What Happened at FinTech's 'Shark Tank 2'

With millions of dollars at stake in venture capital money, ScratchWorks — Season 2 debuted in front of a standing-room-only crowd at the recently held Barron’s Top Independent Advisor Summit in Salt Lake City.

ScratchWorks, a fintech accelerator, connects innovative technology companies with wealth management luminaries to advance the digital transformation of the financial services industry.

In the form of a “shark tank” live event, three companies pitch their firms to the ScratchWorks’ investors for potential valuable investments on stage in front of the industry’s top independent advisors. Sponsored by Fidelity and the University of Colorado’s Leeds School of Business, ScratchWorks is rapidly becoming the face and venue for fintech innovation in wealth management.

Founded by five of the largest RIAs in the country, including Marty Bicknell of Mariner Wealth Advisors, Richard Burridge, Jr. of RMB Capital, John Eadie of Covenant, Jon Jones of Brighton Jones, and Michael Nathanson of The Colony Group, this collective group manages over $70 billion in AUM, making it one of the most powerful investing groups in wealth management.

Newcomer Shannon Eusey, CEO of Beacon Pointe Advisors, also joined the investor group as this collection of leaders considered investing in three of the industry’s most innovative fintech companies.

In the inaugural season of ScratchWorks held a year ago, the investors made substantial investments in marketing automation platform Snappy Kraken, as well as in investment management automation platform InvestmentPOD.

Led by entrepreneurs Robert Sofia and Jackie Matthews respectively, these fintech CEOs provided compelling pitches on stage to ink valuable deals, which has led to accelerating the success for both Snappy Kraken and InvestmentPOD.

SolidusLink First up on stage this year was SolidusLink from Zurich, Switzerland. SolidusLink is a multi-dealer precious metals trading platform capable of integrating with any custodian. With a business model similar to NASDAQ, SolidusLink enables investors, as well as their advisors, to access and hold gold as easily as stocks.

End investors benefit by holding physical gold alongside other portfolio assets through a fiduciary provider and avoid paying 30-70% of fees and taxes compared to commodity ETFs or other “paper gold” products. RIAs benefit by having a more complete suite of products to better engage with clients through the whole economic cycle and keep more assets under their control.

CEO Eliot Samuels and Chief Technology Officer Andrew Moedinger of SolidusLink faced the ScratchWorks investors with their funding ask of $1 million to help fuel further growth for the platform and to gain influence in getting large custodians to join forces with the group to further digitize the gold trading process.

The investors had many challenging questions for the entrepreneurs, particularly about the thorny problem of not having many, or really any, clients who want to own physical gold in their portfolios.

“We have hundreds of clients and I think only one has ever asked us about physical gold,” said Jones of Brighton Jones. The live poll of the 600-plus RIAs in the room concurred, and 40% said they would be interested in working with SolidusLink, which provided a compelling counterpoint to the investors’ concerns.

After an energetic back-and-forth, no deals were offered on stage for SolidusLink from the investors. Afterwards, however, Samuels and Moedinger were approached by many RIAs in attendance, and discussions are underway for potential partnerships.

280CapMarkets Next up was 280CapMarkets, which provides independent advisors with access to the fixed income markets through BondNav, a free cloud-based platform that aggregates the fixed-income market’s thousands of bond offerings and includes detailed information and direct access to a veteran trading team.

According to CEO Gurinder Ahluwalia, investment advisors using BondNav realize better pricing for their clients, save time and gain best execution support for their compliance reporting responsibilities.

Ahluwalia provided a compelling pitch for investment in 280CapMarkets, with an $8 million ask for 15% of the company, making it a roughly $54 million valuation. The investors were shocked at this valuation.

They had pointed questions for the CEO about how many advisors actually use individual bonds in client portfolios and how the business could scale quickly in the competitive fixed income ecosystem now dominated by the large Wall Street institutions and custodians.

The audience live poll provided strong support for 280CapMarkets, indicating that roughly 60% of the RIA audience would be interested in a technology platform like 280CapMarkets.

