Marstone: Friend or Foe


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One of the biggest competitors that incumbent banks, institutions and advisory firms face today is the Robo Advisor. Fintech startups and apps like Betterment and Wealthfront are giving consumers convenient, seamless access to financial planning using automation and artificial intelligence (AI).

However, one fintech startup is trying to do the exact opposite, putting robo advising technology in the hands of incumbents: Marstone. As a digital, white label robo advisory platform for wealth management, Marstone’s goal is to create branded user experiences that are on par with cutting edge fintech competitors. Towards that end, Marstone recently partnered with fintech leader Fiserv to offer banks that rely on Fiserv for their core processing technology a full suite of robo advisory services under the “Powered by Marstone” moniker.

But exactly how powerful will Marstone be when it comes to helping established institutions? Let’s take a closer look and find out.

THE GOOD
The main challenge that Marstone attempts to address for incumbent financial institutions is the speed at which they need to innovate to keep pace with fintech robo-advisory apps and services. Through their existing relationship with Pershing and their partnership with Fiserv, Marstone can provide white label robo advisory services to more institutions across the country that are also Fiserv clients. This includes everything from big banks that are competing with services like Fidelity Go, all the way down to local banks and credit unions.

Marstone develops its AI tech through partnerships with some of the top technology companies, such as IBM Watson. Its platform offers automated holistic account analysis, tailored portfolios and a user experience that feels more like a lifestyle brand than a bank. The goal is to demystify financial decision making for the user, while at the same time solving one of the biggest challenges faced by the industry today: asset retention. There’s currently a massive generational wealth transfer going on, as baby boomers pass their assets onto their children.

Big banks and advisory firms that do not offer the younger generation seamless, cost-effective technology solutions that are competitive with apps like Betterment and Robin Hood risk seeing that money walk out the door as soon as it lands in the hands of millennials. By providing a branded solution developed by Marstone to these younger customers, incumbents give themselves a better chance of retaining those assets.

THE BAD
As robo advisory apps, solutions and platforms continue to enter the market, the struggle for incumbents just getting into the game is differentiation. So, one of the questions for some of Marstone’s future clients is, exactly how different will their robo advisory platform look and feel from everyone else’s? Vanguard and Schwab are already well ahead of the robo advisory game in terms of awareness, so do institutions that licensea white label Powered by Marstone suite of services stand a realistic chance of catching up? And will consumers that use the most popular fintech apps like Betterment and Wealthfront be willing to switch over to a branded robo advisor that they’ve never used before? These are a few of the major question marks (and potential hurdles) that Marstone and their incumbent partners will likely face in the years ahead.

OUR VERDICT: FRIEND
Innovating to keep pace with fintech startups is a huge challenge for big banks, traditional wealth advisories and even smaller credit unions. The cost of internal innovation and development is huge, especially when it comes to complex AI robo advisory solutions. Marstone is helping to alleviate much of that burden, allowing banks to offer competitive robo advisory services without the cost and headache of both development and ongoing maintenance. We see their partnership with Fiserv as a sign of friendship to incumbents, as Marstone will now be able to scale its operation and bring Powered by Marstone white label solutions to even more institutions. This should have a substantial positive impact on customer experience, and asset retention, for clients of Marstone.

What Keeps Alternative Investment Professionals Up at Night?


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The profile of alternative investments like hedge funds, private equity funds and real estate funds has risen dramatically in just the past five years, with a growing number of investors dipping their toes into this particular category. And this interest has pushed this once obscure class to become the fastest growing category of investments, with $18 trillion projected to flow into it by 2020.

This elevated importance has raised the stakes and pressure for key industry stakeholders, with the most obvious being the private fund managers that run the aforementioned alternative investments. However, our perspective is that the stakeholder most strongly feeling this pressure is the fund administrator that services both the private fund manager and the investor.

We find that fund administrators are under-appreciated and under-estimated for the critically important role that they play in the alternative investment industry. They are often the primary source of information and operations for the fund manager, and they are typically the conduit for the investor to be able to see and receive key information about the fund.

As these pressures continue to mount, fund administrators in particular are faced with the daunting task of keeping up with the rapidly changing landscape of the alternative investment industry, and then figuring out what they can do to succeed.

Let’s break this dynamic down into two areas:

Key Challenge
Regulatory and operational concerns have skyrocketed from being nearly non-existent just a few years ago to becoming the primary concern and challenge for both fund administrators and private fund managers. It is literally keeping these stakeholders up at night.

