#ItzOnWealthTech Ep. 80: Best of 2020 – Part 2

Welcome to our annual best of the year edition of the Wealth Management Today podcast. I’m your host, Craig Iskowitz, and I run a consulting company called Ezra Group. We are experts in everything related to wealthtech, and this is where I usually give our standard marketing pitch, but instead I’m going to sneak in a plug for our market research team, lead by our Head of Research, Jean Sullivan. If you’re running a fintech firm and looking to expand into new markets or develop new products, you’re going to need data and insights on the client segments you are targeting. You absolutely have to know what perspective clients are looking for, the size of the obtainable market, the revenue potential, who the top competitors are, and any functionality gaps that need to be addressed. You can get all this and more from Ezra Group’s research team. If you’re a member of the executive team at a growing fintech vendor, contact Ezra Group right now by going to our website, EzraGroupLLC.com and clicking on the big button that says “Schedule a  Complementary Discovery Session” at the bottom of the homepage.

Our content team found so many terrific clips from our interviews this year, that we couldn’t fit them all into a single episode, so this is our “Best Of” Part 2.

Click here and schedule a free Discovery Session to find out how Ezra Group can help your fintech firm grow revenue in the wealth management space.

Ep. 71: Dabbling in Disruption with Babu Sivadasan of Jiffy.ai

Our first guest on this Best of 2020 episode is Babu Sivadasan, Co-Founder and CEO of Jiffy.ai. I’ve known Babu for quite some time, he’s one of the first people I met in the wealth management industry, way back in 2005. Now he has founded Jiffy.ai where they’ve been doing some very cool stuff with robotics process automation, and what they call HyperApps. You can check out their website and some of the things they’re doing with customer service, other process automation, KYC, accounting, invoicing. It may sound like mundane processing, but with tremendous scalability across industries. There is so much good work to be done, and we wish Jiffy.ai all the best and look forward to seeing big things from them in the future.

After 20 years at Envestnet, Babu Sivadasan was ready to start a new company and was looking for the right idea. He realized that there was a need for intelligence software that could help stitch together other applications in datasets and act as a bridge between humans and algorithms. And that’s how his new firm Jiffy.ai was born.

Craig: Interesting. Moving on. So we talked about HyperApps. You have another product that you call Innovate, this is the one I think is really valuable, and I’m really interested in this, being a former programmer. You’re re-imagining software development and having the system generate its own code. How are you doing that, and how is that better than a real programmer doing the code?

Babu: You know, where this is really different, the value add is in every line of code that we write, we introduce the possibility of bots. So as we speak right now, there are thousands of people out there writing, introducing bots into the software. Because we bring new people in all the time and repeating the same set of mistakes and the same things we have solved before, or you don’t know that you have a piece of functionality that is already in there, but you’re still building it because you don’t know that a new person coming into the team doesn’t know about it. So software development, especially enterprise application development, is fundamentally broken that way.

Whereas if we were to let systems do that, they have that digital blueprint of the entire ecosystem and their application that digital twin, if you will, right. So it already knows. And if you are looking for a new piece of functionality, it’ll automatically bring up that that already exists, that you may have already created. Being able to write self tested code automatically. So you’re taking this to a paradigm, a much higher level where you’re talking in terms of the needs that you’re trying to solve for and let machines interpret that. So we have capability and natural language understanding so you’re able to read those instructions in plain English.

And why do we have to write code? For the machines to understand your own way of expressing things, you had to learn machine’s way of doing things, right? And now we are talking about how machines have gotten to that stage where we can with technology, enable them to think like us. Or enable them to interact and take things that are native to us and have them be interpreted rather than the other way around, which is supposed to be the way, it is what we’ve always wanted. And it’s finally getting to be a reality,

Craig: But isn’t it true that the AI is just simulating human thought? Or is it really having his own thoughts?

Babu: Yeah, no, it’s really having a series of small innovations that you put them together and that’s what contributes to that capability.

Craig: Hmm. Let’s talk a bit about, well, this year, you guys raised $18 million in a Series A, so congratulations.

Babu: Thank you.

Craig: You’ve done a lot with a company in a short amount of time where, how has this new latest funding raise going to help the firm?

Babu: Yeah. So what we do takes a lot of capital. We are, putting out groundbreaking technology, you know, that takes a lot of effort and a lot of engineering, a lot of investment that is necessary to do that. And we have been fortunate to get that first round of capital that was essential to invest and build a team out, a really strong technology team, technology capability and things like that. So we’ve done that, we are serving clients today. We have, 30 plus clients and 10 Fortune companies as clients. And so we are just getting our technology out there and customers start leveraging the value of it, and, getting to that next step of the evolution of the organization. And we raise capital from outstanding venture capital firms and public company executives and people who believe in what we’re doing.

