting model portfolios in the same manner. For some, the goal is still to add value in client portfolios with the firm’s proprietary investment process, research, and selection… and using model portfolios is simply a means to implement those portfolios consistently across the client base. For other advisors, standardizing portfolio models allows the firm to simplify and de-emphasize the investment process altogether, shifting their value proposition to a more financial-advice-centric focus instead (or alternatively, to simply focus more on finding more clients to gather more assets). The distinction is important because it leads to a different implementation approach, where firms that based their value proposition on their own investment research want to develop their own unique set of models, while those who are de-emphasizing their proprietary investment value tend to outsource to third-party models or providers instead. Or stated more simply, investment-centric firms want to Customize their own models, while planning-centric (or asset-gathering) firms prefer to simply Choose them (from an available list of third-party providers). And this divide is now playing out as custody and clearing firms expand their model capabilities, with Fidelity’s Automated Managed Platform announcing the new ability for advisors to customize their models in AMP (beyond the pre-selected list for advisors to choose from), while Pershing announced expanded capabilities for third-party asset managers to list their models in Pershing’s updated Manager Gateway (replacing the former Manager Workstation) accompanied by updated workflows for brokers to more easily implement whatever third-party models they choose. Notably, though, the divide between advisors that want to Choose models versus Customize them has not only an impact on the technology tools they require (to either Choose or Customize models as appropriate), but also the business model of the platforms that support them, as advisors focused on Choosing third-party models give platforms the opportunity to participate in the distribution economics of asset managers trying to get their models into the hands of advisors (aka, the Envestnet approach), while advisors focused on Customizing their own models are more likely to see to pay for technology to more scalably implement themselves instead (which may be less financially profitable to their RIA custodian or broker-dealer platforms!).
Broadridge Expands Its Broker-Dealer Technology Towards A Fiduciary Future With Fi360 Acquisition. Broadridge is a large FinTech company with deep roots in the broker-dealer community, having originated as a platform that handled processing of securities trades in the 1960s, expanded into becoming one of the largest full-service brokerage processors, and then expanded over the past 20 years into mutual fund processing and ancillary business lines. Since going public a decade ago, Broadridge has used its access to capital markets to become a serial acquirer of smaller FinTech companies to go deeper into select verticals, with recent acquisitions of Shadow Financial Systems (stock and cryptocurrency trade processing), RPM Technologies (mutual fund processing in Canada), and Rockall (securities-based lending and collateral management). But as broker-dealers themselves increasingly shift towards providing more holistic wealth management services, and the Department of Labor, as well as now a growing number of states, begin to propose fiduciary rules for the advice that brokers provide, Broadridge appears to be making an increasing number of strategic bets on a fiduciary wealth management future. The first was the acquisition earlier this year of Financial Database Services, which supports a broker-dealer’s compliance oversight of its brokers, and had been working on new tools to support compliance with Regulation Best Interest. And now, Broadridge has announced that it is acquiring Fi360, a leading provider of fiduciary training to advisors (particularly those working in the 401(k) channel providing 3(21) or 3(38) services) that has granted its AIF (Accredited Investment Fiduciary) designation to more than 11,000 advisors over the past 15 years. Notably, though, Fi360 was not only a provider of fiduciary education, but also a series of software tools to support the fiduciary process, from doing due diligence benchmarking of a 401(k) plans investment lineup, to crafting investment policy statements, responding to RFPs for large institutional qualified plans, and fee-benchmarking the retirement plan specialist’s own fees. In other words, Broadridge just acquired an entire suite of fiduciary tools developed for the ERISA fiduciary world that can be adapted to broker-dealer (and RIA) channels in what appears to be an increasingly fiduciary future for the advisor business. And given Broadridge’s deep reach in large broker-dealer enterprises – while Fi360 has historically thrived in the small-to-mid-sized independent RIA environment – the acquisition opens up substantial new opportunities to expand Fi360 into the large enterprise market… with not just fiduciary training, but the actual technology tools to support the future of fiduciary compliance oversight.
