Business Transformation | 05.17.23
Coming Up To Speed on a Whirlwind Era for Advisor Technology
The breakneck pace of AI advancement has captured the world's attention with a kind of chatbot mania taking hold in recent months. Machines that can absorb, digest, synthesize and deftly articulate vast amounts of information — yikes, they’re here — yeah, well, it’s something to which the financial advisory space can certainly attest.
Profound technological changes, including machine learning and automation ("robo-advisors"), took hold several years ago but continue to accelerate, reshaping the landscape of the financial advisor playing field.
The impact has been disruptive in some sense — for example, the types of investment vehicles used has seen a dramatic shift; and, at the same time, leading edge technology is augmenting, as never before, the everyday activities of human advisors keen to embrace new normalcy.
Some of the most significant advancements of the past few years in the advisory realm — portfolio construction, personalized investment solutions, tax management and customized indexing — reflect technology that has risen to the fore.
"We have seen a ton of product development and technology acquisitions by asset managers in the recent past," said Matt Apkarian, an associate director at Cerulli Associates, a Boston-based consultancy.
New Ballgame Takes Shape
Cerulli has tracked the shift of asset allocation model portfolios away from primarily relying on mutual funds.
Exchange-traded funds (ETFs) are now used more than mutual funds, he explained.
Furthermore, ETFs have benefited from the proliferation of fractional share trading, which in itself is an extension of new technology abetting speed and cost-efficiency, making fractional share utilization practical, begetting a cycle of increased adoption: “Now you can easily buy 1/1000th of an ETF or an equity," Apkarian said.
That wasn’t the case only a few years ago.
Behemoths at the Cutting Edge
When something new under the sun comes along in the bank advisory channel, usually there's a big player ready to snap it up. Take robo-accountants, for instance.
It was late in 2020, during the throes of the pandemic, when JPMorgan announced it was acquiring 55ip, billed at the time as a pioneer in automated tax technology, delivering cutting-edge strategies through model portfolios.
At the time, Jed Laskowitz, head of asset management solutions, J.P. Morgan Asset Management, said, in a release, that "automating sophisticated strategies while also allowing for customization for tax and individual preferences is a differentiator and will be a key driver of success."
Earlier in 2020, Schwab, in a landmark deal, bought TD Ameritrade's custody business; around the same time, Goldman Sachs announced its deal to purchase Folio Financial, an execution, clearing and custody platform serving independent Registered Investment Advisors (RIAs).
Goldman had at the time said it was drawn to Folio's "differentiated technology offering" giving institutional grade clearing and custody services to RIAs who would have access to "rich analytics” through a “comprehensive suite of Application Programming Interfaces (APIs),” all part of a fully-integrated execution, clearing, and custody solution, the venerated Wall Street giant said at the time.
It was indeed groundbreaking.
"Folio was a big innovator but had a difficult time penetrating a mature RIA custody market dominated by a handful of players," said Andrew Barber, a wealth management researcher, and an investor in the space, who is based in Corning, N.Y.
The user-friendly technology of the Folio platform, Barber explained, complemented Goldman's digital banking foray, Marcus. The Goldman suite/platform was heralded as a "Schwab/Fidelity killer" in terms of its potential to attract the highest-end RIAs (although it’s not clear that panned out as envisioned).
A Flurry of Tech-Driven Deals
Several other examples of technology-driven financial advisory transactions come to mind.
In September of 2021, a quantitative equity pioneer, O’Shaughnessy Asset Management, agreed to be acquired by Franklin Templeton. Here was another deal centered on portfolio construction of personalized investment solutions.
O’Shaughnessy traced its roots to managing high “active share” factor portfolios via separately managed accounts (SMAs) for advisors, ultimately resulting in the Canvas platform for custom indexing.
Being able to deliver custom indexing to clients is what led Prudential in October of 2021 to buy a tax-efficiency-centric ETF manager, Green Harvest Asset Management.
And then not long after that, BNY Mellon’s Pershing announced it would acquire Optimal Asset Management, a direct indexing solutions provider boasting "patented, cutting-edge software for investors seeking personalized portfolios that are aligned to their values."
‘You Need To Be Discerning’
The proliferation of new tools, in all aspects of the advisory business, can be overwhelming. While the use of technology is important, notes Dan Sondhelm, a third-party marketing executive based in Northern Virginia, it pays to do homework and to be discerning, as some tools and techniques are more useful than others.