This, plus Ahluwalia’s presence and leadership — honed by growing his own RIA and TAMP, AssetMark, to more than $20 billion in his previous career as a wealth management executive — swayed a couple of the investors to engage in negotiations, making 280CapMarkets debut a success.

AdvicePay Last up was the most anticipated pitch of the ScratchWorks session — from famous advisors and industry gurus Michael Kitces and Alan Moore. Known for their wide reach in the industry with multiple business lines, publications, conferences and blogs, Kitces and Moore were pitching their fee-for-service platform, AdvicePay.

According to the duo, AdvicePay is the only billing and payment processing platform created specifically for fee-for-service financial planning. Advisors benefit from efficient invoicing and payment workflows designed exclusively to support their businesses, including up-to-date compliance and data security management.

Users can issue agreements for client e-signatures, accept ACH and credit cards, bill hourly or one-time fees, and establish recurring retainer or subscription billing compliantly — all through AdvicePay’s system.

With the recent huge client wins for AdvicePay from large independent broker-dealers, such as Cetera, the platform now has 17,000 advisors — a powerful result for the launch of their recent AdvicePay Enterprise strategy, which Kitces and Moore were pitching to the investors to further accelerate growth.

They asked for $1 million, or 5% of the company, on a $20 million valuation. All of the investors were keen to join in on this deal, as they saw the huge potential for fee-for-service advice and a customized payment platform that will turbocharge that growth.

In his inimitable fashion, Kitces provided a strong argument for why AdvicePay should be valued so highly. The audience also agreed, with the live poll showing that 80% of the top RIAs in the country would be interested in the innovative payments platform.

After a spirited back and forth, the drama on stage kicked up a notch as the ScratchWorks investors offered the duo $2 million for an $8 million valuation. Kitces and Moore countered at $2 million for a $15 million valuation, which was then counter-counter offered by the investors at a $12 million valuation.

Audible gasps from the audience were heard when Kitces and Moore turned down the $2 million offer in a tense, exciting final moment. Right afterwards, the two were swamped by audience members offering to fund AdvicePay at $15 million.

According to Kitces, “The demand from the rest of the room at a $15 million valuation — more than we wanted to raise in the first place — has led us to reconsider whether we may go back to a $20 million valuation.

Meanwhile, ScratchWorks investors are beginning [their] due diligence to try to come to a deal at a final valuation to be determined.” As the wealth management industry continues to be transformed by new and emerging technologies, it’s clear that fintech accelerators like ScratchWorks are in high demand.

Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy. He consults for firms in the wealth management industry and may occasionally mention them in his writing, which does not represent an endorsement or recommendation. Reach him at tim@nexus-strategy.com or on Twitter @NexusStrategy.

E-Trade May Be Close to Launching Cryptocurrency Trading

E*Trade Financial Corp. is getting ready to let customers trade cryptocurrencies on its platform, according to a person familiar with the matter.

The firm will start by adding Bitcoin and Ethereum, and will consider adding other currencies in the future, said the person, who asked to remain anonymous because the matter is private. A spokesman for E*Trade declined to comment.

E*Trade would be one of the largest securities brokerages to allow crypto trading. It will enter into a competitive market with startups like Coinbase Inc., which have made names for themselves as go-to places for such transactions.

Closely held Coinbase reached a valuation of $8 billion in 2018 and projected sales of $1.3 billion. Fintech startup Robinhood, most recently valued at $5.6 billion, has also added cryptocurrency trading as a way to woo millennial customers.

The arrival of E*Trade could help to legitimize cryptocurrency trading for wary investors.

On Thursday, New York’s attorney general accused the operator of one prominent crypto exchange of hiding the loss of about $850 million, sending Bitcoin’s price tumbling.

Bitcoin has failed to rise back to levels it hit at the end of 2017, when it surged to nearly $20,000, but it’s still worth about 35 percent more than it was at the start of 2019.

2019 IA25 Fintech Winners

Jeff Bezos has been in the headlines for a host of reasons lately, but it’s his role as an innovator as head of Amazon that continues to impact the advice business.