Galileo Financial Raises $77M Series A As Competition For Client Cash Heats Up. With the Fed’s aggressive rate cutting and subsequent quantitative easing after the financial crisis, it’s been more than 10 years since cash generated a significant (or even just “material” return). Which, notably, was a world that largely predated not only ‘modern’ services like robo-advisors, but also Venmo, mobile check deposit, and digital banking, and even the smartphone itself (as the first generation iPhone had just launched less than a year before the financial crisis got underway). Consequently, despite smartphones now being out for more than a decade, it’s only just now that consumers are being introduced, for the first time, to the ability to digitally manage their cash holdings from a smartphone in an era where it once again matters where you hold your cash (for an at least somewhat-modest yield). Which in recent years has spawned a new focus on the ultra-low yield on cash being paid by many banks and broker-dealers, and a competition for that cash given how easy it is to ‘digitally’ move the cash to another platform, including from new “non-traditional” entrants to the investing realm from Robinhood to Wealthfront, with the latter attracting nearly $10B of new assets to its platform just by offering a competitive cash yield. In turn, advisory firms have begun to demand their own higher-yielding cash solutions for clients, leading to the growth of platforms like MaxMyInterest, StoneCastle, Flourish, and Galileo Money, offering in some cases not only alternative higher-yielding cash accounts but an entire suite of white-labeled credit and debit cards and digital bank accounts. In fact, Galileo Money in particular made a big splash earlier this year when it launched a partnership with Ron Carson to bring its entire white-labeled banking and cash solution to Carson Wealth’s client base. And now, Galileo has announced a whopping $77M Series A funding round to rapidly accelerate its increasingly popular and already profitable (and largely bootstrapped) platform. Notably, Galileo indicates that the new capital is not specifically for the advisor channel, but simply for a broader wave of “new products” in the realm of cash management and digital banking (as well as a global expansion effort beyond the US). But the sheer magnitude of the funding, and early momentum that such cash solutions are gaining in the advisor channel, is a harbinger of a new wave of cash management and digital banking solutions for advisory firms likely to come in the coming years… a significant opportunity for expanded services for advisory firms, but also setting up advisory firms for a clash with their RIA custodians and broker-dealers that still largely rely on idle client cash (and the significant cash scrape they earn) to fund their own platforms.
Whealthcare Announces Capital Raise To Expand Advisor Tools For Supporting Aging Clients. With the advisory industry increasingly shifting to the assets-under-management (AUM) model, whether as an RIA or via fee-based brokerage accounts and levelized commissions, more and more financial advisors are forming “retirement specializations”, recognizing that retirees are where the money is, with nearly 80% of investable assets in the hands of the retired generations (Baby Boomers, and their Silent Generation parents who are still alive). Yet the challenge is that, in practice, AUM-based “retirement-centric” advisors are often more focused on retirement portfolios than the full breadth of services truly needed by retirees, and are only now beginning to adjust to the reality of working with clients who may have diminishing mental capacity as they age and whose biggest fear is managing not the complexity of sustainable retirement income but of retiree health care costs. To help fill this void, doctor-turned-financial-planning Carolyn McClanahan launched Whealthcare, which aims to help advisors better prepare for working with aging retirees by providing tools to create a “financial caretaking plan” (who will have financial decision-making authority for clients when they can no longer manage on their own?), a “whealthcare risk profile” (of the risk that a client may be prone to poor financial decision-making and/or financial exploitation), and a “proactive aging plan” (to formulate a plan on how to handle the full scope of health care costs in retirement, from health insurance and prescription drugs to long-term care along with where to live or how to modify the home for such care). And after gathering 100 advisory firms onto the Whealthcare platform since launching in 2017, the company has announced that it is looking for investors for a $2M capital raise to expand and scale up the solution. On the one hand, it seems almost inevitable that as more and more advisory firms focus on retirees and must add value beyond ‘just’ what’s done to manage the retirement portfolio, services like Whealthcare will be increasingly necessary both to expand a firm’s breadth of services, and simply to deal with (and better prepare for) the real-world complexities that arise when clients experienced cognitive decline. On the other hand, when an entire comprehensive financial planning software solutions often start at only $50 - $100/month, it’s not clear whether advisory firms will really be ready to pay Whealthcare’s $150 - $230/month pricing “just” for the company’s tools to support a subset of aging retiree clients in conversations that only few advisors are having in-depth with clients today. Yet as both state and Federal regulators and legislators increasingly take up the issue of senior financial abuse and exploitation, from the Senior Safe Act to new FINRA Rules 2165 and 4512, a growing compliance push on firms to have clear processes and procedures in place to spot elder financial abuse may drive enterprise financial services firms in particular to solutions like Whealthcare simply to be able to demonstrate that they have clear processes and procedures and a plan in place to deal with the inevitability of aging clients (which ostensibly would have more palatable Enterprise pricing for large firm buyers).
