2018 Predictions and ActiveAllocator Strategic Response

  • WealthTech disruption from newer forms of digital advice and fulfillment platforms to remain underway;
  • Regulation-driven changes earlier proposed in Department of Labor (DOL) rules intended to eliminate conflicts of interest in financial advice to remain but get kicked down the road;
  • Technology- driven personalization in retail financial advice;
  • Increased adoption of alternative investments by affluent investors;
  • Financial advisor migration to independence from wirehouses and captive channels;
  • Propensity to buy vs. build in-house by mid-size financial firms; and
  • Major technology shifts, including cloud-based services, usage of low cost and open source software development tools as well as partnering across the digital ecosystem through APIs.


Conversation with Sameer Jain

0:44 Company purpose. 4:47 Solution. 10:35 Technology. 11:30 Why now. 13:27 versus robo. 18:27 Marketsize. 27 Team. 29: Company status

Implications for ActiveAllocator: We see drivers in overall industry AUA growth, new opportunities when macro-economic environment changes lead to recalibration of historic asset price relationships, from increasing demand for independent financial advice, from catalyzing advisor migration from captives to independence as well as ramping up newly attracted advisors within RIAs and broker-dealer firms. Our industry has the following opportunities: (i) self-directed investors are struggling to effectively manage their portfolios; (ii) RIAs have challenges to engage and retain their customers; (iii) emerging internet-based financial services companies are paving the path of innovation; (iv) cloud-based platforms are simplifying software delivery; (v) open platforms and application-level developer ecosystems are driving innovation forward; (vi) new technology platforms are leveraging big data; and (vii) a large addressable market through technology driven mass-customization is being created.


  • improves the quality of financial advice;
  • increases the speed at which advice can be rendered, thereby increasing the amount of assets that an advisor can oversee; and,
  • reduces the direct and indirect costs of delivering advice.


  • WealthTech Disruption – The financial advice, retirement and wealth management industries have been spared convulsive change to date. They have been insulated by an older demographic, regulatory barriers, and high capital requirements. However, the forces of digital disruption that have ripped through the news, music, travel and other industries are now poised for a frontal assault on wealth management. For years, it was easy to dismiss technology-driven startups who could not compete with the massive distribution and information technology advantages of incumbent firms. But conditions have become much more favorable for WealthTech digital upstarts. Consumers are ready, industry conditions favor innovation, and the technologies required to transform these industries now finally work. We believe that as the number of affluent households increase, many consumers will outgrow their current financial advisors. Affluent buyers who are beginning to value digital advice, will be disappointed when the human financial advisor experience does not meet their ever-increasing expectations. The financial services value chain continues to get redefined; firms are likely to outsource niche services such as asset allocation and portfolio management to a dedicated digital advice provider.


  • Increased Regulation – Initiatives by Department of Labor (DOL) intend to eliminate conflicts of interest in financial advice rendered to retirement accounts (and, by extension, excessive fees attendant to these conflicts) by imposing a higher fiduciary standard of care. Although much uncertainty remains around the implementation of these rules, as well as additional potential FINRA and SEC regulation with similar aims, the regulatory proposal and comment process has opened a vibrant dialogue around fair compensation and the potential for conflicts of interest. We believe that regardless of the ultimate resolution of the DOL regulations, the stage has been set for clients to demand not only greater transparency around fees, but also greater value from fees being paid.


  • Rise of Online Investment Management – B2B and B2C online investment management platforms have significantly increased their influence over the past five years. Robo-advisors typically provide minimal financial advice and suffer high returns friction, are expected to aggregate substantial assets under administration due to their simple interfaces, 24/7 access and low fee structures. Competition from robo-advisors has pressured traditional financial advice platforms to create their own robo versions (Vanguard, Goldman Sachs, Capital One, Morgan Stanley, Bank of America Merrill Lynch, E*Trade, Fidelity, Wells Fargo, Schwab are all developing their own robo-advisors).

It is our opinion that financial advisors who are unable to justify higher relative fees, with consistently superior performance, will increasingly lose ground to automated advice platforms.


  • Birth of Technology Driven Personalization – Customers demand personalization without realizing they are demanding it, as they grow accustomed to companies anticipating their needs and offering what they’re looking for – sometimes before they even know what that is. Retailers and travel companies are using predictive tools and algorithms to exceed expectations, yet digital teams at financial firms have been slow to re-engineer websites and apps to enable highly personalized digital experiences. As consumers become more accustomed to personalized services – from online music selection, to customized exercise plans, to personal shopping, to travel – expectations will further rise. Within the financial advice sector, our approach will rapidly expose the fallacy of the “one size fits all” solution approach – such as those embodied in model portfolios and managed accounts.