Multiple industry reports point to this, but here is a chart that comes from Linedata’s 2016 Global Asset Management & Administration Survey, which shows just how serious these concerns are:

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Just to reaffirm the impact of regulatory and operational concerns, notice that regulation and operations were considered more important than other seemingly critical concerns like fund performance and investor/client relations!

What can fund administrators do to succeed?

  1. Attack Regulatory and Operational Concerns: Fund administrators should look to technology to help them tackle the regulatory and operational concerns that are keeping them up at night. Begin by attacking regulatory and operational concerns. Technology can help a fund administrator better adapt and more quickly comply with new regulatory and compliance requirements. Progressive software solutions can help a fund administrator “project-ize” regulatory compliance by providing intuitive and transparent workflows that help them better collaborate with clients and investors, assigning a particular task to a particular person, and tracking the completion of each step in a way that is visible to all participants. Email notifications at appropriate moments along the way prompt the assigned person to know that an action needs to be taken. This type of digital collaboration greatly reduces operational efficiencies, including the back-and-forth communication that currently happens via email, electronic file folder systems and phone calls.
  2. Differentiate Themselves Through Client Service: Technology can also help a fund administrator dramatically improve its service to both its fund manager clients, as well as to the investors of its clients. Intuitive portals for both clients and investors that provide useful performance dashboards, as well as easy-to-use digital document storage and sharing, go a long way towards improving the fund administrator’s quality of service.

What’s keeping fund administrators up at night? It’s the fear of the unknown with the ever-increasing regulatory and operational pressures, as well as the fear of losing their clients and investors as a result of poor service.

Using modern technology can be the answer to a good night’s sleep for fund administrators. There’s a quote from the Linedata report that put it best: “Now is the time to embrace digitization to gain competitive advantage in this dynamic market.”

The Robots Are Coming!


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Actually, to some degree they are already here. Today we can buy robots to do simple tasks around the home, and we increasingly see industry turning to robotics to perform functions that were once done by humans. Robots are faster, more efficient, do not take coffee breaks and are not concerned with work/life balance. They can work efficiently and without complaint, with only occasional breaks for their human overseers to repair and update the machinery and perform any necessary programming.

The use of robots—or at least the technology that powers them—is coming to banking as well. There are many areas of banking that can be improved by the use of artificial intelligence and robots to perform tasks faster and at much lower costs. We’ve already seen how technology can automate and improve the arduous task of regulatory compliance, a phenomenon that is often referred to as “regtech.” Much of the compliance process involves the assembly and storage of an almost endless stream of documents, and that is something best done by machines. Oversight of the lending and sales practices can also be done much more accurately and efficiently through the use of technology and big data than by relying on human involvement alone. In the aftermath of the Wells Fargo & Co. cross-selling scandal, I expect to see more banks employ databases and machines to monitor employees and look for irregularities in sales practices.

I was at the FIG Partners Bank CEO Conference recently, and there was a lot of discussion about using technology and data analysis to improve bank lending programs. Bankers are looking for ways to automate much of the underwriting and funding process for both consumer and commercial customers. While there is still plenty of room to debate the advantages of using automation in the sales process compared to relying on people to bring in deals, there is no question that using big data to streamline the underwriting process has shortened approval times from weeks to just days—and in some cases even hours.

Bankers are also starting to use databases and artificial intelligence to manage their loan portfolios. One banker I spoke with said his bank was using data analysis to continually monitor the current loans in its portfolio. Automated systems can collect data about their customers and compare that against all past borrowers to identify those that might be undergoing financial difficulties. Through the use of artificial intelligence, it is now possible to continually scan the portfolio for signs of loans that may be getting close to stress levels and act proactively to head off problems before they fully develop.

In the low-interest rate, low-growth economic conditions we are currently experiencing, banks are continually looking for a way to raise fee income. One of the favored strategies for growing fee income is wealth management, and right now so-called robo-advising is the hot topic in the money management space. Intelligent systems can continually review and test investment strategies and use the gained knowledge to design optimal plans to manage a client’s money. The cost of machine-managed accounts is often much lower than using a human advisor, and community banks can attract customers and raise their fee income levels by using these programs. Those that do not use these machine managers will need a strategy to compete with them, especially in the tech-savvy millennial market.

Banks can also use data management programs to improve their marketing. By collecting and sorting customer data and history, banks can identify customers that are likely targets for different products and services. Cross-selling is temporarily a bad word in the aftermath of the Wells Fargo debacle, but the truth is that the more products a customer has from a particular bank, the deeper their loyalty to the institution will be and the more profitable the overall relationship for the bank. By profiling customers and monitoring current activity levels in deposit and credit accounts, the robots will spot new needs and opportunities that humans may well overlook.