And so the way we are doing this we are taking on AI-based innovation, with a deep sense of social responsibility. And so we are a combination of a for-profit and a nonprofit at the same time. We understand and that recognize that what we do disrupts traditional jobs as we know it at least it has the potential to. Any AI company is in a way dabbling into disrupting the workforce as we know it. And it’s been a good way to combine the two, so on one end you can be disruptive, but then on the other end, you can also be compassionate about it. We can help invest in those people who might be potentially affected, help them retrain for the next set of jobs so it sets up a very humbling experience that way to kind of try and do both at the same time.

Ep. 73: Confessions of a Fintech Heretic with Lex Sokolin

Next up we have Lex Sokolin, who is the Head of Wealth Management at ConsenSys which is one of those crypto/blockchain software companies maybe you’ve heard about in the news. They are a programmable software company, and they’re based on Ethereum, which has a programmable blockchain, and Lex likes to call it a “next generation computing paradigm”. They’re looking to leverage blockchain and other decentralized technologies for financial instruments, whether that be funds, trading, or investments. They also work in decentralized finance, and using blockchain for large financial institutions. Lex always has great insights which is why I like to have him on the program as often as I can, so please take a listen.

Lex Sokolin is a New York & London entrepreneur with senior operating and board-level Fintech experience in digital advice, personal finance, and wealth management. Lex founded the Fintech practice at Autonomous, a financial services equity research firm (bought by Bernstein), where he focused on artificial intelligence, blockchain, and mixed reality. Previously, Lex was COO and led product design / corporate development at AdvisorEngine, a wealth management platform built on roboadvisor DNA, and also CEO of NestEgg, a roboadvisor focused on delivering financial advice algorithmically, which he founded while getting a JD/MBA from Columbia – a reckless but fun decision.

Craig: The soup. I liked your comparison of the Western versus Eastern model. So can we talk about that just a little bit more? Can you explain what you mean when you say, the question was, can the West integrate finance quickly enough versus can the East grow quickly enough? So why is it integration versus growth? Why do you see it that way?

Lex: Well, I think the West is starting from a very different place where behaviorally, people don’t really want to adopt new things. It’s a friction, right? So I think large parts of the US are still swiping their credit cards, or they’re still sending in paper forms to their financial advisor, thinking that is a reasonable thing to be doing. And the regulatory environment in the US puts precedent and consumer protection first in a way that is largely blocking of what are they trying to prevent. They’re trying to prevent Facebook destroying the banking industry to put it into stark terms.

Craig: Yeah. So it’s not consumer protection, but it’s their constituents’ protection are the ones who are the banks that are giving them campaign funds.

Lex: You use the words of one to do the other, so you we can revisit, for example, the reaction to the fiduciary rule. And I’m going to get this wrong too, but it may be the Transamerica’s of the world or similar firms LPLs of the world might’ve had an allergy because they have commission-based businesses, to the fiduciary rule, whether from the DOL or the SEC. Whereas the robo-advisors were all about the fiduciary rule and thought it was good change. And it’s this conversation about what does an individual need, what does a human being need to be taken care of, or to have the freedom to buy stocks for too much commissions? And so the conversation is about the consumer behavior, but behind that is really I think the incumbent interest.

You see the same thing with the banking industry in the States. So the OCC keeps trying to put out this FinTech charter, which would let Square and PayPal, and other Stripe have easier access to holding people’s deposits and then local states, kind of banking organizations just keep suing the OCC for overstepping its mandate. I think that’s just inherent in our society.

Craig: So we’re running out of time, but I want to hit a couple more topics. So the news that Robinhood’s valuation hit $11 billion. Do you see that ever ending? Is there no end for that valuation as they’re going to hit a wall, are people gonna realize that they’re not making any money day trading and it’s going to fall off, or is it just going to keep growing?

Lex: I’m somebody that comes from an asset allocation and modern portfolio theory background, putting aside that none of the numbers work anymore, but regardless. Like a diversify and hold, like sure, I believe in that. So for me, Robinhood was always a sign of kind of selling candy, and especially giving away candy. It’s both delicious and addictive and bad for people in the long run. And so I continue to believe that, at the same time, you have to observe what Robinhood has done, which is it has thrown so much money at user acquisition and training people in certain ways, that the net effect is retail trading is something like 40% of market volumes now. That’s 2-3x over the same as last year. I think Covid has played a large part in that because we’re all trapped in our houses and so everybody’s in these digital experiences.

There’s also, I think underneath the trading sort of like this, it’s not a sadness, but everyone is trapped in a terrible financial situation. So what do CEOs of failing companies do, they take out a whole bunch of debt that the firm cannot possibly repay, but it’s like the moonshot to try and get out of it. And so I think for a lot of Americans, this is why you buy crypto assets. This is why you kind of, you take out too much lending it’s because you have no choice. You’re in such a hole that you need something to give you a narrative to get out of that. And I think Robinhood has amplified that to such an extent that it eradicated the previous industry equilibrium around commission pricing. And so there is no commission pricing anymore for anybody.

