With Bryan, I discussed global trends in wealth management, humans and robo components competing with one another, and expectations for the near future.> More details
WealthTech Insights #4 with Stephane Dubois: WealthTech Was Started by Technologists With Little Wall Street Experience
Stephane is the founder of Xignite, the leading provider of financial market data APIs. He unites FinTech disrupters and innovation and believes that crucial market data makes innovations work, and inspire the future of finance.
In this interview, Stephane relates his story of success and explains how technical people have changed the wealth management industry; discusses why robo-advisors have become so popular nowadays; and shares his expectations for future wealth management services.
Q: Please tell us about your background. How did you come to be in the wealth management industry? What changes have you observed in this niche in recent years?
Stephane: Prior to starting Xignite, I the VP of product management for Advent Software. I also built one of the first account aggregation platforms for the industry when I was there. Before that, I was at Oracle in the early days of their application software. Advent was my first FinTech company. Being at Advent during the late ’90s was a lot of fun. Advent was the leader in investment management software. They were also one of the first software companies to be located deep out of market in San Francisco—way before it became the thing. What they focused on was the more mundane part of wealth management: portfolio accounting, trade order management, CRM for asset managers and financial advisors.
At that time, the concept of wealth management was not so defined from a software standpoint. Accounting was well understood; trading was pretty well boxed in, but wealth was fuzzy. This was a workflow that had not been well normalized. A lot of the best practices were not laid out. Everyone thought wealth management was too customized a workflow for software, and they saw it very much as their “secret sauce.” I left Advent to create Xignite as a wealth management software company. The idea was to create a platform that investors and advisors could use to interact over the Web. There was a lot of fear that the Web would disintermediate the advisor at the time. Investor–advisor interactions were essentially performed via meetings and paper reports. So we built an advisor–investor interaction platform. It was pretty crude by today’s standards, but it had many of the ingredients you see today around holistic reporting of assets and advice. Financial planning and asset allocation were also there, although they were less central to the solution compared to robo-advisors today.
We were not so successful at selling that platform. It was a hosted B2B platform that we sought to market to banks and larger FinTech companies. But the market was not so ready for that. One problem we ran into early on gave birth to what Xignite is today. We needed market data to demonstrate our platform to prospective clients, but we could not find “easy market data.” The legacy vendors (ThomsonReuters and others) had really complex and expensive technology we hated. So we did something that sounded natural to us, but turned out to be really innovative at the time: we created APIs. At first, we were simply scraping Yahoo data. We listed those “demo APIs” on the first API directory of the days (xMethods, now defunct but visible here). We got interest from very early developers in the field who told us, “if you make this a real product, we will buy it.” So we did an early pivot and started to build market data APIs. We built our data distribution and API-management platform from the ground up. We launched our first commercial APIs in 2003. We probably launched the first commercial API, where the API was the product you could buy. Here is a screenshot of it from the WayBackMachine.
The funny thing is that API still exists and is used today, even though we have newer generations of APIs that are much more powerful. But now, those APIs serve more data at a much greater pace compared to many other big things on the Internet today. Just look at where our APIs fall in the concept of an “Internet Minute” in the chart below. Only texts and emails are sent at a greater pace than our APIs are used. We are now one of the top API platforms in the world.
After a few years, our business grew significantly. We raised a series A and B round of funding and we became the leading provider of market data via APIs. We jumped on AWS in 2008 and benefited very early from the scalability the cloud afforded. This is when a handful of WealthTech companies took notice and became our clients—saving themselves huge amounts of money and aggravation in the process. The chart below shows when some of the big robo-advisors and other FinTechs adopted us, as shown on a Google Trend Chart for the word “FinTech.”
It is not surprising that many of those firms used us and that we find ourselves powering all the WealthTech companies today. We solved a problem that we ran into for ourselves early on as a WealthTech company. It was only natural that we would converge. We are extremely proud of having played an empowering role in helping the industry get its start.
Until 2014, few people paid attention to WealthTech. Now, it has become the poster-child segment for the whole FinTech industry. One of the reasons for this is the word “robo-advisor.” It was a word that people like Andy Rachleff hated at first. But because it really helped people understand the concepts that were brought about, it had a transformative effect on the industry.
“One minute you have nothing; the next you have opened an account and you have a completely tailored financial plan complete with cool-looking donut charts and intra-day updates.”
Q: Why do you think the wealth management industry is experiencing rapid growth today?