One area where bankers are reluctant to rely on robots is customer service. While we are seeing mini-branches with ATMs and video links back to the main branch making inroads in some markets, the use of robots in customer facing situations is not something that bankers I have spoken with recently seem to embrace. Most bankers are people just like the rest of us and they have had to endure a customer service conversation with a chat bot that did not go well. Banking is a reputation dependent business and a bad customer service experience can have lasting negative implications on the bottom line. For now, interaction with actual humans will continue to be a big part of the customer experience at most community banks.

The bottom line for most bankers is that if new technology and the use of big data can lower costs and improve the profitability of their institutions, they are generally in favor of adding it to their bank. People will still be a big part of the process for most banks, but the robots and machines will play an ever increasing role.

The Little Bank That Could


strategy-9-23-16.pngSoon after Josh Rowland’s family bought Lead Bank in Garden City, Kansas, in 2005, the small financial institution felt the full impact of the financial crisis. The loan portfolio was in bad shape. Several employees lost their jobs. The entire experience lead to a lot of soul searching.

“It was really existential,’’ Vice Chairman Rowland says. “What do we survive for? What’s the point of a community bank? The situation was that dire. We had to really decide whether we should give it up.”

After much discussion, the family decided to hire Bill Bryant as the chief executive officer to help clean up the bank, now with $164 million in assets, and really focus on its niche: small business owners. A lot of community banks say they are serving small business owners, but Lead Bank decided to go a step further. In 2011, it launched a business advisory division for the purpose of coaching small business owners on cash flows, provide part-time or interim chief financial officers, and advice on strategic planning and even mergers and acquisitions. Rowland says a lot of small businesses could use advisory services, especially if they can’t afford to hire a full-time CFO. Lead Business Advisors has senior managing director Patrick Chesterman, a former energy executive for a large propane company and Jacquie Ward, a trainee analyst. The bank overall made a profit of $500,000 in the first six months of the year and saw assets grow 30 percent in the last year and a half, according to Federal Deposit Insurance Corp. data.

But the investment in advisory services is not a quick payback. Rowland says the division is not profitable yet. The challenges include marketing the program to a business community more accustomed to relying on trusted accountants or lawyers for such advice. Banks naturally have a lot of financial information and expertise, but they fail to provide it to their clients. “We ought to be figuring out every possible way to deliver that kind of financial expertise to Main Street business,” he says.

The tactic is an unusual one for community banks, which might have a wealth management division but not a business advisory division per se. And it’s expensive. Baker Boyer, a $571 million bank in Walla Walla, Washington, has been offering business advisory services as part of its wealth management division for years. But it has taken some 15 years to restructure the bank to offer such services, says Mark Kajita, president and chief executive officer. The average personnel expense per employee for the bank is roughly $80,000 annually with six lawyers on staff and the bank’s efficiency ratio is 73 percent, higher than the peer average of 66 percent.

However, the bank made $2.5 million in profits during the first half of 2016, with half of that coming from the wealth and business advisory division. Kajita says what made it possible was the fact that the bank is family owned and can invest in the long term without worrying about reporting quarterly financial results to pubic shareholders.

Community banks of that size have a real need to create a niche,’’ says Jim McAlpin, a partner at Bryan Cave in Atlanta who advises banks. “Historically, community banks have been focused on the small businesses of America, and to offer services to those small businesses is a great strategy.”

Joel Pruis, a senior director at Cornerstone Advisors in Phoenix, says banks have done themselves a disservice by relinquishing advisory services to CPAs and attorneys. “In terms of empowering lenders, in terms of providing more advice, we definitely need more of that,’’ he says. “Bankers need to be seen as a resource and an expert in the financial arena instead of just application takers.”

For Rowland, rethinking the role of the community bank is fundamental to its survival. “I don’t know how we expect to keep doing the same things and expect different results,’’ he says. People don’t feel their bank is adding any value for them, he says. “If that’s our industry’s problem that we haven’t given them an experience, that’s our fault,’’ Rowland says. “We have taught them over years and years that our services are so cheap, they ought to be free.”

