The waiting is over. And we didn't have to wait all that long. We finally know what Riskalyze CEO Aaron Klein did with the $20 million in Series A funding the firm raised last October.
They built their own Turnkey Asset Management Platform (TAMP).
The reveal occurred at last week's T3 Advisor Conference in Los Angeles, CA. Klein kicked things off on Wednesday morning with a rapid fire series of new product announcements and updates to existing services that could have filled a year's worth of press releases.
There were four parts to Klein's announcement:
- Risk Number® Models – eight model strategies built by their new investment team that will start their TAMP offering.
- Autopilot Partner Store – an online marketplace where advisors can subscribe to models, strategies and research from external asset managers. This is similar, only on a much smaller scale, to the manager network of Envestnet.
- Riskalyze Premier – a new service tier of their core risk profiling service that adds functionality including account opening, a client dashboard, and data aggregation for held away accounts.
- Updated Autopilot Platform – enhancements to their robo-platform, which is now multi-custodial, and enables advisors to deliver their own, white labeled digital advice channel.
Riskalyze now competes directly with TAMPs such as SEI, Assetmark, and Loring Ward (although SEI is offering their models through the AutoPilot store). Of course, they had already encroached into the crowded robo-platform space with their Autopilot product where they locked horns with providers like Jemstep, Advisor Engine and Oranj as well as offerings from almost every wealth management platform provider and custodian.
Envestnet is still in a class by themselves with an industry-leading technology platform, proprietary models (created and managed by their PMC division and delivered through their platform) and the largest model marketplace with over 800 asset managers distributing their strategies.
— Craig Iskowitz🥋🎷 (@craigiskowitz) February 15, 2017
Founded in 2011, Riskalyze's user base has experienced a burst of growth in the past year. When they announced their recent funding round, they had around 15,000 users and they just announced 19,000, which translates into a 26% increase in a little over three months. If they maintain this growth rate they could have 38,000 advisors by the end of the year. (See How Risk Tolerance Software Is Disrupting Wealth Management)
Just for a little perspective, Envestnet reported around 45,000 advisors and close to $1 trillion in assets on their platform last year. Riskalyze has a long road ahead of them to attract enough advisors and win enterprise deals from institutional clients to become a threat to Envestnet's business. But they are definitely popping up on more firm's radar screens with this announcement.
Show Me The Money!
Riskalyze is growing very, very fast. And now they have not only more technology products to sell, but investment products as well. Both their own, called Risk Number Models, and affiliated asset managers via their Partner Store.
Selling investment products are where the real money is because they can charge an asset-based fee as opposed to flat, monthly fee for technology solutions. Riskalyze currently bills a monthly rate per advisor. By becoming a TAMP and offering investment models to their advisors, they have opened a new revenue stream that scalable and is tied it directly to their clients' asset growth.
Selling investment models is so lucrative that even big RIA's have gotten into the act. Carson Wealth and United Capital both have their own TAMP offerings with a technology wrapper. They share some of the tools and processes that helped their firms be successful as well as a handful of models that they charge anywhere from 20-140 bps. (I really wanted to know which model they can charge 140 bps for, because it better be incredible! But the rep at the Carson booth was not able to answer.)
The question is whether advisors will trust Riskalyze enough to invest with them. It is one thing to leverage their innovative software for analysis, but quite another to steer client portfolios to their models. It is standard in the industry to wait until a manager has a track record of at least 18 months before even considering an investment. 36 months is more common. Unless, Klein has done customer surveys that show different attitudes, it might be a while before they see any revenue from their offering.
To Market, To Market
Klein also announced the AutoPilot Partner Store, which is very similar to the iRebal Model Market Center launched by TD Ameritrade at their conference earlier in February. Although, TD appeared to have rushed to announce their offering since there were no third-party managers available, while Riskalyze's store has at least a dozen.
Both offerings share the ability to review and edit model updates instead of having them automatically applied to their accounts. Riskalyze customers will be handcuffed by AutoPilot's limited model update function while iRebal customers have one of the most robust portfolio rebalancers on the market, but why quibble over minor details?