In a nod to Amazon, Apple and Netflix, Charles Schwab recently rolled out a $30-a-month plan for its newly named Schwab Intelligent Portfolios Premium service; it includes “unlimited” support from a certified financial planner (as well as a $25,000 investment minimum and a $300 initial planning fee.) “Wow, HUGE news,” said Michael Kitces on Twitter.

Meanwhile, TD Ameritrade has been working on voice-based online trading Amazon Alexa technology and launched a financial education platform for investors based on artificial intelligence; it aims to work like the personalized recommendations generated by Amazon and Netflix.

Other firms, of course, are looking to capitalize on Amazon-inspired innovations. Platform provider Envestnet | Yodlee, for instance, bought Abe AI earlier this year to let advisors and financial firms take advantage of conversational artificial intelligence in their interactions with clients.

While the threat of Amazon moving into the financial-advice business continues to attract attention, experts like Scott Smith of Cerulli Associates counter that “the level of nuance and regulation” makes the industry “difficult to scale.”

Keeping up with all things Amazon and beyond is IA25 newbie Dani Fava, director of institutional innovation for TD Ameritrade Institutional, whose focus is to both simplify the lives of independent RIAs and make them more competitive in a digital age. She led the launch of portfolio rebalancing technology iRebal and the Model Market Center, which brings outsourced investment management to RIAs.

“I want to help RIAs better understand these technologies and the potential areas of change and disruption, so that they don’t get left behind,” she told IA, which included her in the inaugural Top Women in Wealthtech list in February.

Fava says her favorite tech tools are Slack and Alexa: “She’s becoming my own personal assistant. I can’t wait to see where Voice-First technology is in five years.”

TD Ameritrade Chief Information Officer Vijay Sankaran heads up both investor and advisor tech programs for the company out of its innovation center in Ann Arbor, Michigan. The group works on everything from devices like Pepper the robot to holograph machines.

But it also has focused on ways to let clients access account information on demand without the need to call advisors and for advisors to use the Veo platform’s new virtual assistant to request document delivery through a chat function. It’s all part of the “big picture” goal of making “every associate an innovator” at TDAI, so it can go from “fulfilling ideas to creating ideas” that best support advisors.

Another source of inspiration and cooperation for TD and other firms in the advice business is Apple, led by CEO Tim Cook. In partnership with Goldman Sachs, Apple just launched a mobile-first credit card that works closely with the Wallet iPhone app and has cash-back benefits for Apple-related purchases. Also, it plans to roll out Apple TV+, a video subscription service that will compete with Netflix and others.

“In the long term, I’m extremely bullish. I think the key to the economy, unlocking its potential has always been innovation, and when I travel around the world, I’ve never seen innovation at a more feverish pace than I do today, so I’m extremely optimistic,” Cook said in Beijing earlier this year at an event covered by CNBC.

In the competitive field of platform technology, Eric Clarke is attracting lots of attention these days. The CEO of Orion Advisor Services just announced that Orion’s parent company — NorthStar Financial — and related businesses will be united and rebranded as Orion Advisor Solutions in the fall.

The news of Orion’s rebranding comes several months after rival Envestnet restructured its operations by forming two business groups and just weeks after it moved to buy the MoneyGuide suite of tools for $500 million and to acquire PortfolioCenter, Schwab’s portfolio management and reporting technology.

In response, Orion said RIAs seeking alternatives to PortfolioCenter could use its portfolio-accounting technology for free for nine months. “They make us better in the competitive environment,” Clarke said of Envestnet.

With NorthStar’s announced changes, “We want those on our technology and managed-account sides of the business to gain access to money managers we have on that front. We think our [restructuring and rebranding] definitely will increase our competitiveness in the enterprise marketplace.”

Clarke is set to take on the role of CEO for Orion Advisor Solutions, while continuing to serve as CEO of Orion Advisor Tech (the new name for Orion Advisor Services). “We are excited about the news and hope it simplifies our message to the industry,” he said.