Banks and Fintechs Adjust Strategies as Sector Matures


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After a period of rapid growth, the fintech sector has reached, if not full maturity, at least the end of its adolescence. With customer acquisition growth rates slowing among digital wealth management services, otherwise known as robo-advisors, a number of industry participants have adjusted their strategies in response. One development reflecting this process is the increasing tendency among large banks and other financial institutions (FIs) to enter the sector by purchasing some of the earliest and most successful innovators in the field.

This marks a change from the approach more commonly seen early in the fintech revolution, when large FIs were more likely to take positions as minority shareholders in promising fintechs than to buy them out. Fintech buyouts hit an all-time high in 2015 as banks rushed to stake their claim in this disruptive market, with KPMG and CB Insights showing fintech investments growing from $3 billion in 2011 to $19 billion in 2015. A CNBC.com report on the sector sees no signs of this trend abating in 2016, with big banks expected to continue to favor outright purchases of technology innovators in the sector over investing in startups.

Other banks and FIs have chosen to pursue different strategies, either forming partnerships with leading fintech firms or, in the case of some of the largest FIs such as Fidelity and Schwab, electing to build their own digital wealth management platforms. Fintech firms, in the meantime, continue to rely on product innovation to attempt to set themselves apart from their competitors. As sector growth moderates and truly disruptive innovations become more difficult (and expensive) to develop, these startups must make difficult decisions about whether to attempt to go it alone or to merge or partner with existing financial industry players.

Outside of a few companies willing to devote the tremendous resources necessary to build their own platforms, the majority of FIs entering the fintech space have done so via purchases or partnerships. While partnerships can be a viable method for entering the sector, some banks and other FIs prefer to own the technology their customers use to access their financial information. For these firms, purchasing an existing fintech company offers the advantage of speeding time to market and gaining the expertise of the tech-savvy founders or operators of the acquisition, in addition to controlling the use and development of the acquired technology.

In an interview for this article, Charlie Haims, vice president of marketing at cloud-based portfolio management service MyVest, expanded on this idea: “The larger FIs historically choose to build a new innovation in-house to tightly integrate it with the rest of the company. But now we are seeing an increase in acquisitions, like BBVA with Holvi, Groupe BPCE with Fidor, Silicon Valley Bank with Standard Treasury and many in wealth management like BlackRock with FutureAdvisor, Invesco with JemStep, and Northwestern Mutual with LearnVest.” Haims attributes this trend to sizable VC investment in fintech startups a few years back, leading to the recent buyouts of VC-backed startups whose success in the field attracted suitors.

While owning your own fintech platform may seem attractive to banks and other FIs looking to enter the space, the truth is that the cost of this approach, whether via purchasing an existing startup or building your own platform, is by no means trivial. A price tag upwards of $100 million to build a comprehensive digital wealth management platform is not unknown. For many banks interested in entering the field, finding a technology partner is perhaps a more practical way of gaining access to the industry. Haims agrees: “For smaller FIs, the best approach is often partnering with leading service providers or startups to quickly adopt the best-of-breed for a given fintech innovation, and this still seems to be the case today.”

MyVest offers its enterprise wealth management software platform to FIs such as banks, broker-dealers, RIAs and service providers. Haims cites banks as being particularly well-suited to use the company’s service to “help them bridge silos across their trust, brokerage and RIA divisions, so they can run a smoother operation and provide a holistic customer experience on a single, unified platform.” The company also has channel partnerships with Genpact Open Wealth and Thomson Reuters Wealth Management “to offer a combination of wealth management technology and services to FIs.”

In addition to digital wealth management, banks have formed partnerships across a variety of other fintech platforms, including startups in the crowdfunding and direct-to-consumer loan sectors. In the former category, BNP Paribas has inked a partnership deal with SmartAngels, which provides a platform for investing in crowdfunding deals; in the latter category is JPMorgan Chase’s partnership with On Deck Capital, which provides online small business loans.

As the industry matures, the competition among fintech sector participants has become increasingly fierce. In the digital wealth management field, independent robo-advisors now face the challenge of competing with large FIs such as Vanguard and Schwab, which have attracted the bulk of new robo-advisor assets since entering the space.

One prominent robo-advisor, Personal Capital, has engaged a private equity firm to help it consider its financial options, leading some to speculate that the firm is seeking a buyer. Other digital wealth management platforms, such as Wealthfront and Betterment, have stressed their dedication to innovation as a major factor in helping them stay competitive. Industry expert Craig Iskowitz has outlined the challenges facing such firms as their growth slows in an article on his Wealth Management Today blog. In the article he suggests that, rather than going head-to-head with industry behemoths for assets, a hybrid model of “selling to consumers as well as advisors, along with the B2B model, will soon be seen as the best way to succeed in this market.”