I've been keeping an eye on Riskalyze ever since I first met Klein at the 2014 T3 Advisor Conference. I saw that they were swiftly building one of the best risk profiling solutions on the market. But it always seemed that Klein was looking beyond the Risk Number (TM) and plotting ways to expand their offering.
Riskalyze has been a tsunami of partnership deals over the past year including MoneyGuide Pro, Junxure, Laser App, and iRebal. I'll have to get confirmation, but I'm guessing the number of integrations is approaching 100.
To start playing with the big boys, Riskalyze had to add features that would be required in enterprise environments.
Klein started off his keynote presentation with a funny impersonation of President Trump calling out "fake news" from some of the other vendors. While this was just for comic relief, I have to call Klein on the carpet on some of the marketing speak that came later. While describing the updates to their AutoPilot product he said, "the problem with automation is that there has been no personalization." My impression of this statement is that there is no other technology solution that allows automated delivery of personalized advice.
Of course, this is not the case. Back in 2005, in one of my first consulting projects in wealth management, I helped design and build an automated portfolio rebalancer that supported personalization at both the client and account level. Today, just about every vendor offering any type of portfolio management solution provides some ability to personalize. T3 is a tech-savvy crowd, so I doubt most people took it seriously. Maybe he meant to say that his solutions will provide better personalization? (See Which Portfolio Rebalancing Solution is Right for You?)
— Craig Iskowitz🥋🎷 (@craigiskowitz) February 15, 2017
- Client Dashboard: This is table stakes for any digital advice platform. Up until now, Riskalyze was similar to other robo-platforms in that most of their value added was concentrated in the client acquisition phase. Once the account was opened, they did not have much interaction with the client. Offering a dashboard or portal provides an ongoing touch point for the vendor. This is another point of contention between the different classes of vendors; CRM, Financial Planning, Portfolio Management and Custodians. Everyone wants to be the portal. Of course, the Riskalyze dashboard will show the clients their Risk Number along with their portfolio holdings. This might seem like a minor detail, but it can become a must have feature for other providers if Riskalyze clients begin to understand its meaning to their long-term financial health. I do not know of any other vendor that displays risk profile data on their client-facing screens.
- Retirement Plans: Klein did not have time to explain exactly what this is, but from their website it appears to be just an enhanced view of assets an existing client may hold in their 401(k0, 403(b) or other retirement plan. Although, it could also be a sneaky way to get Riskalyze into the retirement plan outsourcing business like Vestwell. Not sure about that yet. Riskalyze would need access to the record keeper data in order to analyze the participants' holdings and generate a Risk Number. This can be easily accomplished through their Asset Sync feature. The retirement plan market is lucrative and sticky. A tempting target for Klein. (See Rogue 401(k): Can Robo-Platform Vestwell Help Advisors Defeat The Retirement Deathstar?)
- Account Opening: This is a service that had been shoved into a corner and ignored for many years by traditional wealth management platforms. Manual effort, duplicate entry and piles of paper were the norm. That is, until robo-advisors appeared and showed how the entire process can be automated and become paperless by leveraging providers like DocuSign. Only TD Ameritrade and Trust Company of America are supported currently, which is going to be a issue for Riskalyze. It is not as easy to setup paperless account opening with a custodian as you might think. Especially with Pershing, which has historically been difficult to work with in this area. it requires a lot more work than just pointing your code at some web services and clicking Open Account. A lot of programming and extensive testing is required, especially around ACATs to ensure that account envelopes are routed and delivered accurately. (See How the RoboAdvisor Renaissance Pushed the Industry Out of the Dark Ages)
- Asset Sync: This sounds like standard data aggregation for help away assets. I'm guessing it is powered by Quovo since they have an existing relationship. It will also provide data on 401(k) plans for their Retirement Plans offering (above). (See Riskalyze and Quovo Help Advisors Stay Ahead of Robos)
- Data Sharing: A feature that seems well-suited to enterprise users by allowing centralized management of firm data. Allows sharing clients and portfolios across advisors. A good step in the right direction for larger RIA's to take a look at Riskalyze.