  • Adoption of Alternative Investments –  Affluent investors and their financial advisors are becoming aware of the portfolio benefits of including alternative investment asset classes such as private real estate, private equity, managed futures, hedge funds, and liquid alternative mutual funds. Also, large asset managers with huge distribution systems, continue to introduce new investment products which has increased retail investor access. ActiveAllocator has invested two years with multiple quant PhDs to develop the data sets and algorithms needed to correctly include such investments in portfolios.


  • Advisor Migration to Independence from Captive Channels – The past decade has seen a secular shift in the preference of financial advisors to be independent of wire houses who sponsor investment products, with attendant conflicts of interest. While gaining greater control over the advice they provide, independence also requires that advisors identify more efficient resources. This includes greater reliance on technology, not only for providing advice, but also for documenting the origin and disposition of such advice.


  • Buy vs. Build An element for success of platforms is enterprise users’ propensity to buy and adapt newly available digital technology rather than build in-house from scratch. Given the variety of software packages already available and their increasing sophistication, developing new software is probably not the right choice for digital banking executives at many firms, particularly smaller ones. Most startups have provided some advice for free and hope to upsell users to a premium service. That has proved difficult. Without a clear path to generate revenue, many startup digital financial advice businesses have been sold to established businesses over the last few years; and established financial services companies have spotted the opportunity resulting in a series of acquisitions – (Ally Financial announced the acquisition of TradeKing. Goldman Sachs acquired Honest Dollar a web and mobile-based retirement savings platform. Invesco announced the acquisition of Jemstep, a provider of advisor-focused digital solutions. BlackRock acquired Futureadvisor, a digital wealth management platform. John Hancock acquired Guide Financial. Interactive Brokers acquired Covestor. Northwestern Mutual acquired LearnVest, a financial planning platform. Envestnet acquired Upside Financial, a technology company that provides digital advice solutions to financial advisors. Legg Mason acquired Financial Guard, TIIA acquires MyVest, Strategic Insight buys BrightScope).

Several factors point to the benefits of buying. First, with limited resources and an increasingly competitive landscape, firms have higher risk-adjusted return opportunities to deploy capital to other initiatives, such as in new advisor recruiting. Second, few traditional firms have the multi-disciplinary talent required to construct a platform like ActiveAllocator. Finally, the time required to develop a platform like ActiveAllocator puts firms determined to build, test and deploy their own digital asset allocation framework at a huge market disadvantage on a time-to-market basis.


  • Major Technology Shifts Cloud-based services, for example, are cheaper than traditional mainframes and we rent our infrastructure on cloud computing providers for a fraction of the cost of owning expensive systems. Incumbents, on the other hand, own legacy systems and employ teams of expensive people to operate them. Today’s programming tools make it easier to launch software powered products. We use low cost and open source software development tools. Service and product rollouts that established players require months of development time, we now do in days.


  • Partnering through APIs


  • Differentiated Digital Financial Advice – We have stressed earlier, but reiterate, that emergent robo-advisors provide commoditized advice through very coarse asset class selection, mundane portfolio construction, and access through low-cost passive investment vehicles – things that are very easy to do. In fact, there are free tools on the internet that permit this. While robo advice is perceived as a good trend in introducing the mainstream mass-affluent (a household typically with $250,000 to $1,000,000 in investable assets) to investing, we recognize the enormous value that a financial advisor brings to HNW portfolios. We believe that the robo-advisor landscape is cluttered with little differentiation and have no intention to become just another robo. We are also very different from digital financial advice platforms who deliver poor quality advice free, or at very low cost. We have nothing in common with platforms that offer other financial guidance to consumers planning for goals such as homeownership, education and retirement. In contrast, our portal empowers self-directed individuals and strengthens advisors’ relationships with their clients. It makes remote interactions easier, helps reduce client confusion, allays insecurity, and demonstrates value by drawing recommendations to empirical data, facts and numbers. We marry the digital with the very special person-to-person relationship that only an advisor can bring.


  • Renewed Focus on Customer’s Customer – We believe that the real source of competitive advantage left in this new age is an obsession with serving customers. We intend to follow a path trodden by many successful startups before us – obsess about meeting customer needs, figure out how to better serve them and the business will likely follow. Customer obsession is not, however, an attribute of most incumbent retirement, wealth and asset management firms. Most have not delivered on what investors really need – objective financial advice. Digital touch points and the mobile experience have become the channel of choice for most consumers, and we expect the financial advice sector to follow. Despite this massive shift in channel preference, digital remains a low priority at many RIA, broker-dealer served and wealth management firms that have historically been built around person-to-person relationships. Executives at many “old world” firms often reject the idea that software based startups can significantly disrupt their business. We believe that they are wrong. RIAs and broker-dealer systems need to gear up to take advantage of opportunities that digital technology affords. To design and deliver compelling customer experiences quickly, progressive RIAs will need to partner strategically with ActiveAllocator to plug their knowledge, technology, or skills gaps. As digital ecosystems become more integrated around the customer, a non-traditional player such as us will encroach upon spaces that financial services firms have occupied in the past.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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