Among digital wealth management advisory services continuing to pursue the direct-to-consumer model, Iskowitz cites the Acorns robo-advisor platform as notable for experiencing robust growth by pursuing a millennial-friendly strategy. The company’s mobile app allows users to link their bank or credit card accounts to the firm’s platform and automatically invest the spare change gained from rounding up transactions to the nearest dollar in an electronically traded fund, or ETF, which is a diversified portfolio of securities that can be valued and traded at any time during the trading day instead of after market close like a mutual fund.

Build vs. Buy: How to Crack the Digital Wealth Management Sector


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The wealth management industry has been a significant source of fees for many banks in recent years. As innovation in the sector has resulted in the development of a plethora of digital asset management solutions, including so-called robo-advisors and data aggregation applications, a number of banks and other financial institutions (FIs) have taken steps to participate in this emerging market via partnerships or acquisitions. Recent activity in the sector includes Ally Financial entering the space by buying TradeKing, Northwestern Mutual buying LearnVest and BBVA partnering with FutureAdvisor. Leading robo-advisor firms Betterment and iQuantifi have also taken part in the trend by inking partnership agreements with banks.

Some large FIs have taken a different approach to entering the market, choosing to build their own fintech applications instead of buying or partnering. Firms taking this tack include Schwab, Fidelity and Vanguard, all of which have created their own robo-advisor offerings.

An upsurge in M&A activity can be a sign of a maturing industry, and this appears to be the case in the fintech space; after several years of breakneck growth, the market for digital advisory services seems to be stabilizing. Lending support to the idea that the pace of expansion is declining, at least among business-to-consumer digital wealth management services, is this blog post from industry expert Michael Kitces, who reports that robo-advisor growth rates have dropped precipitously this year to approximately one-third of year earlier rates.

In an interview for this article, Kitces, publisher of the Nerd’s Eye View and co-founder of the XY Planning Network, advised that FIs looking to purchase or partner with a company in the fintech sector focus on aligning any such effort with their core strategy. He suggests they identify the core business model used by the partner or acquisition target and ask how the technology powering that model feeds into the FI’s business strategy: “Is it lead generation? Is it customer retention? Is it expanding wallet share? And will the technology realistically be adopted, by the right customers or prospects, to serve that goal?”

One obstacle banks looking to buy their way into the digital wealth management sector may face is that M&A activity in the industry has lessened the pool of potential acquisitions. Tomas Pueyo, vice president for growth at fintech firm SigFig.com, points out that while buying can allow FIs to accelerate their time to market in comparison with building technology of their own, so many digital wealth management companies have been acquired that those left are mainly newer entrants to the space. While some large FIs have built their own fintech systems, the vast majority don’t, he says, “because they are much less productive than startups at creating new technology and don’t have as strong a culture of user experience.”

Mike Kane, co-founder and master sensei (a Japanese martial arts term that means teacher or instructor) at digital wealth management firm Hedgeable, expressed similar sentiment in regards to the difficulty banks face when competing with startups from a technology standpoint. Along these lines, Kane outlined some of Hedgeable’s latest feature introductions, including “core-satellite investing, bitcoin investing, venture investing, a customer rewards platform, account aggregation, and increased artificial intelligence with many more things in the pipeline.”

The difficulty of competing with nimble startups and the paucity of attractive acquisition targets leaves partnering as the preferred option for banks interested in entering the market, according to both Pueyo and Kane. “The great thing about partnering is that it dramatically reduces cost and time to market,” says Pueyo. “It’s a way to pool R&D for banks with very little cost and risk.” Kane also sees branding benefits accruing to banks which work with innovative technology firms in the sector: “Young people trust tech firms over banks, so it is in the best interest of old firms to partner with young tech firms for product in all parts of fintech,” he said.

SigFig has partnered with a variety of companies throughout its existence, beginning with AOL, Yahoo, and CNN for their portfolio trackers, and more recently with FIs including UBS, the largest private wealth management company in the world. Hedgeable also has made use of the partnership model in building its business. Kane reported that over 50 firms, including both U.S. and international FIs, have signed up for access to the firm’s free API. Hedgeable offers its partners revenue sharing opportunities to go along with the benefit of saving money they would otherwise spend developing their own platform.