And then it exposed it generates $600 million in revenue or a billion in revenue. It’s not a FinTech struggling to make money. Where does that revenue come from? The revenue comes from high-frequency trading shops that act as market makers in capital market. What does that mean? It means that they buy and sell on both sides and they take a spread in between. They don’t take really exposure to any asset, they do it really fast and you know, they get retail flows from one side and that gives them liquidity to close out trades on the other side. And you can have super funky outcomes. It’s the equivalent of advertising for Google, right? Selling the product of attention in this case, it’s selling the product of waterflow.

We’re in a transition to a different equilibrium for equities, and that transition benefits Robinhood in a strong way and makes it much more difficult for firms that want to be fiduciaries, and want to do well by the client because, the only revenue pool left is either cash accounts and interest on that which is very low, or trying to incentivize payments, through interchange, or trying to incentivize, trading, and kind of churn in accounts. So I don’t think there is necessarily a cap on that to answer the question more directly, and I think that’s at the expense, it’s like a social cost that has been born as a result of that.

Craig: Can you give me a one minute answer, why are you a fintech heretic?

Lex: Why am I fintech heretic? I must get bored easily and so I always look for what’s the edge. Where’s the place where people are breaking the thing, and re-imagining how it could be. So even in a situation where 99% of the industry is the same, I’m always going to look at that 1% that is behaving in a different way. And so this is why I’m interested in DeFi, this is why I’m interested in how crypto assets repackage financial instruments and repackage asset allocations, and automate all the things about actually manufacturing the financial products. How they break global regulation, how you custody and hold them in a different way. And I think we as people have only so much time to spend, and for me spending my time on things that are curious and different, is where I get the biggest payoff. So yeah, that’s always been my frame.

Ep. 77: Building a Fintech Ecosystem for Modern Retirement, with Rhian Horgan, CEO of Silvur

This next clip is with Rhian Horgan who I really enjoyed talking to, the CEO of Silvur, also Kindur which is their parent company. Part of her story which I really liked was when she was looking for her identity and had left JP Morgan to start her own business, people didn’t see her as someone to invest in, which could be a gender issue, could be an age issue since PE and VC firms tend to look for the young, hip kids. But she finally found a couple firms to take a chance on her and she’s been doing really well. One of those firms was Anthemis, which was a part of one of the first funding rounds of Betterment, so these guys seem to know what they’re talking about. She also received a big stake from Penny Pritzker and Inspired Capital and Alexa von Tobel, the founder of LearnVest. So a number of successful entrepreneurs who have taken a chance on Rhian and Silvur, which us a retirement app built for those 55 and older.

Prior to becoming CEO of Silvur, Rhian worked for 17 years at JP Morgan where she advised individuals and families on investments, credit and wealth planning. She is widely quoted in the press, including The New York TimesForbes, CNBC, American Banker and is a frequent commentator on Yahoo Finance. She resides in New York with her husband and two young children.

Craig: Indeed. That sounds exciting. I can see how you’d want to jump right out something like that. But you’re up against a lot of competition. So I know in a previous interview you mentioned you want to become the Apple Watch of retirement information rather than the Life Alert. Can you explain what you mean by that? I think I know what you mean, but what do you mean?

Rhian: So Craig, we were just discussing a little bit earlier. You described yourself as a baby boomer, but with tech habits that look more like Gen X. And what I would say to you is that’s actually very indicative of our customer base, which is the vast majority of people underestimate how tech savvy this customer base is. This is a customer who grew up using technology in the 80s, and my dad is older than you, but he’s 70. He read CAT scans, MRIs on the computer at home in the 80s. This is a tech literate and a tech savvy community. But for some reason, the market looks at everyone over the age of 50 together as one big bucket of people. And so for the technology that generally has been built for the over 50+ demographic, you have products like Life Alert, which are all about falling and not being able to get up. And I would imagine, Craig, that you have no interest in wearing a Life Alert.

Craig: Only when I’m snowboarding. That has happened, where I’ve fallen and can’t get up while snowboarding.

Rhian: I don’t know if you have an Apple Watch, but I bet if you did have an Apple Watch, it wouldn’t be a signifier that you were old. And I think what we get really excited about is that opportunity to build inspiring, beautiful technology for this demographic that doesn’t make you feel old, that actually just empowers you to live your next best act. And I think you know, we’ve spent a tremendous amount of time learning how to design for this demographic. There is a massive difference between how consumers in their 50s and 60s navigate technology versus consumers who are 80+. Life Alert is for the 80+ crowd. What we’re building is the Apple Watch for financial and health decisions in your 50s and 60s.

