How a Cold Call Led to a Deal with Scottrade for ASI’s Rebalancing Software

It was an idea born of convenience.  Neal Ringquist, President and Chief Operating Officer of Advisor Software Inc., was planning a trip to St. Louis to meet with one of their clients, EverBank.  He knew that Scottrade® Advisor Services was also headquartered there.  The thought seemed natural to him to give them a call and see if he could arrange a meeting and pitch his company’s portfolio rebalancing solution?Scottrade Logo The Chinese philosopher Lao Tzu said, “A journey of a thousand miles begins with the first step.”  Ringquist’s call was the first step a journey that led to the recent announcement by Scottrade that they would be integrating ASI’s Portfolio Rebalancing Solution® into their new custodial platform. Brian A. Davis, who has since left the firm, but up until last month was Head of Scottrade® Advisor Services, was the recipient of the cold call.  “Your competitors use ASI for rebalancing,” Ringquist told him, referring to Schwab Advisor Services and TD Ameritrade Institutional, so why not see if it would also be a good fit for you a well?ASI Logo Ringquist’s pitch apparently resonated with Davis and his team because one of their core principles is always looking for ways to simplify the advisor’s workload.  Since so many of their advisors were already familiar with ASI’s software, they believed it would be a burden for them to be forced to learn how to use a different rebalancing tool.  Ringquist got his meeting.

White Labeling

Scottrade, whose RIA custody business serves over 1,000 advisors, will be licensing ASI’s rebalancer and white labeling it with their own brand, which is similar to what Schwab and TD Ameritrade have done, according to Ringquist. While they do not have access to detailed statistics about the number of accounts or number of trades generated by their software, Ringquist did say that they have seen substantial growth in the number of total rebalancing sessions at both custodians. ASI’s relationship with TD Ameritrade started back in 2005, two years before they acquired iRebal.  This deal means that TD Ameritrade will offer two realancing solutions to their advisors.  Ringquist feels this is because iRebal is not as efficient for advisors that manage their portfolio using models, which is the majority of Scottrade customers. (See TD Ameritrade Comes Out Swinging with iRebal Update)

GadgetThrowAwayOut With The Old

Not only has Scottrade replaced the head of their RIA unit, but this deal also replaces their former technology partner for portfolio modeling and rebalancing, MyVest.  Scottrade and MyVest announced their tie-up a little over a year ago, but it seems that one of the last decisions Davis made was to bring in ASI.  Neither of the vendors would comment on the reasons behind the switch.  Scottrade would only say that it has “ended its relationship with MyVest to provide modeling and rebalancing”. Based on my discussions with MyVest and review of their rebalancing software, I can’t see any reason related to technology that would cause Scottrade to make this change.  MyVest’s product is solid and they are especially strong in UMA\UMH functionality.  My guess is that ASI simply offered them a better deal.  (See Is MyVest the Right Portfolio Rebalancing Software for You?) Since Scottrade launched their new custodial platform back in February, they have been looking to cut costs and increase their revenue per client.  According to an article in RIABiz.com, they recently announced that they were hitting advisors that have less than $7 million in assets on their platform with an annual fee that could reach as high as $12,000.  That should be a strong incentive for the smaller RIA firms to jump ship.

Rebalancing Features

ASI offers a proposal-generation mode as part of their rebalancing solution that is similar to their Client Acquisition Solution, with just a bit less functionality.  Although both products do share the same portfolio analytics including Current vs Proposed, backward-looking analytics like Morningstar rating and forward looking analytics like Monte Carlo Simulations The standard rebalancing software provided by ASI supports multiple custodians, but Scottrade clients will only be able to rebalance assets on their platform with the integrated version.  Of course, RIA’s can always contract with ASI directly to take advantage of this capability. The ASI software provides a lot of flexibility in the modes that an advisor can use in a rebalancing session, Ringquist explained.  It has a lot of flexibility for management of cash-in/out logic, tolerance bands, and restricted securities, he said.

Will ASI Ever Become a TAMP?

While ASI does own an RIA and provides outsourced asset management products for other RIA’s, they have no plans to become a full-fledged TAMP, Rignquist stressed.  Analytics are their core competency, he added, they do not want to be seen as a competitor to their clients or partners and want to work on as many platforms as possible.

Robo-Advisor-In-a-Box

Ringquist noted that his vision for ASI is “marrying technology and asset management to provide solutions”.  One way they are doing this is by providing technology to help advisors to build a digital persona.  This web presence will deliver lead generation workflow, proposal and document delivery, and account opening, to name a few.  There will also be an option for an entirely online service model for smaller accounts or for more tech-savvy clients (like Millenials).  It could also be packaged with ASI-provided model portfolios that fit into a goal-based model mapping functionality that advisors can brand as their own, he observed.