Amresh Jain of Strategic Mergers Group, who advises clients looking to do deals in the sector, sees digital wealth management solutions only gaining in importance as new technologies make it easier and more efficient to process and allocate investment portfolios: “The first phase of digital wealth management was focused on the ability of robo-advisors to automate the investment process. The next phase, in my opinion, will see human advisors increasingly integrating their efforts with digital wealth management solutions to provide an enhanced client experience.”

Digit: Friend or Foe


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In the world of fintech, Ethan Bloch, CEO of the personal savings website Digit, has the three of the four important keys to success. He has the experience of creating a successful company, Flowtown, and selling it to a scale player, Intuit. He has brand name investors: General Catalyst and Google, among others, and they have given him enough capital to have a decent runway to grow the company. And he has what many fintech start ups do not—real live customers. In the last few months Digit has been adding 20 million dollars a month into Digit accounts. It is easy to see why everyone is eager to invest. What he does not appear to have 100 percent nailed down at this moment is a business model for his automated algorithm-based savings fintech.

The Good:
Bloch made a bet that he could make savings painless and almost fun. The market is full of planning tools that are hard to use or do nothing to help a consumer actually save. Digit is the opposite. A customer signs up, gives Digit their login and password to their bank checking account and the firm’s algorithm watches the account and identifies the cash flow of the account. It times withdrawals that the customer won’t miss, and then places the excess money in their Digit account.

This may sound like a traditional micro saving program such as “Keep the Change,” but there are several features that differentiate Digit’s platform from that model. For starters, it’s all centered on text communications. Also, consumers don’t have to set a specific amount to set aside to save, and that they can access their savings or withdraw at any time. Digit savings accounts are FDIC insured up to $250,000. The best part: It’s absolutely free, and it intends to stay that way. This is certainly a convenient and helpful feature for consumers as the amounts deposited into these accounts can be significant for high earners, and it can help create crucial rainy day funds that all consumers will appreciate later.

The Bad:
The immediate worry is that Digit’s app is a consumer data security risk. Digit says that account data is anonymized, encrypted and secure. This is probably not the place to try to settle the bank/fintech divide on data access and protection, but it is certainly a major concern.

The large number of deposits starting to build in Digit accounts are not rewarding consumers with interest. There is a very modest rewards program, 5 cents on every $100 saved–but it is certainly a long way away from compounding interest. Imagine a bank offering what amounts to a .0005 interest rate.

Digit is currently able to make money by earning interest on its deposits. While this may be an attractive vehicle for millennials’ convenience-and-mobility needs, it is not an investment account. For banks, it’s taking consumers money away from traditional institutions. Anytime one of your customers is depositing money, it should be with your bank—not a third party account.

Our Verdict:
Foe. Bloch says Digit will remain independent. Some big scale player will potentially want to buy the the firm, and if that happens all banks may need this kind of automated savings feature. The problem for banks is that Digit is draining deposits from banks and creating avid fans. If it expands into wealth management or other financial services, Digit could become a real competitor to a bank’s core business.

Preparing for the Great Wealth Transfer


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The net worth of millennials is slated to more than double by 2020, with estimates ranging from $19 to $24 trillion, according to a report released by Deloitte Consulting. This, combined with the fact that more than two-thirds of wealth managers’ current clients are over the age of 60, means that wealth managers should be preparing for a massive wealth transfer.

In anticipation of the great wealth transfer, it is important to recognize the expectations of this younger generation. Millennials, a group that has grown accustomed to instant search results and access to on-demand advice, expect to be treated as unique individuals and value the ability to make data-driven decisions. Yet, as much as this generation embraces digital technology and on-demand services, when it comes to finances, they also want a personalized approach.

Consequently, it is no longer sufficient to place a client in a generic portfolio model, especially when the client can pay next to nothing for a similar portfolio allocation through an automated investment service online. The quality and level of service that this new generation of clients demands is higher, as they want to be involved in making informed decisions about their money and now have cheaper options for managing their wealth.

And wealth managers cannot rely on millennials to just “inherit” their services from parents or grandparents. Fifty-seven percent of millennials would change their bank relationship for a better technology platform solution, according to the Deloitte study. In order to remain profitable as client demographics shift, and to meet the demands of millennials, wealth managers should leverage technology and data analytics tools to successfully engage their clients and maximize the value of service provided.

By harnessing the availability of data analytics, wealth managers can adequately get to know their clients and identify the distinct human capital factors in their clients’ lives, enabling them to provide truly tailored financial advice and investment recommendations.