Craig: That’s cool. That’s a great way to describe it. And people need those kinds of anchors to understand what you’re talking about. You can say that you’re an app to help people navigate retirement, that doesn’t click. You want to be the Apple Watch of retirement. Okay, now I kind of see where you’re going with that. With that there’s a lot of competition in this space. There’s so many apps. I was just saying, I’ve got a thousand passwords in my password manager, I’ve got hundreds of apps on my phone, although probably way more than average person because I’m in the tech space, I’m always trying things out. But lots of people have lots of apps and there’s lots of retirement savings programs. Every wealth management firm, every advisor has got these calculators, every asset management firm, Vanguard and Fidelity have these calculators and tools for retirement. How do you set yourself apart knowing that all those other tools are available to your customer base?

Rhian: So the vast majority of modern tech apps have been built for accumulation, for people who are saving for retirement. So it’s learning how to pay down your student loans, accessing your first mortgage, putting money away maybe for your children’s 529 plans. The reality is that our consumer is embarking on a different phase of life, which I would think about as decumulation. So all of a sudden it’s less about saving for, but it’s about spending down your savings and retirement. And also understanding the financial consequences of a lot of decisions you’re about to make. So, your election of social security, huge financial decision. Interestingly enough, your decision around healthcare, a very financial decision when healthcare costs on average, a couple $280,000 over the course of retirement, healthcare in America is a financial issue for every single retiree.

So what I think is really different about how we approached building for this consumer is the first is that we’re purpose-built for decumulation. So we’re helping you in that run up to that retirement decision, and then helping you as you start to draw down your funds. The second thing is that we’re built for what I would think about as modern retirement. So in the old days you know, you had a pension, you had income for life and you actually probably were only living until your early 80s today. The vast majority of our customers don’t have pensions, they will likely live into their 90s. And so really developing an ecosystem that’s much more holistic to help the customer we think is really important.

So when I think about our customers, if they’re in an offline world, they’re talking to a financial advisor, an insurance agent, a Medicare broker, they’re going to the social security website, they’re talking to a real estate agent, they’re talking to a lawyer. There’s no one person pulling all that together for them. And so what we think about as the real opportunity here to simplify and empower these customers is actually to be that digital landing spot that pulls all the pieces together for them and can really act as their general practitioner. It creates a lot of anxiety for this customer to have to be the GP as they make all these decisions. But the existing ecosystem of incumbents is really set up to give you an advice on a sliver of the problem and really leave it to the consumer to make the decision.

Craig: I like how you put that, the existing ecosystem of incumbents.

Rhian: It’s a lot, and look, I came from an incumbent. So I understand which is, I often describe what we’re building as this intersection of consumer tech, InsureTech, FinTech, health tech. Find an incumbent who wants to be in all those buckets. It’s like, why would you want to be regulated like that? Right. So we have the opportunity because we’re building from scratch to really think about how do we build an ecosystem that’s built for modern retirement? But if you’re a bank that’s already regulated at the state level, do you want to now add insurance regulators to the equation? Do you want to add Medicare to the equation? There’s just a level of regulation and scrutiny that if you’re an incumbent, you probably say, look, I’d rather just stay really good at what I am and solve this piece of the puzzle. But again, I think the challenge for the consumer is that with this shift from DB to DC would just keep pushing more and more decisions to the consumer. And that’s what the app is really intended to do is recognize that all these decisions have frankly been pushed to the consumer. Now, how do we help bring it back together and help empower them?

Craig: That’s something you don’t hear a lot about pushing decisions to the consumer. I think people, assuming that politicians were doing things for the right reasons, which is a a tough leap to make, that maybe people aren’t equipped to make these decisions with all the other decisions they have to make. You think that you’re empowering people by giving them more control, but is that what you’re saying, that you’re overwhelming them with decisions that they’re not equipped to make?

Rhian: Well, look, I would just say for the average consumer, the math of social security is complicated. And so it’s no surprise that the vast majority of Americans elect social security at the earliest point possible, which is 62. But as Americans are living into their 80s and 90s, that may not be the best financial decision, particularly if you don’t have a pension or an annuity. So I think about social security as our customers’ largest retirement asset. For most of them it’s the only asset that they have that has lifetime income or longevity insurance. And the reality is that most financial advisors don’t talk about social security with their customers. It’s viewed as a government benefit rather than a financial asset. When it’s more than half of our customers’ retirement income, it’s, it’s a financial asset and it has to be included.

Craig: But isn’t it both the government benefit and a financial asset?

