Bill Hortz's picture

"Five times more startups are innovating on behalf of banks than for the wealth management industry." -Benjamin Gross, CEO, VisualizeWealth

[We recently talked with Benjamin Gross, CEO and co-Founder of VisualizeWealth – a FinTech company bringing advanced technologies to financial services performance reporting. He alarmingly states, from his front line experience, that wealth managers are at a large competitive disadvantage to banks in engaging and directing FinTech technology applications.]

Hortz: Ben, in your journey as a FinTech entrepreneur you had to iterate the applications of your technology and pivot a few times with your performance analytics engine. Can you share with us the back story and experiences you had leading to your conclusion of wealth management’s competitive disadvantage with banks over FinTech companies?

Gross: I actually had the CMO of a large tech firm focused on independent RIAs give me “cautionary” advice about building technology for the wealth management industry. Like all things, I needed to learn my own lessons, but needless to say it was extremely difficult to get Financial Advisors and RIAs to tell you in depth about their pains and what they needed to make their lives easier. Banks, on the other hand, are quite the opposite. They have an entire role carved out – “FinTech Innovation” or “FinTech Strategy” or some similar title or group -- whose sole job is to make intros to the appropriate people in business units within the bank to make sure the entrepreneur understands the company’s problems and is collaboratively addressing scalable solutions. I don’t see similar formalized and dedicated positions charged to build active engagement with FinTech companies in the wealth management world.

Hortz: What are the implications or consequences of this lack of active engagement for advisors and FinTech companies in general? Do you see the formation of any trends or shifting directions for financial technology?

Gross: It’s clear that other entrepreneurs/technologists have had a similar experience as mine in getting the independent wealth management industry to open their doors. This has led to some pretty stark numbers - five times more startups are innovating on behalf of banks than for the wealth management industry. This established trend is being reported on by Crunchbase – a leading business information platform that tracks innovative companies. On top of that, Deloitte did a great study that showed most wealth management startups are actually going B2C, which means that the proportions of “replace” to “augment” are pretty high in the wealth management industry relative to others.

Hortz: Can you go into a little more detail around the “replace vs. augment” conversation? It’s an important point that some readers might not be familiar with.

Gross: Sure. The majority of Startups, once they have validated their business model, are looking for the easiest path to One (i.e. their first customer). If you’re a smart entrepreneur then you understand that oftentimes user acquisition costs are extremely high when going direct to consumer. So tech startups (and savvy entrepreneurs) have realized that. If they found a problem that was common among industry players -- they could solve that problem and get themselves to profitability much faster than going straight to the consumer. Startups that are helping an established player do something more efficiently, like faster credit approval for banks, are “augmenting” existing capabilities of industry firms.

However, because the independent wealth management industry hasn’t effectively attracted technologists, most of the WealthTech startups are either “replacing” existing capabilities (i.e. going straight to the customer) or have been created by an FA or industry player (because they know and understand the needs of firms within the industry).  The result is a sizeable vacuum within the wealth management industry where the technology capabilities of existing players is far inferior to the automated investor platforms that are being built.

Hortz: Do you think this technology gap will affect the market share over the next decade between independent financial advisors and alternative tech-based providers like robo-advisors?

Gross: It’s interesting, I actually get this question a lot and I think it needs to be framed differently. It’s not whether it’s “Robo Advisors” or “Human Advisors.” Behavioral Economists like Kahneman, Tversky, Thaler, Reip, etc. have taught us that for most people, talking about finances is System 1, or emotionally based. A human being has to be part of the Financial Planning conversation. And now, we’re seeing automated platforms augmenting their offering with “human advice.” So really, it’s not a question of “Human” or “Robo” it’s a question of what role the Advisor plays within the organization. For the large automated investors, FAs are W2 employees (salaried) instead of equity holders. So really, the question is, “which business model will win, Advisors as W-2 employees or as equity holders/business owners?”

Hortz: So which business model do you think will own the most market share over the next decade?

Gross: It’s interesting to look at that question from the lens of another industry. In the 1990’s a lot of Private Equity (PE) firms tried to buy up doctor’s practices and treat physicians as W-2 employees because they (the PE Firm) could “run the business better.” In the end, there was no incentive for the doctor to maximize their throughput, which made the practices less revenue, which led to the failure of that model. What has taken its place today is PE firms that are “co-owners” of large physician practices with the doctors.

On the other hand independent wealth management firms have technology that pales in comparison to the automated platforms and new FinTech entrants. That means advisor capacity (the number of clients they can handle) is constrained and their margins have lots of room for growth. So if independent wealth management firms want to be a part of the future, they need to make big investments and develop partnerships with technology to drive down the cost of their service while providing their customers a more curated, dynamic experience.

Hortz: What do you see as the primary challenge that wealth managers need to address in order to build technology that will allow them to improve profitability and increase capacity?

Gross: Data. Specifically RIAs don’t own their data. Sure, an RIA can say, “I don’t want to work with Orion anymore” and extract their data to provide to a vendor. But rip and replace cost is huge. The process that follows is getting the data ingested into a new vendor format, which can cost tens of thousands of dollars. So for data that is generated for each stage in the customer life cycle (prospecting, intake, initial allocation, rebalancing, investment performance generation), it is oftentimes maintained and controlled by a vendor. So not only are RIAs prevented from created integrated applications that make them more efficient, the data can’t be viewed in aggregate to do more sophisticated analysis that would serve as the foundation of customized, dynamic digital experiences. So legally, RIAs do own their data, but from a technologist's standpoint, they don’t.

Hortz: What do you recommend that wealth managers do to better partner and direct FinTech entrepreneurs and financial technology to address their needs and growth challenges? What steps do they have to take?

Gross: I think a big first step would be the creation of WealthTech accelerators. Firms like Yodlee & Orion have their own programs, but those are driven by vendors (not RIAs), so the interests really are mostly self-serving and not addressing the elephant in the room. If the CEOs of 15 mid-sized RIAs ($1B+ AUM / $10B+ AUA) got together with a half-decent business consultant, they would find a lot of overlapping pain points and opportunities for entrepreneurs to build scalable technology.

Aside from that, be proactive; be present in the entrepreneurial activity in your community. Go to FinTech Accelerators and meetings with entrepreneurs willing to share the biggest problems you’re facing within your firm. And, if an entrepreneur sends you an email asking for 15 minutes to discuss an industry challenge, take the call. Open up a dialogue.

Written by Bill Hortz, Founder & Dean, Institute for Innovation Development

Previously posted on Financial Advisor Magazine Online.

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). For more information click here.


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