Rather than simply assessing a client’s age and income, existing technology allows wealth managers to consider other aspects such as, geography, work sector, health, family, real estate, balance sheet and time until retirement. Taking a more holistic approach to wealth management makes it possible to customize a client’s investment portfolio, designed to fit each client’s unique risks and financial situation. This approach also delivers a more interactive, consultative wealth management process for both the wealth manager and the client.

To illustrate the value of this method, consider a petroleum engineer in her thirties living in Houston, where the oil industry drives property prices. An automated investment service or a conventional approach to wealth management would likely propose a wealth portfolio that is based largely on her age and income; however, this would fail to identify the concentration in oil within her career, property and subsequently, her portfolio.

Furthermore, changing market conditions can also be challenging for even the most experienced wealth managers, but today’s technology can help wealth managers mitigate risk and market fluctuations for their clients. Digital platforms and data analytics can adjust the risk exposure of the portfolio and compare performance over various market scenarios, enabling wealth managers to propose targeted solutions in an engaging, diagnostic context.

Ultimately, wealth managers must focus on understanding the needs of their new clientele to remain profitable in an increasingly competitive market. In fact, a recent PwC survey revealed attrition rates of more than 50 percent in intergenerational transfers of wealth, highlighting the fact that the next generation relies very little on the services of their parents’ wealth manager. This means that banks and their wealth managers must expand their technological capabilities and digital offerings, while gaining a deeper understanding of their clients to successfully build a sustainable business in today’s evolving market.

The industry should recognize that this group of clients has incorporated technology into almost every aspect of their lives and they expect nothing less of the businesses and financial advisers they interact with. As the industry quickly approaches the transfer of wealth to millennials, wealth managers will have to satisfy the demands of a new generation, and technology will play a critical role in engaging those who are accustomed to the benefits and polished user experience associated with digital tools and devices.

How Will New Fiduciary Rules Impact the Bank?


fiduciary-rules-4-13-16.pngThe new fiduciary rules from the Department of Labor stand to impact a huge number of banks, as more employees will fall under “fiduciary” standards that will change the way they do business. Boards should be asking questions now about how the revised rules will affect their banks, especially if they have wealth management or trust departments or subsidiaries, which are likely to see the greatest impact.

The Department of Labor, which has rule-making authority for ERISA, the Employee Retirement Income Security Act of 1974, last week expanded the definition of fiduciary to include a wider variety of people who give advice on retirement accounts. The rules don’t apply to non-retirement accounts. Although some employees may already be fiduciaries and familiar with the rules, others may be encountering them for the first time. There also could be an impact on certain fee-generating products such as the sale of proprietary funds and variable annuities, and boards should ask questions of the bank’s senior management to assess the effect on their bank. “Over the next several months, we will find out what the impact is,” says Andrew Strimaitis, a partner at the law firm Barack Ferrazzano in Chicago.

The rules go into effect a year from now, April 2017, with some requirements delayed until January, 2018.

Saying outdated rules didn’t protect Americans as their retirement savings increasingly move away from employer-provided pensions and into self-directed individual retirement accounts (IRAs) and 401(k)s, the labor department said Americans were too often exposed to conflicted advice that moves them into high-fee products that benefit advisors more than clients. The labor department estimated Americans would save $40 billion over 10 years under the new rules. “While many investment advisers acted in their customers’ best interest, not everyone was legally obligated to do so,’’ the labor department said. “Instead, the broken regulatory system had allowed misaligned incentives to steer customers into investments that have higher fees or lower returns—costing some middle-class families tens of thousands of dollars of their retirement savings.”

What’s Changed?
Any investment advisor who handles retirement accounts becomes a fiduciary and has to comply with ERISA standards, which means providing impartial advice and not accepting payments that represent a conflict of interest, according to the department of labor. The industry has been concerned that the new rules would eliminate the possibility of brokers making commissions on trades or fees for selling insurance, or prohibit certain products such as a bank’s proprietary funds, or even variable rate annuities. But none of those products were ruled out, and neither are commissions. Instead, there is a “best interest contract exemption” that allows brokers and other advisors to continue their compensation practices and to sell products such as proprietary funds as long as they promise to put their clients’ best interest first, pay “reasonable” compensation to advisors and disclose all conflicts and fees.