Stephane: FinTech and WealthTech companies drove a significant paradigm shift in the industry. They challenged a decades-old assumption: that advice is a long-term, personal relationship business. Even when we started, we assumed the advisor would be there. But FinTech and WealthTech companies changed that, and that change is what is driving the growth. Advice can now be automated. And it can bring instant gratification as well. One minute you have nothing; the next you have opened an account and you have a completely tailored financial plan complete with cool-looking donut charts and intra-day updates.
WealthTech in particular, and FinTech as a whole, benefited from multiple converging factors: (1) the rise of the stock markets from the 2008 laws and the introduction of simpler instruments like ETFs; (2) the expansion of social media, which made it easier and faster to acquire clients; (3) the rise to financial maturity of the short-attention-span, mobile-only millennial generation; (4) the emergence of the cloud and APIs, which dramatically sped up the process of building new solutions and drastically reduced their costs. It always amazed me in the early days how a robo-advisor who probably spent $50K a year on market data was giving a bank spending $250M a year on market data a run for their money. But that is what happened. This is why Andy Rachleff used to say that Wealthfront was made possible by (1) ETFs, (2) trading APIs, and (3) market data APIs.
But on top of those factors, the biggest factor that has driven the growth in WealthTech is that after 2000 or so, not much happened in WealthTech innovation. The banks got busy with high-frequency trading, they got busy with regulation and the aftermath of the mortgage crisis and they stopped focusing on the clients. They almost forgot they had clients. They did not innovate. They just milked their client base. This dearth of innovation left the road wide open for Andy Rachleff, Jon Stein, and others to reinvent the industry. The wealth management industry tends to be too profitable an industry for its own good. And once the tech guys took notice, it really changed the game.
“The first robos started by handling six ETFs and that was it. The simplicity and purity of that was amazing. That’s the thing Wall Street missed at first.”
Q: Dozens of startups have appeared, mainly robo-advisors intended for B2B and B2C clients. What has caused this growth in the industry?
Stephane: WealthTech used to be boring. It was mostly about printing the prettiest reports you could out of back-office systems and talking to your clients once a quarter in your mahogany-lined conference rooms. There was not much room for technical innovation. Once people realized that you could apply next-generation technology and UX to wealth management, things shifted gears. Suddenly the industry fragmented in all directions. You had so many flavors of robo-advice technologies doing different things.
The nature of wealth management is that you have this incremental complexity that comes from having to deal with increasingly subtle asset classes, and their underlying accounting, performance calculation, and tax implications. The first robos started by handling six ETFs and that was it. The simplicity and purity of that was amazing when you think about it. That’s another thing Wall Street missed at first.
But the industry quickly branched out into every possible flavor of robo-advice: B2B, B2C, single class, multi-class, etc. The pioneers showed the way and everyone was engulfed by it.
Q: New and innovative companies on the market are focused on end investors, the general public, and enable them to invest directly. Why do you think more and more companies in the niche are refocusing on the B2C market and shifting away from the classical way of working through advisors?
Stephane: When we tried to sell our early platform to financial services companies, they would not have it. Complacency and inertia were in the way. It’s no surprise that the disruption came from B2C. If Jon and Andy and Bill (Harris from Personal Capital) had first focused on selling their platforms to banks, the banks would not have budged. By focusing on end users, they were closed to what the client wanted. They controlled the change. And they threatened the status quo. Once that happened, banks took notice. And even if—when the dust settles—the large banks still stand unscathed by the robo attacks, they will have internalized many of the lessons of WealthTech and evolved accordingly. A frontal attack was the only way to make it happen. And it was a capital-intensive thing to do that only venture capital could have made happen.
“The financial services industry was a fat cat who could not be bothered to find a way to offer better advice at lower costs. WealthTech companies did that.”
Q: The wealth management industry is mainly associated with the chance to secure one’s retirement; players in the niche used to be 40 or older. Today, we observe that the potential audience is becoming younger. Why do you think this is happening?
Stephane: Wealth management used to be stratified based on assets. If you had lots of them, you would get the family office treatment. If you had few, the industry had not figured out how give you personal advice. You were relegated to the “self-service” segment. What that means is that the financial services industry was a fat cat who could not be bothered to find a way to offer better advice at lower costs. WealthTech companies did that. That is why the audience is getting younger. It’s now possible to be given the services and tools to receive sound financial advice much earlier in life. And the service itself is tailored to my expectations, instead of those of my parents or grandparents.