My guess is that a lot of these features are still in Beta testing and will need a lot of work to get the bugs out of them. Most of what is listed here would be considered table stakes for getting into the space. They will need a lot more, including connectivity to the other three big RIA custodians before the Riskalyze enhanced platform can become a real competitive threat.
Simplified Portfolio Rebalancing
There were a few new features that did stand out as legitimate differentiators for the new Riskalyze TAMP platform. The first was a simplified portfolio rebalancing solution, which they are calling One-Click Fiduciary™ technology. Klein showed screenshots of what a portfolio management platform vendor would refer to as a 'model rebalancing'. This is when changes have been received to a model and the system automatically generates the necessary trades to implement them.
While this function is not unique, I like the user experience that Riskalyze has designed to walk an advisor through the process. They created a screen that provides a snapshot of the model before and after the updates along with the corresponding risk profile change, if any. The advisor can then accept the model changes, edit them or ignore them entirely.
This is a big step for Riskalyze AutoPilot. Moving from risk profiling into portfolio management is not a step to be taken lightly. Their new functionality puts them well on the path to eventually offering an end-to-end wealth management platform. They would be competing with a new set of competitors that currently dominate the RIA market:
- Envestnet | Tamarac – 500+ RIA clients, including 35% of $1B+ AUM firms.
- SS&C | Advent BlackDiamond – a performance reporting solution that morphed into a full-featured platform and began stealing business from Advent before being snapped up in 2011.
- Orion Advisor Services – was mainly a portfolio accounting solution and outsourcer with a lot of integrations with add-on products, but at T3 they announced their own portfolio management solution, called Eclipse.
- Schwab PortfolioCenter – the largest RIA custodian with $1.3 trillion in assets offers a well-rounded platform for advisors.
- Fidelity WealthScape – the custodian's free technology platform, updated in 2016 by combining their WealthCentral and Streetscape products and now integrating eMoney Advisor technology.
- TD Ameritrade Veo One – in a strikingly similar situation to Orion, Veo was primarily a facilitator of integration rather than a platform, this has changed with the recent launch of Veo One platform. The new layout looks a little busy, but Veo users tend to be more hands on with technology, so they may prefer this.
- Pershing NetX360 – The old man of the custodian platforms, NetX360 recently got a refresh to some of its UI, specifically the Advisor dashboard, but the overall environment has a confused user experience especially when accessing third party products that display multiple levels of menus and options and completely different look and feels. It's still free and offers direct access to trading as well as real-time holdings and cash balances that active advisors need.
- Morningstar Office – Soon to be combined with their recent acquisitions of portfolio rebalancer TRX and data aggregation product ByAllAccounts, along with Redtail CRM, into Morningstar Suite with plans to launch in March 2017.
Klein has a long way to go before his new platform can replace any of these. But they have taken a solid first step.
Not Ready for Rep-as-PM
Advisors who upgrade to the new Riskalyze platform must assign a model to every account. Either their own, a Riskalyze model or one delivered by an approved partner. Klein did not show any tools for advisors to trade individual positions directly. To do this, they will have to switch over to their custodian system to enter the orders.
There is still a segment of advisors at IBD's and large RIA's that we have worked with prefer to avoid models, if possible, and manage each of their accounts directly. While we do not believe that this is the most efficient method, and the market seems to be trending towards models, it is still something that must be supported if you want to reach the maximum number of potential users for your portfolio management product.
There were some well-designed features that Klein showed us. It is very easy to place a Do Not Sell Hold on any position in an account by clicking the lock icon next to it. Most other systems require a few clicks and drill downs to get to this option. This is mainly used to avoid selling positions with low cost basis that a client transferred in, so it is not something an advisor would take advantage of every day.
One function that would get more usage is the ability to 'snooze trades'. When the system generates trades that need to be executed in order to implement a model change, the advisor can click a snooze button, if she is not ready to deal with them. The system would then alert the advisor at a later date about them. This feels less like an institutional platform and more like an iPhone scheduling app. But maybe that's what the Riskalyze design team is shooting for?