Deepening the Relationship

Scottrade already offered ASI’s financial planning app, goalgamiPro™, which constructs a Household Balance Sheet to validate whether a client can reach their goals.  (See Financial Planning in 10 Minutes or Less with goalgamiPro) With the addition of portfolio rebalancing, the relationship between the to firms is strengthened and the ASI brand is more visible to advisors.  Scottrade benefits be reducing the number of vendors they have to support and possibly reducing their licensing costs.  ASI also gets their foot in the door at another of the top five RIA custodians.   That’s a win-win deal in anyone’s book.

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IAS Responds: Which Portfolio Rebalancing Software is Right for You?

As part of my series of articles on portfolio rebalancing software, I met with some folks from Interactive Advisory Software (IAS), who were kind enough to give me a demo of not only their rebalancing tools, but their entire wealth management platform, called Solution 360.

IAS is based in Egg Harbor Township, NJ and was founded in 2000.  They have 55 employees to support around 200 firms using their platform, of which 90% are RIA’s.  They are a fully-owned subsidiary of Hanlon Investment Management, which purchased IAS from their VC backers in 2012.

I had the pleasure of speaking with Nathan Burke, CEO of IAS and Matt Wolf, Regional Sales Director who provided a high level overview of their product.  They handed me off to Wade Waller, Director of Product Management and Ryan Jotkoff, the Product Manager for Rebalancing to answer my more in-depth questions.

Tax Management Sets IAS Apart from the Competition

Tax management is probably the area that most sets them apart from their competitors, according to Wolf.  Since their platform includes financial planning and their rebalancer is tightly integrated with the rest of their system, it has immediate access to a lot of additional client information.  This helps the rebalancer make better decisions as well as generate detailed tax estimates with multi-year projections and taking into account gross income, itemized deductions and client expenses, he explained.Tax Squeeze Finger

While I usually advise clients against ‘re-inventing the wheel’, in this case, the time and effort it took IAS to develop their own financial planning functionality has paid off.  Whereas other firms force clients to import data manually or use programming interfaces that are sometimes unreliable, IAS has immediate access to all the data.

And they use this data to their full advantage across the system in ways I haven’t seen many other vendors offer.  The system has an automatic exercise feature that converts employee stock options into an underlying equity position going forwards, captures dividends and can even project the client’s future tax rate, Wolf added.

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5 Hot Tips For Selling to RIAs

This is a summary of a panel from the Money Management Institute’s 2014 Annual Convention.   The session was targeted at anyone who has investment advisory firms as customers such as service providers, broker-dealers or asset managers.

Moderator: Kian Rafia, VP, Product Development, Cetera Financial Group
Panel: Mark Pennington, Partner, RIA Services, Lord Abbett
Michael Partnow, Director and Financial Solutions Consultant, Pershing, LLC, a BNY Mellon Company
Michael Bryan, Senior VP, Advisory Services, Triad Advisors

The panel was composed of experts representing broker-dealer, product manufacturer, and investment supplier firms who provided these useful tips for selling into the Registered Investment Advisory (RIA) market.  As a consultant who regularly helps clients develop strategies for this space, I was impressed with the depth of knowledge and usefulness of the advice offered in this session.

1. Focus on Their Areas of ConcernDart Board 3

There are currently two drivers of change in the RIA market; organic growth and margin compression, Partnow began.  Growing their business organically is the primary driver for elite RIA firms.  You should be thinking about how to partner with them to help them achieve their goals.  Margin compression is due to the combination of a continued low interest rate environment, as well as margin and mutual fund fee waivers, he stated.

Pennington agreed that there is a squeeze on margins and quoted research from Envestnet that said 77% of advisors are moving to the RIA channel to increase their compensation.  Distribution companies, asset managers, sponsors, providers, platforms and broker-dealers need to react to that.  Clients want independent thought, especially the true entrepreneurs who want to be on their own, he said.

2. Let Your Clients Define ThemselvesFun House Mirror2

If you want to penetrate the RIA market, the first thing you need to do is to define it, Bryan proposed.  He recommended thinking “fee first” when looking at the RIA marketplace to highlight the point that if you want to service fee-based advisors, you need to know where they are coming from, he explained.

Bryan explained that the following advisory business models can be referred to as ‘hybrid’:

  • Indy RIA – An Investment Advisor Representative (IAR) operating under an independent RIA using a discount broker-dealer for their custodial relationship. there are a lot of these out there, but they are hard to capture.
  • Dual registrant – Has both fee and commission licenses, segmentation can get funky, inside this space there are advisors operating under a broker-dealer or insurance company’s RIA (corporate RIA), as well as IAR’s operating under an independent RIA (independent from the broker-dealer). These RIA’s may or may not custody assets with the broker-dealer.  This segment represents the largest revenue opportunity for broker-dealers today.