What’s the Impact?
There will be new compliance costs associated with the rule. Analysts at the investment bank Keefe, Bruyette & Woods estimated that Morgan Stanley, as an example, could face a two-year implementation cost of $2,500 per financial advisor, plus about $600 yearly per advisor after that for on-going compliance, based on calculations from the trade group SIFMA, the Securities Industry and Financial Markets Association. The costs could potentially push some banks with marginally profitable asset managers to sell or outsource their compliance, and many of them already do the latter. Some think the rule could have far-reaching effects in terms of changing the types of products advisors are willing to sell, because of the uncertain liability. “It is fundamentally changing the way a bank will interact with the typical IRA client,’’ says Richard Arenburg, a partner at the law firm Bryan Cave LLP in Atlanta. Customers can sue advisors who don’t represent their best interests. Recommending products that benefit the advisor when lower-cost or more appropriate products are available could be a bad idea. “To continue to recommend funds where it is questionable whether they are in the best interest of consumers, you will have a tougher road to hoe to avoid liability,’’ Arenburg says. Some banks may react by limiting the number of advisors who handle retirement accounts such as IRAs. “I think you’re going to see consolidation definitely,’’ says Strimaitis. “People are going to have larger operations to make the compliance costs worth it.”

Boards should review the impact on the bank periodically, says Nancy Reich, an executive director with accounting and advisory firm Ernst & Young LLP. What’s the impact on the business model? What changes to its policies and procedures is the firm considering to address the impact?

Could Your 401(k) Plan Come Back to Bite You?


401k-4-6-16.pngMost every banking survey I have seen in the last five years includes a question about the ways banks could improve non-interest income fees with the answer of wealth management being the overwhelming number one response. Wealth management is fraught with increased regulation, execution risk, a lack of expertise and culture integration issues. However, it is a wonderful tool to build cross-selling opportunities, customer loyalty and fee income, if done correctly. What is the best direction to begin for a community bank? One of the best ways is to not reinvent the wheel, yet try to do something that differentiates you from others and is easy to implement. How about considering the 401(k) business? But before you decide to market 401(k)s, you might consider reviewing your own 401(k) program.

401(k)s have an inherent risk that many bankers haven’t considered and it is fast becoming a nationwide problem for those worried about Enterprise Risk Management.

  • Did you know there are 38 cases of ongoing lawsuits where employers are being sued by employees for issues related to employer-provided 401(k) programs? Did you know this includes employers such as The Boeing Co., Walmart Stores, Lockheed Martin as well as 401(k) providers like MassMutual Financial Group, which are being sued or have been sued by their own employees over 401(k) programs?
  • Do you know if your provider is or has been sued by its employees or others?
  • Do you know what your fiduciary risk is as a plan sponsor?
  • Do you know if your provider is a fiduciary or whether you, as a sponsor, bear that risk exclusively?

So what’s all the fuss about? 401(k)s have been around for about 40 years. Yet, providers have been more focused on making money and pushing product than providing the best portfolio and overall solutions for employers and their employees.

Most plans contain many issues:

  • Provider companies don’t act as a fiduciary alongside the employer plan sponsor.
  • There is no investment advisor fiduciary to assist the plan sponsor (i.e. the employer).
  • The provider is pushing its own funds, which represents a conflict of interest.
  • High fees look egregious, especially in a market that has a poor outlook for stocks, bonds and cash.
  • There is a lack of disclosure of all fees involved, although recent legislation is improving the level of disclosure.
  • Many plans offer poor structure and poor performance. Recent studies over the past 20 years show the average stock and bond mutual fund investor has under-performed the S&P 500 and the Barclays Aggregate U.S. Bond Index by a whopping 4 percent to 5 percent per year.
  • Even plans with stable value and target-date funds have issues of fees, structure and poor performance.

The recent Supreme Court ruling in May, 2015, requires plan sponsors to “monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

An independent review of your plan can have the following benefits for you:

  • Reduce enterprise risk management issues
  • Lower fees, improve structure
  • Improve performance
  • Lessen fiduciary risk exposure
  • Lessen other liability risk
  • Improve employee morale
  • Provide a competitive hiring edge
  • Satisfy ongoing monitoring obligations

Despite the risks, 401(k)s are a great way to enter or enhance wealth management divisions and add interest income to the bank. It’s a fairly easy way to compete given the large problems in the industry that are loaded with many poorly structured and under-performing 401(k) plans. We know many banks with large trust departments and wealth management businesses where 401(k) sales are the biggest profit center in that line of business. Designing a great 401(k) can help shape your employees’ future and make a long-lasting impact on their lives. Don’t settle for a mediocre plan. When your employees and your customer’s employees deserve a really great plan that helps them meet their financial goals.

Do you want a chance to impact your employees’ well-being, reduce your enterprise risk, improve performance for employees, the bank and the bank’s customers? Consider learning more about 401(k)s.