Challenging the age-old assumption that advice had to be done via personal relationships (read “expensive to deliver”) but instead could be done via computer, with a much greater quality and experience, remain, in my mind, what WealthTech is all about.
Q: Do you think that new technologies and possibilities provided by startups could promote the investment culture among the younger generation?
Stephane: Totally. My 20-year-old son has both a Betterment and a Robinhood account. And hardly any money in it. But it’s part of his world. It’s part of his life. It will always be. WealthTech has had a tremendous impact on newer generations—in the USA at least.
“WealthTech was started by technologists who had little Wall Street experience, did not know what they did not know, but saw an opportunity to reinvent an industry that was stagnant from an innovation standpoint. Their lack of capital markets experience was an advantage.”
Q: Do you think that the risk is high that conservative advisors will not be able to compete with young, ambitious entrepreneurs who have both financial expertise and understanding of new technologies? Is it important for business people to have a deep understanding of the technological side of their business? And should software development staff have knowledge of capital markets?
Stephane: Advice is a very profitable and very comfortable industry. Thank you. Too profitable for its own good. At first, the industry was running scared. But in truth, while the impact of WealthTech has been radical from the perspective of how the industry should reinvent itself, it has had little practical impact on assets and revenues. WealthTech has basically showed the wealth management industry in particular, and Wall Street in general, that it had become complacent when it came to applying technology to solve client problems. That was clearly an issue. The industry was complacent and still is. Its cost structure is massive and these costs are unabashedly passed along to clients, who pay through the nose for not-so-great service.
But the practical threat has been minimal. For sure, some managers are losing assets. For sure, some of the robo-advisors will continue to become bigger and be successful as standalone entities. But the traditional firms are learning quickly now. They are learning how to apply technologies like APIs to improve client experience and reduce costs. If they do not look at the behemoth processes and infrastructures they have built and see how they can reduce their costs and improve their flexibility, they will have a hard time competing. But they can do that and many have already started.
WealthTech was started by technologists, guys like Jon Stein, Hardeep Walia (Motif), and Yoni Assia (eToro), who had little Wall Street experience, did not know what they did not know, but saw an opportunity to reinvent an industry that was stagnant from an innovation standpoint. Their lack of capital markets experience was an advantage. Their answers were not formatted. They threw away assumptions. Those companies are technology companies that create purely architected platforms that are highly scalable. And that could be a real threat to Wall Street, whose strategy tends to be mired in internal territorial battles and handicapped by resistance from stakeholders who are only looking out for their jobs.
Q: Which of the WealthTech companies would you highlight as innovators in the industry, and why?
Stephane: I am strongly biased towards our clients:
- Betterment, Wealthfront, and Personal Capital for their robo-advisory vision and persistence
- Robinhood for going farther than others in doing what millennials want
- eToro for scrappiness, ability to execute, success and reach
- Quovo for their new technology approach to a tough challenge (account aggregation)
Q: Could you share your vision of the future of the wealth management industry? What will a typical company in the niche look like?
Stephane: Fast forward, I would expect that all the newer concepts brought about by WealthTech will have been absorbed by financial services organization at large. So the idea of robo-advice, for instance, will be everywhere.
From a market dynamic standpoint, some of the larger robo-advisors will remain as standalone entities, but others will be absorbed. That’s how technology evolution works. Look at the innovations of online trading back in the late ’90s. Only E*Trade and Scottrade and TD Ameritrade remained as standalones from those days until late last year. Now it’s down to two. All the others have been acquired or have disappeared. I don’t see any reason why it will be different this time.
From a technology and service standpoint, things will never be the same. Advice will be either delivered personally or by computer. User experience will continue to dramatically improve and costs will go down due to increased leverage of the public cloud. For instance, we expect all the world’s market data to move to the cloud within five years (instead of being replicated at great cost in every bank) and most of the wealth applications that consume that data to run off the cloud. Elementary wealth management services, such as asset allocation, performance attribution, portfolio analytics, and so on, will run efficiently as APIs in the cloud, where the data is. The result will be a much higher level of service delivered at a much lower cost throughout the industry; better financial health for millions of people; and a higher performing, more efficient economy as a whole. Good stuff.
Interviewed by Vasyl Soloshchuk, CEO and co-owner at INSART, FinTech & Java engineering company. Vasyl is also author of the WealthTech Club blog, which conducts research into Fortune and Startup Robo-advisor and Wealth Management companies in terms of the technology ecosystem.