Hybrid is more of a marketing term than a compliance term, Partnow insisted.  It really should be defined as whatever your client wants it to be. Advisors are attracted to the hybrid model since it offers more flexibility to offer products to meet the needs of different end investors, he stated.

Some advisory firms do not want to be referred to as broker-dealers.  They prefer to be called an “RIA with a broker-dealer” or even simply a “wealth management organization,” Partnow reported.

3. Partner With CustodiansTeamwork and team spirit

There has been a shift in the independent contracting segment, according to Partnow, with ACAT’s leaving independent broker-dealers and going to the primary third party custodians.  This is forcing the broker-dealers to choose between fighting the custodians or partnering with them, he said.

Elite advisory firms are transforming their organizations into wealth management firms to better support independent RIA’s through and keep the assets from going to the custodians, Partnow reported.   Firms that can not change are forming affiliations with custodians to attract top-producing IARs who are looking for services such as practice management and individual business consulting, he noted.

Advisors are looking for economies of scale but don’t want to disrupt their business, so they look for a partner with similar infrastructure, Bryan pointed out.

Partnow explained that there are two opportunities for broker-dealers to position themselves to gain additional business from IARs:

  • Through their clearing entity
  • Through third party affiliations (i.e. Schwab, TD, Fidelity)

4. Convert Regulatory Issues into Sales OpportunitiesOpportunity Door

Since 2008, the industry has been experiencing what Bryan termed a “tsunami of regulations.”  Although, the fall of the Merrill Rule was not necessarily a bad thing for those in the advisory space, Bryan stated.  This is because it highlighted the differences between commission-only and fee-based advisors.  More recently, Dodd-Frank and the Department of Labor’s (DoL) recent rulings that impact commissions can be seen as a drive to improve transparency, he stated.

Everyone should be brainstorming ways your firms can help advisors to navigate these waters, Bryan insisted.  A big shift occurred when the SEC required firms with <$100mm in AUM to register with state regulators.  At some point, many of these advisory firms will become fed up with trying to comply with the myriad state regulations, and you should be there to help them, he advised.

However, fee-based advisors have been managing this for a long time, Bryan continued.  Use these new regulations as an opportunity to help support advisors.  The compliance environment has become more complex as new rules have come from ERISA, DOL, and even FINRA.  Ask yourself how you can help advisors to continue serving retirement plan assets and stay compliant?  You will receive an enthusiastic welcome if you bring solutions to your clients that make it easier to navigate the regulations, he noted.

The top focus of the SEC this year is dual-registered advisors, Pennington warned.  Specifically, the regulator will be looking to ensure that advisors are putting clients into the proper product for them, whether it is fee-based or commission-based.

Rep as PM (RPM) programs are undergoing additional regulatory scrutiny, Partnow insisted.  Many firms have gotten themselves upside down in the independent contracting space and are seeing almost 2/3 of their new advisory business being directed towards RPM.  When you create new products (i.e. alternative funds or new mutual fund share classes) think about how your broker-dealer clients will be able to leverage them.  Reducing their platform fees is important to them, so try to provide mutual funds without transaction fees, he recommended. 

Dually-registered firms increased their AUM by over 21 percent from 2011 to 2012 and now manage nearly $1.1 trillion in assets, according to Cerulli Associates.

5. Keep an Eye on Industry Trendsmarket trends2

Is there a trend of advisors shifting away from independence and back towards working for broker-dealers?

According to Bryan, his firm has supported the independent RIA model for a long time, but in just the past 18 months, the number of IARs under Triad’s corporate RIA has increased 100%.  There are now 20% under the corporate structure and 80% under the independent structure.  This is a substantial shift.  Some broker-dealers are moving away from the independent model entirely and forcing out any advisors that want that model, he added.

Of the roughly 15,000 RIA firms in the US, Pennington explained, 11,000 of them (73%) have less than $100 mm in AUM.  In 2011, there were 160 firms with over $1 billion in AUM.  Now there are over 600, mainly due to the intense M&A activity that has taken place over the past few years.  It is almost impossible to have a six-fold increase in these firms based solely on organic growth, he stressed.

Advisory firms with over $1 billion in assets control 54% of the market, up from 42% in 2008, according to Cerulli..

The advisory business has become very concentrated.  90% of assets in the RIA space are controlled by just 10% of firms.

BONUS. Don’t Create a Separate Salesforce for RIAs

Cerulli is forecasting growth in RIA channel headcount of 140% between now and 2017, Pennington noted, with dual-registered expected to grow 160%.  It has gone from a trickle to a flood of new hiring, he observed.

Lord Abbett has a good reputation in the RIA space for marketing and client segmentation and yet they do not have a separate sales force just for RIA’s, according to Pennington.  Their independent broker-dealer sales people cover the RIA channel.  He recommends identifying salespeople who can be chameleons.  Give them the right training and they can sell anything, he insisted.