The demo only showed models containing ETFs, so they at least support equities and probably mutual funds as well. Their core risk system already supports almost every security type including individual bonds, alternatives, variable annuities and separately managed accounts, so I would imagine that they are hard at work expanding their model support to also handle these.
The new TAMP platform appears to be tightly integrated with Riskalyze AutoPilot, at least based on the screenshots Klein showed. After model changes are reviewed and the advisor clicks the Preview Trades button, a screen appears with a brief summary including number of trades generated, estimated trading costs and estimated capital gains. The estimated trading costs is a nice feature, but I think there should have been an option before this screen to allow the advisor to avoid capital gains, if possible. What confused me was that the button that I thought said 'Execute Trades' actually says 'Enable AutoPilot'. So, it seems that you have to use AutoPilot for all accounts on the new platform? Is there any way to manage them otherwise?
I would expect that RPM-specific features such as the ability to replace a security across accounts to be on Riskalyze's product roadmap.
The Riskalyze Premier tier of their standard offering starts at $245/month for the first user. They have a pricing table on their website that allows you to enter the number of advisors you have to see the volume discount available. The monthly price tiers for Premium are:
- 2-4: $225
- 5-9: $205
- 10-18: $195
- 19-24: $185
The Premium product is targeted squarely at the RIA market. But they also have an Enterprise product that appears to be a placeholder for their possible future entry into the broker-dealer and bank markets.
It is not possible to compare the pricing to other risk profile vendors, since Riskalyze has moved beyond this niche. It is also difficult to compare them to wealth management platforms, since they are missing a lot of functionality, such as drift-triggered rebalancing, rebalancing multiple accounts and a proposal system, to name a few.
But maybe this is an advantage for them, since it makes apples-to-apples comparisons more difficult for prospective clients. I think they are far short of the raw capabilities of even the free custodian systems, but with some innovative features and a cleaner user experience.
The Riskalyze AutoPilot product has a list price of 10 bps.
Klein reported that pricing for the eight Riskalyze models will start at 15 bps and drop to 10 bps when the advisor reaches $5 million in assets on their platform. I'm guessing they will be all ETF models to start, which is probably why they are so cheap. No word on how many bps Riskalyze will tack on to the strategies offered through their Partner Store.
If an RIA uses Riskalyze AutoPilot, Riskalyze Pro/Premier and their proprietary models, they could expect to pay 25 bps to start, plus a monthly fee per advisor for use of the risk profiling technology.
Riskalyze Autopilot Future Plans
I am going out on a limb and predicting that Klein is planning a name change at some point. Having the word 'risk' in your company name makes sense when your primary product offering is risk profiling. It doesn't make sense when you're a TAMP selling a complete wealth management platform. Expect something similar to what Google did by creating a holding company with a new name to encompass their expanding suite of products. (And for the love of god, please don't include any form of the word 'vest' in your new name. I already stutter like my grandmother trying to remember her grandchildren's names when I'm discussing vendors. Thank you.)
I expect Klein to keep driving his Sacramento-based development team to add all of the features and functionality necessary to make Riskalyze AutoPilot a complete, end-to-end wealth management platform. They believe that their expansive partnership agreements (I'm guessing well over 100 by now) have made them the de facto risk profiling solution in the industry, which gives them leverage. It will be needed since they have now entered the difficult and complex world of coopetition. Everyone is both a partner and competitor, but everyone need to cooperate to ensure that advisors and their end clients are provided a high level of service.
Naturally, there is one message of cooperation in public and sometimes another in private where every vendor wants a bigger piece of their RIA clients' technology budget and their investment assets. My advice to other technology vendors, wealth management platform providers and TAMPs would be to keep a close eye on Riskalyze. I expect them to move quickly to expand their offerings and try to grab market share from everyone and anyone. The required return on $20 million of VC money can be a cruel taskmaster, but Klein and Riskalyze seem well-positioned to make a run for it.