Rhian: I would argue you’ve paid into it. It’s a savings program and you’ve paid into it. And the funds are there for you as you retire. But the mentality of it being a government benefit, I think changes the way people think about taking that election. And so it feels that there’s this risk that it feels like a handout rather than this financial decision you’re making. And so our goal is to help you understand that it’s a financial decision without overwhelming you. So how do we expose and help you see the power potentially of delaying social security? It doesn’t make sense for everyone, but it may make sense for you and help you understand how that impacts your financial plan. But do that in a way that doesn’t require you to read 300 pages, right. That’s just not realistic. And look, there’s a ton of great content in those books, but those books are written for the 1% who, frankly don’t even need social security. It’s not written for the other 99%.

Ep. 74: Not All Fintech Funding Checks Are Equal with Sean Brown of YCharts

Our next clip features Sean Brown, CEO of YCharts. I really enjoy talking to Sean  and we were introduced by Tricia Rothschild, the former Head of Product for Morningstar, was on the board of YCharts and is now president of Apex Clearing, congratulations to Tricia. I love having Sean on the program, he has a lot of interesting insights about portfolio analytics tools and the industry in general. Sean has a long history in startups and we have something in common Sean and I, we both started out as software developers and then became strategy consultants. So check out this clip of Sean talking about how YCharts is expanding their data coverage from just ETFs, mutual funds and such into SMAs which is a big area of growth for RIAs.

With over twenty five years of leading technology-centric companies of all sizes to success in hyper-competitive markets, Sean has a proven process-oriented approach to achieving results, with significant experience aligning vision, product, go-to-market, and operational plans to achieve measurable commercial objectives.

Craig: You brought up a good point, RegBI is changing the way a lot of advisors do their business, at least on the compliance side. What tools do you have that advisors can use to help them in that area?

Sean: Well, we’ve got pre-canned analyses, which is a really big one, which is we know the thing is 80-90% of people who want to do a fundamental analysis or an exposure analysis or a relative merit analysis, we know what they’re trying to do. And you put in two security names, stocks, ETFs, mutual funds, models we’ll help you compare the relative merits. To the point you brought up earlier, which I don’t think I fully answered on SMAs. SMAs is something for high-end customers that advisors want to have as an option. And we just felt it was right thing to put in and provide to them something that they don’t want to have to switch to another tool to do SMA data. We think the most enlightened advisors want to have access to a whole lot of different asset classes.

They want to do some good solid analysis, but they don’t want to start from scratch with a blank sheet of paper and okay, how do I compare these two portfolios? We think the best thing we can do is help them very quickly and efficiently do these analyses, help them save off these analyses and help them present these analyses to their customers to say, I’ve got your back. I’m thinking about this for you. Here’s my proof points. Hope it works for you. Let’s talk more. And, you know, when they want to meet their regulatory obligations or need to prove it, they’ve got a really nice documentation trail that helps them do that.

Craig: Yeah. I think it’s interesting that you guys moved to SMA data. I mean, we work with a lot of enterprise firms, broker dealers and banks, and they put a lot of client assets into separately managed accounts. It’s very popular with HNW clients, especially on the wirehouse side, huge users of separately managed accounts. So it’s interesting that more RIAs are using SMAs. Whereas the majority of assets in the RIA space has always been ETFs and mutual funds. So seeing them move into SMAs, do you think it’s also the fact that there are more SMAs with lower minimums, no trading costs, the fractional shares gives other options for mass affluent clients?

Sean: Absolutely. Absolutely. You know, we have access to over 10,000 separate accounts. Just saying 10,000 means there’s a lot out there and I’ve always found the laws of supply and demand tell you there wouldn’t be 10,000 if there weren’t ample needs and interest in them. The challenging part, whether you’re talking about separate accounts or you’re talking about models is everybody gets those at the conceptual level, but how do you compare them? Models, there are 10,000 models out there and model marketplaces. And a lot of them look something like this is a 60/40. That doesn’t mean they’re the same thing. So how do you do your homework to compare two 60/40 models to know which one’s right? And how do you know the exposures of those models and how do you know the underlying securities?

The thing we really like to see that our clients are doing in our platform is they’re taking these aggregated things, whether those are models or those are mutual funds, or ETFs comprised of a bunch of holdings is saying, what are the atomic pieces each of those aggregated things? And how can I look and see what is my exposure in these two different models or these two different SMAs? What’s my exposure to big tech or FANG stocks? And we just find our clients really leveraging that functionality quite a bit and having very robust discussions with our customers afterward.

Craig: Yeah. I mean, I think a lot of clients don’t even realize their exposure. They think, Oh, I’ll buy a little Apple stock, I’ll buy a little Facebook stock because it’s in the news, they don’t realize how much they already own in any large cap mutual fund.

Sean: Hugely important, hugely important. People have no idea how much exposure they faced in some of these things that look like well-diversified assets on their own, they may or may not be, and you or your advisor should do your homework.