Pennington used to run the SMA business at Lord Abbett and resisted pressure to create a separate SMA sales force.  It is an advantage to be a privately-held partnership since it allows them to be more flexible with roles.  The quality of your investment products will ultimately drive your long-term success and it must be surrounded with a service model that caters to the needs of your clients, he explained.

Channel AUM 2012 ($Bil) Increase from 2011 to 2012
Wirehouses 5.4 12.5%
RIA’s 2.3 14% (very strong EQ year)
IBD’s 2.2 11%
Regional BD’s 1.9 2%
Bank BD 629mm 4.6%
Insurance BD 434mm 2.4%
Total 12.8B 10%

 

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8 Great Distribution Lessons for Asset Managers


The top tier asset management firms have demonstrated success in their efforts at sales and product distribution.  They also oversee a loyal advisor base and have solid partnerships with key accounts.  Understanding their best practices and incorporating them into your firm can help you on the road to emulating their success

This article is a summary of a panel session from the Money Management Institute’s 2014 Annual Convention.  The topics that were covered included common traits of top distribution teams, benefits of different distribution models, training and certification recommendations and how to maintain profit margins in an environment with rising distribution costs.

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7 Best Practices of Successful NextGen Advisors

This is a summary of a panel from the Money Management Institute’s 2014 Annual Convention.  The panel included representatives from a wide range of distribution channels, including a wirehouse, insurance broker-dealer and an online advisor.

Moderator: David Berkowitz, President, Lincoln Financial Network
Panel:   Eli Broverman, Co-Founder & COO, Betterment, LLC
James J. Detterick, Managing Director, Corporate Client Group Director, Morgan Stanley
Andrew J. Wigzell, Senior Financial Planner, Barnum Financial Group, MetLife

How important is it to establish relationships with children of Baby Boomer clients?

Over the next decade, Baby Boomers will be retiring at the rate of 10,000 per day.  Since Boomers make up a large percentage of most advisors books, if they don’t reach out to their children, eventually they won’t have clients left at all, Wigzell pointed out.  As a 41 years old advisor, Wigzell will be retiring sometime in 2037.  He said that he plans to keep adding clients who are younger than he is so that he will have clients to manage when he retires.

Wigzell is used to working with clients in the 49-65 year age bracket, so he recently added a Gen Y’er to his team to focus on reaching younger generations through the use of technology. 

In sharp contrast to the other panel members, the median age of Betterment clients is a mere 35 years old, Broverman reported. The firm’s methodology of engaging with investors through digital means is the primary reason for this, he stated.

Broverman quoted a statistic that 71% of Gen Y’ers would rather visit the dentist than go to a physical bank branch.  (He didn’t mention who came up with that unusual question or how many people were surveyed, but I would imagine they have very healthy teeth)  While it’s well-known that younger people are more inclined to use technology, another statistic he cited was that 4 out of 5 people across all demographics prefer to bank online.
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TD Ameritrade Comes Out Swinging with iRebal Update

I began this series of articles on portfolio rebalancing software with a panel of four product vendors at last year’s T3 Conference. (see Which Portfolio Rebalancing Software is Right for You?)  One of those products was iRebal and since then I have been looking forward to writing a more in-depth review of it.

I recently had my chance when I was able to speak with Danielle Fava, Senior Product Manager at TD Ameritrade (TDA), who gave me a demo and discussed some of the new features that will be part of the upcoming May release of the cloud-based version of iRebal.

iRebal on Veo, as TDA refers to it, was built by following the blue-print for rebalancing set forth by the desktop version, which was acquired by TDA back in 2006, Fava explained.  iRebal on Veo has been offered for free to RIAs for use with accounts that are custodied with TD Ameritrade Institutional, since last year.

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3 Tips for Helping Clients Deal With a Crisis

After a financial crisis, how do you think about what comes next?  How will your clients react and how can you help them?  What are they feeling and why are they feeling that way?  The Hartford Funds has partnered with the MIT Age Lab to study how the changing demographics of aging will impact consumer decision making, preferences, communication.

This article is a summary of a session from the Money Management Institute’s Fall Solutions Conference that was held in October 2013 in New York City.  The presenter was John Diehl, Senior VP, Hartford Funds who spoke about his work at what Hartford calls the Masters of Advice Institute and specifically about a presentation he developed called Fear, Finance and the High Anxiety Client.

Diehl started by explaining that during a financial crisis, most clients will experience some combination of stress, fear, and\or anxiety.  Studies have shown that people under stress experience tunnel vision, auditory exclusion, and a reduced capacity to learn.  All of which make it harder for an advisor to communicate with them. Continue reading