Timeline Enhances Sustainable Withdrawal Rate Illustration Tools With Black Diamond And ByAllAccounts Integrations. While the proverbial “4% rule” has been discussed in the advisor community for nearly 25 years since Bill Bengen’s first study in the Journal of Financial Planning using rolling historical time periods to show the impact of sequence-of-return risk, relatively few advisors actually use the 4% rule in practice. In part, this is simply because most clients have more complicated spending plans than ‘just’ the stable-spending-adjusted-annually-for-inflation that the safe withdrawal rate studies assume. And in part, it’s because despite the popularity of the research about sequence of return risk and why it must be considered, there have never been any software tools to actually illustrate how a client’s prospective retirement withdrawal strategy would have actually fared in the rolling-historical-time-periods that the safe withdrawal rate approach uses. Over the past two years, though, two solutions have emerged that actually are capable of illustrating withdrawal strategies through various historical market scenarios: Big Picture, and Timeline. Of course, the challenge in practice is that showing how a client’s current spending plan would have sustained through various historical market scenarios requires both inputting the spending plan itself into the software, and then updating the client’s account values every time there’s a desired update to the projections (e.g., in response to a market decline to show whether the retiree is still on track and to put the pullback in historical context). Accordingly, Timeline announced this month new integrations to both Black Diamond’s portfolio performance reporting tools, and also to ByAllAccounts’ account aggregation platform, that will allow advisors to automatically import updated account balances into Timeline to immediately show clients where their retirement plan stands (and without the need to manually key new current values), and whether any adjustments need to be made (e.g., using “Guyton’s Guardrails” strategy). Of course, many advisory firms will already update a client’s retirement projections in their financial planning software and show an updated Monte Carlo projection to let clients know whether they’re on track, though with planning software incapable of actually showing the impact and benefit of making dynamic adjustments to the spending plan along the way, Timeline is arguably better positioned to actually set reasonable retirement spending recommendation for clients that they can relate to and understand.