Craig: Yes, they should. Which is why they need tools like YCharts. One area we’ve seen a lot of movement in, every year it seems to get more and more is M&A. The mergers and acquisitions and the amount of money coming into the space, especially not just buying RIAs and buying a broker dealers, but buying FinTech firms that service the wealth management space. We’re seeing a lot of that. And you guys just closed your own deal. Can you talk a little bit about that?

Sean: Yeah. We were acquired by a private equity firm out of Philadelphia called LLR Partners, which is really a thrilling milestone in our journey. It’s neither the end, nor the beginning of a journey. It’s a continuation that’s going to help us grow the way we have an opportunity to grow in our future. So we’re really excited about that. And broadly, if it’s in a context of the advisor space and the space for fintechs that serve advisors is a very, very, very attractive space. A lot of fundamental dynamics for advisors that say, when they break away from a wirehouse or wherever they’re coming from, they cut their chops. If they’re an RIA, they cut their chops on having their own enterprise.

But some of them realize the way to achieve their goals is actually to get economies of scale, which says they may want to merge and engage in M&A. In a lot of ways, the FinTech spaces is fairly similar, which is, it’s not that hard to put a technology asset out in the market. It is challenging, and it is a many, many, many year journey to make a profitable, viable solvent enterprise. And so anytime you have economies of scale as a driver in a market, and any time a market is growing at a significant clip, those are fertile ground for M&A, and I think we’re seeing a lot of that now.

Craig: You have a lot of experience in M&A, you spent years, a couple of years in strategy development, as you mentioned, traveling the world, buying up companies for a public company. So you have probably a lot more experience than the CEOs of other smaller fintechs. So how did that experience help you when LLR came called and said, Hey, we want to buy your firm, how did that change the way you approached that transaction?

Sean: Well, I think one things I’ve learned over the course of my career is M&A is not successful just because the buyer and seller agree to a price. In fact, sometimes that’s a recipe, you know, for a lack of success. I think what makes M&A successful is a shared vision of the future, tight cultural alignment, shared accountability and an understanding that M&A doesn’t work just by handing somebody write a check.

Sean: M&A works when there’s a check plus strategic collaboration, plus shared execution. And so I think the thing I learned through my career is like a marriage, it’s not just about the ceremony, it’s about setting the conditions for a successful marriage going forward. And so bringing that to YCharts, for the past handful of years we have been growing tremendously fast, but we’ve also been self-funding based on many, many years ago, some venture funding we raised, we’ve been constraining ourselves based on our cashflow. And we got to some great milestones revenue-wise, cashflow positive, all those great things. But there’s so much opportunity in the wealth advisor, asset manager space, there’s so much need for somebody to support them and their workflows that we said a change of pace, a capital infusion the ability to engage in future M&A was going to help us best serve our market. So that’s how we got there, and I’m just thrilled with with the partner we’ve found ourselves married to for a long, long time.

Craig: Good to hear. You want to be happy, at least this is still the honeymoon phase.

Sean: Yeah. Yeah. But you know what, if you do your homework upfront, I found that with my own marriage, if you take the time to get to know the person you end up going on a honeymoon with, when you come out of the honeymoon stage, it still feels like you’re in honeymoon. And yeah, we’re in the honeymoon stage with LLR, but I sure do feel good about the things we learned about them over the past three to six months that says, this is going to be a really nice marriage.

Craig: A couple of things, you use the word “shared” a number of times when you were talking about the transaction shared vision of the future, shared accountability, shared execution. Is that something you would recommend to other CEOs of firms looking for funding? To focus on that shared everything being shared between the target and the acquirer, or are there other tips and recommendations you’d give to CEOs who haven’t been through this before?

Sean: I think my biggest thing is, not all checks, and those are physical checks, not all checks are equal. You can go get funding from somebody who will give you a check and no more than that. Or, you can get funding and a check and a partner in a journey that will inspire you, support you, push you, challenge you. Look for the ladder. It’s easy to get checks, but that’s no big success. There’s so much capital being poured into our space right now. The check is the easy part. The success story after the check is what’s really important and just never lose sight of that. And, you know, if you’re thinking of raising around a venture capital, or you’re thinking of taking on some angel investors, don’t limit your scope to, Wow, I got a check, say, What am I getting in addition to that check?

Ep. 79: The Ultimate Tech Stack for Retirement Plans with Aaron Schumm, Vestwell

Last but not lease we have my friend and super fintech entrepreneur, Aaron Schumm, CEO and founder of Vestwell. Vestwell is Aaron’s second startup, his first one was the very successful FolioDynamix which was bought and sold twice, ultimately ending up with Envestnet. Vestwell has been killing it, doing great in the retirement space building out what people are calling a robo-recordkeeper. Please enjoy this clip of Aaron talking about how Vestwell is changing the market for employer retirement plans. This is important because retirement is something that a lot of companies don’t handle well, it’s been clunky, with lots of paperwork involved, and they’re not very efficient. So I think Vestwell has a great platform to help employers not only save money on their retirement plans, but provide better options, tools, and financial success for their employees.