Libor's Looming Demise Is Huge, Risky Task

Darrell Duffie of Stanford (Photo: David Paul Morris/Bloomberg)

The end is coming for Libor and financial markets need to get ready.

That’s the view of Morgan Stanley’s Tom Wipf. He heads the Federal Reserve’s Alternative Reference Rates Committee, which on Thursday released recommendations for language to enable contracts linked to the beleaguered London interbank offered rate to work even if the benchmark disappears.

Darrell Duffie, a finance professor at Stanford University, has also underscored the risks involved with shifting away from a set of benchmarks that underpin some $200 trillion in dollar-denominated instruments.

“This is the largest financial engineering project the world has ever seen,” Duffie said on a conference call hosted by financial-technology firm GLMX on Thursday.

He said that the risks associated with shifting from Libor to the Secured Overnight Financing Rate — the ARRC’s preferred alternative — can be mitigated if market participants convert contracts early and if regulators announce the change date “well in advance.”

Such a transition is by no means assured though. While Libor suffers from various defects and has been tainted by rigging controversies, the battle to replace it is far from over.

The ARRC is backing SOFR, but the new benchmark developed by the New York Fed and the U.S. Treasury still has yet to fully prove itself more than a year after its debut. There are also other potential contenders, such as Ameribor and the ICE Benchmark Administration’s Bank Yield Index, and some remain reluctant to get rid of Libor at all.

Wipf, who is vice chairman of institutional securities at Morgan Stanley, is not among those who see a future for the maligned rate.

“It’s no longer a question of if — but when — Libor will become unusable,” he said in a statement. He added that most contracts referencing the benchmark don’t adequately account for its demise, and that poses “a massive risk to financial stability and market participants.”

The principles recommended by the ARRC on Thursday relate to so-called fallback language for floating-rate notes and syndicated loans, and the group plans to release recommendations for bilateral business loans and securitizations soon. The committee also expects to consult on similar language for consumer products.

Of course, fallback language is not the only hurdle. Other challenges include the lack of a term structure for SOFR, its lack of a credit component and the impact of periodic volatility in the market for repurchase agreements that underpins the setting of the benchmark.

Copyright 2019 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Consumer Satisfaction Higher at Digital-Only Banks

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Digital-only banks are beating credit unions, community banks and traditional banks in customer satisfaction, new data from FIS showed.

According to the survey of 1,749 U.S. consumers, 63% of customers at so-called direct-to-consumer banks, which are typically digital-only financial institutions, said they were “extremely satisfied,” compared to 52% of credit union members, 38% of community bank customers, 27% of regional bank customers and 19% of top 50 global bank customers.

Widening the satisfaction measures showed that digital-only FIs are running neck-and-neck with credit unions, however. According to the survey, 90% of customers at digital-only banks and 90% of credit union members said they were “extremely satisfied” or “very satisfied.” That compared to 84% at community banks, 73% at regional banks and 66% of customers at top 50 global banks.

The survey also found that almost three-quarters (73%) of consumer banking interactions were done via mobile or online, reflecting the growing importance of digital ease of use for consumers.

“While security and trustworthiness continue to be critical attributes, more consumers are choosing their banking providers on the basis of a convenient, frictionless digital experience,” FIS co-COO Bruce Lowthers said. “For banks and credit unions of all sizes, these survey results reinforce the importance of modernizing every touch point of their customer journeys.”

Millennials were particularly interested in digital self-service, the study found. In fact, only 45% of the millennials said they trusted banks more than fintech companies.

“Millennials’ satisfaction with community banks dropped by nearly half from 2018 levels, indicating that these institutions are not meeting the digital needs of younger generations,” the report said.

That could have a significant influence on member attraction and retention, FIS noted.

“When it comes to winning over the youngest of viable banking customers, those between 18 and 26 in age, it’s all about who you know,” it said. “Young millennials are especially appreciative of peer and family recommendations and rarely shop around for banking services. Banks and credit unions have a clear opportunity to use their existing relationships with parents, siblings, and friends, who can usher young customers into new bank accounts with a trusted institution.”