Cetera Launches Fee-For-Service 401(k) Advice Solution For Plan Participants Powered By AdvicePay. In the hypercompetitive world of 401(k) plans, it has been increasingly popular in recent years to offer “financial wellness” tools as a value-added differentiator, with pricing typically bundled into the overall 401(k) offering. Yet the challenge is that self-directed technology, even well-designed for financial wellness, can only go so far, and in many cases plan participants want and need more individualized customized financial planning advice. Which they can certainly obtain by going out and finding a financial advisor… but for 401(k) plan providers, is increasingly appealing to offer directly from the plan provider itself, that already has a direct way to reach plan participants and market such services, as exemplified by the recent Edelman Financial Engines merger. Not to mention that if the financial advisory firm offering 401(k) services can establish personal financial planning advice relationships with plan participants while still with the 401(k) plan, they become the natural recipients for the 401(k) plan rollover at retirement (or, alternatively, can simply leave the assets in the 401(k) plan and continue servicing the client anyway!). The caveat, however, is how the advisor gets paid for such financial planning advice to plan participants, as retirement plans are only permitted to pay their own plan expenses (which may include a full-plan financial wellness platform, but not individual participant advice) and individuals can only pay a retirement account’s investment management but not their own financial planning fees from their retirement accounts. Which at best leads advisory firms to charge individual participants by check, resulting in a large volume of inefficient small checks to process, and challenges in collecting payments when checks don’t clear (or advisors don’t receive a check and/or don’t remember to collect the check from the plan participant in advance). In this context, it’s notable that Cetera announced this month that it is launching a new fee-for-service financial planning offering for its advisors working with 401(k) plans, and will leverage AdvicePay for electronic payment processing of the one-time or ongoing financial planning fees of particularly Gen X and Gen Y plan participants. Which both expands the means by which plan participants can pay to include both ACH bank account transfers and via credit card, largely automates the billing and invoicing process, and eliminates any need to handle and process physical paper checks. Of course, the Cetera 401(k) advisors will still have to market and deliver their plan participant financial planning services, but with plan participants already often asking a wide range of financially-related questions of their 401(k) advisors, the biggest upside may simply that advisors will now actually be able to efficiently charge and get paid for the time they already spend on such plan participant advice conversations.
CapGainsValet Dials Up One Again With Mutual Fund Distribution Tracking Tools For Advisors. For many advisory firms, the start of November marks the onset of the end-of-year tax planning process with clients, which may include not only deciding whether to do an end-of-year Roth conversion or harvest some capital losses, but also to figure out whether any of the clients’ mutual funds may be making late-year distributions that could alter that tax planning picture (not to mention avoiding the purchase of funds with imminent distributions for any new clients or new additions to existing clients’ accounts). Which is especially concerning as the bull market finishes its 10th year of adding to already-sizable embedded capital gains in a wide number of mutual funds. The good news is that fund companies do typically give warnings a month or two in advance of their end-of-year distributions to aid the planning process. The bad news is that the only way to get that information is to contact each fund company separately to find out whether there are any big distributions coming that may need special planning. To fill the void, financial planner Mark Wilson launched a tool for the advisory community several years ago, known as “CapGainsValet,” that aggregates together all of the public mutual fund distribution information from dozens of asset managers into a central database of links for easy reference. A “Free Search” version provides direct access to 20 of the largest and most popular fund companies (from Vanguard to American Funds, Fidelity to PIMCO and DFA), while the “Pro” version (for a mere $45/year) provides access to a list of nearly 250 fund companies. Thus far, not all mutual fund companies have released their end-of-year distribution estimates yet, but Wilson has already found more than 100 mutual funds making end-of-year distributions of 10%-of-NAV or more, along nearly 2 dozen mutual funds in the “doghouse” (anticipated end-of-year distributions in excess of 20% of the fund’s NAV!), and the list of expected distributions should expand rapidly as more asset managers release their estimates in November. Notably, CapGainsValet does not actually provide a database of the mutual fund distributions themselves – just a list of links that go directly to the mutual fund distribution reports of the various fund companies (as they’re released). Still, for just $45, the annual time-savings shortcuts of using CapGainsValet Pro has become popular for many advisory firms.
In the meantime, we’ve updated the latest version of our Financial Advisor FinTech Solutions Map with several new companies, including highlights of the “Category Newcomers” in each area to highlight new FinTech innovation!
So what do you think? Would advisors use a Direct Indexing platform if Schwab made one available to RIAs? Do advisors really want another digital RIA custodian or more ‘robo’ tools, or simply an improvement in their existing platforms? Will advisors adopt more cash savings, checking, and credit/debit card solutions from platforms like Galileo? Will more advisors provide financial planning directly to plan participants once it’s easier to get paid for the advice?
(Disclosure: Michael Kitces is a co-founder of AdvicePay and member of the Advisory Board for Timeline, both of which were mentioned in this article.)
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