After Aaron Schumm graduated with a degree in finance, from the University of Illinois, his very first job was as a portfolio analyst, reviewing the investments held by corporate pension plans. Now, 20 years later, it seems as though he’s come full circle with his latest startup Vestwell that wants to automate all the underlying tasks of companies that are launching retirement plans, as well as helping the advisors that work with them.

Craig: Cool. So your mention there leads us right into the survey. So can you explain what the difference between the multiple employer plans and the pooled employer plans for those of us playing at home who don’t know those terms?

Aaron: Hopefully I don’t reverse these, but the overall idea is it’s creating a plan contract, a plan design with a set of investment elections and matches and so on where everyone is pooled. You have a leading sponsor, someone that acts as the plan sponsor across the entire MEP structure, and what those do is everyone kind of piles into there. Everyone gets the same plan. So it’s been around for 20 plus years. You see actually, if you really kind of look at it goes all the way back to like the pension era, and how those work.

But in the multiple employer plan, what happens if you think of like a PEO, like a TriNet or an ADP or something like that where they have, oftentimes those are MEPs that you become part of when you’re invested within their retirement plan. Now there’s the open, the concept was an open MEP and closed MEP, which talks about who can actually come in and how those get administered. You can now add more people that are outside of the industry or outside of a structure. Where before we would just say, okay, only lawyers can be a part of this MEP, law firms, right now it’s expanded where you can add different types of companies into that.

So that’s happening, and they do that, because it’s supposedly easier for people to administer. I argue that differently. I don’t think it is much easier when you look at if you have multiple payroll providers and that you have to incorporate. If it’s just one payroll company. Yeah, sure. That’s fine, because everyone’s going to the same thing. But if we have a thousand companies and a thousand payroll companies you have to connect to and manage that it’s not that it’s not as easy as people think.

Craig: Gotcha.

Aaron: On the backside of this, the PEPs, as well as the match goes on the 5500. Instead of having to do a 5500 IRS filing for every company, they can do one filing. So you basically do an aggregate filing around it. Which does make some things somewhat easier. We’ve kind of taken a different approach, we automate a lot of the stuff that doesn’t add a lot of value but can, but is necessary, right?

Maybe you think of like payroll connectivity and eligibility, that’s what we focus on. We have, I would argue, the best payroll engine out there. And the ability to aggregate and distill information and look for anomalies, calculate eligibility in microseconds and getting those things right up front, eliminate all the downstream, operational aspects that kind of snowball into these large headaches for folks. And we catch it all up front, and in doing that things get streamlined.

So the way I look at it, we can offer an individual, a retirement plan an individual company retirement plan, but it’s cheaper than any MEP you could ever find in the marketplace. That’s customized for them that allows them to do whatever they want. And grow and change and augment the plan as they need as the company evolves. So from our state now, will we offer MEPs? Sure. Yeah. We have a couple of MEPs that are coming on now. We’ll have some PEPs out there, like, it’s fine. We don’t, we don’t really care. We just want to be the engine to help facilitate and change the experience overall and give people what they expect in today’s world.

Craig: Sure. And in your survey, which is called the 2020 Retirement Trends Report, which I’ll put a link to on our website, you’re showing that 33% of advisors anticipate incorporating these employer plans into their practice. Is that number, low or high, or just about for the industry?

Aaron: I think it’s, it’s, it’s a little high, and here’s why. So as an advisor, if I’m a financial advisor and I’m engaging with a business, I don’t see why an advisor would want to push a business into a box that maybe they don’t fit into. And just to alleviate, you could say, well, there’s better fiduciary coverage, operationally it’s better and that’s all fine. But as an advisor, their advice should be providing the best plan, design and structure for that business and the employers. Because risk is designed for the benefit of employees, the protection of those employees. So I think people gravitate towards this because they think it’s the new, I guess the topic of the day or the hot item that people want to say, yeah, I can do that, check.

But at the end, when we see this play out a few years down the road, I don’t think people are going to, they’re going to look at it and say, yeah, I don’t get that much off it. So I think it’s a little high and if I’m an advisor, I’d want to give my client the best advice, the best plan structure I can. And that’s not saying some people don’t fit in that box. There’s those opportunities. And I think there are opportunities too for advisors to say well, maybe on the stand up a couple of PEPs of MEPs myself as a provider to my clients, and then decide be the air traffic controllers to where they should land.