FIS also found that:

• 75% of young millennials were referred to their primary bank.
• 19% of young millennials used credit unions; 39% used the top 50 global banks, 23% used regional banks and 9% used community banks.
• Senior millennials (age 27-37) checked their account balances via mobile 11.02 times per month.
• 71% of senior millennials chose a nonbanking provider because online and mobile use was easy.
• 51% of Gen Xers used a non-bank P2P app in the last 12 months, and 25% used mobile wallets.
• 49% of baby boomers used mobile banking channels in the last 30 days.

How to Be a Great COO (and Why Every Firm Needs One)

One reason it’s difficult to be in charge of operations at an advisory firm is that the chief operating officer, or director of operations, typically has to live with one foot in two different worlds.

On one side, they need to walk with the firm owner, who often is an entrepreneurial spirit who focuses on sales and client experience. On the other, the COO must be fully invested in operational workflows and how staff members can accommodate the organization’s growth goals.

In a healthy organization, these two sides — strategic and tactical — have to work hand in hand and support each other. Strategic planning focuses on what can be done to bring clients into the firm and to create an ongoing positive experience. Tactical work covers the internal procedures necessary to support the client experience.

For most advisory firms, the client experience gets more attention. It’s the outside of the house —the roof, the front door, the window trim, the paint.

But, a good client experience has to be supported by an exceptional operational experience. The exterior of the house is only as good as the plumbing and wiring inside the walls and the foundation it all rests on. That foundation is called the OX, for operational experience.

As silly as it sounds, when I think about the relationship between a good client experience (CX)  and a strong OX, the story of the three little pigs comes to mind.

Building a Strong Firm

For our purposes, the big bad wolf represents all the things that can go wrong for a business — tax law updates, new regulations, challenging employees — anything that can throw you off track and out of normal operating procedure.

The houses the pigs made show the varying ways in which advisors pay attention to their OX and how that attention (or lack thereof) affects the business.

• A Firm Made of Straw: If an advisor has no written processes and doesn’t take good care of their employees, they have basically a straw house. The smallest change or problem leads to lost time, lost money, and hurt feelings.

• A Firm Made of Sticks: These firms may have a nice exterior client experience. But if a client begins to huff and puff about a down market, and the operational support isn’t there to boost the client experience, then that wood may begin to erode. Soon, the entire structure falls.

• A Firm Made of Brick: This symbolizes the advisor who’s taken time to stack one good process on top of another to support their staff first, like a craftsman laying bricks, so they can go out and support clients.

The advisor who prioritizes OX has a practice that is sturdy. They’ve invested the time and built the foundation to think correctly about what they can withstand, and the business operates accordingly.

Tech Solutions?

Many advisory firm owners believe new technology can solve their OX problems. However, adding a new tech solution is like adding new paint to the outside of the house — it probably won’t impact the materials used to build it.

Of course, there are times when tech helps your team. Before you add new technology, though, follow these steps:

• Document every client interaction, from first contact to ongoing support.
• Match each step in the client interaction flowchart to an operations task; if there is no corresponding OX task for a CX moment, you’ve identified a weak link.
• Once you’ve established each step along the process, then you can begin to add new tech, like a CRM that makes staff more efficient by reducing duplicate data entry tasks.

When we deal with OX issues, we tell advisors to remember a simple contrast. If you give a great employee decent technology and no process, they’re likely to fail. But if you give decent tech and a proven process to mediocre employees, they’ll likely get better at their jobs and usually succeed.

The bottom line is you can spend all day on the client experience and (re)designing it. Yet, if you don’t take the time first to dig into the details of your operations to analyze the strengths of your team’s inner workings, such efforts are useless. By giving OX the attention it deserves, you can make smart tech decisions and grow your operational support to be even stronger.

Jarrod Upton, MBA, MS, CFP® is Chief Operations and Senior Consultant at Herbers & Company, an independent growth consultancy for financial advisory firms. He can be reached at jarrod.upton@herbersco.com.