Craig: Seems to make sense, it gives them more options. So let’s move on to another area, which I wanted to cover on the sponsor side. So it seems to me that user experience and cost are running neck and neck, when it comes to choosing a retirement plan sponsor, why do you think that is?

Aaron: Well, costs would depend on who’s who’s going to bear the actual fees. And it could be the sponsor themselves, it could be the participants, or it could be split. What costs, especially in a cost conscious world, you want to make sure you’re getting the best value. And I think that also ties into the experience, right? As a sponsor of a 401k plan and we have this awesome 401k plan through Vestwell, as long as that flows well, and I have a great experience as the HR person or CFO who’s ever managing the payroll to get ingested into the platform and the participants actually can understand what they’re doing and engage in an experience that makes sense for them without having to be a financial expert, it alleviates the headaches for the sponsor as well as the participant.

It’s kind of funny. We’ve seen a lot of instances where companies have grown, where they’ve come through like a payroll relationship we have, and they don’t have a financial advisor. Most plans do, 93% of retirement plans have a financial advisor attached, just industry statistics. And that’s actually grown over time. It’s gone from 68% back in, I think, 2008 to 2019, we’re at 93%. Fidelity does a study around this stuff every year. And you can see that. I think it shows that advisors aren’t going anywhere. They’re becoming more relevant in the 401k world, but for some businesses, not everyone has a financial advisor. And then they grow and all of a sudden the HR person is getting a knock on their door or phone call or meeting request to talk about what they can do in a 401k plan.

The HR person was like, listen, I got enough on my plate. I don’t want to do this. So that’s where the experience I think comes into play. And then we often get asked like, Hey, do you have a financial advisor you could introduce us to? Absolutely. We work with thousands. So that I think it just boasts, the fact that you want to create an experience you want to alleviate, you want to allow people to make confident decisions without having to be experts in that field. Employees of any business, they shouldn’t have to be 401k experts or investment experts, so we can solve for that we’re doing our job.

Craig: So you mentioned something interesting that people are coming to you, Vestwell, the provider of the underlying technology and saying, Hey, do you have an advisor that we can talk to? And that gives you a whole referral stream to your advisors, which has been an area that custodians have kind of tried to make their own like, Hey, join our neural network. We’ll give you referrals. Is that something you’re seeing as a benefit of advisors coming to the Vestwell network?

Aaron: We’re not doing it as a money-making thing. I know there are payroll providers that use this as like a revenue stream for them. We’re just doing to help businesses. Most of our businesses are advisor-led, advisor-driven probably aligning with the statistics of the industry as a whole. But you know, not everyone’s the same or recognizes that. Advisors do create things and making sure that they’re tapped into this world where there’s a need, we try to find a fit for them. So we do it, but again, it’s not like a business initiative that we have.

Craig: So can we talk about the misalignment of rankings between sponsors and advisors when it comes to measuring success where they seem to have different ideas of what a successful plan is. Can you talk about that a bit?

Aaron: Well, let me start with the sponsor. Sponsors think success is, and this is my opinion, is when things don’t go wrong. You never want a retirement plan to be a headache for someone. The challenge is retirement plans complicated, right? There are so many moving parts in these things. And even as you know, we built this platform, and we’ve been fortunate because myself and a lot of folks on our team, have been on both sides. We’ve been on wealth and retirement over our careers which you don’t see often, which is kind of interesting, but in seeing how things play out on the wealth side, and then looking at the complexities of retirement plans and all the nuance around just eligibility, and the complexities that people have put in place.

Now, I think some of it has been made overly complex, whether because people wanted to scare people into doing certain things or laws just got in the way. So kind of unwinding those things and distilling it, and back to a point where we were trying to take the complicated stuff that’s low value add and streamline it becomes important. So if you do that for a plan sponsor, who’s ultimately the client right, they’re mutual clients at the end of the day, you want to make their life easy. You don’t want to be like, Oh, I got payroll again. Then I gotta go do this, and this is going to take me two hours to process. You want it to happen right away and as easy as possible.

So we focus a lot of that and I think that’s important. On the advisor side, it depends on the advisor and how far they want to go into the equation. But advisors just want to make sure their clients are taken care of. Because if they’re not, it’s a reflection on the advisor who recommended to use this sort of structure or sort of program. So I understand why you, where the respective sides are coming from with it, which makes our job that we have to solve for it all. Keep, the plans clean, keep them happy, keep them moving, create the experience you want and make sure it doesn’t get screwed up and then make sure that the advisor’s clients are happy and getting what they want. And then then we all win. It’s something we talked about all the time as a business, right? Our goal is to make sure that every single person that touches this platform, irrespective of who it is, if it’s an advisor, if it’s an asset manager, if it’s a company, if it’s the employees of those companies, every person has to be better with Vestwell than without. And that’s something we focus on every day.

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